EXHIBIT 10.2
SECURITIES PURCHASE AGREEMENT
          THIS SECURITIES PURCHASE AGREEMENT is entered into as of September 4,
2009, by and between PMFG, Inc. (the “Company”), a corporation organized under
the laws of the State of Delaware, with its principal offices at 14651 North
Dallas Parkway, Suite 500, Dallas, Texas 75254, and the purchasers whose names
and addresses are set forth on the signature pages hereof (individually referred
to as a “Purchaser” and, collectively, the “Purchasers”).
          WHEREAS, on June 16, 2009, the Company’s stockholders approved an
amendment to the Company’s certificate of incorporation to authorize the
issuance of 5,000,000 shares of preferred stock, par value $0.01 per share (the
“Preferred Stock”);
          WHEREAS, the Company proposes to create a new series of Preferred
Stock, designated as the Series A Convertible Preferred Stock, par value $0.01
per share (the “Convertible Preferred Stock”), by filing a Certificate of
Designations in the form attached hereto as Exhibit A (the “Certificate of
Designations”) with the office of the Secretary of State of the State of
Delaware. The form of notice of conversion for the Convertible Preferred Stock
is attached hereto as Exhibit B; and
          WHEREAS, on the terms and subject to the conditions set forth in this
Agreement, the Company proposes to issue and sell to the Purchasers shares of
Convertible Preferred Stock (the “Preferred Shares”) convertible into shares of
common stock, par value $0.01 per share (the “Common Stock”), of the Company and
Warrants (the “Warrants”, and together with the Preferred Shares, the
“Securities”) exercisable for shares of Common Stock, in substantially the form
attached hereto as Exhibit C.
          NOW, THEREFORE, in consideration of the mutual covenants contained in
this Agreement, the Company and the Purchasers agree as follows:
          SECTION 1. Authorization of Sale of the Securities. Subject to the
terms and conditions of this Agreement, the Company has authorized the sale of
the Securities.
          SECTION 2. Agreement to Sell and Purchase the Securities. At the
Closing (as defined in Section 3.1), the Company will sell to the Purchasers,
and the Purchasers will buy from the Company, upon the terms and conditions
hereinafter set forth, (i) the number of Preferred Shares (at the purchase
price) set forth below such Purchaser’s name on the signature pages hereof and
(ii) a Warrant to purchase the number of shares of Common Stock equal to 50% of
the shares of Common Stock underlying the Preferred Shares referred to in clause
(i) above. The purchase price for each Preferred Share shall be $1,000 (the
“Purchase Price”). The purchase price for the Preferred Shares and the Warrant
being purchased by each Purchaser at the Closing (as defined in Section 3.1)
shall be equal to the aggregate Purchase Price of the Preferred Shares being so
purchased by such Purchaser.

 

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          SECTION 3. Closing and Delivery of the Securities.
          3.1 Closing. The purchase and sale of the Securities shall occur (the
“Closing”) at 10:00 a.m., Dallas, Texas time, on the date hereof (the “Closing
Date”). The Closing shall take place at the office of Jones Day located at 2727
North Harwood Street, Dallas, Texas 75201.
          3.2 Delivery of the Securities. At the Closing, the Company shall
deliver to each Purchaser (or to its designated representative) one or more
stock certificates representing the Preferred Shares and the Warrants registered
in the name of each Purchaser, or in such nominee name(s) as designated in such
Purchaser’s Stock Certificate Questionnaire, in the form set forth in Exhibit D
attached hereto, representing the number of Securities set forth in Section 2
above and bearing the legend specified in Section 5.12 hereof referring to the
fact that the Securities were sold in reliance upon the exemption from
registration under the Securities Act of 1933, as amended (the “Securities
Act”), provided by Section 4(2) thereof and Rule 506 thereunder.
          3.3 Conditions to Closing. (a) The Company’s obligation to complete
the purchase and sale of the Securities and deliver the stock certificates
representing the Preferred Shares and the Warrants to the Purchasers at the
Closing shall be subject to the following conditions, any one or more of which
may be waived by the Company: (i) receipt by the Company of same-day funds in
the full amount of the purchase price for the Securities being purchased
hereunder; (ii) the accuracy of the representations and warranties made by the
Purchasers and the fulfillment of those undertakings of the Purchasers to be
fulfilled prior to the Closing; and (iii) receipt by the Company for each
Purchaser of completed versions of Exhibit D, Exhibit E and Exhibit F-1 or F-2
(as applicable) attached hereto.
          (b) The Purchasers’ obligation to accept delivery of the stock
certificates representing the Preferred Shares and the Warrants and to pay for
the Securities evidenced thereby shall be subject to the following conditions:
(i) the accuracy in all material respects of the representations and warranties
made by the Company herein and the fulfillment in all material respects of those
undertakings of the Company to be fulfilled prior to Closing, (ii) receipt of an
opinion of Jones Day, counsel to the Company, addressed to the Purchasers in
form and substance reasonably satisfactory to Needham & Company, LLC (the
“Placement Agent”) and the Purchasers’ counsel and rendering the opinions set
forth in Exhibit G attached hereto, (iii) receipt of a lock-up agreement in the
form set forth in Exhibit H attached hereto by each of the individuals set forth
on Schedule 3.3 and (iv) receipt of (x) a certificate executed by the Chief
Executive Officer and the Chief Financial Officer of the Company, dated as of
the Closing Date, in form and substance reasonably satisfactory to the
Purchasers, to the effect that the representations and warranties of the Company
set forth in Section 4 of this Agreement are true and correct in all material
respects as of the date hereof, and the Company has complied in all material
respects with all the agreements and satisfied in all material respects all the
conditions herein on its part to be performed or satisfied on or prior to the
Closing Date and (y) a certificate signed by the Secretary of the Company to
which is attached a true, complete and correct copy of each of the amended and
restated certificate of incorporation of the Company, the amended and restated
bylaws of the Company and certain resolutions of the Board of Directors of the
Company, to the effect that (1) other than the Certificate of Designations, no
document

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with respect to any amendment to the certificate of incorporation of the Company
has been filed in the office of the Secretary of State of the State of Delaware
since June 16, 2009, and no action has been taken or, to the best knowledge of
the Secretary of the Company, is contemplated by the Board of Directors or the
stockholders of the Company, for the purpose of effecting any such amendment or
the dissolution, merger or consolidation of the Company, (2) no proposal for any
amendment, repeal or other modification to the amended and restated bylaws of
the Company has been taken since August 15, 2008 or is currently pending before
the Board of Directors or stockholders of the Company and (3) the resolutions of
the Board of Directors of the Company authorizing the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated by this Agreement have not been altered, amended or superseded and
remain in full force and effect as of the date hereof. Each Purchaser’s
obligations hereunder are expressly conditioned on the purchase by all of the
other Purchasers of the Securities that they have agreed to purchase from the
Company.
          SECTION 4. Representations, Warranties and Covenants of the Company.
Except as otherwise described in (i) the Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and definitive proxy
statements filed or furnished by the Company and Peerless Mfg. Co. (“Peerless”),
the Company’s predecessor, with the Securities and Exchange Commission (the
“SEC”) since June 30, 2008 (the “SEC Documents” and collectively, including the
documents incorporated by reference therein, the “Company Information”), (ii) as
set forth on the Disclosure Schedules (provided, that disclosure in any
subparagraph of such Disclosure Schedules shall apply to any section or
subparagraph hereof to the extent it is reasonably apparent on its face that
such disclosure would apply to, and fulfill the disclosure requirement of, such
section or subparagraph of this Agreement), or (iii) other disclosure materials
previously delivered to the Purchasers (the “Disclosure Materials”), each which
qualify the following representations and warranties in their entirety, the
Company hereby represents and warrants to, and covenants with, the Purchasers,
effective as of the Closing Date (unless otherwise stated), as follows:
          4.1 Organization and Qualification. The Company and each of the
subsidiaries (each a “Subsidiary” and, collectively, the “Subsidiaries”) listed
in Exhibit 21.1 to the Company’s Annual Report on Form 10-K for the fiscal year
ended June 30, 2008 (the “2008 Form 10-K”) is a business entity duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization, to the extent such concepts are applicable under the laws of such
jurisdiction. The Company and each Subsidiary has all requisite power and
authority to carry on its business as now conducted. The Company and each of its
Subsidiaries is duly licensed or qualified as a foreign business entity
(corporate or otherwise) to do business and is in good standing in all
jurisdictions in which the nature of the activities conducted by it or the
character of the assets owned or leased by it requires such license or
qualification, to the extent such concepts are applicable under the laws of each
such jurisdiction, except to the extent that the failure to be so qualified or
be in good standing would not reasonably be expected to, individually or in the
aggregate, (i) have a material adverse effect on the Company’s performance of
its obligations under this Agreement or the Warrants or the consummation of any
transaction contemplated hereby, or (ii) materially and adversely affect the
Company and its Subsidiaries, taken as a whole, or their respective businesses,
properties, business prospects, conditions (financial or other) or results of
operations, taken as a whole (such effects described in clauses (i) and
(ii) being referred to collectively herein as a “Material Adverse Effect”).

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          4.2 Authorized Capital Stock. The Company has authorized, issued and
outstanding capital stock as set forth on Schedule 4.2 as of the date set forth
therein. All of the issued and outstanding shares of the Company’s Common Stock
have been duly authorized, validly issued and are fully paid and nonassessable,
were issued in compliance with all applicable federal and state securities laws,
and were not issued in violation of or subject to any preemptive rights or other
rights to subscribe for or purchase securities. As of the date hereof, there are
no shares of Preferred Stock issued and outstanding. The rights, preferences,
privileges and restrictions of the Preferred Shares will be as set forth in the
Certificate of Designations. The shares of Common Stock issuable upon conversion
of the Preferred Shares (the “Conversion Shares”) and the exercise of the
Warrants (the “Warrant Shares”) have been duly and validly reserved for
issuance. Except as set forth on Schedule 4.2, the Company does not have
outstanding any options to purchase, or any right of first refusal or preemptive
rights or other rights to subscribe for or to purchase, any securities or
obligations convertible into or exchangeable or exercisable for, or any
contracts or commitments to issue or sell, shares of its capital stock, or any
similar right to participate in the transactions contemplated by the Agreement
and the Warrants. Except for customary adjustments as a result of stock
dividends, stock splits, combinations of shares, reorganizations,
recapitalizations, reclassifications or other similar events, there are no
anti-dilution or price adjustment provisions contained in any security issued by
the Company (or in any agreement providing rights to security holders) and the
issuance and sale of the Preferred Shares and Warrants or other securities
pursuant to any provision of this Agreement will not give rise to any preemptive
rights or rights of first refusal, co-sale rights or any other similar rights on
behalf of any person or result in the triggering of any anti-dilution or other
similar rights. Except as set forth on Schedule 4.2, with respect to each
Subsidiary, (i) the Company owns all of the Subsidiary’s capital stock (except
for directors’ qualifying shares), directly or indirectly through its other
Subsidiaries, and free and clear of all liens, mortgages, pledges, charges and
encumbrances (collectively, “Liens”) of any kind, (ii) all the issued and
outstanding shares of the Subsidiary’s capital stock have been duly authorized,
validly issued and are fully paid and nonassessable, were issued in compliance
with applicable federal and state securities laws, and were not issued in
violation of or subject to any preemptive rights or other rights to subscribe
for or purchase securities, and (iii) there are no outstanding options to
purchase, or any preemptive rights or other rights to subscribe for or to
purchase, any securities or obligations convertible into or exchangeable or
exercisable for, or any contracts or commitments to issue or sell, shares of the
Subsidiary’s capital stock.
          4.3 Issuance, Sale and Delivery of Shares. When issued and delivered
in accordance with the terms of this Agreement, the Warrants and the Certificate
of Designations, as applicable, the Preferred Shares, Conversion Shares and
Warrant Shares will be duly authorized, validly issued, fully paid and
nonassessable, and free and clear of all Liens imposed by the Company. Except
for the Purchasers, no stockholder of the Company has any right (which has not
been waived or has not expired by reason of lapse of time) following
notification of the Company’s intent to file the Registration Statement (as
defined in Section 7.1(a)) to require the Company to register the sale of any
shares owned by such stockholder under the Securities Act, in the Registration
Statement. Subject to the Nasdaq Issuance Limitation, the Maximum Share
Limitation and the Stockholder Approval (each defined in Section 5.13 below), no
further approval or authority of the stockholders or the Board of Directors of
the Company will be required for the issuance and sale of the Securities to be
sold by the Company as contemplated herein or for the issuance of the Conversion
Shares as contemplated by the Preferred Shares or the Warrant Shares as
contemplated by the Warrants.

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          4.4 Due Execution, Delivery and Performance. The Company has full
corporate power and authority to enter into the Agreement and the Warrants and
perform the transactions contemplated hereby and thereby. The Agreement has been
duly authorized, executed and delivered by the Company. Each of the Warrants has
been duly authorized and, as of the Closing, will have been executed and
delivered by the Company. The making and performance of the Agreement and the
Warrants by the Company and the consummation of the transactions contemplated
herein and therein will not result in the creation of any Liens upon any assets
of the Company pursuant to the terms or provisions of, or result in a breach or
violation of, or constitute, either by itself or upon notice or the passage of
time or both, a default under any agreement, mortgage, deed of trust, lease,
franchise, license, indenture, permit or other instrument to which the Company
or any Subsidiary is a party or by which the Company or its properties, or any
Subsidiary or such Subsidiary’s properties, may be bound or affected and in each
case which would have a Material Adverse Effect or, to the Company’s knowledge
(which, as used herein, in each instance shall mean the actual knowledge of the
Company’s Chief Executive Officer or Chief Financial Officer), any statute or
any authorization, judgment, decree, order, rule or regulation of any court or
any regulatory body, administrative agency or other governmental body applicable
to the Company or any Subsidiary or any of their respective properties. No
consent, approval, authorization or other order of any court, regulatory body,
administrative agency or other governmental body is required for the execution
and delivery of this Agreement or the Warrants or the consummation of the
transactions contemplated by this Agreement, except for the filing of a Form D
with the SEC, the filing of the Registration Statement (as defined in
Section 7.1(a)) and compliance with the applicable federal and state securities
laws with respect to post-Closing obligations. Upon their execution and
delivery, and with respect to the Agreement, assuming the valid execution
thereof by the respective Purchasers, the Agreement and the Warrants will
constitute valid and binding obligations of the Company, enforceable in
accordance with their respective terms, except as enforceability may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors’ and contracting parties’ rights generally and except as
enforceability may be subject to general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law)
and, with respect to the Agreement, except as the indemnification agreements of
the Company in Section 7.3 hereof may be legally unenforceable.
          4.5 No Conflicts. The execution, delivery and performance of the
Agreement and the Warrants by the Company and the consummation by the Company of
the transactions contemplated hereby and thereby do not and will not:
(i) conflict with or violate any provision of the Company’s or its Subsidiaries’
certificates of incorporation, bylaws or other organizational documents, (ii)
conflict with, or constitute a default (or an event that with notice or lapse of
time or both would become a default) under, result in the creation of any Liens
upon any of the properties or assets of the Company or any Subsidiary, or give
to others any rights of termination, amendment, acceleration or cancellation
(with or without notice, lapse of time or both) of, any agreement, credit
facility, debt or other instrument (evidencing a Company or Subsidiary debt or
otherwise) or other understanding to which the Company or any Subsidiary is a
party or by which any property or asset of the Company or any Subsidiary is
bound or affected, or (iii) conflict with or result in a violation of any law,
rule, regulation, order, judgment,

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injunction, decree or other restriction of any court or governmental authority
to which the Company or a Subsidiary is subject (including federal and state
securities laws and regulations), or by which any property or asset of the
Company or a Subsidiary is bound or affected; except in the case of each of
clauses (ii) and (iii), such as could not have or reasonably be expected to
result in a Material Adverse Effect.
          4.6 SEC Documents. Each of the Company and Peerless have timely filed
all reports, schedules, forms, statements and other documents required to be
filed by it with the SEC since June 30, 2008, pursuant to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). As of their respective filing dates, the SEC Documents complied in all
material respects with the requirements of the Exchange Act and the rules and
regulations of the SEC promulgated thereunder applicable to the SEC Documents.
As of their respective filing dates, the SEC Documents, taken as a whole, did
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
          4.7 Accountants. Grant Thornton LLP, whose report on the consolidated
financial statements (which term as used in this Agreement includes the related
notes thereto) of the Company was included in the 2008 Form 10-K, are
independent accountants with respect to the Company as required by the Exchange
Act and the rules and regulations promulgated thereunder.
          4.8 Contracts. All agreements that were required to be filed as
exhibits to the SEC Documents under Item 601 of Regulation S-K (collectively,
the “Material Agreements”) to which the Company or any Subsidiary is a party, or
the property or assets of the Company or any Subsidiary are subject, have been
filed as exhibits to one or more of the SEC Documents. All Material Agreements,
other than those agreements that are substantially performed or expired by their
terms, are valid and enforceable against the Company or one of its Subsidiaries,
as the case may be, in accordance with their respective terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors’ and contracting
parties’ rights generally and except as enforceability may be subject to general
principles of equity and except as rights to indemnity and contribution may be
limited by state or federal securities laws or public policy underlying such
laws. Neither the Company nor any of its Subsidiaries is in breach of or default
under any of the Material Agreements, and to the Company’s knowledge, no other
party to a Material Agreement is in breach of or default under such Material
Agreement, except in each case, for such breaches or defaults as would not
reasonably be expected to have a Material Adverse Effect. Neither the Company
nor any of its Subsidiaries has received a notice of termination nor is the
Company otherwise aware of any threats to terminate any of the Material
Agreements.
          4.9 No Defaults. Except as to defaults, violations and breaches which
individually or in the aggregate would not reasonably be expected to have a
Material Adverse Effect, the Company is not in violation or default of any
provision of its certificate of incorporation, bylaws or other organizational
documents, or in breach of or default with respect to any provision of any
agreement, judgment, decree, order, mortgage, deed of trust, lease, franchise,
license, indenture, permit or other instrument to which it is a party or by
which it or

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any of its properties are bound; and no event has occurred that, with notice or
lapse of time or both, would constitute an event of default on the part of the
Company as defined in such documents, except such defaults which individually or
in the aggregate would not reasonably be expected to have a Material Adverse
Effect.
          4.10 No Actions. There are no legal or governmental actions, suits or
proceedings pending or, to the Company’s knowledge, threatened to which the
Company or any Subsidiary is or may be a party to or of which property owned or
leased by the Company or any Subsidiary is or may be the subject, or related to
environmental or discrimination matters, or instituted by the SEC, The NASDAQ
Stock Market, LLC, any state securities commission or other governmental or
regulatory agency, which actions, suits or proceedings, individually or in the
aggregate, might prevent or might reasonably be expected to, individually or in
the aggregate, have a Material Adverse Effect. Neither the Company nor any
Subsidiary, nor, to the Company’s knowledge, any director or officer thereof, is
or has been the subject of any actions, suits or proceedings pending or, to the
Company’s knowledge, threatened involving a claim of violation of or liability
under federal or state securities laws or a claim of breach of fiduciary duty.
No labor disturbance by the employees of the Company or any Subsidiary exists
or, to the Company’s knowledge, is imminent which might reasonably be expected
to have a Material Adverse Effect. Neither the Company nor any Subsidiary is a
party to or subject to the provisions of any material injunction, judgment,
decree or order of any court, regulatory body, administrative agency or other
governmental body.
          4.11 Regulatory Permits. The Company and the Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state, local or foreign regulatory authorities necessary to conduct their
respective businesses as described in the SEC Documents, except where the
failure to possess such permits could not have or reasonably be expected to
result in a Material Adverse Effect (“Material Permits”), and neither the
Company nor any Subsidiary has received any notice of proceedings relating to
the revocation or modification of any Material Permit.
          4.12 Properties. Each of the Company and its Subsidiaries has good and
marketable title to all the properties and assets reflected as owned by it in
the consolidated financial statements included in the 2008 Form 10-K, in each
case free and clear of all Liens of any kind except (i) those, if any, reflected
in such consolidated financial statements, or (ii) those which, individually or
in the aggregate, would not have a Material Adverse Effect. The properties
described in the 2008 Form 10-K as being leased by the Company or any
Subsidiary, are held under valid and binding leases with such exceptions as do
not materially interfere with the use made or proposed to be made of such
property by the Company or such subsidiary.
          4.13 No Material Change. Since June 30, 2008, except as disclosed in
the SEC Documents or the Disclosure Materials, (i) neither the Company nor any
Subsidiary has incurred any material liabilities or obligations, indirect, or
contingent, or entered into any material verbal or written agreement or other
transaction which is not in the ordinary course of business or which could
reasonably be expected to result in a material reduction in the future earnings
of the Company; (ii) neither the Company nor any Subsidiary has incurred any
liabilities not (a) required to be reflected in the Company’s financial
statements pursuant to accounting principles generally accepted in the United
States of America or (b) required to be disclosed in

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filings made with the SEC; (iii) neither the Company nor any Subsidiary has
altered its method of accounting; (iv) neither the Company nor any Subsidiary
has sustained any material loss or interference with its respective businesses
or properties from fire, flood, windstorm, accident or other calamity not
covered by insurance; (v) the Company has not paid or declared any dividends or
other distributions with respect to its capital stock and neither the Company
nor any Subsidiary is in default in the payment of principal or interest on any
outstanding debt obligations; (vi) there has not been any change in the capital
stock of the Company, other than the sale of the Securities hereunder and shares
or options issued pursuant to employee equity incentive plans or purchase plans
approved by the Company’s Board of Directors, or indebtedness material to the
Company (other than in the ordinary course of business); and (vii) there has not
been any material adverse change in the condition (financial or otherwise),
assets, properties, business, prospects or results of operations of the Company.
The Company does not have pending before the SEC any request for confidential
treatment of information.
          4.14 Intellectual Property. The Company and the Subsidiaries have, or
have rights to use, all patents, patent applications, patent rights, inventions,
trademarks (both registered and unregistered), trademark applications, service
marks, trade names, trade secrets, inventions, copyrights, licenses, know-how
and other similar intellectual property rights necessary or material for use in
connection with their respective businesses and which the failure to so have
could have a Material Adverse Effect (collectively, the “Intellectual Property
Rights”). Neither the Company nor any Subsidiary has received a notice (written
notice or otherwise), and has no knowledge, that the Intellectual Property
Rights used by the Company or any Subsidiary violates or infringes upon the
rights of any others. To the knowledge of the Company, all such Intellectual
Property Rights are enforceable and there is no existing infringement of any of
the Intellectual Property Rights of others. The Company and its Subsidiaries
have taken reasonable security measures to protect the secrecy, confidentiality
and value of all of their intellectual properties, except where failure to do so
could not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect.
          4.15 Compliance. The Company has not been advised, and has no reason
to believe, that it is not conducting its business in compliance with all
applicable laws, rules and regulations of the jurisdictions in which it is
conducting business, including, without limitation, all applicable local, state
and federal environmental laws and regulations; except where failure to be so in
compliance would not have a Material Adverse Effect.
          4.16 Taxes. The Company has filed all necessary federal, state and
foreign income and franchise tax returns and has paid or accrued all taxes shown
as due thereon, to the extent such taxes have become due, except where the
failure to so file would not reasonably be expected to have, individually or in
the aggregate, a Material Adverse Effect. The Company has no knowledge of a tax
deficiency which has been or might be asserted or threatened against it that
would reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect.
          4.17 Transfer Taxes. On the Closing Date, all stock transfer or other
taxes (other than income taxes) which are required to be paid in connection with
the sale and transfer of the Securities to be sold to each Purchaser hereunder
will be, or will have been, fully paid or provided for by the Company and all
laws imposing such taxes will be or will have been fully complied with.

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          4.18 Disclosure Controls and Procedures. Except as disclosed in the
SEC Documents, the Company has established and maintains disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are
designed to ensure that material information relating to the Company and its
Subsidiaries is made known to the Company’s principal executive officer and
principal financial officer by others within those entities; and such disclosure
controls and procedures are effective in all material respects to perform the
functions for which they were established. The Company is not aware of any
change in its internal control over financial reporting that has occurred during
its most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
          4.19 Accounting Controls. Except as disclosed in the SEC Documents,
the Company maintains a system of accounting controls sufficient to provide
reasonable assurances that (i) transactions are executed in accordance with
management’s general or specific authorization, (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles as applied in the United States and to
maintain accountability for assets, (iii) access to assets is permitted only in
accordance with management’s general or specific authorization, 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.
          4.20 Investment Company. The Company is not an “investment company” or
an “affiliated person” of, or “promoter” or “principal underwriter” for an
investment company, within the meaning of the Investment Company Act of 1940, as
amended.
          4.21 No General Solicitation; Offering Materials. Neither the Company,
nor any of its affiliates (as such term is defined in the Exchange Act), nor any
person acting on its behalf, has engaged in any form of general solicitation or
general advertising (within the meaning of Regulation D promulgated under the
Securities Act) in connection with the offer or sale of the Securities. The
Company has not distributed any offering material in connection with the
offering and sale of the Securities. The Company has not in the past nor will it
hereafter take any action independent of the Placement Agent to sell, offer for
sale or solicit offers to buy any securities of the Company which would bring
the offer, issuance or sale of the Securities, as contemplated by this
Agreement, within the provisions of Section 5 of the Securities Act, unless such
offer, issuance or sale was or shall be within the exemptions of Section 4 of
the Securities Act.
          4.22 Private Placement. No registration under the Securities Act is
required for the offer and sale of the Securities by the Company to the
Purchasers as contemplated hereby. The issuance and sale of the Securities
hereunder does not contravene the rules and regulations of The NASDAQ Stock
Market LLC.

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          4.23 Disclosure. As of the date of this Agreement, all disclosure
provided to the Purchasers regarding the Company, its business and the
transactions contemplated hereby, including the Disclosure Schedules to this
Agreement and the Disclosure Materials, furnished by or on behalf of the Company
with respect to the representations and warranties made herein are true and
correct with respect to such representations and warranties and do not contain
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading. The Company
acknowledges and agrees that no Purchaser makes or has made any representations
or warranties with respect to the transactions contemplated hereby other than
those specifically set forth in Section 5 hereof. Notwithstanding the provisions
of this Section 4.23, the Company and its Subsidiaries shall not provide the
Purchasers or their agents or counsel with any information that constitutes or
might constitute material, nonpublic information without their prior written
consent other than as may be included in the Disclosure Schedules to this
Agreement and the Disclosure Materials. The Company agrees that it will promptly
disclose to the public any such material, nonpublic information by the earlier
of (i) the date on which the Company files its Annual Report on Form 10-K for
the fiscal year ended June 30, 2009 (the “2009 Form 10-K”) with the SEC, and
(ii) the date on which the Company is required to file its 2009 Form 10-K with
the SEC pursuant to the Exchange Act, including any extension permitted pursuant
to Rule 12b-25 under the Exchange Act.
          4.24 Insurance. The Company and its Subsidiaries maintain insurance of
the types and in the amounts as are prudent and customary for their respective
businesses, including, but not limited to, insurance covering all real and
personal property owned or leased by the Company against theft, damage,
destruction, acts of vandalism and all other risks customarily insured against
by similarly situated companies, all of which is in full force and effect.
          4.25 Corrupt Practices. Neither the Company nor, to the knowledge of
the Company, any agent or other person acting on behalf of the Company, has
violated in any material respect any provision of the Foreign Corrupt Practices
Act of 1977, as amended, including (i) directly or indirectly, using any
corporate funds for unlawful contributions, gifts, entertainment or other
unlawful expenses related to foreign or domestic political activity, (ii) making
any unlawful payment to foreign or domestic government officials or employees or
to foreign or domestic political parties or campaigns from corporate funds, or
(iii) failing to disclose fully any contribution made by the Company or made by
any person acting on its behalf and of which the Company is aware in violation
of law.
          4.26 Price of Common Stock. The Company has not, and to its knowledge
no one acting on its behalf has, (i) taken, directly or indirectly, any action
designed to cause or to result in the stabilization or manipulation of the price
of any security of the Company to facilitate the sale or resale of any of the
Securities, (ii) sold, bid for, purchased, or, paid any compensation for
soliciting purchases of, any of the Securities, or (iii) paid or agreed to pay
to any person any compensation for soliciting another to purchase any other
securities of the Company, other than, in the case of clauses (ii) and (iii),
compensation paid to the Placement Agent in connection with the placement of the
Securities.

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          4.27 Transactions with Affiliates. Except as disclosed in the SEC
Documents, none of the officers or directors of the Company is presently a party
to any transaction with the Company or any Subsidiary (other than as holders of
stock options and/or warrants, and for services as officers and directors),
including any contract, agreement or other arrangement providing for the
furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer or
director or, to the Company’s knowledge, any entity in which any officer or
director has a substantial interest or is an officer, director, trustee or
partner.
          4.28 Employee Relations. The Company is not involved in any union
labor dispute nor, to the Company’s knowledge, is any such dispute threatened.
The Company is not a party to a collective bargaining agreement, and the Company
believes that its relations with its employees are good. No executive officer
(as defined in Rule 501(f) of the Securities Act) of the Company has notified
the Company that such officer intends to leave the employ of the Company or
otherwise terminate such officer’s employment with the Company. To the Company’s
knowledge, no executive officer of the Company, as a consequence of his or her
employment by the Company is, or is now expected to be, in violation of any
material term of any agreement, covenant or contract (including any employment
contract, confidentiality, disclosure or proprietary information agreement,
non-competition agreement, or any other contract or agreement or any restrictive
covenant with any previous employer), and the continued employment of each such
executive officer by the Company will not subject the Company to any liability
with respect to any of the foregoing matters. The Company and its Subsidiaries
are in compliance with all U.S. federal, state, local and foreign laws and
regulations relating to employment and employment practices, terms and
conditions of employment and wages and hours, except where the failure to be in
compliance could not, individually or in the aggregate, reasonably be expected
to have a Material Adverse Effect.
          4.29 Application of Takeover Protection. Assuming the accuracy of, and
compliance with, the Purchaser’s representations, warranties and covenants
herein, the execution and delivery of this Agreement and the Warrants and the
consummation of the transactions contemplated hereby and thereby will not impose
any restriction on any Purchaser, or create in any party (including any current
stockholder of the Company) any rights, under any share acquisition, business
combination, poison pill (including any distribution under a rights agreement),
or other similar anti-takeover provisions under the Company’s certificate of
incorporation, bylaws or other organizational documents or the laws of its state
of incorporation.
          4.30 Public Announcements. Prior to Closing, no party shall make any
public announcement regarding the existence or terms of the Agreement without
the prior written consent of all of the parties, other than as required by law.
No later than 9:00 A.M., Eastern Daylight Time, on the first trading day
immediately following the date hereof, the Company shall issue a press release
reasonably acceptable to the Purchasers’ counsel disclosing the material terms
of the transactions contemplated by this Agreement.
          4.31 NASDAQ Compliance and Listing. The Company’s Common Stock is
registered pursuant to Section 12(b) of the Exchange Act and the Company’s
outstanding shares of Common Stock are listed on the NASDAQ Global Market. The
Company has filed an application with The NASDAQ Stock Market LLC to list the
Conversion Shares and Warrant

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Shares on the NASDAQ Global Market, and has received notification that the
listing has been approved, subject to notice of issuance of such shares. The SEC
has not issued any stop order or other order suspending the effectiveness of any
registration statement filed by the Company or any Subsidiary under the Exchange
Act or the Securities Act.
          4.32 No Integrated or Aggregated Offering. Neither the Company, nor
any person acting on its behalf, has, directly or indirectly, made, or will
make, any offers or sales of any security or solicited any offers to buy any
security, under circumstances that would cause the offering of Securities
contemplated by this Agreement to be (i) integrated with prior offerings by the
Company for purposes of the Securities Act or (ii) aggregated with prior
offerings by the Company for the purposes of the rules and regulations of the
NASDAQ Global Market.
          4.33 Seniority. As of the Closing, no indebtedness or other equity of
the Company is senior to the Convertible Preferred Stock in right of payment,
whether with respect to interest or upon liquidation or dissolution, or
otherwise, other than (a) indebtedness secured by purchase money security
interests (which is senior only as to underlying assets covered thereby),
(b) capital lease obligations (which is senior only as to the property covered
thereby) and (c) the Company’s obligations under the Revolving Credit and Term
Loan Agreement, dated as of April 30, 2008, among Peerless Mfg. Co., PMC
Acquisition, Inc., the Company, Comerica Bank, as administrative agent for the
lenders, and the other lenders party thereto, as such credit facility may be
amended, restated, modified, renewed, replaced, supplemented or refinanced in
whole or in part from time to time (including successive amendments,
restatements, modifications, renewals, replacements, supplements or refinancings
and whether or not with the original administrative agent and lenders or another
administrative agent or agents or other lenders) (the “Credit Facility”);
provided, that any such amendment, restatement, modification, renewal,
replacement, supplement or refinancing shall not increase by more than ten
(10) percent the aggregate amount of the indebtedness and commitments covered
thereby as of the date hereof, or impose materially more restrictive limitations
on the payment of dividends on, or the redemption of, the Preferred Stock, than
those set forth therein as of the date hereof; provided, further, that the
modification of financial or other covenants (other than the covenant set forth
in Section 8.5 of the Credit Facility on the date hereof with respect to
dividends and redemptions) or defaults, which has the effect of making them more
restrictive, shall be deemed (for purposes of this Section 4.33) not to be an
additional restriction on the payment of dividends on, or the redemption of, the
Preferred Stock.
          4.34 Registration. The Company satisfies the eligibility requirements
for the use of a registration statement on Form S-3 to register the Conversion
Shares and the Warrant Shares for resale by the Purchasers under the Securities
Act.
          4.35 Shareholder Rights Plan. Assuming the accuracy of, and compliance
with, the Purchaser’s representations, warranties and covenants herein, by
reason of the Purchasers’ acquisition of Securities hereunder, no claim will be
made or enforced by the Company or, to the knowledge of the Company, any other
entity that any Purchaser is an “Acquiring Person” under any shareholder rights
plan or similar plan or arrangement in effect or hereafter adopted by the
Company, or that any Purchaser could be deemed to trigger the provisions of any
such plan or arrangement, by virtue of receiving Securities under the Agreement
or the Warrants or under any other agreement between the Company and the
Purchasers.

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          4.36 Acknowledgement Regarding Purchasers’ Trading Activity. Anything
in this Agreement or elsewhere herein to the contrary notwithstanding (except
for Section 5.10 hereof), it is understood and agreed by the Company that none
of the Purchasers have been asked to agree, nor has any Purchaser agreed, to
desist from purchasing or selling, long and/or short, securities of the Company,
or “derivative” securities based on securities issued by the Company or to hold
the Securities for any specified term. The Company further understands and
acknowledges that (a) one or more Purchasers may engage in hedging activities at
various times during the period that the Securities are outstanding, including,
without limitation, during the periods that the value of the Conversion Shares
and Warrant Shares deliverable with respect to Securities are being determined
and (b) such hedging activities (if any) could reduce the value of the existing
stockholders’ equity interests in the Company at and after the time that the
hedging activities are being conducted. The Company acknowledges that such
aforementioned hedging activities do not constitute a breach of the Agreement or
the Warrants.
          4.37 Reimbursement. If any Purchaser becomes involved in any capacity
in any action, suit or proceeding by or against any stockholder of the Company
(except as a result of sales, pledges, margin sales and similar transactions by
such Purchaser to or with any current stockholder), solely as a result of such
Purchaser’s acquisition of the Securities under this Agreement, the Company will
reimburse such Purchaser for its reasonable legal and other expenses (including
the cost of any investigation preparation and travel in connection therewith)
incurred in connection therewith, as such expenses are incurred. The
reimbursement obligations of the Company under this paragraph shall be in
addition to any liability which the Company may otherwise have, shall extend
upon the same terms and conditions to any affiliates of the Purchasers who are
actually named in such action, proceeding or investigation, and partners,
directors, agents, employees and controlling persons (if any), as the case may
be, of the Purchasers and any such affiliate (each, a “Purchaser Party”), and
shall be binding upon and inure to the benefit of any successors, assigns, heirs
and personal representatives of the Company, the Purchasers and any such
affiliate. If any action shall be brought against any Purchaser Party in respect
of which reimbursement may be sought pursuant to this Section 4.37, such
Purchaser Party shall promptly notify the Company in writing, and all Purchaser
Parties who are party to such action shall have the right to reimbursement for
reasonable fees and expenses for one counsel selected by such Purchaser Parties,
which counsel shall be reasonably satisfactory to the Company. Any Purchaser
Party shall have the right to employ separate counsel in any such action, but
the fees and expenses of such counsel shall be at the expense of such Purchaser
Party except to the extent that (i) the employment thereof has been specifically
authorized by the Company in writing, or (ii) in such action there is, in the
reasonable opinion of such separate counsel, a material conflict on any material
issue between the position of such Purchaser Party and the position of the other
Purchaser Parties who are party to such action. The Company will not be liable
to any Purchaser Party under this Agreement (i) for any settlement by a
Purchaser Party effected without the Company’s prior written consent, which
shall not be unreasonably withheld or delayed, or (ii) to the extent, but only
to the extent that a loss, claim, damage or liability is attributable to any
Purchaser Party’s breach of any of the representations, warranties, covenants or
agreements made by the Purchasers in this Agreement or the Warrants or is a
result of any violations by such Purchaser of state or federal securities laws
or any conduct by such Purchaser which constitutes fraud, gross negligence,
willful misconduct or malfeasance.

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          4.38 Use of Proceeds. The Company will use the proceeds received from
the issuance and sale of the Securities to repay debt obligations as required
under the Credit Facility and the Senior Subordinated Loan Agreement, dated as
of April 30, 2008, by and among the Company, Peerless, PMC Acquisition, Inc. and
Prospect Capital Corporation, subject to any amendments or waivers the Company
may receive prior to the Closing.
          4.39 Equal Treatment of Purchasers. No consideration shall be offered
or paid to any person to amend or consent to a waiver or modification of any
provision of any of the Agreement or the Warrants unless the same consideration
is also offered to all of the parties to the Agreement and the Warrants. For
clarification purposes, this provision constitutes a separate right granted to
each Purchaser by the Company and negotiated separately by each Purchaser, and
is intended for the Company to treat the Purchasers as a class and shall not in
any way be construed as the Purchasers acting in concert or as a group with
respect to the purchase, disposition or voting of Securities or otherwise.
          4.40 Preemptive Rights.
          (a) Subject to Section 4.40(g) below, from and after the Closing, each
Purchaser shall have the right to exercise the preemptive rights set forth in
this Section 4.40 (such Purchaser who exercises such right, an “Exercising
Party”). If the Company, at any time following the Closing, intends to offer any
of its equity securities, including any security convertible into, or
exercisable or exchangeable for, any equity security of the Company (any such
security, a “New Security”) (other than (i) a registered offering of Common
Stock, (ii) pursuant to the granting or exercise of compensatory stock options
or other equity-based awards pursuant to the Company’s stock incentive plans in
the ordinary course of equity compensation awards and any other compensatory
stock options or equity-based awards that may be considered an “inducement
grant” pursuant to NASDAQ Marketplace Rule 5635(c)(4), (iii) issuances of
securities to holders of securities of acquired entities in connection with
acquisition transactions, (iv) issuances of securities to holders of assets in
connection with acquisition transactions, (v) issuances of shares of Common
Stock issued upon conversion of, or as a dividend on, any convertible or
exchangeable securities of the Company issued pursuant to the transactions
contemplated hereby and (vi) distributions or issuances pursuant to the
Company’s rights plan), the Exercising Party shall be afforded the opportunity
to acquire from the Company a portion of such New Securities (the “Purchaser New
Securities”) for the same price (net of any underwriting discounts or sales
commissions) and on the same terms as such New Securities are sold to others, up
to the amount specified in the following sentence. The amount of Purchaser New
Securities that the Exercising Party shall be entitled to purchase in the
aggregate shall be determined by multiplying (x) the total number of such
offered shares of New Securities by (y) a fraction, the numerator of which is
the number of shares of Common Stock held by such Purchaser on a fully-diluted
basis (assuming conversion, exercise or exchange of all “in-the-money”
securities or other “in-the-money” interests convertible into, exercisable for
or exchangeable for shares of Common Stock) from either Conversion Shares or
Warrant Shares, as of such date, and the denominator of which is the number of
shares of Common Stock then outstanding on a fully-diluted basis (assuming
conversion, exercise or exchange of all “in-the-money” securities or other
“in-the-money” interests convertible into, exercisable for or exchangeable for
shares of Common Stock), as of such date (such fraction, a “Preemptive Rights
Fraction”).

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          (b) In the event the Company proposes to offer New Securities, it
shall deliver written notice thereof to each Purchaser (the “Offer Notice”),
which Offer Notice shall also describe the price, anticipated amount of New
Securities to be sold, the anticipated timing of such sale and the other
material terms upon which the Company proposes to offer same (including, in the
case of a registered public offering, to the extent possible, a copy of the
prospectus included in the registration statement filed with respect to such
offering, and, in the case of a private offering, any term sheet and other
offering materials used or prepared to be used by the Company in connection with
such offering) no later than five (5) business days, as the case may be, after
the initial filing of a registration statement with the SEC with respect to an
underwritten public offering, after the commencement of marketing with respect
to a Rule 144A offering or after the Company determines to pursue any other
offering. The Exercising Party shall have ten (10) business days from the date
of receipt of such notice to notify the Company in writing that it intends to
exercise such preemptive rights and as to the amount of New Securities the
Exercising Party desires to purchase, up to the maximum amount of Purchaser New
Securities calculated pursuant to Section 4.40(a) above (such notice, the
“Exercise Notice”). The failure of the Exercising Party to respond within such
ten (10) business day period shall be deemed a waiver of the Exercising Party’s
rights under this Section 4.40 only with respect to the offering described in
the applicable Offer Notice.
          (c) If the Exercising Party exercises its preemptive rights provided
in this Section 4.40, the closing of the purchase of the Purchaser New
Securities with respect to which such right has been exercised shall take place
simultaneously with the closing of the sale of the New Securities to the other
purchasers thereof (or, if such purchasers close on different dates,
simultaneously with the earliest of such closing date); provided, that the
closing may be extended for a maximum of ninety (90) days in order to comply
with applicable laws, rules and regulations (including receipt of any applicable
regulatory or stockholder approvals). Each of the Company and the Exercising
Party agrees to use its commercially reasonable efforts to secure any regulatory
or stockholder approvals or other consents applicable to it, and to comply with
any laws, rules and regulations as necessary in connection with the offer, sale
and purchase of such Purchaser New Securities.
          (d) In the event the Exercising Party fails to exercise its preemptive
rights as provided in this Section 4.40 within ten (10) business days or, if so
exercised, the Exercising Party is unable to consummate such purchase within the
time period specified in Section 4.40(c) above because of the failure to obtain
any required regulatory or stockholder consent or approval, the Company shall
thereafter be entitled, during the period of ninety (90) days following the
conclusion of the applicable period, to enter into an agreement (pursuant to
which the sale of the New Securities covered thereby shall be consummated, if at
all, within sixty (60) days from the date of such agreement) to sell the New
Securities not elected to be purchased pursuant to this Section 4.40 or which
the Exercising Party is unable to purchase because of such failure to obtain any
such consent or approval (such New Securities, “Remaining New Securities”), at a
price and upon terms no more favorable to the purchasers of such Remaining New
Securities than were specified in the Company’s original Offer Notice therefor.
In the event the Company has not sold the Remaining New Securities or entered
into an agreement to sell the Remaining New Securities within the ninety
(90)-day period (or sold and issued Remaining New Securities in accordance with
the foregoing within sixty (60) days from the date of such agreement), the
Company shall not thereafter offer, issue or sell such Remaining New Securities
without first offering such securities once again in the manner provided in
Section 4.40(a) and (b) above.

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          (e) The Company and each applicable Purchaser shall cooperate in good
faith to facilitate the exercise of the applicable Exercising Party’s preemptive
rights hereunder, including securing any required approvals or consents.
          (f) To the extent the procedure described in Section 4.40(a) through
(e) does not result in the purchase of all Remaining New Securities, if any,
such procedure shall be repeated for the benefit of any Exercising Party who has
successfully consummated the purchase of its Purchaser New Securities as offered
under the original Offer Notice until there are no Remaining New Securities.
          (g) To the extent that the terms of any offering of New Securities are
revised, the Company shall again comply with the procedures of this
Section 4.40, including delivery of a New Offering Notice; provided, however,
the Exercising Party shall only have three (3) business days from the date of
receipt of such notice to notify the Company pursuant to Section 4.40(b) if such
revisions are not material.
          (h) The preemptive rights under this Section 4.40 shall be terminated
and not exercisable if the liquidation preference of the Preferred Shares
outstanding is less than $5,000,000.
          4.41 Furnishing of Information. As long as any Purchaser owns
Securities, the Company covenants to timely file (or obtain extensions in
respect thereof and file within the applicable grace period) all reports
required to be filed by the Company after the date hereof pursuant to the
Exchange Act. As long as any Purchaser owns Securities, if the Company is not
required to file reports pursuant to the Exchange Act, it will prepare and
furnish to the Purchasers and make publicly available in accordance with Rule
144(c) such information as is required for the Purchasers to sell the Securities
under Rule 144.
          4.42 Stockholders Meeting. The Company shall, in accordance with the
laws of the State of Delaware and the Company’s certificate of incorporation and
bylaws, take all action necessary to duly call, give notice of, convene and hold
a meeting of stockholders for the purpose of obtaining the Stockholder Approval
(as defined in Section 5.13) as promptly as reasonably practicable, and in no
event later than December 31, 2009, including filing a proxy statement no later
than November 15, 2009, which includes the unanimous recommendation of the
Company’s Board of Directors for the Company’s stockholders to vote for the
Stockholder Approval, subject to the fiduciary obligations under applicable law
of the Company’s Board of Directors (as determined in good faith by the
Company’s Board of Directors after consultation with the Company’s outside
counsel).
          4.43 Restrictions on Dividends. During the period for which any of the
Preferred Shares are outstanding, the Company shall not enter into any
agreement, other than the Credit Facility, restricting its ability to perform
its obligations under this Agreement, the Certificate of Designations and the
Warrants, including, without limitation, the payment of dividends on, the making
of other distributions with respect to, and the redemption of, the Preferred
Shares.

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          SECTION 5. Representations, Warranties and Covenants of the Purchaser.
Each Purchaser hereby, for itself and no other Purchaser, represents and
warrants to, and covenants with, the Company, effective as of the Closing Date,
as follows:
          5.1 Investment Representations and Covenants. Such Purchaser
represents and warrants to, and covenants with, the Company that: (i) such
Purchaser is knowledgeable, sophisticated and experienced in making, and is
qualified to make, decisions with respect to investments in securities
representing an investment decision like that involved in the purchase of the
securities, including investments in securities issued by the Company and has
requested, received, reviewed and considered all information it deems relevant
in making an informed decision to purchase the Securities; (ii) such Purchaser
is acquiring the number of Securities set forth in Section 2 above in the
ordinary course of its business and for its own account for investment (as
defined for purposes of the Hart-Scott-Rodino Antitrust Improvement Act of 1976
and the regulations thereunder) only and with no present intention of
distributing any of such Securities or any arrangement or understanding with any
other persons regarding the distribution of such Securities within the meaning
of Section 2(11) of the Securities Act; (iii) such Purchaser will not, directly
or indirectly, offer, sell, pledge, transfer or otherwise dispose of (or solicit
any offers to buy, purchase or otherwise acquire or take a pledge of) any of the
Securities except in compliance with the Securities Act and the rules and
regulations promulgated thereunder; (iv) such Purchaser has completed or caused
to be completed the Stock Certificate Questionnaire attached hereto as Exhibit D
and the Registration Statement Questionnaire attached hereto as Exhibit E, for
use in preparation of the Registration Statement and the Certificate attached
hereto as Exhibit F-1 or F-2, as applicable, and the answers thereto are true
and correct as of the date hereof and will be true and correct as of the
effective date of the Registration Statement; (v) the Purchaser will notify the
Company immediately of any change in any of such information until such time as
the Purchaser has sold all of its Conversion Shares and Warrant Shares or until
the Company is no longer required to keep the Registration Statement effective;
(vi) the Purchaser has, in connection with its decision to purchase the number
of Securities set forth in Section 2 above, relied solely upon the SEC
Documents, Disclosure Schedules, Disclosure Materials and the representations
and warranties of the Company contained herein; (vii) such Purchaser understands
that except as set forth in Section 7, neither the Company nor any other person
is under any obligation to register the resale of the Securities, Conversion
Shares or Warrant Shares under the Securities Act or any state securities laws
or to comply with the terms and conditions of any exemption thereunder and that
the Registration Statement contemplated by Section 7 will only register for
resale the Conversion Shares and the Warrant Shares and not the Preferred Shares
and Warrants themselves; and (viii) such Purchaser is an “accredited investor”
within the meaning of Rule 501 of Regulation D promulgated under the Securities
Act.
          5.2 No General Solicitation. Such Purchaser is not purchasing the
Securities as a result of any “general solicitation” or “general advertising,”
as such terms are used in Regulation D under the Securities Act, including any
advertisement, article, notice or other communication regarding the Securities
published in any newspaper, magazine or similar media or broadcast over the
television or radio or presented at any seminar or any other general
solicitation or general advertisement. Prior to the time that such Purchaser was
first contacted

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with respect to the offer of Securities contemplated herein by the Company or
the Placement Agent, such Purchaser had a pre-existing and substantial
relationship with the Company or the Placement Agent.
          5.3 Compliance with Resale Requirements. Such Purchaser agrees that if
it decides to offer, sell or otherwise transfer any of the Securities, such
Securities may be offered, sold or otherwise transferred only pursuant to an
effective registration statement under the Securities Act or pursuant to an
applicable exemption from the registration requirements under the Securities
Act. In connection with any sale pursuant to an effective registration
statement, the Purchaser hereby covenants with the Company not to make any sale
of the Conversion Shares and Warrant Shares without satisfying the prospectus
delivery requirement under the Securities Act, if any, and such Purchaser
acknowledges and agrees that such Conversion Shares or Warrant Shares are not
transferable by such Purchaser on the books of the Company unless the
certificate submitted to the transfer agent evidencing the Conversion Shares or
Warrant Shares is accompanied by a separate officer’s certificate: (i) in the
form of Exhibit I hereto, (ii) executed by an officer of, or other authorized
person designated by, such Purchaser, and (iii) to the effect that (A) the
Conversion Shares or Warrant Shares, as the case may be, have been sold in
accordance with the Registration Statement, the Securities Act and the rules and
regulations promulgated thereunder and any applicable state securities or blue
sky laws and (B) the requirement of delivering a current prospectus has been
satisfied. Without prejudice to the Company’s obligations under Section 7.7,
such Purchaser acknowledges that there may occasionally be times when the
Company must suspend the use of the prospectus forming a part of the
Registration Statement until such time as an amendment or supplement to the
Registration Statement or such prospectus has been filed by the Company and
declared effective by the SEC, or until such time as the Company has filed an
appropriate report with the SEC pursuant to the Exchange Act. Such Purchaser
hereby covenants that it will not sell any Conversion Shares or Warrant Shares
pursuant to the prospectus forming a part of the Registration Statement during
the period commencing at the time at which the Company gives such Purchaser
written notice of the suspension of the use of said prospectus and ending at the
time the Company gives such Purchaser written notice that the Purchaser may
thereafter effect sales pursuant to said prospectus. Such Purchaser further
covenants to notify the Company promptly of the sale of all of its Conversion
Shares and Warrant Shares, if any.
          5.4 Filings. If required by applicable securities legislation,
regulatory policy or order, or if required or requested by any securities
commission, stock exchange or other regulatory authority, at the request of and
at the sole expense of the Company, such Purchaser will use commercially
reasonable efforts to execute, deliver and file and otherwise assist the Company
in filing reports, questionnaires, undertakings and other documents with respect
to the issue of the Securities.
          5.5 Organization; Authority. Such Purchaser is an entity duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization, to the extent such concepts are applicable
under the laws of such jurisdiction, with the requisite power and authority to
enter into and to consummate the transactions contemplated by this Agreement and
otherwise to carry out its obligations hereunder.

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          5.6 Authorization; Validity of Agreement. Such Purchaser further
represents and warrants to, and covenants with, the Company that (i) such
Purchaser has full right, power, authority and capacity to enter into this
Agreement and to consummate the transactions contemplated hereby and has taken
all necessary action to authorize the execution, delivery and performance of
this Agreement, and (ii) upon the execution and delivery of this Agreement, this
Agreement shall constitute a valid and binding obligation of such Purchaser
enforceable in accordance with its terms, except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditors’ and contracting parties’ rights generally and
except as enforceability may be subject to general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law).
          5.7 No Conflicts. The execution, delivery and performance by such
Purchaser of this Agreement and the consummation by such Purchaser of the
transactions contemplated hereby will not (i) result in a violation of the
organizational documents of such Purchaser or (ii) conflict with, or constitute
a default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any material agreement, indenture or instrument
to which such Purchaser is a party, or (iii) result in a violation of any law,
rule, regulation, order, judgment or decree (including federal and state
securities laws) applicable to such Purchaser, except in the case of clauses
(ii) and (iii) above, for such conflicts, defaults, rights or violations which
would not, individually or in the aggregate, reasonably be expected to have a
material adverse effect on the ability of such Purchaser to perform its
obligations hereunder.
          5.8 Requirements of Foreign Jurisdictions. Such Purchaser acknowledges
and agrees that no action has been or will be taken in any jurisdiction outside
the United States by the Company or the Placement Agent that would permit an
offering of the Securities, or possession or distribution of offering materials
in connection with the issue of the Securities, in any jurisdiction outside the
United States where action for that purpose is required. Each Purchaser outside
the United States will comply with all applicable laws and regulations in each
foreign jurisdiction in which it purchases, offers, sells or delivers Securities
or has in its possession or distributes any offering material, in all cases at
its own expense. The Placement Agent is not authorized to make any
representation or use any information in connection with the issue, placement,
purchase and sale of the Securities.
          5.9 No Legal, Tax or Investment Advice. Such Purchaser understands
that nothing in this Agreement or any other materials presented to such
Purchaser in connection with the purchase and sale of the Securities constitutes
legal, tax or investment advice. Such Purchaser has consulted such legal, tax
and investment advisors as it, in its sole discretion, has deemed necessary or
appropriate in connection with its purchase of Securities.
          5.10 Trading Restrictions and Confidentiality.
          (a) Other than the transaction contemplated hereunder, such Purchaser
has not directly or indirectly, nor has anyone acting on behalf of or pursuant
to any understanding with such Purchaser, executed any disposition, including
short sales as defined in Rule 200 of Regulation SHO under the Exchange Act
(“Short Sales”) (but not including the location and/or

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reservation of borrowable shares of Common Stock), in the securities of the
Company during the period commencing from the time that such Purchaser first
received a term sheet from the Company or any other entity setting forth the
material terms of the transactions contemplated hereunder until the date hereof.
Such Purchaser covenants that neither it nor any person acting on its behalf or
pursuant to any understanding with such Purchaser will engage, directly or
indirectly, in any transactions in the securities of the Company (including
Short Sales) prior to the time the Company is required to file the 2009
Form 10-K, including any extension permitted by Rule 12b-25 of the Exchange Act.
Notwithstanding the foregoing, in the case of a Purchaser that is a
multi-managed investment vehicle whereby separate portfolio managers manage
separate portions of such Purchaser’s assets and the portfolio managers have no
direct knowledge of the investment decisions made by the portfolio managers
managing other portions of such Purchaser’s assets, the representation and
covenant set forth above shall only apply with respect to the portion of assets
managed by the portfolio manager that made the investment decision to purchase
the Securities covered by this Agreement.
          (b) Beginning on the 120th day prior to the fifth anniversary of the
date hereof, such Purchaser will not, directly or indirectly, nor will anyone
acting on behalf of or pursuant to any understanding with such Purchaser, engage
in any Short Sales in the securities of the Company with the intent of
depressing the price of the Common Stock. Notwithstanding the foregoing, in the
case of a Purchaser that is a multi-managed investment vehicle whereby separate
portfolio managers manage separate portions of such Purchaser’s assets and the
portfolio managers have no direct knowledge of the investment decisions made by
the portfolio managers managing other portions of such Purchaser’s assets, the
representation and covenant set forth above shall only apply with respect to the
portion of assets managed by the portfolio manager that made the investment
decision to purchase the Securities covered by this Agreement.
          (c) Notwithstanding the provisions of this Section 5.10, no Purchaser
who shares dispositive power with respect to shares of Common Stock prior to the
date hereof with BAHI (defined below) shall be deemed to have engaged in any
transaction in the securities of the Company (including Short Sales) in the
event another person that is not a Purchaser and shares dispositive power over
shares of Common Stock with BAHI engages in any transaction in the securities of
the Company (including Short Sales); provided, that neither BAHI nor any other
Purchaser shall have informed such person, directly or indirectly, of any
Purchaser’s or BAHI’s investment decision with respect to the Securities or the
information included in the Disclosure Materials.
          5.11 Beneficial Ownership; Group Status.
          (a) By reason of the acquisition of the Securities hereunder (assuming
the acquisition of the Warrant Shares on the date hereof), such Purchaser would
not be required to make any filing in accordance with Section 13(d) of the
Exchange Act as a group with any other Purchaser or other beneficial owner of
Common Stock resulting in any such group having beneficial ownership of more
than 9.9% of the Common Stock, other than any group including Brown Advisory
Holdings Incorporated or its affiliates (“BAHI”) with beneficial ownership equal
to or less than 49.9% of the Common Stock.

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          (b) Such Purchaser will not share voting power or dispositive power
with respect to the Securities, Conversion Shares or Warrant Shares with any
person if such shared voting or dispositive power would result in any such
person beneficially owning more than 9.9% of the Common Stock; provided,
however, such Purchaser may share dispositive power with respect to the
Securities, Conversion Shares or Warrant Shares with BAHI.
          5.12 Restrictive Legend. The Purchaser understands that, until such
time as the Registration Statement has been declared effective (with respect to
the Conversion Shares and Warrant Shares) or the Securities, Conversion Shares
or Warrant Shares may be sold pursuant to Rule 144 under the Securities Act
without any restriction as to the number of securities as of a particular date
that can then be immediately sold, the certificates or other instruments
representing the Securities, Conversion Shares and Warrant Shares, and all
certificates or other instruments issued in exchange therefore or in
substitution thereof, shall bear a restrictive legend in substantially the
following form (and a stop-transfer order may be placed against transfer of the
certificates for the Conversion Shares and Warrant Shares):
“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES MAY NOT BE SOLD,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION OF COUNSEL OR OTHER EVIDENCE,
IN FORM, SUBSTANCE AND SCOPE REASONABLY ACCEPTABLE TO THE COMPANY AND ITS
COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED UNDER SAID ACT.”
          5.13 Acknowledgment of Issuance Limitations. Such Purchaser
acknowledges:
          (a) no holder of Preferred Shares will be entitled to receive
Conversion Shares or other shares of Common Stock issuable upon redemption,
dividend payments, or as otherwise provided in the Certificate of Designations,
to the extent (but only to the extent) that such receipt would cause the
aggregate number of Conversion Shares and other shares of Common Stock issued
upon redemption, dividend payments, or as otherwise provided in the Certificate
of Designations, to all Purchasers, to represent more than 19.99% of the number
of shares of Common Stock outstanding on the Closing Date (the “Nasdaq Issuance
Limitation”), unless the Company obtains the requisite stockholder approval
under NASDAQ Marketplace Rule 5635(d) (the “Nasdaq Stockholder Approval”), in
which case, the Nasdaq Issuance Limitation would no longer apply to the
Purchasers;
          (b) no holder of Preferred Shares will be entitled to receive shares
of Common Stock issuable upon redemption, dividend payments, or otherwise,
pursuant to the Certificate of Designations to the extent (but only to the
extent) that such receipt would cause such holder to become, directly or
indirectly, a “beneficial owner” (within the meaning of Section 13(d) of the
Exchange Act and the rules and regulations promulgated thereunder) of more than
9.9% of the shares of Common Stock outstanding at such time, other than any
group including BAHI; and

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          (c) no holder of Securities will be entitled to receive Conversion
Shares or other shares of Common Stock issuable upon redemption of or dividend
payments on the Preferred Stock, to the extent (but only to the extent) that
such receipt would cause the aggregate number of shares of Common Stock so
issued to all Purchasers, to represent more than 8,879,374 shares of Common
Stock, (the “Maximum Share Limitation”) unless the Company obtains stockholder
approval of an amendment to the Company’s certificate of incorporation
increasing the number of authorized shares thereunder by 25,000,000 shares (the
“Amendment Stockholder Approval”, and together with the Nasdaq Stockholder
Approval, the “Stockholder Approval”).
          SECTION 6. Termination of Representations, Warranties and Agreements.
All covenants, agreements, representations and warranties made by the Company
and the Purchasers herein shall survive the Closing and the delivery, exercise
and conversion of the Securities, as applicable, in accordance with their terms
and for the applicable statute of limitations.
          SECTION 7. Registration of Shares; Compliance with the Securities Act.
          7.1 Registration Procedures and Expenses. The Company shall:
          (a) as soon as reasonably practicable following the Closing Date, but
in no event by the later of thirty (30) days following the Closing Date and ten
(10) calendar days after the Company files the 2009 Form 10-K with the SEC (the
“Filing Date”), prepare and file with the SEC a Registration Statement on Form
S-3 (or any successor form to Form S-3) (the “S-3 Registration Statement”)
relating to the resale of all of the Conversion Shares and Warrant Shares by the
Purchasers, together with any shares of capital stock issued or issuable, from
time to time, upon any reclassification, share combination, share subdivision,
stock split, share dividend or similar transaction or event or otherwise as a
distribution on, in exchange for or with respect to any of the foregoing, in
each case held at the relevant time by a Purchaser (the “Registrable
Securities”); provided, however, that in the event that the SEC specifically
prohibits the S-3 Registration Statement from including all Registrable
Securities of each Purchaser (“Commission Guidance”) (provided, that the Company
shall advocate with the SEC for the registration of all or the maximum number of
the Registrable Securities permitted by Commission Guidance), then the Company
will file such additional Registration Statements (the “Subsequent Registration
Statements,” together with the Initial Registration Statement, the “Registration
Statements”) at the earliest practicable date on which the Company is permitted
by Commission Guidance to file such additional Registration Statements related
to the Registrable Securities. If any Commission Guidance specifically limits
the number of Registrable Securities to be registered on a particular
Registration Statement, the number of Registrable Securities to be registered on
such Registration Statement will first be reduced by the Registrable Securities
represented by Warrant Shares on a pro rata basis based on the total number of
unregistered Warrant Shares held by such Purchasers on a fully diluted basis,
and second by the Registrable Securities represented by Conversion Shares on a
pro rata basis based on the total number of unregistered Preferred Shares held
by such Purchasers. If the context so requires, Conversion Shares and Warrant
Shares of any Purchaser will not be considered Registrable Securities for the
purposes of a certain determination of Registrable Securities hereunder if, at
that time of such determination, they can be sold pursuant to Rule 144 without
volume or manner of sales limitations or have been sold under an effective
Registration Statement. In the event that Form S-3 (or any successor form to
Form S-3) becomes unavailable to maintain registration of the

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resale of the Conversion Shares and Warrant Shares at any time prior to the
expiration of the Effectiveness Period pursuant to Section 7.1(c), the Company
shall prepare and file with the SEC, as soon as reasonably practicable following
the Closing but in no event by the Filing Date, a registration statement on Form
S-1 (or any successor to Form S 1), covering the resale of the Conversion Shares
and Warrant Shares (the “S-1 Registration Statement” and collectively with the
S-3 Registration Statement, the “Registration Statement”);
          (b) use its reasonable best efforts, subject to receipt of necessary
information from the Purchasers, to cause the SEC to declare the Registration
Statement effective within ninety (90) calendar days of the Closing Date (the
“Required Effective Date”); provided, however, that if the Registration
Statement receives SEC review, then the Required Effective Date will be the
120th calendar day after the Closing Date. If the Company receives notification
from the SEC that the Registration Statement will receive no action or review
from the SEC, then the Company will use its reasonable best efforts to cause the
Registration Statement to become effective within five (5) business days after
such notification;
          (c) prepare and file with the SEC (and promptly notify the Purchasers
of such filing) such amendments, including post-effective amendments, and
supplements to the Registration Statement and the prospectus used in connection
therewith as may be necessary to keep the Registration Statement continuously
effective until the earlier of (i) the first anniversary of the date hereof,
(ii) the date on which all Registrable Securities have been resold under the
Registration Statement or (iii) the date on which the Registrable Securities may
be resold by the Purchasers without registration by reason of Rule 144 under the
Securities Act or any other rule of similar effect without volume or manner of
sale limitations (the period ending on the earliest such date, the
“Effectiveness Period”);
          (d) furnish to the Purchasers with respect to the Conversion Shares
and Warrant Shares registered under the Registration Statement (and to each
underwriter, if any, of such Conversion Shares and Warrant Shares) such
reasonable number of copies of prospectuses and such other documents as the
Purchasers may reasonably request, in order to facilitate the public sale or
other disposition of all or any of the Conversion Shares and Warrant Shares by
the Purchaser;
          (e) comply with all applicable rules and regulations of the SEC under
the Securities Act and the Exchange Act, including, without limitation, Rule 172
under the Securities Act, file any final Prospectus (as defined in Section 7.3),
including any supplement or amendment thereof, with the SEC pursuant to Rule 424
under the Securities Act, promptly inform each Purchaser in writing if, at any
time during the Effectiveness Period, the Company does not satisfy the
conditions specified in Rule 172 and, as a result thereof, the Purchasers are
required to deliver a Prospectus in connection with any disposition of the
Conversion Shares or Warrant Shares and take such other actions as may be
reasonably necessary to facilitate the registration of the Conversion Shares and
Warrant Shares hereunder;

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          (f) advise each Purchaser promptly:
(i) of any request by the SEC for amendments to the Registration Statement or
amendments to the prospectus or for additional information relating thereto;
(ii) of the issuance by the SEC of any stop order suspending the effectiveness
of the Registration Statement under the Securities Act or of the suspension by
any state securities commission of the qualification of the Conversion Shares or
Warrant Shares for offering or sale in any jurisdiction, or the initiation of
any proceeding for any preceding of the purposes; and
(iii) of the existence of any fact and the happening of any event that makes any
statement of a material fact made in the Registration Statement, the prospectus
and amendment or supplement thereto, or any document incorporated by reference
therein, untrue, or that requires the making of any additions to or changes in
the Registration Statement or the prospectus in order to make the statements
therein, in the light of the circumstances in which they were made, not
misleading; and
          (g) bear all expenses in connection with the procedures in paragraphs
(a) through (f) of this Section 7.1 and the registration of the Conversion
Shares and Warrant Shares pursuant to the Registration Statement, other than
fees and expenses, if any, of counsel or other advisers to the Purchasers or
underwriting discounts, brokerage fees and commissions incurred by the
Purchasers, if any.
          (h) use its best efforts to avoid the issuance of, or, if issued,
obtain the withdrawal of any order suspending the effectiveness of a
Registration Statement, at the earliest practicable moment.
          (i) if FINRA Rule 5190 requires any broker-dealer to make a filing
prior to executing a sale by a Purchaser, the Company shall (i) make such filing
with the Financial Industry Regulatory Authority, Inc. Market
Regulation Department pursuant to FINRA Rule 5190(c), (ii) respond within five
Trading Days to any comments received from FINRA in connection therewith, and
(iii) pay the filing fee required in connection therewith.
          (j) prior to any resale of Registrable Securities by a Purchaser, use
its commercially reasonable efforts to register or qualify or cooperate with
such Purchaser in connection with the registration or qualification (or
exemption from the registration or qualification) of such Registrable Securities
for the resale by such Purchaser under the securities or blue sky laws of such
jurisdictions within the United States as any Purchaser reasonably requests in
writing, to keep each registration or qualification (or exemption therefrom)
effective during the Effectiveness Period and to do any and all other acts or
things reasonably necessary to enable the disposition in such jurisdictions of
the Registrable Securities covered by each Registration Statement; provided,
that the Company shall not be required to qualify generally to do business in
any jurisdiction where it is not then so qualified, subject the Company to any
material tax in any such jurisdiction where it is not then so subject or file a
general consent to service of process in any such jurisdiction.

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          7.2 Transfer of Conversion Shares and Warrant Shares After
Registration. The Purchasers agree not to effect any disposition of the
Conversion Shares or Warrant Shares or the right to purchase the Conversion
Shares or Warrant Shares that would constitute a sale within the meaning of the
Securities Act, except as contemplated in the Registration Statement referred to
in Section 7.1 or as otherwise permitted by the Securities Act or applicable
law, and that the Purchasers will promptly notify the Company of any changes in
the information set forth in the Registration Statement regarding such Purchaser
or its plan of distribution, as described on the Registration Statement
Questionnaire attached hereto as Exhibit E.
          7.3 Indemnification. For the purpose of this Section 7.3:
(i) the term “Purchaser” shall include the Purchaser and any affiliate of such
Purchaser; and
(ii) the term “Registration Statement” shall include any final prospectus,
exhibit, supplement or amendment included in or relating to the Registration
Statement referred to in Section 7.1.
          (a) The Company agrees to indemnify and hold harmless each of the
Purchasers and each person, if any, who controls any Purchaser within the
meaning of the Securities Act, against any losses, claims, damages, liabilities
or expenses, joint or several, to which such Purchasers or such controlling
persons may become subject, under the Securities Act, the Exchange Act, or any
other federal or state statutory law or regulation, or at common law or
otherwise (including in settlement of any litigation, if such settlement is
effected with the written consent of the Company), insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof as
contemplated below) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement, including the prospectus, financial statements and schedules, and all
other documents filed as a part thereof, as amended at the time of effectiveness
of the Registration Statement, including any information deemed to be a part
thereof as of the time of effectiveness pursuant to paragraph (b) of Rule 430A,
Rule 434 or other rules and regulations promulgated under the Securities Act, or
the prospectus, in the form first filed with the SEC pursuant to Rule 424(b)
under the Securities Act, or filed as part of the Registration Statement at the
time of effectiveness if no Rule 424(b) filing is required (the “Prospectus”),
or any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state in any of them a material fact required to
be stated therein or necessary to make the statements in any of them, in the
light of the circumstances under which they were made, not misleading, or arise
out of or are based in whole or in part on any inaccuracy in the representations
and warranties of the Company contained in this Agreement, or any failure of the
Company to perform its obligations hereunder or under law, and will reimburse
each of the Purchasers and each such Purchaser’s controlling persons for any
legal and other expenses as such expenses are reasonably incurred by such
Purchasers or such controlling persons in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action; provided, however, that the Company will not be
liable in any such case to a Purchaser or such Purchaser’s controlling persons
to the extent that any such loss, claim, damage, liability or expense arises
solely out of or is based upon (i) an untrue statement or alleged untrue
statement or omission or alleged omission made in the Registration Statement,
the Prospectus or any amendment or

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supplement thereto in reliance upon and in conformity with written information
furnished to the Company by or on behalf of such Purchaser expressly for use
therein, (ii) the failure of such Purchaser to comply with the covenants and
agreements contained in Sections 5.3 or 7.2 hereof respecting sale of the
Conversion Shares and Warrant Shares (unless such failure shall be a result of
the Company breaching any of its obligations to such Purchaser hereunder),
(iii) the inaccuracy of any representations made by such Purchaser herein or
(iv) any statement or omission in any Prospectus that is corrected in any
subsequent Prospectus that was delivered to such Purchaser prior to the
pertinent sale or sales by such Purchaser.
          (b) Each Purchaser will severally, and not jointly, indemnify and hold
harmless the Company, each of its directors, each of its officers who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Securities Act, against any losses, claims, damages,
liabilities or expenses to which the Company, each of its directors, each of its
officers who signed the Registration Statement or controlling person may become
subject, under the Securities Act, the Exchange Act, or any other federal or
state statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of such Purchaser) insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof as contemplated below) arise out of
or are based upon (i) any failure to comply with the covenants and agreements
contained in Sections 5.3 or 7.2 hereof respecting the sale of the Conversion
Shares and Warrant Shares (unless such failure shall be a result of the Company
breaching any of its obligations to such Purchaser hereunder), (ii) the
inaccuracy of any representation made by such Purchaser herein or (iii) any
untrue or alleged untrue statement of any material fact contained in the
Registration Statement, the Prospectus, or any amendment or supplement thereto,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances in which they were made,
not misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in the Registration Statement, the Prospectus, or any amendment or
supplement thereto, in reliance upon and in conformity with written information
furnished to the Company by or on behalf of such Purchaser expressly for use
therein, and will reimburse the Company, each of its directors, each of its
officers who signed the Registration Statement or controlling person for any
legal and other expense reasonably incurred by the Company, each of its
directors, each of its officers who signed the Registration Statement or
controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action; provided, however, that no Purchaser shall be liable for any amount in
excess of the net proceeds (the “Net Proceeds”) received by such Purchaser with
respect to such Purchaser’s sale of the Conversion Shares and Warrant Shares.
          (c) Promptly after receipt by an indemnified party under this
Section 7.3 of notice of the threat or commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against an
indemnifying party under this Section 7.3 promptly notify the indemnifying party
in writing thereof; but the omission to so notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party for
contribution or otherwise than under the indemnity agreement contained in this
Section 7.3 or to the extent it is not materially prejudiced as a result of such
failure. In case any such action is brought against any indemnified party and
such indemnified party seeks or intends to seek

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indemnity from an indemnifying party, the indemnifying party will be entitled to
participate in, and, to the extent that it may wish, jointly with all other
indemnifying parties similarly notified, to assume the defense thereof with
counsel reasonably satisfactory to such indemnified party; provided, however,
that if the defendants in any such action include both the indemnified party and
the indemnifying party and the indemnified party shall have reasonably concluded
that there may be a conflict between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of its election so to
assume the defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified party
under this Section 7.3 for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed such counsel in connection with the
assumption of legal defenses in accordance with the proviso to the preceding
sentence (it being understood, however, that the indemnifying party shall not be
liable for the expenses of more than one separate counsel (plus one local
counsel in each applicable jurisdiction), approved by such indemnifying party in
the case of paragraph (a), representing the indemnified parties who are parties
to such action) or (ii) the indemnified party shall not have employed counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party within a reasonable time after notice of commencement of action, in each
of which cases the reasonable fees and expenses of counsel shall be at the
expense of the indemnifying party.
          (d) If the indemnification provided for in this Section 7.3 is
required by its terms but is for any reason held to be unavailable to or
otherwise insufficient to hold harmless an indemnified party under paragraphs
(a), (b) or (c) of this Section 7.3 in respect to any losses, claims, damages,
liabilities or expenses referred to herein, then each applicable indemnifying
party shall contribute to the amount paid or payable by such indemnified party
as a result of any losses, claims, damages, liabilities or expenses referred to
herein (i) in such proportion as is appropriate to reflect the relative fault of
the Company and any such Purchaser in connection with the statements or
omissions or inaccuracies in the representations and warranties in this
Agreement which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
fault of the Company and each Purchaser shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact or the
inaccurate or the alleged inaccurate representation and/or warranty relates to
information supplied by the Company or by each such Purchaser and the parties’
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The amount paid or payable by a party as a
result of the losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include, subject to the limitations set forth in
paragraph (c) of this Section 7.3, any legal or other fees or expenses
reasonably incurred by such party in connection with investigating or defending
any action or claim. The provisions set forth in paragraph (c) of this
Section 7.3 with respect to the notice of the threat or commencement of any
threat or action shall apply if a claim for contribution is to be made under
this paragraph (d); provided, however, that no additional notice shall be
required with respect to any threat or action

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for which notice has been given under paragraph (c) for purposes of
indemnification. The Company and each Purchaser agree that it would not be just
and equitable if contribution pursuant to this Section 7.3 were determined
solely by pro rata allocation (even if the Purchasers were treated as one entity
for such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to in this paragraph.
Notwithstanding the provisions of this Section 7.3, no Purchaser shall be
required to contribute any amount in excess of the amount by which the Net
Proceeds exceeds the amount of any damages that such Purchaser has otherwise
been required to pay by reason of all such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Purchasers’ obligations to contribute pursuant to this
Section 7.3 are several and not joint.
          7.4 Termination of Conditions and Obligations. The restrictions
imposed by Section 5 or this Section 7 upon the transferability of the
Conversion Shares and Warrant Shares shall cease and terminate as to any
particular number of the Conversion Shares and Warrant Shares upon the
expiration of the Effectiveness Period or at such time as an opinion of counsel
satisfactory in form and substance to the Company shall have been rendered to
the effect that such conditions are not necessary in order to comply with the
Securities Act.
          7.5 Information Available. So long as the Registration Statement is
effective covering the resale of Conversion Shares and Warrant Shares owned by
the Purchasers, the Company will furnish (or, in the case of the documents
listed in clause (a)(ii), (iii) and (iv), make available via the SEC’s EDGAR
website) to the Purchasers:
          (a) as soon as practicable after available (but in the case of the
Company’s Annual Report to Stockholders, within 120 days after the end of each
fiscal year of the Company), one copy of (i) its Annual Report to Stockholders
(which Annual Report shall contain financial statements audited in accordance
with generally accepted accounting principles by a national firm of certified
public accountants), (ii) if not included in substance in the Annual Report to
Stockholders, its Annual Report on Form 10-K, (iii) its quarterly reports on
Form 10-Q, and (iv) a full copy of the particular Registration Statement
covering the Conversion Shares and Warrant Shares (the foregoing, in each case,
excluding exhibits);
          (b) upon the reasonable request of a Purchaser, a reasonable number of
copies of the prospectuses to supply to any other party requiring such
prospectuses;
and the Company, upon the reasonable request of a Purchaser, will meet with such
Purchaser or a representative thereof at the Company’s headquarters to discuss
information relevant for disclosure in the Registration Statement covering the
Conversion Shares and Warrant Shares subject to appropriate confidentiality
limitations.
          7.6 Allowed Delays in Effectiveness. For not more than twenty
(20) consecutive days or for a total of not more than forty (40) days in any
twelve (12) month period, the Company may delay the disclosure of material
non-public information concerning the Company, by suspending the use of any
Prospectus included in the Registration Statement, the disclosure of which at
the time of such suspension is not, in the good faith opinion of the

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Company, in the best interests of the Company (an “Allowed Delay”); provided,
however, if Form S-3 (or any successor form to Form S-3) becomes unavailable to
maintain the registration of the resale of the Conversion Shares and Warrant
Shares at any time prior to the expiration of the Effectiveness Period and the
Company is required to file a registration statement on Form S-1 (or any
successor to Form S-1) pursuant to Section 7.1, then such Allowed Delay shall be
increased to not more than sixty (60) consecutive days or for a total of not
more than sixty (60) days in any twelve (12) month period. Upon the occurrence
of an Allowed Delay, the Company shall promptly (a) notify each Purchaser in
writing of the existence of an Allowed Delay (but in no event, without the prior
written consent of a Purchaser, shall the Company disclose to such Purchaser any
of the facts or circumstances regarding material non-public information giving
rise to an Allowed Delay), (b) advise each Purchaser in writing to cease all
sales under the Registration Statement until the end of the Allowed Delay and
(c) use reasonable best efforts to terminate an Allowed Delay as promptly as
practicable. In connection with any such notice, the Company shall not provide
any material nonpublic information to the Purchasers unless subsequently
requested by such Purchasers.
          7.7 Damages. Should an Event (as defined below) occur, then upon the
occurrence of such Event, each Purchaser shall be entitled to damages from the
Company equal to one percent (1.0%) per month of the aggregate Purchase Price
paid by such Purchaser to the Company with respect to the Preferred Shares then
held by such Purchaser. Any such damages payable pursuant to the terms hereof
(i) shall be payable within five (5) days after each monthly anniversary of such
Event until the applicable Event is cured and (ii) apply on a pro rated basis
for any portion of a month prior to the cure of an Event. All pro rated
calculations made pursuant to this paragraph shall be based upon the actual
number of days in such pro rated month.
     For purposes of this Section 7.7, each of the following shall constitute an
“Event”: (i) the Registration Statement is not filed by the Company with the SEC
on or prior to the Filing Date, or is not declared effective by the SEC by the
Required Effective Date and (ii) if the Registration Statement is filed and
declared effective but, during the Effectiveness Period, the Registration
Statement shall thereafter cease to be effective or fails to be usable for its
intended purpose, other than as a result of an Allowed Delay. Notwithstanding
the foregoing provisions, in no event shall the Company be obligated to pay such
damages to more than one Purchaser in respect of the same Securities for the
same period of time. Such payments shall be made to the Purchasers in cash.
          SECTION 8. Broker’s Fee. The Purchasers acknowledge that the Company
intends to pay to the Placement Agent a fee in respect of the sale of the
Securities to the Purchasers. Each of the parties hereto hereby represents that,
on the basis of any actions and agreements by it, there are no other brokers or
finders entitled to compensation in connection with the sale of the Securities
to the Purchasers.
          SECTION 9. Notices. All notices, requests, consents and other
communications hereunder shall be in writing, shall be mailed by first-class
registered or certified airmail, facsimile (with receipt confirmed by telephone)
or nationally recognized overnight express courier postage prepaid, and shall be
deemed given when so mailed and shall be delivered as addressed as follows:

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  (a) if to the Company, to:         PMFG, Inc.
14651 North Dallas Parkway
Suite 500
Dallas, Texas 75254
Attention: Melissa G. Beare
Facsimile: (214) 351-4172       with a copy to:         Jones Day
2727 North Harwood Street
Dallas, Texas 75201
Attention: James E. O’Bannon
Facsimile: (214) 969-5100       or to such other person at such other place as
the Company shall designate to the Purchasers in writing; and

          (b) if to the Purchasers, at the addresses as set forth on the
signature pages of this Agreement, or at such other addresses as may have been
furnished to the Company in writing.
          SECTION 10. Changes. With the exception of Section 7 hereof, this
Agreement may not be modified or amended except pursuant to an instrument in
writing signed by the Company and Purchasers holding a majority of the
liquidation preference of the Preferred Shares; provided, that any such
modification or amendment to this Section 10 may not affect the following
sentence governing amendments and waivers to Section 7 hereof. With respect to
Section 7 hereof, with the written consent of the Company and holders of a
majority of the Securities then outstanding, the terms of the Agreement may be
waived or amended and any such waiver or amendment shall be binding upon the
Company and all holders of Securities.
          SECTION 11. Headings. The headings of the various sections of this
Agreement have been inserted for convenience of reference only and shall not be
deemed to be part of this Agreement.
          SECTION 12. Severability. In case any provision contained in this
Agreement should be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.
          SECTION 13. Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties and their successors and permitted
assigns. The Company may not assign this Agreement or any rights or obligations
hereunder without the prior written consent of each Purchaser, except in
connection with a consolidation, reorganization, merger, sale of substantially
all of the Company’s assets or otherwise pursuant to assignments by operation of
law. Any Purchaser may assign any or all of its rights under this Agreement to
any

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entity to whom such Purchaser assigns or transfers any Securities, provided such
transferee agrees in writing to be bound, with respect to the transferred
Securities, by the provisions hereof that apply to the “Purchasers”.
          SECTION 14. Governing Law; Jurisdiction. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York,
without giving effect to the principles of conflicts of laws. Each party hereby
irrevocably submits to the non-exclusive jurisdiction of the state and federal
courts sitting in the City and County of New York for the adjudication of any
dispute hereunder or in connection herewith or with any transaction contemplated
hereby (including without limitation any dispute under or with respect to the
Agreement and the Warrants), and hereby irrevocably waives, and agrees not to
assert in any suit, action or proceeding involving any Purchaser or permitted
assignee of such Purchaser, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address in effect for notices to it
under this Agreement and agrees that such service shall constitute good and
sufficient service of process and notice thereof. Nothing contained herein shall
be deemed to limit in any way any right to serve process in any manner permitted
by law.
          SECTION 15. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall constitute an original, but all of which,
when taken together, shall constitute but one instrument, and shall become
effective when one or more counterparts have been signed by each party hereto
and delivered to the other parties.
          SECTION 16. Independent Nature of Purchasers’ Obligations and Rights.
No Purchaser shall be responsible in any way for the performance of the
obligations of any other Purchaser under the Agreement. Nothing contained herein
and no action taken by any Purchaser pursuant to the Agreement shall be deemed
to constitute the Purchasers as a partnership, an association, a joint venture
or any other kind of entity, or create a presumption that the Purchasers are in
any way acting in concert or as a group, or are deemed affiliates (as such term
is defined under the Exchange Act) with respect to such obligations or the
transactions contemplated by this Agreement. Each Purchaser shall be entitled to
independently protect and enforce its rights, including without limitation the
rights arising out of the Agreement, and it shall not be necessary for any other
Purchaser to be joined as an additional party in any proceeding for such
purpose.
          SECTION 17. Fees and Expenses. The Company shall (i) at the Closing,
pay the fees and expenses of its advisers (other than the Placement Agent),
counsel, accountants and other experts, if any, the reasonable legal fees and
expenses incurred by the Purchasers, and all other expenses incurred by the
Company, in each case incident to the negotiation, preparation, execution,
delivery and performance of this Agreement, (ii) pay all Transfer Agent fees,
stamp taxes and other taxes and duties levied in connection with the sale and
issuance of their applicable Securities and (iii) reimburse the Purchasers for
reasonable legal fees and expenses incurred by the Purchasers with respect to
the review of the Registration Statement and Subsequent Registration Statements.

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

            PMFG, INC.
      By   /s/ Peter J. Burlage         Peter J. Burlage        President and
Chief Executive Officer     

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGES FOR PURCHASERS FOLLOW]

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[SIGNATURE PAGES INTENTIONALLY OMITTED. PLEASE SEE ATTACHED
SCHEDULE FOR NAMES OF PURCHASERS AND NUMBER OF SHARES OF
PREFERRED STOCK PURCHASED]

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SCHEDULE OF PURCHASERS AND SHARES PURCHASED

          Purchaser   Number of Shares Purchased
1. AARD Defined Pension Plan
    75    
2. Frederick Battenfeld
    100    
3. Suzanne Battenfeld
    250    
4. Suzanne Battenfeld
    250    
5. Richard A. Bayles Revocable Trust
    1,000    
6. Peter E. Bennett
    500    
7. Frank A. Bonsal Irrevocable Trust
    150    
8. Edward L. Cahill
    200    
9. David J. Callard Living Trust
    500    
10. Martin A. Desmery (IRA)
    200    
11. Drake, Loeb, Heller, Kennedy, Gogerty, Gaba & Rodd 401K, Profit Sharing Plan
& Trust
    200    
12. Richard J. and Margaret D. Drake Joint
    100    
13. EFCO Products Pension Plan
    200    
14. EFCO Products PSP Plan
    100    
15. Ganfer and Shore LLP Pension Plan
    50    
16. Ganfer and Shore LLP PSP
    100    
17. Richard A. Gerentine and Domenica L. Gerentine
    125    
18. Lynn E. Gorguze Separate Property Trust
    2,500    
19. Vincent and Gloria Gorguze Trust
    2,500    
20. Paul J. Huston and Linda A. Huston
    100    
21. Jacques Kohn
    250    
22. Margot W. Kohn
    250  

 

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          Purchaser   Number of Shares Purchased
23. Estate of Barbara Krieger
    250    
24. John Monfort (IRA)
    2,000    
25. Christine Murphy
    75    
26. Edmund H. Nicklin Jr.
    500    
27. Franklin C. Nicklin Test Trust
    100    
28. Freda W. Nicklin
    250    
29. John William Nicklin
    250    
30. Jonathan Case Nicklin
    250    
31. V. Adah Nicklin
    250    
32. William F. Nicklin
    2,000    
33. John O’Shea (IRA)
    250    
34. Anthony M. Pascale (IRA)
    250    
35. Pohogonot Ventures II, LLC
    200    
36. Russell T. Ray
    500    
37. George Rich
    100    
38. George Rich
    150    
39. George S. Rich Family Foundation
    500    
40. RichFam LLLP
    250    
41. Carl Ring
    100    
42. Tarshis, Catania, Liberth, Mahon & Milligram, PLLC
    150    
43. Barrie Holt Thrasher and J. Tammenoms Bakker
    200    
44. Utility Service Holding Co. Inc.
    2,865