<PAGE>   1
                                                        
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                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                         ------------------------------
                                  FORM 10-K/A
                                AMENDMENT NO. 1

                    FOR ANNUAL REPORT AND TRANSITION REPORTS
                    PURSUANT TO SECTIONS 13 OR 15(D) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
    OF 1934


                    FOR THE FISCAL YEAR ENDED JUNE 30, 1997

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
    ACT OF 1934

                  FOR THE TRANSITION PERIOD FROM ____ TO ____

                         ------------------------------

                         COMMISSION FILE NUMBER 0-5214

                               PEERLESS MFG. CO.
             (Exact name of Registrant as specified in its charter)

          TEXAS                                      75-0724417
(State or other jurisdiction of                   (I.R.S. Employer
incorporation or organization)                   Identification No.)

                   2819 WALNUT HILL LANE, DALLAS, TEXAS 75229
              (Address of principal executive offices) (Zip Code)
       Registrant's telephone number, including area code: (214) 357-6181
          Securities registered pursuant to Section 12(g) of the Act:

Title of Each Class                 Name of Each Exchange on Which Registered:
Common Stock, par value $1.00        The Nasdaq Stock Market's National Market
-----------------------------       -------------------------------------------
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|

     At September 19, 1997, Peerless Mfg. Co. had 1,451,992 shares of common
stock, $1.00 par value outstanding. The Company estimates that the aggregate
market value of the common stock on September 19, 1997 (based upon the closing
price of these shares on Nasdaq) held by non-affiliates was approximately
$20,690,886.

                      DOCUMENTS INCORPORATED BY REFERENCE

         None.

                                       1
<PAGE>   2



ITEM 5.           MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER 
                  MATTERS.

         The Company's Common Stock is quoted on the Nasdaq Stock Market's
National Market under the symbol PMFG. The Company's Board of Directors reviews
the financial position of the Company periodically to determine the
advisability of paying dividends. The following table sets forth, for the
periods indicated, the range of the daily high and low closing bid prices for
the Company's Common Stock as reported by Nasdaq Stock Market's National Market
and cash dividends paid per share.


<TABLE>
<CAPTION>
Quarter Ended:         Closing Bid Prices    Cash Dividends
                        High        Low        Per Share
                       -------     ------      ---------
Fiscal 1996
<S>                    <C>         <C>         <C>      
September 30, 1995     $12-3/4     $ 9-7/8      $    .125
December 31, 1995       11-5/8       9-1/4           .125
March 31, 1996           9-3/4       8-3/4           .125
June 30, 1996           11-5/8       9-5/8           .125

Fiscal 1997
September 30, 1996     $13-3/4     $ 9-1/4      $    .125
December 31, 1996       14-7/8      11-5/8           .125
March 31, 1997          13-1/4       9-1/2           .125
June 30, 1997           11           9-1/8           .125
</TABLE>

         The number of record holders of the Company's Common Stock on August
15, 1997 was 221. The Company estimates that approximately 700 additional
shareholders own shares in broker names.


                                       2
<PAGE>   3



ITEM 7.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
                  AND RESULTS OF OPERATIONS.

Liquidity And Capital Resources

         As a general policy, the Company maintains corporate liquidity at a
level it believes adequate to support existing operations and planned growth,
as well as continue operations during reasonable periods of unanticipated
adversity. Management also intends to direct additional resources to strategic
new product development, market expansion and continuing improvement of
existing products to enhance the Company's position as a market leader and to
promote planned internal growth and profitability.

         The Company has historically financed and continues to finance working
capital requirements and any expansion, equipment purchases or acquisitions
primarily through the retention of earnings, which is reflected by the absence
of long-term debt on the Company's consolidated balance sheet. In addition to
retained earnings, the Company has infrequently used short term bank credit
lines of $7,500,000 to supplement working capital. During Fiscal 1996 and
Fiscal 1997, it was necessary for the Company to use its short-term bank credit
lines in order to finance a temporary shortfall in working capital. At June 30,
1997, the Company had no amounts outstanding against its credit lines. The
Company pays an annual commitment fee of 0.25% of the unused balance under the
credit lines. The Company has no material commitments for capital expenditures
other than replacing equipment and maintaining its existing plants and
equipment. During Fiscal 1997 the Company purchased fixed assets totaling
$596,395, consisting primarily of replacement manufacturing equipment, computer
hardware and software, office equipment and building improvements. This is
compared to purchases of $273,593 during Fiscal 1996. The Company believes that
these sources will be sufficient to satisfy its needs in the foreseeable
future.

         Working capital was $8,584,424 at June 30, 1997, down from $9,350,600
at June 30, 1996, a decline of 8.2%. This decline was due primarily to the
adverse effects of a third-quarter cost overrun related to a major
international project in the Company's environmental equipment division and to
the early declaration of dividends in Fiscal 1997 rather than in Fiscal 1998,
which resulted in a charge against working capital in Fiscal 1997.



                                       3
<PAGE>   4



         The following table sets forth certain information related to working
capital for the Company's last three fiscal years:

<TABLE>
<CAPTION>
                                           1997           1996           1995
                                         --------       --------       ------
<S>                                       <C>            <C>            <C>  
 Average working capital as
 a percentage of net sales                20.8%          25.6%          27.5%
 Annual accounts receivable
      turnover(1)                          4.3            3.8            6.0
 Annual inventory turnover(2)              6.6            5.7            6.7
</TABLE>

(1)      Annual accounts receivable turnover is computed by dividing annual net
         sales by the average monthly accounts receivable.

(2)      Annual inventory turnover is computed by dividing the cost of goods
         sold by the average monthly inventory and contract costs.

         The average working capital decrease as a percentage of net sales is
related to increased sales volume of approximately $7,842,000 reported in
Fiscal 1997 over Fiscal 1996. The increase in annual accounts receivable
turnover reflects improved collection methods by the Company in Fiscal 1997.
The increase in average inventory turnover is due primarily to increased
efforts to manage inventory in Fiscal 1997. Peerless continues to monitor and
streamline the Company's receivable collection and inventory purchasing
procedures to enhance and maximize cash flow.

Results of Operations

         The following table sets forth various measures of performance
expressed as percentages of net sales for the Company's last three fiscal
years, as well as the Company's effective income tax rate for the same periods:

<TABLE>
<CAPTION>
                                       1997             1996             1995
                                     --------         --------         ------
<S>                                    <C>              <C>              <C>  
Gross profit margin                    27.8%            30.4%            33.0%
Operating expenses                     26.8%            26.8%            27.3%
Earnings before income taxes           1.3%             3.5%             6.0%
Effective income tax rate              0.1%             33.2%            35.8%
</TABLE>

         Inflation did not have a material impact on the Company's operating
results during the last three fiscal years.



                                       4
<PAGE>   5

Comparison of Fiscal 1997 to Fiscal 1996

Net Sales

         The Company's net sales increased approximately $7,842,000, or 23.3%,
to $41,486,000 in Fiscal 1997 from $33,644,000 in Fiscal 1996. Compared to
Fiscal 1996, Fiscal 1997 domestic sales increased by 11.5% from $14,244,000 to
$15,886,000. Foreign sales increased from $19,400,000 in Fiscal 1996 to
$25,600,000 in Fiscal 1997, an increase of 32.0%. The increase resulted
primarily from additional sales realized in Asia.

         The Company's backlog of unfilled orders increased from $15,300,000 at
June 30, 1996 to $20,200,000 at June 30, 1997.

         Sales increased from $2,562,000 in Fiscal 1996 to $3,326,000 in Fiscal
1997 at the Company's Singapore sales office. The backlog of unfilled orders at
June 30, 1997 includes approximately $2,000,000 of orders generated through the
Singapore office. The Company continues to believe that its sales in Asia are
enhanced by its maintenance of a Singapore office.

         During Fiscal 1997, Peerless Europe Ltd., the Company's UK subsidiary,
contributed Fiscal 1997 sales revenue of $4,605,000, representing a decrease of
$789,000, or 14.6% below Fiscal 1996 revenue of $5,394,000. This subsidiary
continued to operate solidly during Fiscal 1997, with a year-end backlog of
approximately $2,515,000 as compared with $1,000,000 in Fiscal 1996.
Approximately $800,000 of this increase is attributable to Peerless Europe Ltd.
assuming certain sales of Peerless Europe B.V. in Fiscal 1997.

         Peerless Europe B.V., the Company's Dutch subsidiary, continued its
efforts during Fiscal 1997 to implement the Company's direct marketing strategy
in Europe. Sales revenue decreased from $2,105,000 in Fiscal 1996 to $1,332,000
in Fiscal 1997. Peerless Europe B.V. is winding down its operations, which will
be continued by Peerless Europe Ltd., the Company's U.K. subsidiary.

         Sales by the Company's SCR (Selective Catalytic Reduction) division
improved from $6,013,000 in Fiscal 1996 to $9,632,000 in Fiscal 1997. During
Fiscal 1997, the SCR division, which designs and manufactures equipment used to
remove nitrogen oxide (NOx) emissions caused by boilers, gas burners, turbines
and internal combustion engines, ended the year with a backlog of unfilled
orders of approximately $2,123,000, a decrease from the Fiscal 1996 backlog of
$4,838,000.

Gross Profit Margin

         The Company's gross profit margin decreased from 30.4% of net sales in
Fiscal 1996 to 27.8% of net sales in Fiscal 1997. The decrease resulted from a
change in product mix of orders completed in Fiscal 1997 and adverse effects of
a cost overrun related to a major international project in the Company's
environmental equipment division in the third quarter.




                                       5
<PAGE>   6

Operating Expenses

         Operating expenses increased from $9,009,000 in Fiscal 1996 to
$11,118,000 in Fiscal 1997. However, operating expenses as a percent of sales
held steady at 26.8% in Fiscal 1996 and 26.8% in Fiscal 1997. This increase in
operating expenses was primarily due to increased sales and additional
personnel hired to support the increased level of sales anticipated by the
Company.

Income Tax

         The Company's effective income tax rate decreased from 33.2% in Fiscal
1996 to 0.1% in Fiscal 1997. This decrease resulted from foreign deferred tax
benefits offsetting domestic tax expenses. The Company anticipates that it will
not be able to continue utilizing these deferred tax benefits to the same
extent and expects that the Company's effective income tax rates will return to
historical levels in Fiscal 1998. For a further discussion of the Company's
federal income taxes, see Note H to the Company's Consolidated Financial
Statements.

Comparison of Fiscal 1996 to Fiscal 1995

Net Sales

         The Company's net sales increased approximately $1,555,000, or 4.8%,
to $33,644,000 in Fiscal 1996 as compared to $32,089,000 in Fiscal 1995.
Compared to Fiscal 1995, Fiscal 1996 domestic sales decreased by 1.0% from
$14,389,000 to $14,244,000. Foreign sales increased from $17,700,000 in Fiscal
1995 to $19,400,000 in Fiscal 1996, an increase of 9.6%. The increase was
primarily the result of additional sales realized in Europe.

         The Company's backlog of unfilled orders decreased slightly from
$15,875,000 at June 30, 1995 to $15,300,000 at June 30, 1996.

         Sales decreased from $3,346,000 in Fiscal 1995 to $2,562,000 in Fiscal
1996 at the Company's Singapore sales office. The backlog of unfilled orders at
June 30, 1996 includes approximately $510,000 of orders generated through the
Singapore office. The Company continues to believe that its sales in Asia are
enhanced by its maintenance of a Singapore office.

         During Fiscal 1996, Peerless Europe Ltd., the Company's UK subsidiary,
contributed Fiscal 1996 sales revenue of $5,394,000, representing an increase
of $1,760,000, or 48.4% over Fiscal 1995 revenue of $3,634,000. This subsidiary
continued to operate solidly during Fiscal 1996, with a year-end backlog of
approximately $1,000,000.

         Peerless Europe B.V., the Company's Dutch subsidiary which became
operational as a trading company late in Fiscal 1993, continued its efforts
during Fiscal 1996 to implement the Company's direct marketing strategy in
Europe. Sales revenue increased from $1,155,000 in Fiscal 1995 to $2,105,000 in
Fiscal 1996.




                                       6
<PAGE>   7

         Sales by the Company's SCR (Selective Catalytic Reduction) division
improved from $3,696,000 in Fiscal 1995 to $6,013,000 in Fiscal 1996. During
Fiscal 1996, the SCR division, which designs and manufactures equipment used to
remove nitrogen oxide (NOx) emissions caused by boilers, gas burners, turbines
and internal combustion engines, experienced an improvement in its order intake
activity and ended the year with a backlog of unfilled orders of approximately
$4,838,000.

Gross Profit Margin

         The Company's gross profit margin decreased from 33.0% of net sales in
Fiscal 1995 to 30.4% of net sales in Fiscal 1996. The decrease resulted from a
change in product mix of orders completed in Fiscal 1996.

Operating Expenses

         Operating expenses increased from $8,770,000 in Fiscal 1995 to
$9,009,000 in Fiscal 1996. However, operating expenses as a percent of sales
decreased slightly from 27.3% in Fiscal 1995 to 26.8% in Fiscal 1996, due
primarily to the increase in net sales.

Income Tax

         The Company's effective income tax rate decreased from 35.8% in Fiscal
1995 to 33.2% in Fiscal 1996. For a further discussion of the Company's federal
income taxes, see Note H to the Company's Consolidated Financial Statements.

Outlooks and Uncertainties

         This Annual Report on Form 10-K contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Such statements refer to events that could occur in the future or may be
identified by the use of words such as "expect," "intend," "plan," "believe,"
correlative words, and other expressions indicating that future events are
contemplated. Such statements are subject to inherent risks and uncertainties,
and actual results could differ materially from those projected in the
forward-looking statements as a result of certain of the risk factors set forth
below and elsewhere in this Annual Report on Form 10-K. In addition to the
other information contained in this Annual Report on Form 10-K, investors
should carefully consider the following risk factors.

Competition. The Company operates in highly competitive markets worldwide. The
Company competes with manufacturers and sellers of separators, filters and
pulsation dampeners, some of which are larger than the Company and have greater
financial resources. In addition, several smaller manufacturers also produce
custom-designed equipment that is competitive with the Company's specialized
products and services. Competition may also increase as larger and better
financed foreign companies become attracted to the market potential for
products 




                                       7
<PAGE>   8

manufactured by the Company. There can be no assurance that the Company will be
able to compete successfully with current or future competitors.

Foreign Operations. The Company derives a significant portion of its revenues
from foreign sales, particularly in Asia. The Company is subject to risks of
doing business abroad, including the possibility that foreign purchasers may
default in the payment of amounts due, and that collection of such amounts may
be more difficult than for U.S. customers, adverse fluctuations in currency
exchange rates, that the U.S. and foreign governments may impose regulatory
burdens upon exports and imports of the Company's products, and that the
Company may be required to perform its obligations under product warranties,
which might result in added expense due to the requirement that it perform such
services in a foreign country. The occurrence of any one or more of the
foregoing could adversely affect the Company's operations.

Concentrations of Credit Risk. The Company continues to closely monitor the
creditworthiness of its customers and has never experienced significant credit
losses; however, a significant portion of the Company's sales are to customers
whose activities are related to the oil and gas industry, including some who
are located in foreign countries. The Company generally extends credit to these
customers. Its exposure to credit risk is affected by conditions within the oil
and gas industry, and with respect to foreign sales, collection may be more
difficult in the event of a default. However, substantially all foreign sales
are made to large, well-established companies and the Company generally
requires collateral or guarantees on foreign sales to smaller companies.

Backlog. The Company's backlog represents incomplete customer orders. Although
the Company has historically completed and shipped virtually all of its backlog
and expects to complete and ship all outstanding orders in Fiscal 1998,
customers may cancel outstanding orders prior to their completion. In such
cases, the Company would not recognize revenues for canceled orders. However,
the Company has contractual protection to recover from its customers at least
the Company's costs related to canceled orders.




                                       8
<PAGE>   9



ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                         Index to Financial Statements

<TABLE>
<CAPTION>
                                                                      Page
                                                                      ----
<S>                                                                     <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC
         ACCOUNTANTS ............................................       16

CONSOLIDATED BALANCE SHEETS AT JUNE 30, 1997 AND 1996............       17

CONSOLIDATED STATEMENTS OF EARNINGS FOR THE YEARS
         ENDED JUNE 30, 1997, 1996 AND 1995......................       19

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
         EQUITY FOR THE YEARS ENDED JUNE 30, 1997,
         1996 AND 1995...........................................       20

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS
         ENDED JUNE 30, 1997, 1996 AND 1995......................       22

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
         YEARS ENDED JUNE 30, 1997, 1996 AND 1995................       24

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
         ON SCHEDULE.............................................       36

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNT...................       37
</TABLE>




                                       9
<PAGE>   10










               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS




Board of Directors
Peerless Mfg. Co.


We have audited the accompanying consolidated balance sheets of Peerless Mfg.
Co. and Subsidiaries as of June 30, 1997 and 1996, and the related consolidated
statements of earnings, changes in stockholders' equity, and cash flows for
each of the three years in the period ended June 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for
our opinion.

In our opinion, the financial statements referred to above, present fairly, in
all material respects, the consolidated financial position of Peerless Mfg. Co.
and Subsidiaries as of June 30, 1997 and 1996, and the consolidated results of
their operations and their consolidated cash flows for each of the three years
in the period ended June 30, 1997, in conformity with generally accepted
accounting principles.




GRANT THORNTON LLP

Dallas, Texas
September 2, 1997




                                      10
<PAGE>   11



                       PEERLESS MFG. CO. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                                    June 30,




<TABLE>
<CAPTION>
                    ASSETS                                              1997            1996
                                                                     ----------      -----------

<S>                                                                  <C>             <C>        
CURRENT ASSETS
    Cash and cash equivalents                                        $   772,553     $ 2,082,329
    Short-term investments                                               259,007         246,659
    Accounts receivable - principally trade - net of allowance
        for doubtful accounts of $312,450 and $100,000 in 1997
        and 1996, respectively                                         9,671,067       8,404,331
    Inventories                                                        2,993,855       2,972,456
    Costs and earnings in excess of billings on uncompleted
        contracts                                                      1,871,817       1,403,199
    Deferred income taxes                                                269,721         226,214
    Other                                                                298,605         240,214
                                                                     -----------     -----------

              TOTAL CURRENT ASSETS                                    16,136,625      15,575,402

PROPERTY, PLANT AND EQUIPMENT - AT COST, less
    accumulated depreciation                                           1,527,856       1,213,859

PROPERTY HELD FOR INVESTMENT - AT COST, less
    accumulated depreciation                                             888,383         948,775

OTHER ASSETS                                                             528,729         453,390
                                                                     -----------     -----------

                                                                     $19,081,593     $18,191,426
                                                                     ===========     ===========
</TABLE>




                                      11
<PAGE>   12



                       PEERLESS MFG. CO. AND SUBSIDIARIES

                    CONSOLIDATED BALANCE SHEETS - CONTINUED

                                    June 30,




<TABLE>
<CAPTION>
   LIABILITIES AND STOCKHOLDERS' EQUITY                                  1997              1996
                                                                     ------------     -------------

<S>                                                                  <C>               <C>         
CURRENT LIABILITIES
    Accounts payable - trade                                         $  5,054,532      $  4,325,595
     Billings in excess of costs and earnings on uncompleted
         contracts                                                        363,257                --
    Commissions payable                                                   779,474           566,766
    Accrued expenses
        Compensation                                                      656,082           549,210
        Warranty reserve                                                  406,903           286,384
        Other                                                             291,953           496,847
                                                                     ------------      ------------

              TOTAL CURRENT LIABILITIES                                 7,552,201         6,224,802

DEFERRED INCOME TAXES                                                      99,962            86,768

COMMITMENTS                                                                    --                --

STOCKHOLDERS' EQUITY
    Common stock - authorized, 4,000,000 shares of $1 par value;
     issued and outstanding, 1,451,992 and 1,446,742 shares in
     1997 and 1996, respectively                                        1,451,992         1,446,742
    Additional paid-in capital                                          2,535,221         2,489,879
    Unamortized value of restricted stock grants                          (44,625)          (33,750)
    Cumulative foreign currency translation adjustment                    (93,944)           23,842
    Retained earnings                                                   7,580,786         7,953,143
                                                                     ------------      ------------
                                                                       11,429,430        11,879,856
                                                                     ------------      ------------

                                                                     $ 19,081,593      $ 18,191,426
                                                                     ============      ============
</TABLE>


       The accompanying notes are an integral part of these statements.




                                      12
<PAGE>   13



                       PEERLESS MFG. CO. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF EARNINGS

                              Year ended June 30,


<TABLE>
<CAPTION>
                                               1997              1996              1995
                                               ----              ----              ----

<S>                                        <C>               <C>               <C>         
NET SALES                                  $ 41,486,492      $ 33,643,998      $ 32,089,132

COST OF GOODS SOLD                           29,961,203        23,430,761        21,506,004
                                           ------------      ------------      ------------

          GROSS PROFIT                       11,525,289        10,213,237        10,583,128

OPERATING EXPENSES
   Marketing and engineering                  9,129,347         7,524,363         7,011,380
   General and administrative                 1,988,618         1,485,113         1,758,432
                                           ------------      ------------      ------------
                                             11,117,965         9,009,476         8,769,812
                                           ------------      ------------      ------------

          OPERATING PROFIT                      407,324         1,203,761         1,813,316

OTHER INCOME (EXPENSE)
   Interest income                               24,687            45,559            93,974
   Interest expense                             (55,475)          (16,858)           (8,040)
   Foreign exchange gains (losses)              103,583           (28,628)          (56,368)
   Other, net                                    57,877           (21,686)           65,779
                                           ------------      ------------      ------------
                                                130,672           (21,613)           95,345
                                           ------------      ------------      ------------

          EARNINGS BEFORE INCOME TAXES          537,996         1,182,148         1,908,661

INCOME TAX EXPENSE (BENEFIT)
   Current                                       65,766           397,023           661,046
   Deferred                                     (65,186)           (4,596)           21,369
                                           ------------      ------------      ------------
                                                    580           392,427           682,415
                                           ------------      ------------      ------------

          NET EARNINGS                     $    537,416      $    789,721      $  1,226,246
                                           ============      ============      ============

Earnings per common share                  $        .37      $        .55      $        .85
                                           ============      ============      ============

Weighted average number of common
    shares outstanding                        1,454,045         1,446,742         1,442,039
                                           ============      ============      ============
</TABLE>


       The accompanying notes are an integral part of these statements.




                                      13
<PAGE>   14




                       PEERLESS MFG. CO. AND SUBSIDIARIES

           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY



<TABLE>
<CAPTION>
                                                                                    Cumulative
                                                                      Unamortized    foreign
                                                          Additional    value of     currency
                                               Common       paid-in    restricted   translation   Retained
                                                stock       capital   stock grants  adjustment    earnings        Total
                                                -----       -------   ------------  ----------    --------        -----
<S>                                           <C>         <C>           <C>         <C>         <C>           <C>         
Balances as of July 1995                      1,436,742   $ 2,383,870   $ (49,841)  $ (76,063)  $ 7,381,682   $ 11,076,390

Net earnings                                         --            --          --          --     1,226,246      1,226,246
Issuance of 12,000 shares of common stock        12,000       123,000    (135,000)         --            --             --
Forfeiture of 2,000 shares of common stock       (2,000)      (18,500)     20,500          --            --             --
Translation adjustment                               --            --          --     132,173            --        132,173
Cash dividends paid ($.50 per share)                 --            --          --          --      (721,122)      (721,122)
Amortization of restricted stock grants              --            --      67,234          --            --         67,234
Income tax benefit related to restricted
  stock plans                                        --         5,058          --          --            --          5,058
                                            -----------   -----------   ---------   ---------   -----------   ------------

Balances as of June 30, 1995                  1,446,742     2,493,428     (97,107)     56,110     7,886,806     11,785,979

Net earnings                                         --            --          --          --       789,721        789,721
Translation adjustment                               --            --          --     (32,268)           --        (32,268)
Cash dividends paid ($.50 per share)                 --            --          --          --      (723,384)      (723,384)
Amortization of restricted stock grants              --            --      63,357          --            --         63,357
Income tax expense related to restricted
  stock plans                                        --        (3,549)         --          --            --         (3,549)
                                            -----------   -----------   ---------   ---------   -----------   ------------

Balances as of June 30, 1996                  1,446,742     2,489,879     (33,750)     23,842     7,953,143     11,879,856

Net earnings                                         --            --          --          --       537,416        537,416
Issuance of 8,000 shares of common stock          8,000        72,250     (80,250)         --            --             --
Forfeiture of 4,000 shares of common stock       (4,000)      (38,750)     42,750          --            --             --
Stock options exercised                           1,250        10,312          --          --            --         11,562
Translation adjustment                               --            --          --    (117,786)           --       (117,786)
Cash dividends paid ($.50 per share)                 --            --          --          --      (727,149)      (727,149)
Cash dividends declared ($.125 per share)            --            --          --          --      (182,624)      (182,624)
Amortization of restricted stock grants              --            --      26,625          --            --         26,625
Income tax benefit related to restricted
  stock plans                                        --         1,530          --          --            --          1,530
                                            -----------   -----------   ---------   ---------   -----------   ------------

Balances as of June 30, 1997                $ 1,451,992   $ 2,535,221   $ (44,625)  $ (93,944)  $ 7,580,786   $ 11,429,430
                                            ===========   ===========   =========   =========   ===========   ============
</TABLE>


       The accompanying notes are an integral part of these statements.




                                      14
<PAGE>   15




                       PEERLESS MFG. CO. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                              Year ended June 30,



<TABLE>
<CAPTION>
                                                            1997         1996          1995
                                                         ---------    ----------    ---------

<S>                                                    <C>           <C>           <C>        
CASH FLOWS FROM OPERATING ACTIVITIES
   Net earnings                                        $   537,416   $   789,721   $ 1,226,246
   Adjustments to reconcile net earnings to net
       cash provided by (used in) operating
       activities
          Depreciation and amortization                    370,525       416,207       386,364
          Deferred income taxes                            (65,185)       (4,596)       21,369
          Foreign exchange loss (gain)                    (103,583)       28,628        56,368
          Other                                              1,530        (2,342)        5,058
          Changes in operating assets and liabilities
             Accounts receivable                        (1,586,991)      508,764      (323,226)
             Inventories                                   (11,463)     (154,231)    1,695,052
             Cost and profit in excess of billings
                on uncompleted contracts                  (468,618)   (1,287,644)      115,555
             Other current assets                          (59,501)     (285,196)      108,174
             Other assets                                  (40,466)      156,025      (195,985)
             Accounts payable                              791,364     1,240,661       464,022
             Billings in excess of costs and earnings
                on uncompleted contracts                   363,257      (197,010)   (1,624,268)
             Commissions payable                           212,708        57,254         6,981
             Accrued expenses                               22,497       266,563      (133,144)
                                                       -----------   -----------   -----------
                                                          (573,926)      743,083       582,320
                                                       -----------   -----------   -----------

                    NET CASH PROVIDED BY (USED IN)
                        OPERATING ACTIVITIES               (36,510)    1,532,804     1,808,566

CASH FLOWS FROM INVESTING ACTIVITIES
   Net sales (purchases) of short-term investments         (12,348)      (24,691)      415,017
   Purchase of property and equipment                     (596,395)     (273,593)     (339,199)
                                                       -----------   -----------   -----------

                    NET CASH PROVIDED BY (USED IN)
                         INVESTING ACTIVITIES             (608,743)     (298,284)       75,818
</TABLE>




                                      15
<PAGE>   16



                       PEERLESS MFG. CO. AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                              Year ended June 30,



<TABLE>
<CAPTION>
                                                           1997          1996           1995
                                                        ---------     ----------     ---------

<S>                                                    <C>           <C>           <C>        
CASH FLOWS FROM FINANCING ACTIVITIES
   Sale of common stock                                $    11,562   $        --   $        --
   Net changes in short-term borrowings                         --            --      (260,400)
   Dividends paid                                         (727,149)     (723,384)     (721,122)
                                                       -----------   -----------   -----------

                NET CASH USED IN FINANCING ACTIVITIES     (715,587)     (723,384)     (981,522)

EFFECT OF EXCHANGE RATE ON CASH AND CASH
   EQUIVALENTS                                              51,064         9,446        25,691
                                                       -----------   -----------   -----------

                NET INCREASE (DECREASE) IN CASH
                  AND CASH EQUIVALENTS                  (1,309,776)      520,582       928,553

Cash and cash equivalents at beginning of year           2,082,329     1,561,747       633,194
                                                       -----------   -----------   -----------

Cash and cash equivalents at end of year               $   772,553   $ 2,082,329   $ 1,561,747
                                                       ===========   ===========   ===========


Supplemental information on cash flows:

Interest paid                                          $    55,475   $    16,858   $     9,597
Income taxes paid                                      $   379,347   $   138,018   $ 1,059,500
</TABLE>



       The accompanying notes are an integral part of these statements.




                                      16
<PAGE>   17







                       PEERLESS MFG. CO. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          June 30, 1997, 1996 and 1995


NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES

   Nature of Operations

   Peerless Mfg. Co. designs, engineers, and manufactures specialized products
   for the removal of contaminants from gases and liquids and for air pollution
   abatement. The Company's products are manufactured principally at plants
   located in Dallas, Texas and are sold worldwide with the principal markets
   located in the United States and Europe. Primary customers are equipment
   manufacturers, engineering contractors and operators of power plants.

   Consolidation

   The Company consolidates the accounts of its wholly-owned foreign
   subsidiaries, Peerless Europe Limited (Europe Limited), Peerless
   International N.V. (International) and Peerless Europe B.V. (Europe B.V.).
   All significant intercompany accounts and transactions have been eliminated
   in consolidation.

   Cash Equivalents

   For purposes of the statement of cash flows, the Company considers all
   highly liquid investments purchased with an original maturity of three
   months or less to be cash equivalents.

   Inventories

   Inventories are stated at the lower of cost (first-in, first-out) or market.

   Depreciable Assets

   Depreciation is provided for in amounts sufficient to relate the cost of
   depreciable assets to operations over their estimated service lives,
   principally by the straight-line method.


                                      17
<PAGE>   18

                       PEERLESS MFG. CO. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                          June 30, 1997, 1996 and 1995


NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - CONTINUED


   Revenue Recognition

   The Company generally recognizes sales of custom-contracted products at the
   completion of the manufacturing process. The percentage-of-completion method
   is used for significant long-term contracts. Percentage-of-completion is
   generally determined using the actual labor incurred to date as compared to
   management's estimate of total labor to be incurred on each contract.

   Stock-Based Compensation

   Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting
   for Stock-Based Compensation, encourages, but does not require, companies to
   record compensation cost for stock-based employee compensation plans at fair
   value. The Company has chosen to account for stock-based compensation using
   the intrinsic value method prescribed in Accounting Principles Board Opinion
   No. 25 (APB 25), Accounting for Stock Issued to Employees, and related
   interpretations.

   Earnings Per Common Share

   Earnings per common share are computed by dividing net earnings by the
   weighted average number of shares of common stock outstanding during the
   year. The dilutive effect of stock options is not material.

   Statement of Financial Accounting Standards No. 128 (SFAS 128), Earnings Per
   Share, is effective for financial statements issued after December 15, 1997.
   The adoption of SFAS 128 is not expected to have a material impact on the
   disclosure of earnings pr share in the financial statements.

   Foreign Currency

   All balance sheet accounts of foreign operations are translated into U.S.
   dollars at the year-end rate of exchange and statements of earnings items
   are translated at the weighted average


                                      18
<PAGE>   19

                       PEERLESS MFG. CO. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                          June 30, 1997, 1996 and 1995


NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - CONTINUED


   exchange rates for the year. The resulting translation adjustments are made
   directly to a separate component of stockholders' equity. Gains and losses
   from foreign currency transactions, such as those resulting from the
   settlement of foreign receivables or payables, are included in the
   consolidated statements of earnings.

   From time to time, the Company enters into forward exchange contracts in
   anticipation of future movements in certain foreign exchange rates and to
   hedge against foreign currency fluctuations. Realized and unrealized gains
   and losses on these contracts are included in net income, except that gains
   and losses on contracts to hedge specific foreign currency commitments are
   deferred and accounted for as part of the underlying transaction.

   Reclassifications

   Certain prior years' amounts have been reclassified to conform with the 1997
   presentation.

   Financial Instruments

   The carrying amounts of cash and cash equivalents and short-term investments
   approximate fair value because of the short-term nature of these items.

   Use of Estimates

   The preparation of financial statements in conformity with generally
   accepted accounting principles requires management to make estimates and
   assumptions that affect the reported amounts of assets and liabilities and
   disclosure of contingent assets and liabilities at the date of the financial
   statements and the reported amounts of revenues and expenses during the
   reporting period. Actual results could differ from those estimates.


                                      19
<PAGE>   20

                       PEERLESS MFG. CO. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                          June 30, 1997, 1996 and 1995


NOTE B - CONCENTRATIONS OF CREDIT RISK

   A significant portion of the Company's sales are to customers whose
   activities are related to the oil and gas industry, including some who are
   located in foreign countries. The Company generally extends credit to these
   customers. Its exposure to credit risk is affected by conditions within the
   oil and gas industry. Also, with respect to foreign sales, collection may be
   more difficult in the event of a default.

   However, the Company closely monitors extensions of credit and has never
   experienced significant credit losses. Substantially all foreign sales are
   made to large, well-established companies. The Company generally requires
   collateral or guarantees on foreign sales to smaller companies.

   Sales to one customer accounted for approximately 12.3% of revenues for the
   year ended June 30, 1997. No single customer accounted for more than 10% of
   revenues in 1996 or 1995.


NOTE C - INVENTORIES AND UNCOMPLETED CONTRACTS

   Principal components of inventories are as follows:

<TABLE>
<CAPTION>
                                          June 30,
                                   -----------------------
                                   1997               1996
                                   ----               ----
<S>                            <C>                <C>       
Raw materials                  $1,084,890         $1,094,774
Work in process                 1,586,213          1,591,289
Finished goods                    322,752            286,393
                                 --------           --------

                               $2,993,855         $2,972,456
                               ==========         ==========
</TABLE>

   At June 30, 1997 and 1996, progress payments of $318,043 and $296,431,
   respectively, have been offset against inventories and costs of uncompleted
   contracts.


                                      20
<PAGE>   21


                       PEERLESS MFG. CO. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                          June 30, 1997, 1996 and 1995


NOTE D - PROPERTY, PLANT AND EQUIPMENT AND PROPERTY HELD FOR INVESTMENT

   Property, plant and equipment is summarized as follows:

<TABLE>
<CAPTION>
                                                                       June 30,
                                                                 ------------------
                                                                 1997          1996
                                                                 ----          ----
<S>                                                          <C>           <C>        
    Buildings                                                $ 1,380,241   $ 1,418,842
    Equipment                                                  2,432,792     2,300,777
    Furniture and fixtures                                     1,585,930     1,114,583
                                                             -----------   -----------
                                                               5,398,963     4,834,202
      Less accumulated depreciation                           (4,131,323)   (3,880,559)
                                                             -----------   -----------
                                                               1,267,640       953,643
    Land                                                         260,216       260,216
                                                             -----------   -----------

                                                             $ 1,527,856   $ 1,213,859
                                                             ===========   ===========

Property held for investment is summarized as follows:

                                                                      June 30,
                                                                 ------------------
                                                                 1997          1996
                                                                 ----          ----

    Buildings                                                $ 1,641,769   $ 1,641,776
    Equipment                                                    158,171       158,171
                                                             -----------   -----------
                                                               1,799,940     1,799,947
      Less accumulated depreciation                           (1,440,967)   (1,380,582)
                                                             -----------   -----------
                                                                 358,973       419,365
    Land                                                         529,410       529,410
                                                             -----------   -----------

                                                             $   888,383   $   948,775
                                                             ===========   ===========
</TABLE>


                                      21
<PAGE>   22

                       PEERLESS MFG. CO. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                          June 30, 1997, 1996 and 1995


NOTE E - CREDIT ARRANGEMENT

   The Company has banking agreements for unsecured revolving lines of credit
   in the combined amount of $7,500,000 due upon demand, with interest at the
   banks' prime lending rate (8.50% at June 30, 1997), payable monthly. The
   banks charge usage fees at an annual rate of .25% of the average daily
   unused portion of the line. At June 30, 1997 and 1996, no amounts were
   outstanding under the lines. The Company had letters of credit outstanding
   under separate arrangements of $3,597,646 and $3,259,533 at June 30, 1997
   and 1996, respectively. Other assets with a cost of approximately $566,000
   were pledged against the letters of credit outstanding at June 30, 1997.


NOTE F - STOCKHOLDERS' EQUITY

   The Company has a 1985 restricted stock plan (the 1985 Plan) under which
   75,000 shares of common stock were reserved for awards to employees.
   Restricted stock grants made under the 1985 Plan vest over a five-year
   period. The Company awarded 12,000 shares (fair value at date of grant of
   $135,000) in fiscal 1995 and 8,000 shares (fair value at date of grant of
   $80,250), of which 3,000 shares were subsequently forfeited, in fiscal 1997.
   Compensation expense for stock grants is charged to earnings over the
   five-year restriction period and amounted to $26,625, $63,357 and $67,234 in
   fiscal 1997, 1996, and 1995, respectively. The tax effect of differences
   between compensation expense for financial statement and income tax purposes
   is charged or credited to additional paid-in capital.

   In December 1995, the Company adopted a stock option and restricted stock
   plan (the 1995 Plan), which provides for a maximum of 100,000 shares of
   common stock to be issued. Stock options are granted at market value, vest
   generally over four years, and expire ten years from date of grant.

   At June 30, 1997, 67,250 shares of common stock were available for issuance
   under the 1995 Plan, and 4,750 shares were available under the 1985 Plan.

   The Company has adopted the disclosure provisions of SFAS 123. It applies
   APB 25 and related interpretations in accounting for stock options issued
   and, therefore, does not recognize compensation expense for stock options
   granted at or greater than market value. If the Company had elected to
   recognize compensation expense based upon the fair value at the


                                      22
<PAGE>   23

                       PEERLESS MFG. CO. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                          June 30, 1997, 1996 and 1995


NOTE F - STOCKHOLDERS' EQUITY - CONTINUED


   grant date for awards under this plan consistent with the methodology
   prescribed by SFAS 123, the effect on net earnings and earnings per share
   would have been as follows:


<TABLE>
<CAPTION>
                                              Year ended         Year ended
                                             June 30, 1997      June 30, 1996
                                             -------------      -------------
<S>                                              <C>               <C>     
       Net earnings - as reported                $537,416          $789,721
       Net earnings - pro forma                   527,012           784,896
       Earnings  per share - as reported              .37               .55
       Earnings per share - pro forma                 .36               .54
</TABLE>

   The fair value of these options was estimated at the date of grant using the
   Black-Scholes option pricing model with the following weighted-average
   assumptions: expected volatility of 45%; risk-free interest rates ranging
   from 4.6% to 5.3%; dividend yield of 3.7% in fiscal 1997 and 5.4% in fiscal
   1996; and expected lives of five years.

   Additional information with respect to options outstanding under the plan is
   as follows:

<TABLE>
<CAPTION>
                                       Number of shares       Weighted average
               Stock options          underlying options       exercise price
               -------------          ------------------       --------------
<S>                                          <C>                   <C>
       Outstanding at June 30, 1995             --                 $  --
        Granted                              34,000                  9.25
                                             ------

       Outstanding at June 30, 1996          34,000                  9.25
       Granted                                2,500                 13.33
       Exercised                             (1,250)                 9.25
       Canceled/forfeited                    (3,750)                 9.25
                                             ------

       Outstanding at June 30, 1997          31,500                  9.57
                                             ======

       Exercisable at June 30, 1997           9,250                  9.25
                                             ======

       Exercisable at June 30, 1996             --
                                             ======
</TABLE>


                                      23
<PAGE>   24

                       PEERLESS MFG. CO. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                          June 30, 1997, 1996 and 1995


NOTE F - STOCKHOLDERS' EQUITY - CONTINUED


   The weighted-average remaining life of options outstanding at June 30, 1997
   was 9.08 years. The weighted average fair-value at grant date for options
   granted in 1997 was $1.82.

   On May 21, 1997, the Board of Directors declared a dividend of one common
   share purchase right for each outstanding share of common stock to
   shareholders of record at the close of business on June 2, 1997. Each Right
   entitles the registered holder to purchase from the Company one common share
   at a price of $30.00, subject to adjustment, as more fully set forth in a
   Rights Agreement dated May 22, 1997.

   The Rights will become exercisable only in the event that any person or
   group of affiliated persons acquires, or obtains the right to acquire,
   beneficial ownership of 20% or more of the outstanding common shares or
   commences a tender or exchange offer, the consummation of which would result
   in the beneficial ownership by a person or group of 20% or more of such
   outstanding common shares. The rights are redeemable under certain
   circumstances at $.01 each and expire in May 2007.


NOTE G - EMPLOYEE BENEFIT PLANS

   The Company has a 401(k) Plan to provide eligible employees with a
   retirement savings plan. All employees are eligible to participate in the
   plan upon completing 90 days of service. Company contributions are voluntary
   and at the discretion of the Board of Directors of the Company. The
   Company's contribution expense for the years ended June 30, 1997, 1996 and
   1995 was $119,500, $109,000 and $103,000, respectively.


NOTE H - FEDERAL INCOME TAXES

   Deferred taxes are provided for the temporary differences between the
   financial reporting bases and the tax bases of the Company's assets and
   liabilities. The temporary differences that give rise to the deferred tax
   assets or liabilities are as follows:


                                      24
<PAGE>   25

                       PEERLESS MFG. CO. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                          June 30, 1997, 1996 and 1995


NOTE H - FEDERAL INCOME TAXES - CONTINUED

<TABLE>
<CAPTION>
                                                                  June 30,
                                                              ----------------
                                                              1997        1996
                                                              ----        ----
<S>                                                        <C>         <C>      
Deferred tax assets
   Restricted stock grants                                 $  13,938   $  19,125
   Inventories                                                28,362      16,052
   Foreign subsidiaries' net operating loss carryforwards    145,157      15,371
   Accrued expenses                                          243,090     311,237
   Other                                                      52,701      70,158
                                                           ---------   ---------
                                                             483,248     431,943
   Less valuation allowance                                  (29,710)   (160,405)
                                                           ---------   ---------
                                                           $ 453,538   $ 271,538
                                                           =========   =========

Deferred tax liabilities
   Property, plant and equipment                           $(110,396)  $ (88,491)
   Uncompleted contracts                                    (135,006)    (39,014)
   Other                                                      (3,504)     (4,587)
                                                           ---------   ---------
                                                           $(248,906)  $(132,092)
                                                           =========   =========

         Net deferred tax asset                            $ 204,632   $ 139,446
                                                           =========   =========
</TABLE>

Deferred tax assets and liabilities included in the balance sheet are as 
follows:
<TABLE>
<CAPTION>
                                              June 30,
                                         -------------------
                                         1997           1996
                                         ----           ----
<S>                                   <C>            <C>      
Current deferred tax asset            $ 269,721      $ 226,214
Noncurrent deferred tax asset            34,873             --
Noncurrent deferred tax liability       (99,962)       (86,768)
                                      ---------      ---------

                                      $ 204,632      $ 139,446
                                      =========      =========
</TABLE>


                                      25
<PAGE>   26

                       PEERLESS MFG. CO. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                          June 30, 1997, 1996 and 1995


NOTE H - FEDERAL INCOME TAXES - CONTINUED


   The provision for income taxes consisted of the following:

<TABLE>
<CAPTION>
                   1997           1996           1995
                  ------         ------         -----

<S>             <C>            <C>            <C>     
Federal
   Current      $  41,765      $ 348,830      $581,976
   Deferred       (65,185)        (4,596)       21,369
State              24,000         48,193        79,070
                ---------      ---------      --------

                $     580      $ 392,427      $682,415
                =========      =========      ========
</TABLE>

   The valuation allowance relates to deferred tax assets of foreign
   subsidiaries. These assets are recoverable only from future income of the
   respective foreign subsidiaries. Because of a recapitalization of Europe
   Limited and a reorganization of European operations, the Company concluded
   at June 30, 1997 that it was more likely than not that certain of the
   deferred tax assets are recoverable, and the valuation allowance was
   reduced. Utilization of foreign net operating carryforwards reduced income
   tax expense by approximately $130,000, $19,000 and $55,000 for 1997, 1996
   and 1995, respectively.

   The effective income tax rate varies from the statutory rate due to the
   following:

<TABLE>
<CAPTION>
                                                              As a percentage
                                                             of pretax earnings
                                                        ---------------------------
                                                        1997        1996       1995
                                                        ----        ----       ----
<S>                                                      <C>        <C>        <C>  
Income tax expense at statutory rate                     34.0%      34.0%      34.0%
Increase (decrease) in income taxes resulting from
    State tax, net of federal benefits                    2.9        2.8        2.9
    Foreign sales corporation exclusions                (10.2)      (1.5)      (3.1)
    Change in valuation allowance                       (24.3)       3.5       (1.4)
    Other                                                (2.3)      (5.6)       3.4
                                                        -----      -----      -----

Income tax expense at effective rate                       .1%      33.2%      35.8%
                                                        =====      =====      =====
</TABLE>


                                      26
<PAGE>   27

                       PEERLESS MFG. CO. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                          June 30, 1997, 1996 and 1995


NOTE I - INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION

   The Company's operations consist of a dominant industry segment, the
   designing and manufacturing of specialized products for the removal of
   contaminants from gases and liquids and for air pollution abatement,
   principally in the United States and the United Kingdom.

   Information about the Company's operations in different geographic areas as
   of and for the years ended June 30, 1997, 1996 and 1995 is as follows:

<TABLE>
<CAPTION>
                                 United          United
                                 States          Kingdom           Other        Eliminations     Consolidated
                                 ------          -------           -----        ------------     ------------
1997
----
<S>                            <C>             <C>              <C>              <C>              <C>        
   Net sales to unaffiliated
      customers                $35,553,000     $ 4,601,000      $ 1,332,000      $        --      $41,486,000
   Transfers between
      geographic areas             889,000           4,000               --         (893,000)              --
                               -----------     -----------      -----------      -----------      -----------

   Total                       $36,442,000     $ 4,605,000      $ 1,332,000      $  (893,000)     $41,486,000
                               ===========     ===========      ===========      ===========      ===========

   Operating profit (loss)     $   549,000     $  (129,000)     $   (12,000)     $    (1,000)     $   407,000
                               ===========     ===========      ===========      ===========      ===========

   Identifiable assets         $17,409,000     $ 2,790,000      $ 1,027,000      $(2,144,000)     $19,082,000
                               ===========     ===========      ===========      ===========      ===========

1996
----
   Net sales to unaffiliated
      customers                $26,775,000     $ 4,764,000      $ 2,105,000      $        --      $33,644,000
   Transfers between
      geographic areas             984,000         630,000               --       (1,614,000)              --
                               -----------     -----------      -----------      -----------      -----------

   Total                       $27,759,000     $ 5,394,000      $ 2,105,000      $(1,614,000)     $33,644,000
                               ===========     ===========      ===========      ===========      ===========

   Operating profit (loss)     $ 1,119,000     $   145,000      $   (39,000)     $   (21,000)     $ 1,204,000
                               ===========     ===========      ===========      ===========      ===========

   Identifiable assets         $17,244,000     $ 2,112,000      $ 1,599,000      $(2,764,000)     $18,191,000
                               ===========     ===========      ===========      ===========      ===========
</TABLE>


                                      27
<PAGE>   28

                       PEERLESS MFG. CO. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                          June 30, 1997, 1996 and 1995


NOTE I - INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION - CONTINUED


<TABLE>
<CAPTION>
                                United         United
                                States         Kingdom           Other        Eliminations     Consolidated
                                ------         -------           -----        ------------     ------------
<S>                           <C>             <C>              <C>            <C>              <C>        
1995
----
Net sales to unaffiliated
   customers                  $27,673,000     $ 3,261,000      $1,155,000     $        --      $32,089,000
Transfers between
   geographic areas               479,000         373,000              --        (852,000)              --
                              -----------     -----------      ----------     -----------      -----------

Total                         $28,152,000     $ 3,634,000      $1,155,000     $  (852,000)     $32,089,000
                              ===========     ===========      ==========     ===========      ===========

Operating profit (loss)       $ 1,812,000     $   (13,000)     $    9,000     $     5,000      $ 1,813,000
                              ===========     ===========      ==========     ===========      ===========

Identifiable assets           $16,048,000     $ 2,113,000      $1,237,000     $(2,242,000)     $17,156,000
                              ===========     ===========      ==========     ===========      ===========
</TABLE>

   Transfers between the geographic areas primarily represent intercompany
   export sales and are accounted for based on established sales prices between
   the related companies. In computing operating profit (loss), no allocations
   of general corporate expenses have been made.

   Identifiable assets of geographic areas are those assets related to the
   Company's operations in each area. United States assets consist of all other
   operating assets of the Company.

   Export sales account for a significant portion of the Company's revenues and
   are summarized by geographic area as follows:

<TABLE>
<CAPTION>
                                                   1997            1996            1995
                                                  ------          -------         ------
<S>                                            <C>             <C>             <C>        
North and South America (excluding U.S.A.)     $ 5,899,000     $ 5,864,000     $ 3,817,000
Europe                                           5,213,000       6,627,000       5,055,000
Asia                                            11,023,000       5,188,000       8,008,000
Other                                            3,470,000       1,756,000         826,000
                                               -----------     -----------     -----------

                                               $25,605,000     $19,435,000     $17,706,000
                                               ===========     ===========     ===========
</TABLE>


                                      28
<PAGE>   29


         REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE



Board of Directors
Peerless Mfg. Co.

In connection with our audit of the consolidated financial statements of
Peerless Mfg. Co. and Subsidiaries referred to in our report dated September 2,
1997, which is included in Part II of this form, we have also audited Schedule
II for each of the three years in the period ended June 30, 1997. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.




GRANT THORNTON LLP

Dallas, Texas
September 2, 1997


                                      29
<PAGE>   30

                       PEERLESS MFG. CO. AND SUBSIDIARIES

                SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                                    June 30,

<TABLE>
<CAPTION>
                                               Additions
                          Balance at    ----------------------------
                         beginning of   Charged to    Charged to                         Balance at
      Description          period       expenses    other accounts(1)    Deductions(2)  end of period
      -----------          ------       --------    -----------------    -------------  -------------
<S>                        <C>          <C>               <C>              <C>             <C>
1997
----
Allowance for doubtful
    accounts               $100,000     $249,612          $ --             $ 37,162(2)     $312,450  
                           ========     ========          ====             ========        ========  
                                                                                                     
Deferred tax valuation                                                                               
    allowance              $160,405     $     --          $ --             $130,695(3)     $ 29,710  
                           ========     ========          ====             ========        ========  
                                                                                                     
1996                                                                                                 
----                                                                                                 
Allowance for doubtful                                                                               
    accounts               $ 99,082     $ 44,307          $852             $ 44,241(2)     $100,000  
                           ========     ========          ====             ========        ========  
                                                                                                     
Deferred tax valuation                                                                               
    allowance              $121,091     $ 39,314          $ --             $     --        $160,405  
                           ========     ========          ====             ========        ========  
                                                                                                     
1995                                                                                                 
----                                                                                                 
Allowance for doubtful                                                                               
    accounts               $ 85,827     $ 55,401          $ --             $ 42,146(2)     $ 99,082  
                           ========     ========          ====             ========        ========  
                                                                                                     
Deferred tax valuation                                                                               
    allowance              $147,071     $     --          $ --             $ 25,980(3)     $121,091  
                           ========     ========          ====             ========        ========  
                                                                           
</TABLE>


(1) Collections on accounts previously written off.

(2) Write offs.

(3) Utilization and/or revaluation of net operating loss carryovers.



                                      30
<PAGE>   31
                                   SIGNATURES

         Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                            PEERLESS MFG. CO.


Date:  October 28, 1997                     By: /s/ Sherrill Stone
                                                -----------------------------
                                                Sherrill Stone,
                                                Chairman, President
                                                and Chief Executive Officer