<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                    FORM 10-K

    (Mark One)
         X            ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
   -----------        SECURITIES AND EXCHANGE ACT OF 1934

                      FOR THE FISCAL YEAR ENDED JUNE 30, 2001

                                       OR

                      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
   -----------        SECURITIES EXCHANGE ACT  OF 1934

                           COMMISSION FILE NO. 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)

       Registrant's telephone number, including area code: (214) 357-6181
        Securities registered pursuant to Section 12(b) of the Act: NONE
           Securities Registered Pursuant to Section 12(g) of the Act:

COMMON STOCK, PAR VALUE $1.00 PER SHARE                  1,488,742
            (Title of Class)                         (Number of shares
                                           outstanding as of September 21, 2001)

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. [ ]

The aggregate market value of voting stock held by non affiliates of the
registrant is approximately $48.8 million. This amount was calculated by
reducing the total number of shares of the registrant's common stock outstanding
by the total number of shares of common stock held by officers, directors, and
stockholders owning in excess of 10% of the registrant's common stock, and
multiplying the remainder by the average of the bid and asked price of the
registrant's common stock on September 21, 2001, as reported on the National
Association of Securities Dealers, Inc. Automatic Quotation System. The
information provided shall in no way be construed as an admission that any
officer, director, or more than 10% stockholder of the registrant may be deemed
an affiliate of the registrant or that such person is the beneficial owner of
the shares reported as being held by such person, and any such inference is
hereby disclaimed.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on or about November 20, 2001 (to be filed) are
incorporated by reference into Part III of this Form 10-K.


<PAGE>   2





                                TABLE OF CONTENTS

<Table>
<Caption>

                                                                                                    PAGE
                                                                                                    NUMBER
                                                                                                    ------
<S>                                                                                                 <C>
PART I

         Item 1.    Business...........................................................................1

         Item 2.    Properties.........................................................................4

         Item 3.    Legal Proceedings..................................................................4

         Item 4.    Submission of Matters to a Vote of Security Holders................................4

PART II

         Item 5.    Market for Registrant's Common Equity and
                       Related Stockholder Matters.....................................................5

         Item 6.    Selected Financial Data............................................................6

         Item 7.    Management's Discussion and Analysis of Financial
                       Condition and Results of Operations.............................................7

         Item 7A.   Quantitative and Qualitative Disclosures about Market Risk.........................12

         Item 8.    Consolidated Financial Statements and Supplementary Data...........................12

         Item 9.    Changes in and Disagreements with Accountants on Accounting
                       and Financial Disclosure........................................................12
PART III

         Item 10.   Directors and Executive Officers of the Registrant.................................13

         Item 11.   Executive Compensation.............................................................13

         Item 12.   Security Ownership of Certain Beneficial Owners and Management.....................13

         Item 13.   Certain Relationships and Related Transactions.....................................13

PART IV

         Item 14.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................14
</Table>






<PAGE>   3





                                     PART I

ITEM 1. BUSINESS

         Peerless Mfg. Co. (the "Company," "Registrant," "Peerless" or "we,"
"us" or "our") was organized in 1933 as a proprietorship and was incorporated as
a Texas corporation in 1946. We have three wholly-owned subsidiaries
incorporated in Texas, the United Kingdom, and Barbados, respectively. Our
executive offices are located at 2819 Walnut Hill Lane, Dallas, TX 75229, our
telephone number at that location is (214) 357-6181, and our website may be
accessed at www.peerlessmfg.com. Our fiscal year ends on June 30th. References
herein to "fiscal 1999," "fiscal 2000," "fiscal 2001," and "fiscal 2002" refer
to our fiscal years ended June 30, 1999, 2000, 2001, and 2002, respectively.

PRODUCTS AND OPERATIONS

         We operate our business through two primary business segments, the
largest of which is our "Selective Catalytic Reduction Systems" business. In
this business segment we design, engineer, manufacture and sell highly
specialized products referred to as "SCR Systems." These environmental control
systems are used for air pollution abatement by converting nitrogen oxide (NOx)
emissions from exhaust gases caused by burning hydrocarbon fuels such as coal,
gasoline, natural gas and oil to harmless nitrogen and water vapor. These
systems are packaged on skids complete with instruments, controls and related
valves and piping, and are totally integrated systems.

         Our other business segment is our gas/liquid filtration business. In
this business segment we design, engineer, manufacture and sell specialized
products known as "separators" or "filters" which are used for a variety of
purposes in cleaning gases and liquids as they move through a piping system.
These products are used primarily to remove solid and liquid contaminants from
natural gas and salt water aerosols from the combustion intake air of ship board
gas turbine and diesel engines. Separators are also used in nuclear power plants
to remove water from saturated steam. In this business segment, we also design,
engineer, manufacture and sell specialized products known as "pulsation
dampeners" which are used primarily to reduce or eliminate vibrations caused by
acoustical pulsations commonly found in piping connected to reciprocating
compressors. Pulsation dampeners reduce noise levels, improve efficiency and
prolong the life of piping systems. Additionally, we sell gas odorization
equipment, quick-opening closures, parts for our products and other
miscellaneous items, as well as render certain engineering services through this
business segment.

         In addition to our two primary business segments, we also design,
engineer, manufacture and sell packaged boilers and other steam generating
equipment through our Texas subsidiary that does business as ABCO Industries
("ABCO"). This equipment is used to produce steam which is used in processes,
heating, drying, driving steam turbines and a variety of other applications.
ABCO is also used to support the manufacturing needs of other Peerless products.

         Although we manufacture and stock a limited number of items of
equipment for immediate delivery, the vast majority of our products are designed
and constructed for specific customer requirements or specifications. In certain
cases, our products and components are designed by us but produced by
subcontractors under our supervision.

         Please see Note L - "Industry Segment and Geographic Information," in
our Notes to Consolidated Financial Statements for a disclosure of certain
financial information of each of our two primary industry segments, Selective
Catalytic Reduction Systems and Gas/Liquid Filtration.





<PAGE>   4

MANUFACTURING AND OUTSOURCING

         Our products are fabricated utilizing a combination of in-house
manufacturing, subcontractors and vendors. In fiscal 2001, we estimate that
subcontractors and vendors accounted for a significant percentage of our costs
of goods sold. We believe that our use of outsourcing relationships provides us
with flexibility to rapidly expand or contract manufacturing capacity without
increasing capital expenditures. Our subcontractors and vendors manufacture
products on a fixed-price basis for each project. We regularly review our
subcontractor and vendor relationships to ensure quality and workmanship
standards and on-time delivery.

         We maintain significant in-house manufacturing capabilities as well. We
internally develop production methods, train personnel, implement designs and
fabricate products whose complexity may preclude their production by
subcontractors and vendors.

CUSTOMERS

         Our SCR Systems are sold to independent power producers, heat recovery
steam generator suppliers, boiler manufacturers, refineries, petrochemical
plants and others who desire or may be required by environmental regulations to
reduce nitrogen oxide (NOx) emissions.

         Gas separators and filters produced by our gas/liquid filtration
business are sold to gas producers and gas gathering, transmission and
distribution companies, chemical manufacturers and oil refineries, either
directly or through contractors engaged to build plants and pipelines, and to
manufacturers of compressors, turbines, and nuclear and conventional steam
generating equipment. Marine separation/filtration systems are sold primarily to
shipbuilders. Generally, Pulsation dampeners are purchased by customers in the
same industries, except shipbuilders and steam generating equipment
manufacturers.

         We market our products worldwide through manufacturers' representatives
who sell on a commission basis under the general direction of an officer of
Peerless. We also sell products directly to customers. Our business activity and
revenues have historically not been seasonal, but we have noticed an increase in
demand for our SCR Systems during the third and fourth quarters of our last
fiscal year. The demand for these environmental control systems peaks
during the spring and summer months and we expect that trend to continue in
fiscal 2002.

         Boilers supplied by ABCO are sold to industrial, process and utility
customers. These products are sold through a number of sales channels including
direct to users of the equipment, consulting engineers and OEM's.

         We are not dependent upon any single customer or group of customers in
either of our business segments and ABCO is not dependent upon any single
customer or group of customers. The custom-designed nature of our business and
the nature of the products cause year to year variance in our major customers.
During fiscal 2001, one customer accounted for 17% of our consolidated revenues
and in fiscal 2000, a different customer accounted for 19% of our total
consolidated revenues. No customer accounted for 10% or more of our total
consolidated revenues during fiscal 1999.

         Sales to international customers have been a part of our business for
more than forty years. During fiscal 2001, foreign sales amounted to $9.4
million, or 12% of our total consolidated revenues, compared to sales of $13.6
million, or 23% of our total consolidated revenues, during fiscal 2000. The
custom-designed and project-specific nature of our products enables us to sell
to any geographic region. See "Quantitative and Qualitative Disclosures About
Market Risk."





                                      -2-
<PAGE>   5


BACKLOG

         Our backlog of uncompleted orders at June 30, 2001, was approximately
$68 million, compared to $29 million at June 30, 2000. Our backlog as of August
31, 2001, was approximately $72 million. Backlog has been calculated under our
normal practice of including incomplete orders for products that are deliverable
in future periods but that may be changed or cancelled. Of the $68 million
backlog as of June 30, 2001, approximately 90% is scheduled to be completed by
the end of the current fiscal year.

COMPETITION

         There are many U.S. and international competitors with capital and
revenues both larger and smaller than us in the manufacturing and selling of
SCR Systems, separators, filters and pulsation dampeners. Management believes
that performance, reliability and warranty service are the prime competitive
factors in our markets. We believe that we strongly compete in these areas and
have become a world leader in the industries in which we compete.

PATENTS, LICENSES AND PRODUCT DEVELOPMENT

         We believe that we are an industry leader in designing, manufacturing
and applicating efficient, dependable SCR Systems. We also consider ourselves to
be a world leader in the technology required to design and apply our high
efficiency vapor/liquid separation and filtration equipment. In addition, we
believe that we are a leader in the design, manufacture and application of high
efficiency pulsation dampeners for reciprocating compressors. Our expenditures
for new product development and improvements were approximately $621,000 in
fiscal 2001, $848,000 in fiscal 2000 and $667,000 in fiscal 1999. We expect
product development expenditures to be approximately $700,000 in fiscal 2002.

         To protect our intellectual property rights, we depend upon a
combination of patents, trademarks, nondisclosure and confidentiality agreements
with our employees, subcontractors and others and internal controls. We have
existing patents and patent applications pending on some of our products and
processes that are important to our business. These include patents on vane
designs, separator profiles, marine/separator filtration systems and pressure
testing capabilities. In addition, most of our products are proprietary and are
sold utilizing our proven technology and knowledge of the applications.

EMPLOYEES

         At June 30, 2001, Peerless and its subsidiaries had 271 employees. None
of our employees are represented by unions. We believe our employee relations
are satisfactory.

RAW MATERIALS

         We purchase raw materials and component parts essential to our business
from established sources and have not experienced any unusual problems in
purchasing required materials and parts. We believe that raw materials and
component parts will be available in sufficient quantities to meet anticipated
demand. However, there can be no assurance that we will continue to find our raw
materials in quantities or at prices satisfactory to us.





                                      -3-
<PAGE>   6

ENVIRONMENTAL REGULATION

         We do not believe that our compliance with federal, state or local
statutes or regulations relating to the protection of the environment has had
any material effect upon capital expenditures, earnings or our competitive
position. Our manufacturing processes do not emit substantial foreign substances
into the environment.

         Environmental regulations related to NOx emissions resulted in
increased sales of our SCR Systems in fiscal years 2000 and 2001. See "Caution
Regarding Forward Looking Statements."

ITEM 2. PROPERTIES.

         We own our principal executive offices consisting of approximately
48,000 square feet in Dallas, Texas. This facility is used primarily for our
executive offices, as well as for our selling, general and administrative
functions. We also own a manufacturing facility consisting of approximately
80,000 square feet in Dallas, Texas, which is used primarily to manufacture our
SCR Systems. In addition, we own a manufacturing facility in Denton, Texas
consisting of approximately 22,000 square feet that is used primarily to
manufacture our gas/liquid filtration products. We own an approximately 78,000
square feet facility in Abilene, Texas that we use to manufacture all of our
ancillary products. In early fiscal 2002, we leased a 3,500 square foot facility
in Dallas, Texas that we use as additional office space for our sales and
marketing departments. This lease does not expire until 2003.

         We also own a 29,000 square foot manufacturing facility located in
Carrollton, Texas and approximately 34 acres of unimproved property in Wylie,
Texas. We are evaluating alternatives for these properties, neither of which is
used in the operation of our business.

         We believe that our office and manufacturing facilities are adequate
and suitable for our present requirements. If we continue to experience the
growth in demand for our SCR Systems, our future manufacturing capacity can be
met by building, modernizing or expanding the manufacturing and office
facilities at our Dallas or Abilene, Texas locations, where space is available
for expansion.

         All of our facilities, except the ABCO facility, are pledged as
collateral to secure our obligations under our new revolving line of credit
facility. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."

ITEM 3. LEGAL PROCEEDINGS

         We are subject to various pending and threatened litigation from time
to time in the ordinary course of our business. Although all litigation involves
some degree of uncertainty, in the opinion of management, liabilities, if any,
arising from such litigation or threat thereof are not expected to have a
material adverse effect on the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         None.




                                      -4-
<PAGE>   7




                                     PART II


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

         Our common stock, par value $1.00 per share, is listed on the Nasdaq
National Market under the symbol "PMFG." The following table sets forth, for the
periods indicated, the range of the daily high and low closing bid prices for
our common stock as reported by Nasdaq and cash dividends paid per share.


<Table>
<Caption>
                           CLOSING BID PRICES
QUARTER ENDED              -------------------        CASH DIVIDENDS
-------------              HIGH            LOW           PER SHARE
                           ----            ---           ---------
<S>                     <C>             <C>             <C>
FISCAL 2000
September 30, 1999      $    14.13      $    10.50      $     .125
December 31, 1999            13.00            9.88            .125
March 31, 2000               15.81           12.00            .125
June 30, 2000                17.88           12.00            .125

FISCAL 2001
September 30, 2000      $    21.80      $    15.73      $     .125
December 31, 2000            19.32           12.25            .125
March 31, 2001               15.69           12.50              --
June 30, 2001                37.00           13.25              --
</Table>

         There were 146 record holders of our common stock on September 21,
2001. We estimate that approximately 700 additional shareholders own shares in
broker names. Cash dividends may be paid on our common stock as our Board of
Directors deems appropriate after consideration of our continued growth rate,
operating results, financial condition, cash requirements, compliance with
financial covenants set forth in our bank credit facility and such other factors
as the Board of Directors deems appropriate. See "Management's Discussion and
Analysis of Financial Creditors and Results of Operations - Liquidity and
Capital Resources."



                                      -5-
<PAGE>   8




ITEM 6. SELECTED FINANCIAL DATA

         The selected consolidated financial information regarding the Company's
financial position and operating results set forth below for the fiscal years
ended June 30, 2001, 2000, 1999, 1998 and 1997 have been devised from our
audited consolidated financial statements. The selected consolidated financial
data set forth below should be used in conjunction with our consolidated
financial statements and related notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this report.


<Table>
<Caption>

                                                YEAR ENDED JUNE 30,
                                                -------------------
                                                  (IN THOUSANDS)
                                                  --------------
                               2001             2000             1999             1998              1997
                            -----------      -----------      -----------      -----------      -----------
<S>                         <C>              <C>              <C>              <C>              <C>
Net sales                   $    78,159      $    58,561      $    40,568      $    43,455      $    41,486
Gross profit                     23,510           15,658           14,272           15,240           11,525
Earnings before
income tax                        4,875            1,578            2,846            3,522              538
Net earnings                $     3,072      $       931      $     1,850      $     2,450      $       537
                            ===========      ===========      ===========      ===========      ===========
Earnings per
common share - basic        $      2.09      $      0.64      $      1.27      $      1.68      $      0.37
Earnings per
common share - diluted      $      2.05      $      0.63      $      1.27      $      1.68      $      0.37
Total assets                $    46,156      $    32,121      $    23,479      $    23,756      $    19,047
                            ===========      ===========      ===========      ===========      ===========
Long-term obligations       $     1,200            1,406               --               --               --
Cash dividend per
common share                $      0.25      $      0.50      $      0.50      $      0.50      $      0.50
</Table>





                                      -6-
<PAGE>   9




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

RESULTS OF OPERATIONS

         The Company's fiscal year ends on June 30th. References herein to
fiscal 2001, 2000 and 1999 refer to our fiscal years ended June 30, 2001, 2000
and 1999, respectively.

         The following table sets forth selected statements of operations items
expressed as a percentage of net revenues for the periods indicated:

<Table>
<Caption>

                                                  FISCAL YEAR ENDED JUNE 30,
                                                  --------------------------
                                          2001                2000                1999
                                      ------------        ------------        ------------
<S>                                   <C>                 <C>                 <C>
Net revenues                                 100.0%              100.0%              100.0%
Cost of revenues                              69.9                73.3                64.8
                                      ------------        ------------        ------------
    Gross margin                              30.1                26.7                35.2

Operating expenses                            22.6                23.7                27.9
                                      ------------        ------------        ------------
    Operating income                           7.5                 3.0                 7.3

Interest income (expense), net                (0.9)               (0.2)                0.0
Other, net                                    (0.4)               (0.1)               (0.3)
                                      ------------        ------------        ------------

    Earnings before income taxes               6.2                 2.7                 7.0
Income taxes                                   2.3                 1.1                 2.4
                                      ------------        ------------        ------------
Net earnings                                   3.9                 1.6                 4.6
                                      ============        ============        ============
</Table>



FISCAL 2001 COMPARED TO FISCAL 2000

         Our net revenues increased approximately $19.6 million, or 33%, from
$58.6 million in fiscal 2000 to $78.2 million in fiscal 2001. A 53% increase in
our domestic revenues accounted for nearly all of the increase in net revenues.
The increase in domestic revenues was attributable to the increased demand for
our SCR Systems. Domestic revenues for our SCR Systems increased approximately
$24.8 million, or 87%, from $28.5 million in fiscal 2000 to $53.3 million in
fiscal 2001. Foreign revenues decreased approximately $4.2 million, or 31%, from
$13.6 million in fiscal 2000 to $9.4 million in fiscal 2001.

         Our backlog of unfilled orders increased to $68.0 million as of
June 30, 2001, from $29.0 million as of June 30, 2000. The increase is primarily
attributable to several significant SCR orders booked during the second half of
fiscal 2001, as well as an increase in boiler orders. Regulations related to NOx
emissions have in the past resulted in increased sales of our component parts
for SCR Systems and we anticipate that trend to continue in fiscal 2002.

         Our gross profit increased $7.9 million, or 50%, from $15.7 million in
fiscal 2000 to $23.5 million in fiscal 2001. Gross profit, as a percentage of
sales, increased from 26.7% for the twelve months ended June 30, 2000 to 30.1%
for the twelve months ended June 30, 2001. The higher gross profit was primarily
attributable to increased margins recognized on our SCR revenues, which were
partially offset by additional costs we incurred in connection with the ABCO
acquisition in early 2000, as well as cost overruns on a significant order
recognized in fiscal 2000.



                                      -7-
<PAGE>   10
         Operating expenses increased by $3.7 million, or 27%, to $17.6 million
for the twelve months ended June 30, 2001, compared to $13.8 million for the
twelve months ended June 30, 2000. The increase in operating expenses was
primarily threefold. First, we incurred additional costs in connection with our
acquisition of ABCO in February 2000. Second, we incurred additional engineering
and project management costs to support the increase in the demand for our SCR
Systems. Finally, during fiscal 2001, we recognized our obligations under the
Company's profit sharing plan.

         Interest expense increased by $0.6 million due to the increased debt we
incurred to finance our working capital needs and the financing required to
acquire the ABCO operations. The effective borrowing rate under our credit
facilities also contributed to the additional interest expense we incurred.

         As a result of the factors discussed above, we recorded net earnings
for the fiscal year ended June 30, 2001, of $3.1 million, compared to net
earnings of $0.9 million for the fiscal year ended June 30, 2000. Our effective
tax rate was 37% in fiscal 2001 compared to 41.0% in fiscal 2000. For a further
discussion of our federal income taxes, see Note J to our Notes to Consolidated
Financial Statements.

         Our balance of accounts receivable for the twelve months ended June 30,
2001, increased by $16.7 million to $30.0 million, compared to $12.3 million for
the twelve months ended June 30, 2000. Likewise, our balance of billings in
excess of costs and earnings on uncompleted contracts for the twelve months
ended June 30, 2001, increased by $9.2 million to $9.6 million, compared to $0.4
million for the twelve months ended June 30, 2000.

         These significant increases are not attributable to our customers not
timely paying us, but rather are directly related to the nature of our business.
Because we are engaged in the business of manufacturing custom systems, our
progress billing practices are event oriented rather than date oriented, and
vary from contract to contract. We customarily bill our customers after the
occurrence of certain project milestones. For example, after we complete
engineering drawings for a customized product or after ordering raw materials to
produce that product. Once we bill our customer, our accounts receivable balance
increases as does our balance of billings in excess of costs and earnings on
uncompleted contracts. Consequently, we focus on the difference between our
accounts receivable balance and our billings in excess of costs balance to
determine our "net working capital impact" related to billings for a particular
period. As of June 30, 2001, our net working capital impact was approximately
$19.4 million, and as of June 30, 2000, that balance was approximately $12.0
million.

         A period to period analysis of our balance of accounts receivable must
also take into account any changes in our backlog (uncompleted orders less
revenue recognized under the percentage of completion method). The increase to
our accounts receivable balance from June 30, 2000, to June 30, 2001, and the
associated increase in our balance of billings in excess of costs, was directly
related to the growth in demand for our products. The increase in demand caused
our backlog to increase from approximately $29 million as of June 30, 2000, to
$68 million as of June 30, 2001. Because we are engaged in the business of
manufacturing custom systems, our balances of accounts receivables, billings in
excess of costs and earnings, and costs and earnings in excess of billings
change in direct correlation to the quantity and mix of our backlog, as well as
the specific terms of each of our customer contracts.

         Cash provided by operating activities for the twelve months ended June
30, 2001, was $8.5 million, compared to cash used in operating activities of
$4.7 million for the twelve months ended June 30, 2000. In fiscal 2000, we
incurred substantial time and material expenses for one large custom order prior
to billing the customer for those costs. As a result, our costs and earnings in
excess of billings increased significantly. The increased demand for our systems
and our ability to more effectively manage our large contracts in fiscal 2001
contributed to the improvement in our cash flow during fiscal 2001.


                                      -8-
<PAGE>   11
FISCAL 2000 COMPARED TO FISCAL 1999

         Our net sales increased approximately $18.0 million, or 44%, from $40.6
million for fiscal 1999 to $58.6 million for fiscal 2000. A 99% increase in our
domestic revenues accounted for nearly all of the increase in net revenues. The
increase in domestic revenues was attributable to the increased demand for our
SCR Systems. Domestic revenues for our SCR Systems increased approximately $22.4
million, or 367%, from $6.1 million in fiscal 1999 to $28.5 million in fiscal
2000. Foreign revenues decreased approximately $4.4 million, or 25%, from $18.0
million in fiscal 1999 to $13.6 million in fiscal 2000.

         Our backlog of unfilled orders remained unchanged at $29.0 million as
of June 30, 1999, and June 30, 2000.

         Our gross profit increased $1.4 million, or 10%, from $14.2 million in
fiscal 1999 to $15.7 million in fiscal 2000. However, the gross profit margin
decreased from 35.2% of net revenues in fiscal 1999 to 26.7% of net revenues in
fiscal 2000. The lower gross profit margin is primarily due to cost overruns on
a significant order and lower margins inherent with specialty components
purchased and shipped direct to customers associated with environmental
products.

         Operating expenses increased by $2.6 million, or 23%, from $11.3
million in fiscal 1999 to $13.9 million in fiscal 2000. This increase in
operating expenses is primarily due to increased implementation costs for an ERP
system, costs associated with integration of ABCO and the addition of personnel
to support the higher sales volume. However, operating expenses, as a percent of
sales, decreased from 27.8% in fiscal 1999 to 23.7% in fiscal 2000.

         Our effective tax rate was 41.0% in fiscal 2000 compared to 35.0% in
fiscal 1999. For a further discussion of our federal income taxes, see Note J to
our Notes to Consolidated Financial Statements.

         Cash used in operating activities for the twelve months ended June 30,
2000, was $4.7 million, compared to cash provided by operating activities of
$0.9 million for the twelve months ended June 30, 1999. In fiscal 2000, we
incurred substantial time and material expenses for one large custom order prior
to billing the customer for those costs. As a result, our costs and earnings in
excess of billings increased significantly to $9.9 million for the twelve months
ended June 30, 2000, compared to $3.3 million for the twelve months ended June
30, 1999.

QUARTERLY FLUCTUATIONS

         Our financial position and results of operations are slightly affected
by seasonal fluctuations in sales and operating profits. We have noticed an
increase in demand for our SCR Systems during the third and fourth quarters of
our fiscal year. The demand for these environmental control systems peaks during
the spring and summer months and we expect that trend to continue in fiscal
2002.

         In addition, during the fourth quarter of fiscal 2000, the Company
incurred significant cost overruns on a large contract and, as a result,
recorded a loss during that quarter. Our quarterly sales can also be affected by
the timing and amount of sales contributed by new contracts. Accordingly, the
results of operations for interim periods are not necessarily indicative of
results for the entire fiscal year.




                                      -9-
<PAGE>   12





The following tables set forth certain unaudited financial data for the quarters
indicated:


<Table>
<Caption>

                                           FISCAL 2001 QUARTER ENDED                           FISCAL 2000 QUARTER ENDED
                                -------------------------------------------------   ----------------------------------------------
                                SEPT. 30,     DEC. 31,     MARCH 31,    JUNE. 30,   SEPT. 30,     DEC. 31,    MARCH 31,    JUNE 30
                                  2000          2000         2001         2001         1999         1999        2000        2000
                                ---------     ---------    ---------    ---------   ---------    ---------    ---------   --------
                                                           (In thousands, except percentages and per share data)


<S>                             <C>           <C>          <C>          <C>          <C>         <C>          <C>         <C>
Net sales ...................   $  11,059     $  16,383    $  18,229    $  32,488    $ 12,307    $  10,358    $ 13,764    $ 22,132
Gross profit ................       2,995         4,265        5,268       10,982       3,595        3,900       4,380       3,783
% of net sales ..............        27.1%         26.0%        28.9%        33.8%       29.2%        37.7%       31.8%       17.1%
Operating income (loss) .....   $    (539)    $     460    $   1,056    $   4,925    $    394    $     713    $    935    $   (266)
% of net sales ..............        (4.9)%         2.8%         5.8%        15.2%        3.2%         6.9%        6.8%       (1.2)%
Net income (loss) ...........   $    (532)    $     132    $     444    $   3,028    $    287    $     439    $    562    $   (357)
% of net sales ..............        (4.8)%         0.8%         2.4%         9.3%        2.3%         4.2%        4.1%       (1.6)%
Net income (loss)
   per share -- basic .......   $   (0.36)    $    0.09    $    0.30    $    2.05    $   0.20    $    0.30    $   0.38    $  (0.24)
Net income (loss) per share -
   assuming dilution ........   $   (0.36)    $    0.09    $    0.30    $    1.98    $   0.20    $    0.30    $   0.38    $  (0.24)
</Table>


LIQUIDITY AND CAPITAL RESOURCES

         As of June 30, 2001, we maintained two separate short-term lines of
credit, each in the amount of $5.5 million. In addition, we had a $2.0 million
installment note payable that was utilized to finance the ABCO acquisition in
early 2000. As of June 30, 2001, we had no outstanding balance under the credit
lines and $2.0 million outstanding under letters of credit, leaving us with $9.0
million of availability under the revolving credit lines. We had $1.6 million
outstanding on the ABCO installment note, all of which was prepaid in full in
July 2001.

         Effective August 31, 2001, we entered into a new $10 million revolving
line of credit facility to replace our two $5.5 million credit facilities. The
new credit facility expires in October 2003. The new credit line carries a
floating interest rate based on the prime rate less 0.25% (6.00% at August 31,
2001) and is secured by substantially all of our assets. ABCO is a guarantor of
our obligations under this credit facility. Our interest rate is subject to
change based on our financial performance. As of August 31, 2001, we had no
outstanding balance under the credit line, and $1.9 million outstanding under
letters of credit, leaving us with $8.1 million of availability under the credit
line. We pay an annual commitment fee of 0.25% of the unused balance under the
credit line. The credit line contains financial covenants, restrictions on
capital expenditures, acquisitions, asset dispositions, additional debt, and
other customary covenants.

         We have historically been a net provider of cash from operations and
have financed our working capital requirements and capital expenditures through
the retention of earnings and the use of our short-term credit facilities. Cash
provided by operating activities was $8.5 million for fiscal 2001 compared to
cash used in operating activities of $4.7 million for fiscal 2000. The change
was primarily the result of the increases in billings in excess of cost and
earnings, accounts payable and accrued liabilities which were offset by the
increased accounts receivable. Although historically the Company's capital
expenditure requirements have not been significant, the Company may have to
increase its level of capital expenditures in the future to expand the Company's
manufacturing capacity if the demand for its SCR Systems continues to increase
at the current rate.



                                      -10-
<PAGE>   13

         We believe we have adequate liquidity to support existing operations
and planned growth, as well as to continue operations during reasonable periods
of unanticipated adversity. Management directs additional resources to strategic
new product development, market expansion and continuing improvement of existing
products to enhance our position as a market leader and to promote planned
internal growth and profitability. Although historically the Company has paid
quarterly dividends, we announced in January 2001 that we would not pay a
dividend for the quarter ending March 31, 2001, and thereafter in order to
preserve working capital for future growth. Our Board of Directors has decided
to continue the policy of preserving working capital for the quarter ending
September 30, 2001. Consequently, no dividend will be paid for that quarter.

EFFECTS OF INFLATION

         We believe that the effects of inflation on our operations have not
been material during the past three years.

CAUTION REGARDING FORWARD LOOKING STATEMENTS

         The Company occasionally makes forward-looking statements concerning
its plans, goals, product and service offerings, and anticipated financial
performance. These forward-looking statements may generally be identified by
introductions such as "outlook" for an upcoming period of time, or words and
phrases such as "should", "expect", "hope", "plans", "projected", "believes",
"forward-looking" (or variants of those words and phrases) or similar language
indicating the expression of an opinion or view concerning the future.

         These forward-looking statements are subject to risks and uncertainties
based on a number of factors and actual results or events may differ materially
from those anticipated by such forward-looking statements. These factors
include, but are not limited to: the growth rate of the Company's revenue and
market share; the consummation of new, and the non-termination of, existing
contracts; the Company's ability to effectively manage its business functions
while growing its business in a rapidly changing environment; the Company's
ability to adapt and expand its services in such an environment; the Company's
ability to successfully refinance or extend its lines of credit or obtain
alternative sources of financing; the Company's ability to effectively and
efficiently manage its backlog, large contracts for its SCR Systems, inventory
levels and processing of sales orders; the quality of the Company's plans and
strategies; the Company's ability to execute such plans and strategies; the
Company's ability to manage its SCR Systems business if a slowdown occurs in the
construction or refurbishment of power plants; the Company's ability to adapt to
changes in regulatory standards; and the size and value of product warranty
claims submitted to the Company by customers.

         In addition, forward-looking statements concerning the Company's
expected revenue or earnings levels are subject to many additional uncertainties
applicable to competitors generally and to general economic conditions over
which the Company has no control, including, but not limited to, fluctuations in
foreign exchange rates, political developments and foreign laws and regulations,
such as forced divestiture of assets, restrictions on production, imports and
exports, price controls, and environmental regulations, as well as the rate at
which power plants are constructed or refurbished worldwide. The Company does
not plan to generally publicly update prior forward-looking statements for
unanticipated events or otherwise and, accordingly, prior forward-looking
statements should not be considered to be "fresh" simply because the Company has
not made additional comments on those forward-looking statements.



                                      -11-
<PAGE>   14

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         Interest Rate Risk. Our earnings are affected by changes in interest
rates due to the impact those changes have on the interest expense payable by us
under our variable rate debt revolving line of credit and installment debt, for
which the outstanding balance was $1.6 million as of June 30, 2001. A 1.0%
change in the underlying prime rate would result in a $16,000 change in the
annual amount of interest based on the impact of the hypothetical interest rates
on our revolving line of credit outstanding as of June 30, 2001.

         Foreign Currency Exchange Risk. Our earnings may be affected by
changes in foreign currency exchange rates or changes in economic conditions in
foreign markets. In addition, sales of products and services are affected by the
value of the U.S. dollar relative to other currencies.

ITEM 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The Financial Statements together with the report thereon of Grant
Thornton LLP, independent auditors, are included in this report commencing at
Page F-1.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

         None.




                                      -12-
<PAGE>   15




                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         The information set forth under the heading "Director Information" and
"Information Concerning Executive Officers" of the definitive proxy statement
for our 2001 Annual Meeting of Shareholders is incorporated by reference in this
Form 10-K Annual Report.

ITEM 11. EXECUTIVE COMPENSATION.

         The information set forth under the heading "Executive Compensation" of
the definitive proxy statement for our 2001 Annual Meeting of Shareholders is
incorporated by reference in this Form 10-K Annual Report.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The information set forth under the heading "Stock Ownership" of the
definitive proxy statement for our 2001 Annual Meeting of Shareholders is
incorporated by reference in this Form 10-K Annual Report.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The information set forth under the headings "Other Director and
Executive Officer Information" of the definitive proxy statement for our 2001
Annual Meeting of Shareholders is incorporated by reference in this Form 10-K
Annual Report.











                                      -13-
<PAGE>   16




                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

FINANCIAL STATEMENTS

           The following financial statements of the company are filed as a part
of this report:

<Table>
<Caption>

                                                                                                                Page
<S>                                                                                                             <C>
Report of Independent Certified Public Accountants..............................................................F-1
Consolidated Balance Sheets as of June 30, 2001 and 2000........................................................F-2
Consolidated Statements of Operations -- For the Fiscal Years Ended
  June 30, 2001, 2000 and 1999..................................................................................F-4
Consolidated Statements of Stockholders' Equity -- For the Fiscal Years Ended
  June 30, 2001, 2000 and 1999..................................................................................F-5
Consolidated Statements of Cash Flows -- For the Fiscal Years Ended
  June 30, 2001, 2000 and 1999..................................................................................F-6
Notes to Consolidated Financial Statements......................................................................F-8
</Table>

         All financial statement schedules have been omitted because they are
not applicable or the required information is shown in the consolidated
financial statements and notes thereto.

REPORTS ON FORM 8-K

         None.






                                      -14-
<PAGE>   17




                                    EXHIBITS

         The following exhibits are filed as part of this report:

<Table>
<Caption>

         Exhibit
         Number                             Exhibit
         -------                            -------
<S>               <C>

         3(a)     Articles of Incorporation, as amended to date (filed as
                  Exhibit 3(a) to our Quarterly Report on Form 10-Q, for the
                  fiscal quarter ended December 31, 1997, and incorporated
                  herein by reference).

         3(b)     Bylaws, as amended to date (filed as Exhibit 3(b) to our
                  Annual Report on Form 10-K, for the fiscal year ended June 30,
                  1997, and incorporated herein by reference).

         4(a)     Rights Agreement between Peerless Mfg. Co. and ChaseMellon
                  Shareholder Services, L.L.C., adopted by the Board of
                  Directors May 21, 1997 (filed as Exhibit 1 to our Registration
                  Statement on Form 8-A (File No. 0-05214) and incorporated
                  herein by reference).

         4(b)     First Amendment to Rights Agreement between Peerless Mfg. Co.
                  and ChaseMellon Shareholder Services, L.L.C. (Filed as Exhibit
                  2 to our Registration Statement on Form 8-A dated August 30,
                  2001 and incorporated herein by reference).

         10(a)    Incentive Compensation Plan effective January 1, 1981, as
                  amended January 23, 1991 (filed as Exhibit 10(b) to our Annual
                  Report on Form 10-K, for the fiscal year ended June 30, 1991,
                  and incorporated herein by reference).

         10(b)    1985 Restricted Stock Plan for Peerless Mfg. Co., effective
                  December 13, 1985 (filed as Exhibit 10(b) to our Annual Report
                  on Form 10-K, for the fiscal year ended June 30, 1993, and
                  incorporated herein by reference).

         10(c)    1991 Restricted Stock Plan for Non-Employee Directors of
                  Peerless Mfg. Co. (filed as Exhibit 10(e) to our Annual Report
                  on Form 10-K for the fiscal year ended June 30, 1991, and
                  incorporated herein by reference).

         10(d)    Employment Agreement and Agreement, each dated as of April 29,
                  1994, by and between Peerless Mfg. Co. and Sherrill Stone
                  (filed as Exhibit 10(d) to our Annual Report on Form 10-K for
                  the fiscal year ended June 30, 1994, and incorporated herein
                  by reference).

         10(e)    Peerless Mfg. Co. 1995 Stock Option and Restricted Stock Plan
                  (filed as Exhibit 10(h) to our Annual Report on Form 10-K for
                  the fiscal year ended June 30, 1997 and incorporated herein by
                  reference), as amended by Amendment #1 dated November 11, 1999
                  (filed as exhibit 10(h) to our Quarterly Report on Form 10-Q,
                  for the fiscal quarter ended December 31, 1999 and
                  incorporated herein by reference).

         10(f)    Asset Purchase Agreement dated February 25, 2000, by and
                  between PMC Acquisition, Inc. and ABCO Industries, Inc. (filed
                  as Exhibit 2.1 to our Current Report on Form 8-K dated
                  February 25, 2000 and incorporated herein by reference).
</Table>



                                      -15-
<PAGE>   18
<Table>

         <S>               <C>
         10(g)    Employment Agreement and Agreement, each dated as of May 16,
                  2000, by and between Peerless Mfg. Co. and Roy C. Cuny (filed
                  as Exhibit 10(l) to our Annual Report on Form 10-K for the
                  fiscal year ended June 30, 2000, and incorporated herein by
                  reference).

         10(h)    Loan Agreement, Revolving Note, Security Agreement and Deed of
                  Trust dated as of August 31, 2001, by and between Peerless
                  Mfg. Co. and Bank of America*

         21       Subsidiaries of Peerless Mfg. Co.*

         22       Consent of Grant Thornton LLP*

</Table>

--------------------------------------------------------------------------------
*  Filed herewith




                                      -16-
<PAGE>   19




                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                          PEERLESS MFG. CO.

                                          By: /s/ Sherrill Stone
                                          --------------------------------------
                                          Sherrill Stone, Chairman of the Board,
Date: September 28, 2001                  President, and Chief Executive Officer



         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on September 28, 2001.


<Table>
<S>                                                <C>
/s/ Sherrill Stone                                 Chairman of the Board, President, and
------------------------------                     Chief Executive Officer
Sherrill Stone


/s/ Robert J. Boutin                               Principal Accounting and
------------------------------                     Financial Officer
Robert J. Boutin


/s/ Donald A. Sillers                              Director
------------------------------
Donald A. Sillers, Jr.


/s/ J. V. Mariner, Jr.                             Director
------------------------------
J. V. Mariner, Jr. Director


/s/ Bernard S. Lee                                 Director
------------------------------
Bernard S. Lee


/s/ D. D. Battershell                              Director
------------------------------
D. D. Battershell
</Table>





                                      -17-
<PAGE>   20





               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, 2001 and 2000, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the three years in the period ended June 30, 2001. 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 auditing standards generally accepted
in the United States of America. 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, 2001 and 2000, and the consolidated results of
their operations and their consolidated cash flows for each of the three years
in the period ended June 30, 2001, in conformity with accounting principles
generally accepted in the United States of America.



                                                /s/ GRANT THORNTON LLP

Dallas, Texas
August 16, 2001, except for Note F
as to which the date is September 28, 2001







                                      F-1

<PAGE>   21




                       PEERLESS MFG. CO. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)

<Table>
<Caption>

ASSETS

                                                                           JUNE 30,
                                                                     2001           2000
                                                                 ------------    ------------
<S>                                                              <C>             <C>
Current assets:
  Cash and cash equivalents                                      $      2,577    $        561
  Short-term investments                                                  300             273
  Accounts receivable-principally trade, net of allowance for
      uncollectible accounts of $297 and $778 in 2001 and
      2000, respectively                                               28,987          12,319
     Inventories                                                        2,084           3,288
     Costs and earnings in excess of billings
          on uncompleted contracts                                      6,328           9,912
     Deferred income taxes                                                704             471
     Other                                                                751             704
                                                                 ------------    ------------
                Total current assets                                   41,731          27,528


Property, plant and equipment - at cost,
      less accumulated depreciation                                     3,365           3,510
Other assets                                                            1,060           1,083
                                                                 ------------    ------------
                Total assets                                     $     46,156    $     32,121
                                                                 ============    ============
</Table>



                                      F-2

<PAGE>   22



                       PEERLESS MFG. CO. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)

<Table>
<Caption>

LIABILITIES AND STOCKHOLDERS' EQUITY

                                                                             JUNE 30,
                                                                        2001             2000
                                                                    ------------     ------------
<S>                                                                 <C>              <C>
Current liabilities:
     Accounts payable - trade                                       $     10,172     $      6,471
     Lines of credit                                                          --            5,800
     Current maturities of long-term debt                                    400              421
     Billings in excess of costs and earnings
         on uncompleted contracts                                          9,618              364
     Commissions payable                                                   1,443              985
     Income taxes payable                                                  1,754               --
Accrued expenses
     Compensation                                                          1,816              746
     Other                                                                 1,913              803
                                                                    ------------     ------------
                       Total current liabilities                          27,116           15,590

Long-term debt, net of current maturities                                  1,200            1,406

Deferred income taxes                                                        147              376

Stockholders' equity:
     Common stock - authorized, 10,000,000
          shares of $1 par value; issued and
          outstanding, 1,477,492 and 1,467,992
          shares in 2001 and 2000, respectively                            1,477            1,468
     Additional paid-in capital                                            2,804            2,692
     Unamortized value of restricted stock grants                            (35)             (71)
     Accumulated other comprehensive loss                                    (66)            (149)
     Retained earnings                                                    13,513           10,809
                                                                    ------------     ------------
                      Total stockholders' equity                          17,693           14,749
                                                                    ------------     ------------
                      Total liabilities and stockholders' equity    $     46,156     $     32,121
                                                                    ============     ============
</Table>


          See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>   23



                       PEERLESS MFG. CO. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                (Dollars in thousands, except per share amounts)

<Table>
<Caption>

                                                                   YEAR ENDED JUNE 30,
                                                           2001             2000             1999
                                                       ------------     ------------     ------------
<S>                                                    <C>              <C>              <C>
Net sales                                              $     78,159     $     58,561     $     40,568
Cost of goods sold                                           54,649           42,903           26,296
                                                       ------------     ------------     ------------


                       Gross profit                          23,510           15,658           14,272

Operating expenses:
     Marketing and engineering                               11,711           10,036            8,631
     General and administrative                               5,897            3,846            2,662
                                                       ------------     ------------     ------------
                                                             17,608           13,882           11,293
                                                       ------------     ------------     ------------
                       Operating profit                       5,902            1,776            2,979
                                                       ------------     ------------     ------------

Other income (expense)
     Interest income                                            101               38               59
     Interest expense                                          (808)            (180)             (24)
     Foreign exchange losses                                   (155)              (7)            (119)
     Other, net                                                (165)             (49)             (49)
                                                       ------------     ------------     ------------
                                                              (1027)            (198)            (133)
                                                       ------------     ------------     ------------
                       Earnings before income taxes           4,875            1,578            2,846

Income tax expense (benefit)
     Current                                                  2,265              725              618
     Deferred                                                  (462)             (78)             378
                                                       ------------     ------------     ------------
                                                              1,803              647              996
                                                       ------------     ------------     ------------
                       Net earnings                    $      3,072     $        931     $      1,850
                                                       ============     ============     ============

Earnings per common share - basic                      $       2.09     $       0.64     $       1.27
                                                       ============     ============     ============

Earnings per common share - diluted                    $       2.05     $       0.63     $       1.27
                                                       ============     ============     ============
</Table>


           See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>   24




                       PEERLESS MFG. CO. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                             (Dollars in thousands)

<Table>
<Caption>

                                                                                          ACCUMULATED
                                             $1 PAR                  UNAMORTIZED VALUE      OTHER                         TOTAL
                                             COMMON       PAID-IN      OF RESTRICTED     COMPREHENSIVE    RETAINED     STOCKHOLDER
                                             STOCK        CAPITAL      STOCK GRANTS       INCOME (LOSS)   EARNINGS        EQUITY
                                           -----------   ----------  -----------------   --------------  -----------   -----------

<S>                                        <C>           <C>         <C>                 <C>             <C>           <C>
Balances at June 30, 1998                  $     1,457   $    2,584      $       (51)    $      (80)     $     9,486   $    13,396

Net earnings                                        --           --               --             --            1,850         1,850
Foreign currency translation adjustment             --           --               --            (24)              --           (24)
                                                                                                                       -----------
       Total comprehensive income                                                                                            1,826

Dividends ($.50 per share)                          --           --               --             --             (728)         (728)
Forfeiture of restricted stock grants               (5)         (44)              29             --               --           (20)
Amortization of restricted stock grants                                           18             --               --            18
                                           -----------   ----------      -----------     ----------      -----------   -----------
Balances at June 30, 1999                        1,452        2,540               (4)          (104)          10,608        14,492

Net earnings                                        --           --               --             --              931           931
Foreign currency translation adjustment             --           --               --            (45)              --           (45)
                                                                                                                       -----------
       Total comprehensive income                                                                                              886

Dividends ($.50 per share)                          --           --               --             --             (730)         (730)
Stock options exercised                              9           75               --             --               --            84
Issuance of restricted stock grants                  7           74              (81)            --               --            --
Amortization of restricted stock grants             --           --               14             --               --            14
Income tax benefit related to restricted
  stock plan                                        --            3               --             --               --             3
                                           -----------  -----------      -----------    -----------      -----------   -----------
Balances at June 30, 2000                        1,468        2,692              (71)          (149)          10,809        14,749

Net earnings                                        --           --               --             --            3,072         3,072
Foreign currency translation adjustment             --           --               --             83               --            83
                                                                                                                       -----------
       Total comprehensive income                   --           --               --             --               --         3,155

Dividends ($.25 per share)                          --           --               --             --             (368)         (368)
Forfeiture of restricted stock grants               (1)          (9)              --             --               --           (10)
Stock options exercised                             10          111               --             --               --           121
Amortization of restricted stock grants             --           --               36             --               --            36
Income tax benefit related to restricted
  stock plan                                        --           10               --             --               --            10
                                           -----------  -----------      -----------    -----------      -----------   -----------
Balances at June 30, 2001                  $     1,477  $     2,804      $       (35)   $       (66)     $    13,513   $    17,693
                                           ===========  ===========      ===========    ===========      ===========   ===========
</Table>


           See accompanying notes to consolidated financial statements


                                      F-5

<PAGE>   25
                       PEERLESS MFG. CO. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<Table>
<Caption>
                                                         YEAR ENDED JUNE 30,
                                                      2001       2000       1999
                                                    --------    -------    -------
<S>                                                 <C>         <C>        <C>
Cash flows from operating activities:
     Net earnings                                   $  3,072    $   931    $ 1,850
     Adjustments to reconcile net earnings
       to net cash provided by (used in)
       operating activities:
           Depreciation and amortization                 566        490        413
           Deferred income taxes                        (462)       (78)       378
           Foreign exchange loss                         155          7        119
           Other                                         127         (1)       (34)
     Changes in operating assets and liabilities
             Accounts receivable                     (16,823)      (124)     1,950
             Inventories                               1,236        443     (1,302)
             Cost and earnings in excess of
                billings on uncompleted contracts      3,392     (6,644)    (1,429)
             Other current assets                        (47)        74       (612)
             Other assets                                (45)      (223)      (186)
             Accounts payable                          3,703        845         59
             Billings in excess of costs and
                earnings on uncompleted contracts      9,254       (209)       523
             Commissions payable                         458       (220)        (1)
             Accrued expenses                          3,917          8       (789)
                                                    --------    -------    -------
                                                       5,431     (5,632)      (911)
                                                    --------    -------    -------
Net cash provided by (used in)
    operating activities                               8,503     (4,701)       939

Cash flow from investing activities
     Net purchases of short-term investments             (27)        --         (5)
     Purchase of property and equipment                 (316)    (1,879)      (203)
                                                    --------    -------    -------
Net cash used in investing activities                   (343)    (1,879)      (208)

Cash flows from financing activities
     Sale of common stock                           $    121    $    84    $    --
     Net changes in lines of credit                   (5,800)     5,800       (200)
     Advances on long-term borrowings                     --      2,827         --
     Payments on long-term borrowings                   (227)    (1,000)        --
     Dividends paid                                     (368)      (729)      (727)
                                                    --------    -------    -------

Net cash provided by (used in)
     financing activities                           $ (6,274)   $ 6,982    $  (927)

Effect of exchange rate changes on
     cash and cash equivalents                           130        (52)       (21)
                                                    --------    -------     -------
Net increase (decrease) in cash and cash
     equivalents                                       2,016        350       (217)
</Table>


                                      F-6
<PAGE>   26


                       PEERLESS MFG. CO. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
                                 (In thousands)


<Table>
<Caption>

                                                        YEAR ENDED JUNE 30,
                                               2001             2000             1999
                                            ------------     ------------     ------------

<S>                                         <C>              <C>              <C>
Cash and cash equivalents at                $        561     $        211     $        428
     beginning of year

Cash and cash equivalents at
     end of year                            $      2,577     $        561     $        211
                                            ============     ============     ============

Supplemental information on cash flows:

Interest paid                               $        744     $        150     $         21
Income taxes paid                           $        105     $        781     $        901
</Table>






          See accompanying notes to consolidated financial statements.

                                      F-7
<PAGE>   27



                       PEERLESS MFG. CO. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Dollars in thousands)

NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT 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 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.

A summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows.

Consolidation

The Company consolidates the accounts of its subsidiaries, all of which are
wholly-owned. 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.

Revenue Recognition

The Company uses a combination of the percentage-of-completion method and the
completed contract method of accounting for revenue recognition. As the Company
continues to market its SCR Systems, the order size and delivery cycles have
increased from the Company's traditional product line, thereby leading to the
increased use of the percentage-of-completion method of revenue recognition. The
method is applied on an order-by-order basis with stage of completion
determined by the relevant characteristics of each order.


                                      F-8
<PAGE>   28

                       PEERLESS MFG. CO. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Dollars in thousands)

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

All orders with revenue over a specified amount are accounted for using the
percentage-of-completion method, which incorporates the increased SCR business.
These orders have estimates that are reasonably dependable, and the contracts
meet the guidelines outlined in SOP 81-1.

The percentage-of-completion is estimated on factors appropriate to the specific
order. Revenue and cost are recognized in the Statements of Operations based on
the resulting percentage of total anticipated revenue and cost.

The completed contract method is applied to relatively short-term contracts
where the financial statement presentation does not vary materially from the
presentation under the percentage-of-completion method. All orders with revenue
under a specified amount are assumed to be short-term and are accounted for
under the completed contract method.

Stock Based Compensation

The Company accounts 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

Basic earnings per common share is computed by dividing net earnings by the
weighted average number of common shares outstanding during each year presented.
Diluted earnings per common share give effect to the assumed issuance of shares
pursuant to outstanding stock option plans, when dilutive.

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 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.



                                      F-9
<PAGE>   29


                       PEERLESS MFG. CO. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Dollars in thousands)

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

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. The
carrying amount of debt approximates fair value because all debt has interest
rates tied to market.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America 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.

Reclassification

Certain reclassifications of prior year amounts have been made to conform to the
current year presentation.

NOTE B - BUSINESS COMBINATION

On February 25, 2000, the Company purchased substantially all of the assets of
ABCO Industries, Inc. (ABCO) for approximately $1,700,000. No goodwill resulted
from the acquisition. ABCO is in the business of designing and manufacturing
industrial boilers. Following is unaudited pro forma data assuming that the
acquisition of ABCO had occurred on July 1, 1998:

<Table>
<Caption>

                                                              YEAR ENDED JUNE 30,
                                                         ------------------------------
                                                            2000              1999
                                                         ------------      ------------
<S>                                                      <C>               <C>
Sales                                                    $     69,316      $     55,569
Net earnings (loss) before extraordinary credit                   (13)             (327)
Net earnings (loss)                                             2,109              (327)
Per share - basic
     Net earnings (loss) before extraordinary credit             (.01)            (0.22)
     Net earnings (loss)                                         1.44             (0.22)
Per share - diluted
     Net earnings (loss) before extraordinary credit             (.01)            (0.22)
     Net earnings (loss)                                         1.43             (0.22)
</Table>




                                      F-10
<PAGE>   30


                       PEERLESS MFG. CO. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Dollars in thousands)

NOTE C - CONCENTRATIONS OF CREDIT RISK

We continue to closely monitor the creditworthiness of our customers and have
not experienced significant credit losses to date. A significant portion of our
sales are to customers who place large orders for custom systems and customers
whose activities are related to the electrical generation and oil and gas
industries, including some who are located in other countries. We generally
either require progress payments, but may extend credit to some of these
customers. Our exposure to credit risk is also affected to some degree by
conditions within the electrical generation and oil and gas industries. When
sales are made to smaller international enterprises, we generally require
progress payments or an appropriate guarantee of payment, such as a letter of
credit from a banking institution.

For the year ended June 30, 2001, sales to one customer accounted for
approximately 17% of revenues. For the year ended June 30, 2000, sales to one
customer accounted for approximately 19% of revenues. For the year ended June
30, 1999, no single customer accounted for more than 10% of revenues.

NOTE D - INVENTORIES

         Principal components of inventories are as follows:

<Table>
<Caption>


                                JUNE 30,
                     -----------------------------
                         2001             2000
                     ------------     ------------
<S>                  <C>              <C>
Raw materials        $      1,151     $      1,252
Work in progress              583            1,669
Finished goods                350              367
                     ------------     ------------
                     $      2,084     $      3,288
                     ============     ============
</Table>


NOTE E - PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment is summarized as follows:

<Table>
<Caption>


                                                 JUNE 30,
                                      ------------------------------
                                          2001              2000
                                      ------------      ------------
<S>                                   <C>               <C>
Buildings                             $      3,791      $      3,789
Equipment                                    3,300             3,204
Furniture and fixtures                       2,404             2,202
                                      ------------      ------------
                                             9,495             9,195
    Less accumulated depreciation           (7,035)           (6,521)
                                      ------------      ------------
                                             2,460             2,674
Land                                           905               836
                                      ------------      ------------
                                      $      3,365      $      3,510
                                      ============      ============
</Table>




                                      F-11
<PAGE>   31
                       PEERLESS MFG. CO. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Dollars in thousands)

NOTE F - LINES OF CREDIT

As of June 30, 2001, we maintained two separate short-term lines of credit, each
in the amount of $5.5 million. As of June 30, 2001, we had no outstanding
balance under the credit lines and $2.0 million outstanding under letters of
credit, leaving us with $9.0 million of availability under the revolving credit
lines.

Effective August 31, 2001, we entered into a new $10 million revolving line of
credit facility to replace our two $5.5 million credit facilities. The new
credit facility expires in October 2003. The new credit line carries a floating
interest rate based on the prime rate less 0.25% (6.00% at August 31, 2001) and
is secured by substantially all of our assets. ABCO is a guarantor of our
obligations under this credit facility. Our interest rate is subject to change
based on our financial performance. As of August 31, 2001, we had no outstanding
balance under the credit line, and $1.9 million outstanding under letters of
credit, leaving us with $8.1 million of availability under the credit line. We
pay an annual commitment fee of 0.25% of the unused balance under the credit
line. The credit line contains financial covenants, restrictions on capital
expenditures, acquisitions, asset dispositions, additional debt, and other
customary covenants.

NOTE G - LONG-TERM DEBT

As of June 30, 2001, we had a $2.0 million installment note payable that was
utilized to finance the ABCO acquisition in early 2000. We had $1.6 million
outstanding on the ABCO installment note, all of which was prepaid in full in
July 2001.

<Table>
<Caption>
                                                                             2001              2000
                                                                         ------------      ------------
<S>                                                                      <C>               <C>
Note payable, due June 30, 2005, principal due in 19 quarterly
    installments of $100,000 beginning June 30, 2000 interest at the
    bank's prime rate plus 2.5%
    (9.25% at June 30, 2001)                                             $      1,600      $      1,827
      Less current maturities                                                    (400)             (421)
                                                                         ------------      ------------
                                                                         $      1,200      $      1,406
                                                                         ============      ============
</Table>

The aggregate annual maturities of long-term debt at June 30, 2001 are as
follows:

<Table>
<Caption>

        Year ended
          June 30,
        ----------
<S>                           <C>
           2002                    400
           2003                    400
           2004                    400
           2005                    400
                              --------
                              $  1,600
</Table>

NOTE H - STOCKHOLDERS' EQUITY

The Company had a 1985 restricted stock plan (the 1985 Plan), which expired in
December 2000, under which 75,000 shares of common stock were reserved for
awards to employees. Restricted stock grants made under the 1985 Plan generally
vest ratably over a three to five-year period. The Company awarded 6,500 shares
(fair value at date of grant of $80) in fiscal 2000. Compensation expense for
stock grants is charged to earnings over the restriction period and amounted to
$36, $14, and $17 in fiscal 2001, 2000, and 1999, 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 120,000 shares of common stock
to be issued. Stock options are granted at market value, generally vest ratably
over four years, and expire ten years from date of grant.


                                      F-12
<PAGE>   32
                       PEERLESS MFG. CO. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             (Dollars in thousands)


NOTE H - STOCKHOLDERS' EQUITY - CONTINUED

At June 30, 2001, 5,450 shares of common stock were available for issuance under
the 1995 Plan.

The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards ("SFAS") 123. It applies Accounting Principals Board 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 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 JUNE 30,
                                  2001            2000            1999
                               -----------     -----------     -----------
<S>                            <C>             <C>             <C>
Net earnings - as reported     $     3,072     $       931     $     1,850
Net earnings - pro forma             3,066             836           1,813

Basic earnings per share
As reported                           2.09            0.64            1.27
Pro forma                             2.04            0.57            1.25

Diluted earnings per share
As reported                           2.05            0.63            1.27
Pro forma                             2.00            0.57            1.24
</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 62% to 74% for fiscal 2001, 41% to 44% for
fiscal 2000 and 43% for fiscal 1999; risk-free interest rates ranging from 4.9%
to 6.8%; dividend yield of 0%, 4.2%, and 3.7% in fiscal 2001, 2000 and 1999,
respectively; and expected lives of five to seven years.


                                      F-13

<PAGE>   33
                       PEERLESS MFG. CO. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             (Dollars in thousands)



NOTE H - STOCKHOLDERS' EQUITY - CONTINUED

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

<Table>
<Caption>
                                          Number of          Weighted
                                           shares            average
                                         underlying          exercise
         Stock options                     options            price
         -------------                   ------------      -----------
<S>                                      <C>               <C>
Outstanding at June 30, 1998                   53,000            10.11
Granted                                         7,000            13.64
                                         ------------
Outstanding at June 30, 1999                   60,000            10.52
Granted                                        42,800            12.00
Exercised                                      (9,000)            9.33
Canceled                                      (14,000)           12.12
                                         ------------
Outstanding at June 30, 2000                   79,800            11.17
Granted                                        30,500            12.69
Exercised                                     (10,500)           11.60
Canceled                                       (8,500)           11.77
                                         ------------
Outstanding at June 30, 2001                   91,300            11.57
                                         ============      ===========

Options exercisable at June 30, 1999           31,000            10.15
                                         ============      ===========

Options exercisable at June 30, 2000           63,175            11.14
                                         ============      ===========

Options exercisable at June 30, 2001           67,675            11.30
                                         ============      ===========
</Table>

Weighted average fair value per share of options granted:

<Table>
<S>                                         <C>
         Year ended June 30, 1999           $4.72
         Year ended June 30, 2000           $3.94
         Year ended June 30, 2001           $7.97
</Table>

The following table summarizes information about stock options at June 30, 2001:

<Table>
<Caption>
                                         Outstanding
                           --------------------------------------------
                                               Options exercisable
   Range of                   Number        weighted average remaining           Weighted average
Exercise Prices            outstanding      contractual life (in years)           exercise price
------------------         -----------      ---------------------------       ----------------------
<S>                        <C>               <C>                              <C>
$9.25                         16,000                    4.6                         $  9.25
$10.625-$11.875               16,500                    6.8                           10.85
$12.00-$13.375                58,800                    8.7                           12.41
                              ------
                              91,300
                              ======
</Table>

<Table>
<Caption>
                                         Exercisable
                           --------------------------------------------
                                               Options exercisable
  Range of                   Number         weighted average remaining           Weighted average
Exercise Prices            exercisable      contractual life (in years)           exercise price
---------------            -----------      ---------------------------       ----------------------
<S>                           <C>            <C>                              <C>
$9.25                         16,000                    4.6                         $  9.25
$10.625-$11.875               13,375                    6.8                           10.91
$12.00-$13.375                38,300                    8.3                           12.29
                              ------
                              67,675
                              ======
</Table>

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. The Rights Agreement was amended on August 23, 2001, to increase the
price of the Rights to $200.00.

                                      F-14
<PAGE>   34
                       PEERLESS MFG. CO. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE I - 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, 2001, 2000 and 1999 was approximately
$191, $151 and $157, respectively.

NOTE J - 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:

<Table>
<Caption>
                                                 JUNE 30,
                                           2001              2000
                                       ------------      ------------
<S>                                    <C>               <C>
Deferred tax assets
     Restricted stock grants           $         10      $         7
     Inventories                                 28              126
     Net operating
         loss carryforwards                     118              115
     Accrued expenses                           450              230
     Accounts receivable                         87               92
Other                                            11               26
                                       ------------      -----------
                                                704              596
Deferred tax liabilities
     Property, plant and equipment             (144)            (122)
Uncompleted contracts                           (--)            (375)
Other                                            (3)              (4)
                                       ------------      -----------
                                               (147)            (501)
                                       ------------      -----------
          Net deferred tax asset       $        557      $        95
                                       ============      ===========
</Table>


Deferred tax assets and liabilities included in the balance sheet are as
follows:

<Table>
<Caption>
                                                   JUNE 30,
                                            2001              2000
                                        ------------      ------------
<S>                                     <C>               <C>
Current deferred tax asset              $       704       $       471
Noncurrent deferred tax liability              (147)             (376)
                                        -----------       -----------
                                        $       557       $        95
                                        ===========       ===========
</Table>

The provision for income taxes consisted of the following:

<Table>
<Caption>
                                YEAR ENDED JUNE 30,
                      2001             2000               1999
                  ------------      ------------      ------------
<S>               <C>               <C>               <C>
Federal
     Current      $      1,962      $        599      $        553
     Deferred             (536)             (194)              487
State                      303               126                65
Foreign-deferred            74               116              (109)
                  ------------      ------------      ------------
                  $      1,803      $        647      $        996
                  ============      ============      ============
</Table>

                                      F-15
<PAGE>   35
                       PEERLESS MFG. CO. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE J - INCOME TAXES - CONTINUED

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

<Table>
<Caption>

                                                         As a percentage
                                                        of pretax earnings
                                              --------------------------------------
                                                2001           2000           1999
                                              --------       --------       --------
<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            3.0            3.8            1.5
     Foreign sales corporation exclusions         (0.6)          (2.5)          (2.9)
     Adjustment to prior year taxes                 --            5.4             --
     Effect of lower foreign tax rate             (1.0)          (1.4)            --
     Other                                         1.6            1.7            2.4
                                              --------       --------       --------
Income tax expense at effective rate              37.0%          41.0%          35.0%
                                              ========       ========       ========
</Table>



NOTE K - EARNINGS PER SHARE

Summarized basic and diluted earnings per common share for each of the three
years ended June 30, 2001 is as follows:

<Table>
<Caption>

                                  2001                                     2000                                 1999
                     -------------------------------    ---------------------------------------------    -------------------
                                              Per                                 Per                                 Per
                       Net                   Share        Net                    Share         Net                   Share
                     Earnings    Shares      Amount     Earnings     Shares      Amount      Earnings    Shares      Amount
                     -------     -------     -------    --------     -------     -------     --------    -------     -------
<S>                  <C>           <C>       <C>         <C>           <C>       <C>         <C>           <C>       <C>
Basic earnings
  per share          $ 3,072       1,473     $  2.09     $   931       1,459     $  0.64     $ 1,850       1,455     $  1.27
    Effect of
    dilutive
    options               --          28       (0.04)         --          11       (0.01)         --           5          --
                     -------     -------     -------     -------     -------     -------     -------     -------     -------
Diluted earnings
  per share          $ 3,072       1,501     $  2.05     $   931       1,470     $  0.63     $ 1,850       1,460     $  1.27
                     =======     =======     =======     =======     =======     =======     =======     =======     =======
</Table>


For fiscal 2001, 2000, and 1999, stock options covering 0, 11,500, and 2,500
shares, respectively were excluded in the computations of diluted earnings per
share because their effect was antidilutive.

                                      F-16
<PAGE>   36

                       PEERLESS MFG. CO. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE L - INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION

The Company identifies reportable segments based on management responsibility
within the corporate structure. The Company has two reportable industry
segments: SCR Systems and gas/liquid filtration. The SCR Systems segment
produces selective catalytic reduction systems ("SCR") used to separate nitrogen
oxide (NOx) emissions from exhaust gases caused by burning hydrocarbon fuels
such as coal, gasoline, natural gas and oil. We combine these systems with other
components as totally integrated systems. Many of the Company's components are
packaged on skids complete with instruments, controls and related valves and
piping. The gas/liquid filtration segment produces various types of separators
and filters used for removing liquids and solids from gases and air. The segment
also provides engineering design and services, pulsation dampeners, natural gas
odorizers, quick-opening closures and parts for its products.

Segment profit and loss is based on revenue less direct costs of the segment
before allocation of general, administrative, research and development costs.
There were no sales or transfers between segments. Segment information and a
reconciliation to operating profit for the years ended June 30, 2001, 2000, and
1999 are presented below. Note that the Company does not allocate assets,
expenditures for assets or depreciation expense on a segment basis for internal
management reporting, and therefore such information is not presented.


<Table>
<Caption>

                                                                           Unallocated
                                                      Gas/Liquid            Corporate
                                    SCR               Filtration            Overhead       Consolidated
                                ------------         ------------         ------------     ------------

<S>                             <C>                  <C>                 <C>               <C>
2001
Revenues from customers         $     53,329         $     24,830        $         --      $     78,159
Segment profit (loss)                 14,967                  730              (9,795)            5,902

2000
Revenues from customers         $     28,533         $     30,028        $         --      $     58,561
Segment profit (loss)                  3,793                2,634              (4,651)            1,776

1999
Revenues from customers         $      6,132         $     34,436        $         --      $     40,568
Segment profit (loss)                    849                5,580              (3,450)            2,979
</Table>

The Company attributes revenues from external customers to individual geographic
areas based on the country where the sale originated. Information about the
Company's operations in different geographic areas as of and for the years ended
June 30, 2001, 2000 and 1999 is as follows:



                                      F-17
<PAGE>   37

                       PEERLESS MFG. CO. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE L - INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION - CONTINUED

<Table>
<Caption>


                                      United
                                      States            Europe          Eliminations       Consolidated
                                   -------------     -------------      -------------     -------------
<S>                                <C>               <C>                <C>               <C>
2001
Net sales to unaffiliated
    customers                      $      72,791     $       5,368      $          --     $      78,159
Transfers between
    geographic areas                         492                                 (492)
                                   -------------     -------------      -------------     -------------
Total                              $      73,283     $       5,368      $        (492)    $      78,159
                                   =============     =============      =============     =============
Identifiable long-lived assets     $       3,800     $          31      $          --     $       3,831
                                   =============     =============      =============     =============

2000
Net sales to unaffiliated
    customers                      $      51,917     $       6,644      $          --     $      58,561
Transfers between
    geographic areas                       1,750                --             (1,750)               --
                                   -------------     -------------      -------------     -------------
Total                              $      53,667     $       6,644      $      (1,750)    $      58,561
                                   =============     =============      =============     =============
Identifiable long-lived assets     $       4,245     $          17      $          --     $       4,262
                                   =============     =============      =============     =============

1999
Net sales to unaffiliated
    customers                      $      34,707     $       5,861      $          --     $      40,568
Transfers between
    geographic areas                         726                --               (726)               --
                                   -------------     -------------      -------------     -------------

Total                              $      35,433     $       5,861      $        (726)    $      40,568
                                   =============     =============      =============     =============
Identifiable long-lived assets     $       2,836     $          77      $          --     $       2,913
                                   =============     =============      =============     =============
</Table>


Transfers between the geographic areas primarily represent intercompany export
sales and are accounted for based on established sales prices between the
related companies.

Identifiable long-lived assets of geographic areas are those assets related to
the Company's operations in each area.





                                      F-18
<PAGE>   38

                       PEERLESS MFG. CO. AND SUBSIDIARIES

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                                    JUNE 30,
                             (DOLLARS IN THOUSANDS)

<Table>
<Caption>
                                                                           ADDITIONS
                                                      BALANCE AT    --------------------------
                                                     BEGINNING OF   CHARGED TO     CHARGED TO                   BALANCE AT
DESCRIPTION                                             PERIOD       EXPENSES    OTHER ACCOUNTS   DEDUCTIONS   END OF PERIOD
-----------                                          ------------   ----------   --------------   ----------   -------------
<S>                                                  <C>            <C>          <C>              <C>          <C>
2001
Allowance for uncollectible accounts...............      $778          $ 54           $ --           $535          $297
2001
Allowance for uncollectible accounts...............      $685          $163           $ --           $ 70          $778
1999
Allowance for uncollectible accounts...............      $806          $184           $ --           $305          $685
</Table>








                                      F-19
<PAGE>   39






                                  EXHIBIT INDEX

<Table>
<Caption>

         EXHIBIT
         NUMBER                             DESCRIPTION
         -------                            -----------
<S>               <C>
         3(a)     Articles of Incorporation, as amended to date (filed as
                  Exhibit 3(a) to our Quarterly Report on Form 10-Q, for the
                  fiscal quarter ended December 31, 1997, and incorporated
                  herein by reference).

         3(b)     Bylaws, as amended to date (filed as Exhibit 3(b) to our
                  Annual Report on Form 10-K, for the fiscal year ended June 30,
                  1997, and incorporated herein by reference).

         4(a)     Rights Agreement between Peerless Mfg. Co. and ChaseMellon
                  Shareholder Services, L.L.C., adopted by the Board of
                  Directors May 21, 1997 (filed as Exhibit 1 to our Registration
                  Statement on Form 8-A (File No. 0-05214) and incorporated
                  herein by reference).

         4(b)     First Amendment to Rights Agreement between Peerless Mfg. Co.
                  and ChaseMellon Shareholder Services, L.L.C. (Filed as Exhibit
                  2 to our Registration Statement on Form 8-A dated August 30,
                  2001, and incorporated herein by reference).

         10(a)    Incentive Compensation Plan effective January 1, 1981, as
                  amended January 23, 1991 (filed as Exhibit 10(b) to our Annual
                  Report on Form 10-K, for the fiscal year ended June 30, 1991,
                  and incorporated herein by reference).

         10(b)    1985 Restricted Stock Plan for Peerless Mfg. Co., effective
                  December 13, 1985 (filed as Exhibit 10(b) to our Annual Report
                  on Form 10-K, for the fiscal year ended June 30, 1993, and
                  incorporated herein by reference).

         10(c)    1991 Restricted Stock Plan for Non-Employee Directors of
                  Peerless Mfg. Co. (filed as Exhibit 10(e) to our Annual Report
                  on Form 10-K for the fiscal year ended June 30, 1991, and
                  incorporated herein by reference).

         10(d)    Employment Agreement and Agreement, each dated as of April 29,
                  1994, by and between Peerless Mfg. Co. and Sherrill Stone
                  (filed as Exhibit 10(d) to our Annual Report on Form 10-K for
                  the fiscal year ended June 30, 1994, and incorporated herein
                  by reference).

         10(e)    Peerless Mfg. Co. 1995 Stock Option and Restricted Stock Plan
                  (filed as Exhibit 10(h) to our Annual Report on Form 10-K for
                  the fiscal year ended June 30, 1997 and incorporated herein by
                  reference), as amended by Amendment #1 dated November 11, 1999
                  (filed as exhibit 10(h) to our Quarterly Report on Form 10-Q,
                  for the fiscal quarter ended December 31, 1999 and
                  incorporated herein by reference).

         10(f)    Asset Purchase Agreement dated February 25, 2000, by and
                  between PMC Acquisition, Inc. and ABCO Industries, Inc. (filed
                  as Exhibit 2.1 to the registrant's Current Report on Form 8-K
                  dated February 25, 2000 and incorporated herein by reference).

         10(g)    Employment Agreement and Agreement, each dated as of May 16,
                  2000, by and between Peerless Mfg. Co. and Roy C. Cuny (filed
                  as Exhibit 10(l) to our Annual Report on Form 10-K for the
                  fiscal year ended June 30, 2000, and incorporated herein by
                  reference).

         10(h)    Loan Agreement, Revolving Note, Security Agreement and Deed of
                  Trust dated as of August 31, 2001, by and between Peerless
                  Mfg. Co. and Bank of America*

         21       Subsidiaries of Peerless Mfg. Co.*

         23       Consent of Grant Thornton LLP*
</Table>


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    *  Filed herewith