##### Table of Contents



WASHINGTON, D.C. 20549
 
 FORM 10-K
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal Year Ended June 30, 2005
Commission File No. 0-5214
 
 PEERLESS MFG. CO.
  Texas
(State or other jurisdiction of
incorporation or organization)
    
    75-0724417
(I.R.S. employer identification no.)
 2819 Walnut Hill Lane, Dallas, Texas 75229
 (214) 357-6181
 Securities registered pursuant to Section 12(b) of the Act:
 None
 Securities Registered Pursuant to Section 12(g) of the Act:
 (Title of Class)
    
    (Name of each exchange where registered)Common Stock, $1.00 Par Value
    
    NASDAQ
 YES þ NO o
 þ
 o o
 Yes o No þ
   DOCUMENTS
INCORPORATED BY REFERENCE




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TABLE OF CONTENTS
 PageNumberPART IItem 1. Business
    
    
    3Item 2. Properties
    
    
    7Item 3. Legal Proceedings
    
    
    8Item 4. Submission of Matters to a Vote of Security Holders
    
    
    8PART IIItem 5. Market for Registrants Common Equity, Related Shareholder Matters
and Issuer Purchases of Equity Securities
    
    
    8Item 6. Selected Financial Data
    
    
    9Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    10Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    28Item 8. Consolidated Financial Statements and Supplementary Data
    
    
    29Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
    
    
    54Item 9A.  Controls and Procedures
    
    
    54Item 9B.  Other Information
    
    
    55PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    56Item 11. Executive Compensation
    
    
    56Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Shareholder Matters
    
    
    57Item 13. Certain Relationships and Related Transactions
    
    
    57Item 14.  Principal Accountant Fees and Services
    
    
    57PART IVItem 15. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K
    
    
    58Signatures
    
    
    59Index to Exhibits
    
    
    60SubsidiariesConsent of Grant Thornton LLPRule 13a-14(a)/15d-14(a) Certification of CEORule 13a-14(a)/15d-14(a) Certification of CFOSection 1350 Certification of CEOSection 1350 Certification of CFO
 2




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##### Table of Contents



PART I
 
 ITEM 1. BUSINESS
 www.peerlessmfg.com
  Operating Segments and Products
     3




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Restructuring and Organizational Realignment
   Manufacturing and Outsourcing
   Customers
   4




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Customers  continued
    Backlog
  Competition
  Patents, Licenses and Product Development
   5




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Employees
  June 30,Geographic location:
    
    2005
    
    
    2004United States
    
    
    141
    
    
    
    156United Kingdom
    
    
    21
    
    
    
    21Singapore
    
    
    4
    
    
    
    4Total
    
    
    166
    
    
    
    181
  Raw Materials
  Environmental Regulation
   6




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Available Information
 http://www.peerlessmfg.com. http://www.sec.gov.
 http://www.peerlessmfg.com.
 
 ITEM 2. PROPERTIES
  ApproximateLocation
    
    Sq. Footage
    
    
    General UseOwned:Dallas, Texas
    
    
    48,000
    
    
    Office, warehouse, and research and development.Abilene, Texas
    
    
    78,000
    
    
    Manufacturing  Environmental products and Separation Filtration products.Denton, Texas
    
    
    22,000
    
    
    Manufacturing  Separation Filtration products.Dallas, Texas
    
    
    80,000
    
    
    Manufacturing  Capable of Environmental and Separation Filtration manufacturing. Currently, being leased to third party.Leased:Halstead, U. K.
    
    
    3,995
    
    
    Sales, engineering and administration office.Singapore
    
    
    2,300
    
    
    Sales office.
   7




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ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
  Fiscal Year
    
    
    
    
    High
    
    
    Low2004
    
    
    First Quarter
    
    $
    11.44
    
    
    $
    9.33Second Quarter
    
    
    13.89
    
    
    
    10.91Third Quarter
    
    
    14.15
    
    
    
    10.80Fourth Quarter
    
    
    11.98
    
    
    
    10.122005
    
    
    First Quarter
    
    $
    16.00
    
    
    $
    11.85Second Quarter
    
    
    15.33
    
    
    
    13.95Third Quarter
    
    
    15.30
    
    
    
    13.07Fourth Quarter
    
    
    15.00
    
    
    
    13.75
   8




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ITEM 6. SELECTED FINANCIAL DATA
 The share, earnings (loss) per
share, dividends per share, and book value per share amounts have been adjusted to give effect to
the two-for-one stock split effected on October 18, 2001. Certain earnings per share amounts may
not total due to rounding.
 Year ended June 30,2005
    
    
    %
    
    
    2004
    
    
    %
    
    
    2003
    
    
    %
    
    
    2002
    
    
    %
    
    
    2001
    
    
    %(Amounts in thousands, except per share amounts)Operating results:Revenues
    
    $
    51,063
    
    
    
    100.0
    
    
    $
    59,761
    
    
    
    100.0
    
    
    $
    64,854
    
    
    
    100.0
    
    
    $
    94,880
    
    
    
    100.0
    
    
    $
    75,278
    
    
    
    100.0Cost of revenues
    
    
    37,356
    
    
    
    73.2
    
    
    
    40,959
    
    
    
    68.5
    
    
    
    47,842
    
    
    
    73.8
    
    
    
    64,908
    
    
    
    68.4
    
    
    
    51,898
    
    
    
    68.9Gross profit
    
    
    13,707
    
    
    
    26.8
    
    
    
    18,802
    
    
    
    31.5
    
    
    
    17,012
    
    
    
    26.2
    
    
    
    29,972
    
    
    
    31.6
    
    
    
    23,380
    
    
    
    31.1Operating expenses
    
    
    14,409
    
    
    
    28.2
    
    
    
    14,929
    
    
    
    25.0
    
    
    
    16,429
    
    
    
    25.3
    
    
    
    21,047
    
    
    
    22.2
    
    
    
    15,636
    
    
    
    20.8Operating income (loss)
    
    
    (702
    )
    
    
    (1.4
    )
    
    
    3,873
    
    
    
    6.5
    
    
    
    583
    
    
    
    0.9
    
    
    
    8,925
    
    
    
    9.4
    
    
    
    7,744
    
    
    
    10.3Other income (expense)
    
    
    63
    
    
    
    0.1
    
    
    
    (24
    )
    
    
    (0.1
    )
    
    
    727
    
    
    
    1.1
    
    
    
    410
    
    
    
    0.4
    
    
    
    (989
    )
    
    
    (1.3
    )Tax benefit (expense)
    
    
    113
    
    
    
    0.2
    
    
    
    (1,447
    )
    
    
    (2.4
    )
    
    
    (399
    )
    
    
    (0.6
    )
    
    
    (3,256
    )
    
    
    (3.4
    )
    
    
    (2,498
    )
    
    
    (3.3
    )Net earnings (loss)
from continuing
operations
    
    
    (526
    )
    
    
    (1.1
    )
    
    
    2,402
    
    
    
    4.0
    
    
    
    911
    
    
    
    1.4
    
    
    
    6,079
    
    
    
    6.4
    
    
    
    4,257
    
    
    
    5.7Net loss from
discontinued operations
    
    
    (66
    )
    
    
    (0.1
    )
    
    
    (364
    )
    
    
    (0.6
    )
    
    
    (1,290
    )
    
    
    (2.0
    )
    
    
    (1,690
    )
    
    
    (1.8
    )
    
    
    (1,185
    )
    
    
    (1.6
    )Net earnings (loss)
    
    $
    (592
    )
    
    
    (1.2
    )
    
    $
    2,038
    
    
    
    3.4
    
    
    $
    (379
    )
    
    
    (0.6
    )
    
    $
    4,389
    
    
    
    4.6
    
    
    $
    3,072
    
    
    
    4.1Basic earnings (loss) per shareNet earnings (loss)
from continuing
operations
    
    $
    (0.17
    )
    
    
    
    
    
    $
    0.80
    
    
    
    
    
    
    $
    0.30
    
    
    
    
    
    
    $
    2.04
    
    
    
    
    
    
    $
    1.44Net loss from
discontinued operations
    
    $
    (0.02
    )
    
    
    
    
    
    $
    (0.12
    )
    
    
    
    
    
    $
    (0.43
    )
    
    
    
    
    
    $
    (0.57
    )
    
    
    
    
    
    $
    (0.40
    )Net earnings (loss)
    
    $
    (0.20
    )
    
    
    
    
    
    $
    0.68
    
    
    
    
    
    
    $
    (0.13
    )
    
    
    
    
    
    $
    1.47
    
    
    
    
    
    
    $
    1.04Diluted earnings (loss) per shareNet earnings (loss)
from continuing
operations
    
    $
    (0.17
    )
    
    
    
    
    
    $
    0.79
    
    
    
    
    
    
    $
    0.30
    
    
    
    
    
    
    $
    1.97
    
    
    
    
    
    
    $
    1.42Net loss from
discontinued operations
    
    $
    (0.02
    )
    
    
    
    
    
    $
    (0.12
    )
    
    
    
    
    
    $
    (0.43
    )
    
    
    
    
    
    $
    (0.55
    )
    
    
    
    
    
    $
    (0.39
    )Net earnings (loss)
    
    $
    (0.20
    )
    
    
    
    
    
    $
    0.67
    
    
    
    
    
    
    $
    (0.13
    )
    
    
    
    
    
    $
    1.43
    
    
    
    
    
    
    $
    1.02Cash dividends per share
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    0.13Weighted average shares outstanding:Basic
    
    
    3,028
    
    
    
    
    
    
    
    3,003
    
    
    
    
    
    
    
    2,996
    
    
    
    
    
    
    
    2,978
    
    
    
    
    
    
    
    2,947Diluted
    
    
    3,028
    
    
    
    
    
    
    
    3,044
    
    
    
    
    
    
    
    3,013
    
    
    
    
    
    
    
    3,080
    
    
    
    
    
    
    
    3,002
 9




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ITEM 6. SELECTED FINANCIAL DATA  CONTINUED
 As of June 30,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Amounts in thousands, except per share amounts)Financial position:Working capital
    
    $
    20,272
    
    
    $
    20,529
    
    
    $
    17,771
    
    
    $
    17,755
    
    
    $
    14,615Current assets
    
    
    35,696
    
    
    
    35,331
    
    
    
    39,223
    
    
    
    42,129
    
    
    
    41,731Total assets
    
    
    39,804
    
    
    
    39,475
    
    
    
    43,763
    
    
    
    46,889
    
    
    
    46,156Current liabilities
    
    
    15,424
    
    
    
    14,802
    
    
    
    21,452
    
    
    
    24,374
    
    
    
    27,116Long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,200Total liabilities
    
    
    15,514
    
    
    
    14,802
    
    
    
    21,452
    
    
    
    24,374
    
    
    
    28,463Equity
    
    
    24,290
    
    
    
    24,673
    
    
    
    22,311
    
    
    
    22,515
    
    
    
    17,693Book value per share
    
    $
    8.00
    
    
    $
    8.19
    
    
    $
    7.44
    
    
    $
    7.53
    
    
    $
    5.99
 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 AND RESULTS OF OPERATIONS.
 Overview
  Environmental Systems.
 Separation Filtration Systems.
 Boilers.
 10




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Forward-Looking Statements
   Results of Operations  Consolidated
 Revenues.
 Year ended June 30,2005
    
    
    % of Total
    
    
    2004
    
    
    % of Total
    
    
    2003
    
    
    % of TotalDomestic
    
    $
    30.3
    
    
    
    59.3
    %
    
    $
    40.3
    
    
    
    67.4
    %
    
    $
    44.2
    
    
    
    68.1
    %International
    
    
    20.8
    
    
    
    40.7
    %
    
    
    19.5
    
    
    
    32.6
    %
    
    
    20.7
    
    
    
    31.9
    %Total
    
    $
    51.1
    
    
    
    100.0
    %
    
    $
    59.8
    
    
    
    100.0
    %
    
    $
    64.9
    
    
    
    100.0
    %
   11




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replicated in fiscal 2004. The decreased Canadian sales were partially
offset by increased sales in our UK subsidiary of our separation & filtration products in Europe
and the Middle East. See Item 7  Results of Operations  Segments of this Report for further
discussion.
 Gross Profit Margin .
 Year ended June 30,2005
    
    
    % of Sales
    
    
    2004
    
    
    % of Sales
    
    
    2003
    
    
    % of SalesSelling margin
    
    $
    17.8
    
    
    
    34.7
    %
    
    $
    22.1
    
    
    
    37.0
    %
    
    $
    22.4
    
    
    
    34.5
    %Unabsorbed manufacturing
    
    
    (2.2
    )
    
    
    -4.3
    %
    
    
    (2.3
    )
    
    
    -3.8
    %
    
    
    (1.9
    )
    
    
    -2.9
    %Warranty and start
up costs
    
    
    (1.9
    )
    
    
    -3.6
    %
    
    
    (1.0
    )
    
    
    -1.7
    %
    
    
    (3.5
    )
    
    
    -5.4
    %Gross profit margin
    
    $
    13.7
    
    
    
    26.8
    %
    
    $
    18.8
    
    
    
    31.5
    %
    
    $
    17.0
    
    
    
    26.2
    %
    12




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Operating Expenses.
 Year ended June 30,2005
    
    
    % of Sales
    
    
    2004
    
    
    % of Sales
    
    
    2003
    
    
    % of SalesSales and marketing
    
    $
    6.0
    
    
    
    11.8
    %
    
    $
    6.2
    
    
    
    10.4
    %
    
    $
    5.9
    
    
    
    9.1
    %Engineering & project
management
    
    
    3.6
    
    
    
    7.1
    %
    
    
    4.1
    
    
    
    6.9
    %
    
    
    5.2
    
    
    
    8.0
    %General and administrative
    
    
    4.8
    
    
    
    9.3
    %
    
    
    4.6
    
    
    
    7.7
    %
    
    
    4.8
    
    
    
    7.5
    %Restructuring expense
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    0.5
    
    
    
    0.7
    %Total operating expenses
    
    $
    14.4
    
    
    
    28.2
    %
    
    $
    14.9
    
    
    
    25.0
    %
    
    $
    16.4
    
    
    
    25.3
    %
   Other Income and Expense
   13




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Income Taxes
  Net Earnings (Loss) from Continuing Operations
   Discontinued Operations
   14




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Net Earnings (Loss)
   Results of Operations  Segments
  Environmental Systems
 Separation Filtration Systems
 Revenue .
 Year ended June 30,2005
    
    
    %
    
    
    2004
    
    
    %
    
    
    2003
    
    
    %Environmental Systems
    
    $
    20,591
    
    
    
    40.3
    %
    
    $
    28,096
    
    
    
    47.0
    %
    
    $
    37,511
    
    
    
    57.8
    %Separation
Filtration Systems
    
    
    30,472
    
    
    
    59.7
    %
    
    
    31,665
    
    
    
    53.0
    %
    
    
    27,343
    
    
    
    42.2
    %Total
    
    $
    51,063
    
    
    
    100.0
    %
    
    $
    59,761
    
    
    
    100.0
    %
    
    $
    64,854
    
    
    
    100.0
    %
 15




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Segment Profit
 Year ended June 30,2005
    
    
    2004
    
    
    2003Environmental Systems
    
    $
    2,309
    
    
    $
    4,133
    
    
    $
    3,191Separation Filtration Systems
    
    
    1,759
    
    
    
    4,371
    
    
    
    2,708Total
    
    
    4,068
    
    
    
    8,504
    
    
    
    5,899Unallocated overhead
    
    
    (4,770
    )
    
    
    (4,631
    )
    
    
    (5,316
    )Operating
income (loss)
    
    $
    (702
    )
    
    $
    3,873
    
    
    $
    583
  16




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Environmental Systems.
 1.
    
    Start-up and warranty expenses, as a percentage of sales.
Actual start-up and warranty expenses were approximately $1.8 million,
$940,000, and $3.4 million in fiscal 2005, fiscal 2004, and fiscal 2003,
respectively. Start-up and warranty expenses as a percentage of sales were
approximately 8.5%, 3.3% and 9.2% in fiscal 2005, fiscal 2004, and fiscal 2003,
respectively. The increase in expense during fiscal 2005 relates predominately
to two projects. These projects were high temperature, ultra-low NOx
applications that required extensive modifications to accommodate the
customers operating conditions and meet their expectations. In addition to
these modification costs, we are potentially liable for project delays on each
of these projects. In connection therewith, while we feel we have reasonable
defenses, we have reserved for our assessment of the damages associated with
such delays. The decrease in fiscal 2004 expenses reflects the improvement our
project execution associated with our fiscal year 2004 quality control
initiatives.2.
    
    Operational expenses, as a percentage of sales. As part of our
cost control measures instituted in connection with our fiscal 2003
reorganization and realignment initiative, our operational expenses have
continued to decline from approximately $5.6 million in fiscal 2003, to $4.4
million in fiscal 2004 and $3.8 million in fiscal 2005. However, while these
expenses have declined on a dollar-basis, due to the decline in this segments revenues exceeding its expense reductions over these
periods, the expenses have, as a percentage of sales, actually increased from
14.9% in fiscal 2003, to 15.5% in fiscal 2004 and 18.4% in fiscal 2005.3.
    
    Corrections associated with control deficiencies. As discussed
under Part II  Item 9A Controls and Procedures of this Report, we discovered
certain control deficiencies during the second quarter of fiscal 2005. In
connection therewith, certain correcting adjustments were recorded in the
second quarter of fiscal 2005 to our previously reported financial results.
These adjustments, while immaterial in the aggregate to both our previously
reported financial results and to the quarter, did have an impact on our
reported segment profit. Specifically, this correction increased our
Environmental Systems reported segment profits for fiscal 2005 by approximately
$349,000, or 1.7 %.
 Separation Filtration Systems
 1.
    
    Significant material price increases. Due to heavy worldwide
demand, steel prices (most notably stainless steel prices) have increased
considerably over the past year (approximately 30% in the past 18 months). Stainless
steel is a significant material expense in the production of our nuclear/marine
separation products. Most of the contracts governing the sale of these
products are long-term, fixed-priced contracts which, in a volatile
environment, increases our risks to margin deterioration. We attempt to
stabilize our costs by ordering materials at the time an order is received.
However,
 17




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Factors That May Affect Our Operating Results and Other
Risk Factors  We enter into fixed-priced contracts. If our actual costs
exceed our original estimates, our profits will be reduced.
 2.
    
    Corrections associated with control deficiencies. As discussed
under Part II  Item 9A Controls and Procedures of this Report, our
management discovered certain control deficiencies during the second quarter of
fiscal 2005. In connection therewith, certain correcting adjustments were
recorded in the second quarter of fiscal 2005 to our previously reported
financial results. These adjustments, while immaterial in aggregate to both
our previously reported financial results and to the quarter, did have a
significant impact on our reported segment profit. Specifically, this
correction decreased our Separation Filtration Systems reported segment profits
for fiscal 2005 by approximately $452,000, or 1.5 %.3.
    
    Operational expenses, as a percentage of sales. Actual
operational expenses were approximately $5.8 million, $5.9 million, and $5.5
million in fiscal 2005, fiscal 2004, and fiscal 2003, respectively.
Operational expenses as a percentage of sales were approximately 19.2%, 18.7%,
and 20.2% in fiscal 2005, fiscal 2004, and fiscal 2003, respectively.
 Market Outlook
 Environmental Systems.
 Separation Filtration Systems.
 Contingencies
  18




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Backlog
  Financial Position
 Assets.
 Liabilities and Shareholders Equity.
 19




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Liquidity and Capital Resources
        20




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Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
  Payments Due by PeriodLess Than
    
    
    1 to 3
    
    
    3 to 5
    
    
    After 5Contractual Obligations
    
    Total
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating lease obligations
    
    $
    283
    
    
    $
    141
    
    
    $
    142
    
    
    $
    
    
    
    $
    Purchase obligations (1)
    
    
    9,024
    
    
    
    9,024
    
    
    
    
    
    
    
    
    
    
    
    Stand-by letters of credit (2)
    
    
    6,633
    
    
    
    4,326
    
    
    
    2,132
    
    
    
    175
    
    
    
    Total contractual
obligations
    
    $
    15,940
    
    
    $
    13,491
    
    
    $
    2,274
    
    
    $
    175
    
    
    $
    
 
 (1)
    
    Purchase obligations in the table above represent the value of open purchase orders
as of June 30, 2005. We believe that some of these obligations could be canceled for
payment of a nominal penalty, or no penalty; however, the amount of open purchase orders
that could be canceled under such terms is difficult to quantify. In addition, the
Company generally has contracts with its customers that minimize its exposure to losses
for materials purchased within lead-times necessary to meet customer forecasts.(2)
    
    Included in the amount of stand-by letters of credit is an approximately $1.8 million
stand-by letter of credit issued on the behalf of Peerless to guarantee the debenture
agreement of its subsidiary, Peerless Europe Limited. Critical Accounting Policies
  21




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##### Table of Contents



Revenue Recognition
  Product Warranties.
 Allowance for Doubtful Accounts.
 22




---



##### Table of Contents



Reserve for Obsolete and Slow-Moving Inventory.
 Deferred
Tax Asset  Valuation Allowance.
 New Accounting Standards
 Share Based Payment
 Inventory
Costs
 23




---



##### Table of Contents



Factors That May Affect Our Operating Results and Other Risk Factors
  Changes in the power generation industry and/or the economy could have an adverse impact on
sales of our Environmental Systems and our operating results.
  Changes in the price, supply or demand for natural gas could have an adverse impact on our
sales of Separation Filtration Systems and our operating results.
  Changes in current environmental legislation could have an adverse impact on the sale of our
Environmental Systems and on our operating results.
  24




---



##### Table of Contents



Competition could result in lower sales and decreased margins.
  We enter into fixed-priced contracts. If our actual costs exceed our original estimates, our
profits will be reduced.
  Our backlog may not be indicative of our future revenue.
  Our ability to conduct business outside the United States may be adversely affected by factors
outside of our control and our revenues and profits from international sales could be adversely
impacted.
  25




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##### Table of Contents



Our financial performance may vary significantly from period to period, making it difficult to
estimate future revenue.
  Our margins are affected by shifts in our product mix.
  Our products are covered by warranties. Unanticipated warranty costs for defective products
could adversely affect our financial condition and results of operations and reputation.
  Product liability claims not covered by insurance could adversely affect our financial
condition and results of operations.
  26




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##### Table of Contents



Large contracts represent a significant portion of our accounts receivable, which increases
our exposure to credit risk.
  Changes in billing terms can increase our exposure to working capital and credit risk.
  The terms and conditions of our credit facility impose restrictions on our operations. We may
not be able to raise additional capital, if needed.
   Our business is subject to risks of terrorist acts, acts of war and natural disasters.
  27




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##### Table of Contents



Our common stock is thinly traded, which may result in low liquidity.
  The inability of our engineering and/or manufacturing operations to sufficiently scale up
operations in the short term, in response to unexpected spikes in orders with short cycle times,
directly impacts our ability to optimize absorption of our manufacturing overhead expense.
  Our customers may require us to execute portions of our projects in their local countries.
  
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
  28




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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
        
 29




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS  (Dollars in thousands)
 ASSETS
 June 30,2005
    
    
    2004Current assets:Cash and cash equivalents
    
    $
    8,277
    
    
    $
    4,119Accounts receivable-principally trade  net of
allowance for doubtful accounts of $352 at
June 30, 2005 and $431 at June 30, 2004
    
    
    11,613
    
    
    
    13,604Inventories  net
    
    
    3,297
    
    
    
    3,106Costs and earnings in excess of billings
on uncompleted contracts
    
    
    10,140
    
    
    
    12,448Deferred income taxes
    
    
    1,163
    
    
    
    1,013Other
    
    
    1,206
    
    
    
    816Current assets of discontinued operations
    
    
    
    
    
    
    225Total current assets
    
    
    35,696
    
    
    
    35,331Property, plant and equipment  net
    
    
    3,315
    
    
    
    3,053Other assets
    
    
    784
    
    
    
    922Deferred
income taxes
    
    
    
    
    
    
    160Other assets of discontinued operations
    
    
    9
    
    
    
    9Total assets
    
    $
    39,804
    
    
    $
    39,475
  30




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS  (Dollars in thousands)
 LIABILITIES AND SHAREHOLDERS EQUITY
 June 30,2005
    
    
    2004Current liabilities:Accounts payable
    
    $
    8,572
    
    
    $
    9,791Billings in excess of costs and earnings
on uncompleted contracts
    
    
    2,081
    
    
    
    399Commissions payable
    
    
    762
    
    
    
    844Income taxes payable
    
    
    
    
    
    
    557Product warranties
    
    
    845
    
    
    
    982Accrued liabilities and other
    
    
    3,058
    
    
    
    1,923Current liabilities of discontinued operations
    
    
    106
    
    
    
    306Total current liabilities
    
    
    15,424
    
    
    
    14,802Deferred income taxes
    
    
    90
    
    
    
    Shareholders equity:Common stock  authorized, 10,000,000
shares of $1 par value; issued and
outstanding, 3,036,434 and 3,013,684
shares at June 30, 2005 and 2004, respectively
    
    
    3,036
    
    
    
    3,014Additional paid-in capital
    
    
    2,114
    
    
    
    1,884Other, principally other comprehensive income
    
    
    171
    
    
    
    214Retained earnings
    
    
    18,969
    
    
    
    19,561Total shareholders equity
    
    
    24,290
    
    
    
    24,673Total liabilities and shareholders equity
    
    $
    39,804
    
    
    $
    39,475
 See accompanying notes to consolidated financial statements.
 31




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS  (Dollars in thousands, except per share amounts)
 Year ended June 30,2005
    
    
    2004
    
    
    2003Revenues
    
    $
    51,063
    
    
    $
    59,761
    
    
    $
    64,854Cost of goods sold
    
    
    37,356
    
    
    
    40,959
    
    
    
    47,842Gross profit
    
    
    13,707
    
    
    
    18,802
    
    
    
    17,012Operating expensesSales and marketing
    
    
    6,031
    
    
    
    6,158
    
    
    
    5,926Engineering and project
management
    
    
    3,608
    
    
    
    4,140
    
    
    
    5,187General and administrative
    
    
    4,770
    
    
    
    4,631
    
    
    
    4,833Restructuring expense
    
    
    
    
    
    
    
    
    
    
    48314,409
    
    
    
    14,929
    
    
    
    16,429Operating income (loss)
    
    
    (702
    )
    
    
    3,873
    
    
    
    583Other income (expense)Foreign exchange gain (loss)
    
    
    (22
    )
    
    
    (101
    )
    
    
    146Other income, net
    
    
    85
    
    
    
    77
    
    
    
    58163
    
    
    
    (24
    )
    
    
    727Earnings (loss) from continuing operations
before income taxes
    
    
    (639
    )
    
    
    3,849
    
    
    
    1,310Income tax benefit (expense)
    
    
    113
    
    
    
    (1,447
    )
    
    
    (399
    )Net earnings (loss) from continuing operations
    
    
    (526
    )
    
    
    2,402
    
    
    
    911Discontinued operations (Note D)Loss from discontinued operations,
(including gain on disposal of $140 for the
year ended June 30, 2004)
    
    
    (80
    )
    
    
    (622
    )
    
    
    (2,028
    )Income tax benefit
    
    
    14
    
    
    
    258
    
    
    
    738Net loss from discontinued operations
    
    
    (66
    )
    
    
    (364
    )
    
    
    (1,290
    )Net earnings (loss)
    
    $
    (592
    )
    
    $
    2,038
    
    
    $
    (379
    )BASIC EARNINGS (LOSS) PER SHAREEarnings (loss) from continuing operations
    
    $
    (0.17
    )
    
    $
    0.80
    
    
    $
    0.30Loss from discontinued operations
    
    
    (0.02
    )
    
    
    (0.12
    )
    
    
    (0.43
    )Basic earnings (loss) per share
    
    $
    (0.20
    )
    
    $
    0.68
    
    
    $
    (0.13
    )DILUTED EARNINGS (LOSS) PER SHAREEarnings (loss) from continuing operations
    
    $
    (0.17
    )
    
    $
    0.79
    
    
    $
    0.30Loss from discontinued operations
    
    
    (0.02
    )
    
    
    (0.12
    )
    
    
    (0.43
    )Diluted earnings (loss) per share
    
    $
    (0.20
    )
    
    $
    0.67
    
    
    $
    (0.13
    )
 See accompanying notes to the consolidated financial statements.
 32




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY  (Dollars in thousands)
 AccumulatedUnamortized Value
    
    
    Other
    
    
    
    
    
    
    TotalCommon
    
    
    Paid-in
    
    
    of Restricted
    
    
    Comprehensive
    
    
    Retained
    
    
    ShareholderStock
    
    
    Capital
    
    
    Stock Grants
    
    
    Income (loss)
    
    
    Earnings
    
    
    EquityBalance at July 1, 2002
    
    $
    2,991
    
    
    $
    1,720
    
    
    $
    (16
    )
    
    $
    (82
    )
    
    $
    17,902
    
    
    $
    22,515Net earnings from continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    911
    
    
    
    911Net loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,290
    )
    
    
    (1,290
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    103
    
    
    
    
    
    
    
    103Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (276
    )Stock options exercised
    
    
    11
    
    
    
    53
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64Stock grant forfeiture
    
    
    (3
    )
    
    
    (16
    )
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    (11
    )Amortization of restricted stock grants
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5Income tax benefit related to restricted
stock plan
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14Balance at June 30, 2003
    
    
    2,999
    
    
    
    1,771
    
    
    
    (3
    )
    
    
    21
    
    
    
    17,523
    
    
    
    22,311Net earnings from continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,402
    
    
    
    2,402Net loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (364
    )
    
    
    (364
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    193
    
    
    
    
    
    
    
    193Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,231Stock options exercised
    
    
    15
    
    
    
    83
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98Amortization of restricted stock grants
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    3Income tax benefit related to restricted
stock plan
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30Balance at June 30, 2004
    
    
    3,014
    
    
    
    1,884
    
    
    
    
    
    
    
    214
    
    
    
    19,561
    
    
    
    24,673Net loss from continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (526
    )
    
    
    (526
    )Net loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (66
    )
    
    
    (66
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (43
    )
    
    
    
    
    
    
    (43
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (635
    )Stock options exercised
    
    
    22
    
    
    
    118
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    140Income tax benefit related to stock option
exercises
    
    
    
    
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43Stock option expense
    
    
    
    
    
    
    69
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69Balance at June 30, 2005
    
    $
    3,036
    
    
    $
    2,114
    
    
    $
    
    
    
    $
    171
    
    
    $
    18,969
    
    
    $
    24,290
 See accompanying notes to consolidated financial statements
 33




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PEERLESS MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS  (Dollars in thousands)
 Year ended June 30,2005
    
    
    2004
    
    
    2003Cash flows from operating activities:Net earnings (loss)
    
    $
    (592
    )
    
    $
    2,038
    
    
    $
    (379
    )Net loss from discontinued operations
    
    
    66
    
    
    
    364
    
    
    
    1,290Net earnings (loss) from continuing operations
    
    
    (526
    )
    
    
    2,402
    
    
    
    911Adjustments to reconcile net earnings (loss) from continuing operations
to net cash provided by operating activities:Depreciation and amortization
    
    
    636
    
    
    
    754
    
    
    
    759Deferred income taxes
    
    
    100
    
    
    
    280
    
    
    
    (503
    )Provision for bad debt
    
    
    318
    
    
    
    39
    
    
    
    124Provision for warranty expense
    
    
    541
    
    
    
    880
    
    
    
    1,157Inventory valuation reserve
    
    
    161
    
    
    
    74
    
    
    
    77Foreign exchange (gain) loss
    
    
    22
    
    
    
    101
    
    
    
    (146
    )Gain on sales on property and equipment
    
    
    
    
    
    
    
    
    
    
    (473
    )Stock option expense
    
    
    69
    
    
    
    
    
    
    
    Changes in operating assets and liabilitiesAccounts receivable
    
    
    1,661
    
    
    
    1,393
    
    
    
    6,747Inventories
    
    
    (359
    )
    
    
    36
    
    
    
    (14
    )Costs and earnings in excess of billings on uncompleted contracts
    
    
    2,288
    
    
    
    (3,705
    )
    
    
    798Other current assets
    
    
    (348
    )
    
    
    284
    
    
    
    (357
    )Other assets
    
    
    138
    
    
    
    59
    
    
    
    (581
    )Accounts payable
    
    
    (1,236
    )
    
    
    (3,971
    )
    
    
    2,578Billings in excess of costs and earnings uncompleted contracts
    
    
    1,682
    
    
    
    (1,628
    )
    
    
    (1,895
    )Commissions payable
    
    
    (82
    )
    
    
    (197
    )
    
    
    (395
    )Product warranties
    
    
    (678
    )
    
    
    (744
    )
    
    
    (938
    )Income taxes payable
    
    
    (557
    )
    
    
    534
    
    
    
    (713
    )Accrued liabilities and other
    
    
    1,123
    
    
    
    (887
    )
    
    
    (1,389
    )5,479
    
    
    
    (6,698
    )
    
    
    4,836Net cash provided by (used in) operating activities of continuing operations
    
    
    4,953
    
    
    
    (4,296
    )
    
    
    5,747Cash flow from investing activities:Net proceeds from short-term investments
    
    
    
    
    
    
    309
    
    
    
    (2
    )Net purchases of property and equipment
    
    
    (897
    )
    
    
    (407
    )
    
    
    425Net cash provided by (used in) investing activities of continuing operations
    
    
    (897
    )
    
    
    (98
    )
    
    
    423Cash flows from financing activities:Proceeds from sale of common stock
    
    
    140
    
    
    
    98
    
    
    
    64Net cash provided by financing activities of continuing operations
    
    
    140
    
    
    
    98
    
    
    
    64Net cash provided by (used in) discontinued operations
    
    
    (41
    )
    
    
    1,755
    
    
    
    (893
    )Effect of exchange rate changes on
cash and cash equivalents
    
    
    3
    
    
    
    (20
    )
    
    
    (47
    )Net increase (decrease) in cash and cash equivalents
    
    
    4,158
    
    
    
    (2,561
    )
    
    
    5,294Cash and cash equivalents at beginning of period
    
    
    4,119
    
    
    
    6,680
    
    
    
    1,386Cash and cash equivalents at end of period
    
    $
    8,277
    
    
    $
    4,119
    
    
    $
    6,680Supplemental information on cash flow:Income taxes paid
    
    $
    716
    
    
    $
    128
    
    
    $
    834
 See accompanying notes to consolidated financial statements.
 34




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts in thousands, except share and per share amounts)
 NOTE A. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
 Nature of Operations
   Consolidation
  Cash Equivalents
  Accounts Receivable
   Year ended June 30,2005
    
    
    2004
    
    
    2003Balance at beginning of year
    
    $
    431
    
    
    $
    402
    
    
    $
    354Bad debt expense
    
    
    318
    
    
    
    39
    
    
    
    124Accounts written off, net
    
    
    (397
    )
    
    
    (10
    )
    
    
    (76
    )Balance at end of year
    
    $
    352
    
    
    $
    431
    
    
    $
    402
 35




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts in thousands, except share and per share amounts)
 NOTE A. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES  CONTINUED
 Inventories
  Depreciable Assets
  Warranty Costs
  Revenue Recognition
   36




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts in thousands, except share and per share amounts)
 NOTE A. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES  CONTINUED
 Shipping and Handling Policy
  Earnings (Loss) Per Common Share
  Stock Based Compensation
   Year ended June 30,2005
    
    
    2004
    
    
    2003Net earnings (loss), as reported
    
    $
    (592
    )
    
    $
    2,038
    
    
    $
    (379
    )Deduct: Total stock-based employee
compensation expense determined
using the fair value based method for
all awards, net of related tax effects
    
    
    (161
    )
    
    
    (161
    )
    
    
    (117
    )Pro forma net earnings (loss)
    
    $
    (753
    )
    
    $
    1,877
    
    
    $
    (496
    )Earnings (loss) per share:Basic  as reported
    
    $
    (0.20
    )
    
    $
    0.68
    
    
    $
    (0.13
    )Basic  pro forma
    
    $
    (0.25
    )
    
    $
    0.63
    
    
    $
    (0.17
    )Diluted  as reported
    
    $
    (0.20
    )
    
    $
    0.67
    
    
    $
    (0.13
    )Diluted  pro forma
    
    $
    (0.25
    )
    
    $
    0.62
    
    
    $
    (0.16
    )
 37




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts in thousands, except share and per share amounts)
 NOTE A. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES  CONTINUED
   Foreign Currency
  Financial Instruments
  Long-Lived Assets
  Use of Estimates
  Reclassification
  38




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts in thousands, except share and per share amounts)
 NOTE B. NEW ACCOUNTING PRONOUNCEMENTS
 Share Based Payment
 Inventory
Costs
 NOTE C. CONCENTRATIONS OF CREDIT RISK
   39




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts in thousands, except share and per share amounts)
 NOTE D. DISCONTINUED OPERATIONS
   Year ended June 30,2005
    
    
    2004
    
    
    2003Revenues
    
    $
    
    
    
    $
    360
    
    
    $
    4,316Cost of goods sold
    
    
    75
    
    
    
    833
    
    
    
    4,711Gross margin (loss)
    
    
    (75
    )
    
    
    (473
    )
    
    
    (395
    )Operating expenses
    
    
    5
    
    
    
    289
    
    
    
    1,680Operating loss
    
    
    (80
    )
    
    
    (762
    )
    
    
    (2,075
    )Other income
    
    
    
    
    
    
    
    
    
    
    47Income tax benefit
    
    
    14
    
    
    
    306
    
    
    
    738Net loss from operations
    
    
    (66
    )
    
    
    (456
    )
    
    
    (1,290
    )Gain on disposal, net of taxes
    
    
    
    
    
    
    92
    
    
    
    Net loss
    
    $
    (66
    )
    
    $
    (364
    )
    
    $
    (1,290
    )Diluted loss per shareNet loss from operations
    
    $
    (0.02
    )
    
    $
    (0.15
    )
    
    $
    (0.43
    )Net gain on disposal
    
    $
    
    
    
    $
    0.03
    
    
    $
    Net loss
    
    $
    (0.02
    )
    
    $
    (0.12
    )
    
    $
    (0.43
    )
  June 30,2005
    
    
    2004Accounts receivable, principally trade  net of
allowance for uncollectible accounts of $0
at June 30, 2005 and $10 at June 30, 2004
    
    $
    
    
    
    $
    225Current assets of discontinued operations
    
    
    
    
    
    
    225Equipment, net
    
    
    9
    
    
    
    9Total assets of discontinued operations
    
    $
    9
    
    
    $
    234Commissions payable
    
    $
    
    
    
    $
    6Product warranties and other reserves
    
    
    106
    
    
    
    300Total current liabilities of discontinued operations
    
    $
    106
    
    
    $
    306
 40




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts in thousands, except share and per share amounts)
 NOTE E. INVENTORIES
  June 30,2005
    
    
    2004Raw materials
    
    $
    3,027
    
    
    $
    2,630Work in progress
    
    
    232
    
    
    
    427Finished goods
    
    
    356
    
    
    
    2453,615
    
    
    
    3,302Reserve for obsolete and slow-moving inventory
    
    
    (318
    )
    
    
    (196
    )$
    3,297
    
    
    $
    3,106
  Year ended June 30,2005
    
    
    2004
    
    
    2003Balance at beginning of year
    
    $
    196
    
    
    $
    122
    
    
    $
    45Additions
    
    
    161
    
    
    
    74
    
    
    
    77Amounts written off
    
    
    (39
    )
    
    
    
    
    
    
    Balance at end of year
    
    $
    318
    
    
    $
    196
    
    
    $
    122
 NOTE F. PROPERTY, PLANT AND EQUIPMENT
  June 30,2005
    
    
    2004Buildings & improvements
    
    $
    3,965
    
    
    $
    3,969Equipment
    
    
    4,577
    
    
    
    4,137Furniture and fixtures
    
    
    3,512
    
    
    
    3,09712,054
    
    
    
    11,203Less accumulated depreciation
    
    
    (9,482
    )
    
    
    (8,893
    )2,572
    
    
    
    2,310Land
    
    
    743
    
    
    
    743$
    3,315
    
    
    $
    3,053
  41




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts in thousands, except share and per share amounts)
 NOTE G. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
  June 30,2005
    
    
    2004Costs incurred on uncompleted contracts and
estimated earnings
    
    $
    34,978
    
    
    $
    44,348Less billings to date
    
    
    (26,919
    )
    
    
    (32,299
    )$
    8,059
    
    
    $
    12,049
  June 30,2005
    
    
    2004Costs and earnings in excess billings on
uncompleted contracts
    
    $
    10,140
    
    
    $
    12,448Billings in excess of costs and earnings on
uncompleted contracts
    
    
    (2,081
    )
    
    
    (399
    )$
    8,059
    
    
    $
    12,049
 NOTE H. LINE OF CREDIT
   42




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts in thousands, except share and per share amounts)
 NOTE I. PRODUCT WARRANTIES
  Year Ended June 30,2005
    
    
    2004
    
    
    2003Balance at beginning of period
    
    $
    982
    
    
    $
    846
    
    
    $
    627Provision for warranty expenses
    
    
    541
    
    
    
    880
    
    
    
    1,157Warranty charges
    
    
    (678
    )
    
    
    (744
    )
    
    
    (938
    )Balance at end of period
    
    $
    845
    
    
    $
    982
    
    
    $
    846
 NOTE J. COMMITMENTS AND CONTINGENCIES
   Fiscal Year
    
    Amount2006
    
    $
    1412007
    
    
    1082008
    
    
    342009
    
    
    2010
    
    
    Thereafter
    
    
    $
    283
 43




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts in thousands, except share and per share amounts)
 NOTE J. COMMITMENTS AND CONTINGENCIES  CONTINUED
    NOTE K. SHAREHOLDERS EQUITY
    44




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts in thousands, except share and per share amounts)
 NOTE K. SHAREHOLDERS EQUITY  CONTINUED
  Number of
    
    
    Weightedshares
    
    
    averageunderlying
    
    
    exerciseOptions
    
    
    PriceOutstanding at July 1, 2002
    
    
    211,950
    
    
    $
    9.89Granted
    
    
    4,000
    
    
    
    9.85Exercised
    
    
    (10,400
    )
    
    
    6.17Canceled
    
    
    (18,800
    )
    
    
    14.91Outstanding at June 30, 2003
    
    
    186,750
    
    
    
    9.59Granted
    
    
    67,300
    
    
    
    12.32Exercised
    
    
    (15,150
    )
    
    
    6.38Canceled
    
    
    (16,300
    )
    
    
    15.52Outstanding at June 30, 2004
    
    
    222,600
    
    
    
    10.20Granted
    
    
    41,600
    
    
    
    14.55Exercised
    
    
    (22,750
    )
    
    
    6.19Canceled
    
    
    (3,500
    )
    
    
    18.52Outstanding at June 30, 2005
    
    
    237,950
    
    
    
    11.22Options exercisable at June 30, 2003
    
    
    142,850
    
    
    $
    8.13Options exercisable at June 30, 2004
    
    
    153,500
    
    
    $
    8.95Options exercisable at June 30, 2005
    
    
    167,850
    
    
    $
    10.36
  Year ended June 30, 2003
    
    $
    5.46Year ended June 30, 2004
    
    $
    6.44Year ended June 30, 2005
    
    $
    5.76
  45




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts in thousands, except share and per share amounts)
 NOTE K. SHAREHOLDERS EQUITY  CONTINUED
  OutstandingWeightedRange of
    
    Number
    
    Weighted average remaining
    
    averageExercise Prices
    
    outstanding
    
    contractual life (in years)
    
    exercise price$4.625 - $4.6250
    
    
    26,000
    
    
    
    0.6
    
    
    
    4.63$5.313 - $5.9380
    
    
    13,000
    
    
    
    2.7
    
    
    
    5.38$6.000 - $6.6880
    
    
    51,150
    
    
    
    4.7
    
    
    
    6.15$9.850 - $10.750
    
    
    15,000
    
    
    
    7.9
    
    
    
    10.57$12.64 - $12.900
    
    
    52,000
    
    
    
    8.4
    
    
    
    12.66$14.52 - $14.830
    
    
    41,600
    
    
    
    9.6
    
    
    
    14.55$16.94 - $19.500
    
    
    39,200
    
    
    
    6.4
    
    
    
    18.94237,950
 ExercisableWeightedRange of
    
    Number
    
    Weighted average remaining
    
    averageExercise Prices
    
    outstanding
    
    contractual life (in years)
    
    exercise price$4.625 - $4.6250
    
    
    26,000
    
    
    
    0.6
    
    
    
    4.63$5.313 - $5.9380
    
    
    13,000
    
    
    
    2.7
    
    
    
    5.38$6.000 - $6.6880
    
    
    51,150
    
    
    
    4.7
    
    
    
    6.15$9.850 - $10.750
    
    
    6,000
    
    
    
    7.7
    
    
    
    10.30$12.64 - $12.900
    
    
    23,500
    
    
    
    8.4
    
    
    
    12.68$14.52 - $14.830
    
    
    9,000
    
    
    
    9.5
    
    
    
    14.66$16.94 - $19.500
    
    
    39,200
    
    
    
    6.4
    
    
    
    18.94167,850
   46




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts in thousands, except share and per share amounts)
 NOTE L. EMPLOYEE BENEFIT PLANS
  NOTE M. INCOME TAXES
  June 30,2005
    
    
    2004Deferred tax assetsInventories
    
    $
    150
    
    
    $
    136Net operating loss carryforwards
    
    
    202
    
    
    
    212Accrued expenses
    
    
    825
    
    
    
    712Accounts receivable
    
    
    130
    
    
    
    162Other
    
    
    58
    
    
    
    31,365
    
    
    
    1,225Less valuation allowance
    
    
    (149
    )
    
    
    1,216
    
    
    
    1,225Deferred tax liabilitiesProperty, plant and equipment
    
    
    (139
    )
    
    
    (48
    )Other
    
    
    (4
    )
    
    
    (4
    )(143
    )
    
    
    (52
    )Net deferred tax asset
    
    $
    1,073
    
    
    $
    1,173
  June 30,2005
    
    
    2004Current deferred tax asset
    
    $
    1,163
    
    
    $
    1,013Non-current deferred tax asset, net
    
    
    
    
    
    
    160Non-current deferred tax liability, net
    
    
    (90
    )
    
    
    $
    1,073
    
    
    $
    1,173
  47




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts in thousands, except share and per share amounts)
 NOTE M. INCOME TAXES  CONTINUED
  Year ended June 30,2005
    
    
    2004
    
    
    2003Federal tax benefit (expense)Current
    
    $
    332
    
    
    $
    (698
    )
    
    $
    117Deferred
    
    
    (104
    )
    
    
    (266
    )
    
    
    503State tax expense
    
    
    (33
    )
    
    
    (96
    )
    
    
    (51
    )Foreign tax benefit (expense)Current
    
    
    (72
    )
    
    
    (115
    )
    
    
    (230
    )Deferred
    
    
    4
    
    
    
    (14
    )
    
    
    $
    127
    
    
    $
    (1,189
    )
    
    $
    339Income tax benefit (expense)  continuing operations
    
    $
    113
    
    
    $
    (1,447
    )
    
    $
    (399
    )Income tax benefit  discontinued operations
    
    
    14
    
    
    
    258
    
    
    
    738Income tax benefit (expense)
    
    $
    127
    
    
    $
    (1,189
    )
    
    $
    339
  Year ended June 30,2005
    
    
    2004
    
    
    2003Income tax benefit (expense) at federal statutory rate
    
    $
    244
    
    
    $
    (1,097
    )
    
    $
    244Decrease (increase) in income tax expense
resulting fromState tax, net of federal benefit
    
    
    (38
    )
    
    
    (96
    )
    
    
    21Foreign sales income exclusions
    
    
    67
    
    
    
    26
    
    
    
    22Effect of lower tax rate on foreign income
    
    
    15
    
    
    
    36
    
    
    
    43Net operating loss valuation allowance
    
    
    (149
    )
    
    
    
    
    
    
    Other
    
    
    (12
    )
    
    
    (58
    )
    
    
    9Income tax benefit (expense)
    
    $
    127
    
    
    $
    (1,189
    )
    
    $
    339
  48




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts in thousands, except per share amounts)
 NOTE N. EARNINGS PER SHARE
 Certain
earnings per share amounts may not total due to rounding.
 Year ended June 30,2005
    
    
    2004
    
    
    2003Net earnings (loss) from continuing operations
    
    $
    (526
    )
    
    $
    2,402
    
    
    $
    911Loss from discontinued operations
    
    
    (66
    )
    
    
    (364
    )
    
    
    (1,290
    )Net earnings (loss)
    
    $
    (592
    )
    
    $
    2,038
    
    
    $
    (379
    )Basic weighted average common shares outstanding
    
    
    3,028
    
    
    
    3,003
    
    
    
    2,996Effect of dilutive options
    
    
    
    
    
    
    41
    
    
    
    17Diluted weighted average common shares outstanding
    
    
    3,028
    
    
    
    3,044
    
    
    
    3,013Net earnings (loss) per share  basic:Earnings (loss) from continuing operations
    
    $
    (0.17
    )
    
    $
    0.80
    
    
    $
    0.30Loss from discontinued operations
    
    
    (0.02
    )
    
    
    (0.12
    )
    
    
    (0.43
    )Net earnings (loss) per share
    
    $
    (0.20
    )
    
    $
    0.68
    
    
    $
    (0.13
    )Net earnings (loss) per share  diluted:Earnings (loss) from continuing operations
    
    $
    (0.17
    )
    
    $
    0.79
    
    
    $
    0.30Loss from discontinued operations
    
    
    (0.02
    )
    
    
    (0.12
    )
    
    
    (0.43
    )Net earnings (loss) per share
    
    $
    (0.20
    )
    
    $
    0.67
    
    
    $
    (0.13
    )
  49




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts in thousands, except share and per share amounts)
 NOTE O. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
   SeparationEnvironmental
    
    Filtration
    
    UnallocatedSystems
    
    Systems
    
    Overhead
    
    Consolidated2005Net revenues from customers
    
    $
    20,591
    
    
    $
    30,472
    
    
    $
    
    
    
    $
    51,063Segment profit (loss)
    
    
    2,309
    
    
    
    1,759
    
    
    
    (4,770
    )
    
    
    (702
    )2004Net revenues from customers
    
    $
    28,096
    
    
    $
    31,665
    
    
    $
    
    
    
    $
    59,761Segment profit (loss)
    
    
    4,133
    
    
    
    4,371
    
    
    
    (4,631
    )
    
    
    3,8732003Net revenues from customers
    
    $
    37,511
    
    
    $
    27,343
    
    
    $
    
    
    
    $
    64,854Segment profit (loss)
    
    
    3,191
    
    
    
    2,708
    
    
    
    (5,316
    )
    
    
    583
 50




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts in thousands, except share and per share amounts)
 NOTE O. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION  CONTINUED
  United
    
    
    UnitedStates
    
    
    Kingdom
    
    
    Eliminations
    
    
    Consolidated2005Net sales to unaffiliated
customers
    
    $
    40,261
    
    
    $
    10,802
    
    
    $
    
    
    
    $
    51,063Transfers between
geographic areas
    
    
    2,230
    
    
    
    
    
    
    
    (2,230
    )
    
    
    Total
    
    $
    42,491
    
    
    $
    10,802
    
    
    $
    (2,230
    )
    
    $
    51,063Identifiable long-lived assets
    
    $
    3,247
    
    
    $
    68
    
    
    $
    
    
    
    $
    3,3152004Net sales to unaffiliated
customers
    
    $
    48,589
    
    
    $
    11,172
    
    
    $
    
    
    
    $
    59,761Transfers between
geographic areas
    
    
    2,369
    
    
    
    
    
    
    
    (2,369
    )
    
    
    Total
    
    $
    50,958
    
    
    $
    11,172
    
    
    $
    (2,369
    )
    
    $
    59,761Identifiable long-lived assets
    
    $
    2,964
    
    
    $
    89
    
    
    $
    
    
    
    $
    3,0532003Net sales to unaffiliated
customers
    
    $
    55,823
    
    
    $
    9,031
    
    
    $
    
    
    
    $
    64,854Transfers between
geographic areas
    
    
    809
    
    
    
    
    
    
    
    (809
    )
    
    
    Total
    
    $
    56,632
    
    
    $
    9,031
    
    
    $
    (809
    )
    
    $
    64,854Identifiable long-lived assets
    
    $
    3,329
    
    
    $
    71
    
    
    $
    
    
    
    $
    3,400
   51




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts in thousands, except share and per share amounts)
 NOTE P. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION  UNAUDITED
  Year ended June 30, 2005First Quarter

    
    Second Quarter

    
    Third Quarter

    
    Fourth Quarter

    
    TotalRevenues
    
    $
    11,218
    
    
    $
    10,844
    
    
    $
    12,999
    
    
    $
    16,002
    
    
    $
    51,063Gross profit
    
    
    3,215
    
    
    
    2,939
    
    
    
    3,844
    
    
    
    3,709
    
    
    
    13,707Operating expenses
    
    
    3,481
    
    
    
    3,645
    
    
    
    3,650
    
    
    
    3,633
    
    
    
    14,409Operating income (loss)
    
    
    (266
    )
    
    
    (706
    )
    
    
    194
    
    
    
    76
    
    
    
    (702
    )Net earnings (loss)
from continuing
operations
    
    
    (109
    )
    
    
    (464
    )
    
    
    205
    
    
    
    (158
    )
    
    
    (526
    )Net earnings (loss)
from discontinued
operations
    
    
    (20
    )
    
    
    (33
    )
    
    
    
    
    
    
    (13
    )
    
    
    (66
    )Net earnings
    
    
    (129
    )
    
    
    (497
    )
    
    
    205
    
    
    
    (171
    )
    
    
    (592
    )Basic earnings (loss)
per share *Earnings (loss) from
continuing operations
    
    ($
    0.04
    )
    
    ($
    0.15
    )
    
    $
    0.07
    
    
    ($
    0.05
    )
    
    ($
    0.17
    )Net earnings (loss)
from discontinued
operations
    
    ($
    0.01
    )
    
    ($
    0.01
    )
    
    $
    0.00
    
    
    $
    0.00
    
    
    ($
    0.02
    )Net earnings (loss)
    
    ($
    0.04
    )
    
    ($
    0.16
    )
    
    $
    0.07
    
    
    ($
    0.06
    )
    
    ($
    0.20
    )Diluted earnings (loss)
per share *Earnings (loss) from
continuing operations
    
    ($
    0.04
    )
    
    ($
    0.15
    )
    
    $
    0.07
    
    
    ($
    0.05
    )
    
    ($
    0.17
    )Net earnings (loss)
from discontinued
operations
    
    ($
    0.01
    )
    
    ($
    0.01
    )
    
    $
    0.00
    
    
    $
    0.00
    
    
    ($
    0.02
    )Net earnings (loss)
    
    ($
    0.04
    )
    
    ($
    0.16
    )
    
    $
    0.07
    
    
    ($
    0.06
    )
    
    ($
    0.20
    )
 
 *
    
    Certain earnings per share amounts may not total due to rounding.  52




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts in thousands, except share and per share amounts)
 NOTE P. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION  UNAUDITED
 Year ended June 30, 2004First Quarter

    
    Second Quarter

    
    Third Quarter

    
    Fourth Quarter

    
    TotalRevenues
    
    $
    16,807
    
    
    $
    16,429
    
    
    $
    13,491
    
    
    $
    13,034
    
    
    $
    59,761Gross profit
    
    
    4,806
    
    
    
    4,545
    
    
    
    4,812
    
    
    
    4,639
    
    
    
    18,802Operating expenses
    
    
    3,655
    
    
    
    3,724
    
    
    
    3,916
    
    
    
    3,634
    
    
    
    14,929Operating income
    
    
    1,151
    
    
    
    821
    
    
    
    896
    
    
    
    1,005
    
    
    
    3,873Net earnings from
continuing operations
    
    
    740
    
    
    
    609
    
    
    
    555
    
    
    
    498
    
    
    
    2,402Net earnings (loss)
from discontinued
operations
    
    
    65
    
    
    
    (142
    )
    
    
    (117
    )
    
    
    (170
    )
    
    
    (364
    )Net earnings
    
    
    805
    
    
    
    467
    
    
    
    438
    
    
    
    328
    
    
    
    2,038Basic earnings (loss)
per share *Earnings from
continuing operations
    
    $
    0.25
    
    
    $
    0.20
    
    
    $
    0.18
    
    
    $
    0.17
    
    
    $
    0.80Net earnings (loss)
from discontinued
operations
    
    $
    0.02
    
    
    ($
    0.05
    )
    
    ($
    0.04
    )
    
    ($
    0.06
    )
    
    ($
    0.12
    )Net earnings
    
    $
    0.27
    
    
    $
    0.16
    
    
    $
    0.15
    
    
    $
    0.11
    
    
    $
    0.68Diluted earnings (loss)
per share *Earnings from
continuing operations
    
    $
    0.24
    
    
    $
    0.20
    
    
    $
    0.18
    
    
    $
    0.16
    
    
    $
    0.79Net earnings (loss)
from discontinued
operations
    
    $
    0.02
    
    
    ($
    0.05
    )
    
    ($
    0.04
    )
    
    ($
    0.06
    )
    
    ($
    0.12
    )Net earnings
    
    $
    0.26
    
    
    $
    0.15
    
    
    $
    0.14
    
    
    $
    0.11
    
    
    $
    0.67
 
 *
    
    Certain earnings per share amounts may not total due to rounding. NOTE Q. OTHER INFORMATION
  June 30,2005
    
    
    2004Accrued start-up expense
    
    $
    974
    
    
    $
    312Accrued compensation expense
    
    
    691
    
    
    
    677Sales and use tax payable
    
    
    491
    
    
    
    41Accrued property tax expense
    
    
    111
    
    
    
    107Accrued bonus expense
    
    
    
    
    
    
    114Other
    
    
    791
    
    
    
    672$
    3,058
    
    
    $
    1,923
  Year ended June 30,2005
    
    
    2004
    
    
    2003Continuing operationsUnited States
    
    $
    (886
    )
    
    $
    3,366
    
    
    $
    595United Kingdom
    
    
    247
    
    
    
    483
    
    
    
    715(639
    )
    
    
    3,849
    
    
    
    1,310Discontinued operations  U. S.
    
    
    (80
    )
    
    
    (622
    )
    
    
    (2,028
    )$
    (719
    )
    
    $
    3,227
    
    
    $
    (718
    )
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##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
  
 ITEM 9A. CONTROLS AND PROCEDURES.
     54




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##### Table of Contents



1.
    
    We have developed and implemented new written sales order entry procedures
designed to ensure that the essential elements of all contracts are in place prior to
entering sales orders into the Companys Enterprise Resource Planning system (ERP).2.
    
    We have developed and implemented written contract filing and maintenance
procedures designed to ensure that all contracts meet Company, customer and third party
requirements.3.
    
    We have developed and implemented new written change order procedures designed
to ensure: a) proper management approval prior to implementation, b) timely entry of
contract changes, and c) the Companys ERP system reflects the most current contract
sales order value and data.4.
    
    We have improved the status review process for on-going projects to assure that
potential project cost overruns are timely identified and the Companys ERP system is
timely updated.5.
    
    We have realigned the departments and reporting responsibilities associated
with the Contracts Administration and Project Management departments.
   
 ITEM
9B. OTHER INFORMATION
  55




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PART III
 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
   Code of Ethics
 http//:www.peerlessmfg.com
  Information About the Audit Committee
  
 ITEM 11. EXECUTIVE COMPENSATION.
  56




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##### Table of Contents



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED SHAREHOLDER MATTERS.
   Number ofsecuritiesavailable forfuture issuancesNumber of
    
    
    
    
    
    
    under equitysecurities to be
    
    
    Weighted-
    
    
    compensationissued upon
    
    
    average
    
    
    plans (excludingexercise of
    
    
    exercise price
    
    
    securitiesoutstanding
    
    
    of outstanding
    
    
    reflected inoptions
    
    
    options
    
    
    column (a))Plan Category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
security
holders (1)
    
    
    237,950
    
    
    $
    11.22
    
    
    
    121,200Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    237,950
    
    
    $
    11.22
    
    
    
    121,200
 
 (1)
    
    Includes the 1995 Stock Option and Restricted Stock Plan and the 2001 Stock Option and
Restricted Stock Plan. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
  
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
  57




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##### Table of Contents



PART IV
 
  (a)(1)
    
    The following audited consolidated financial statements of Peerless Mfg. Co. and
Subsidiaries are included in Part II, Item 8, of this Report.
 
 (a)(2)
    
    The following financial statement schedule of Peerless Mfg. Co. and Subsidiaries is
included.
 .
 (a)(3)
    
    Exhibits
  (b)
    
    Reports on Form 8-K
   58




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##### Table of Contents



SIGNATURES
  PEERLESS MFG. CO.By:
    
    /s/ Sherrill StoneSherrill StoneChairman of the Board and Chief Executive OfficerDate: September 28, 2005
  /s/ Sherrill Stone

Sherrill Stone
    
    Chairman of the Board and 
Chief
Executive Officer/s/ Richard L. Travis, Jr.

Richard L. Travis, Jr.
    
    Vice President and Chief Financial Officer (Principal Financial and
Accounting Officer)/s/ Bernard S. Lee

Bernard S. Lee
    
    Director/s/ J. V. Mariner, Jr.

J. V. Mariner, Jr.
    
    Director/s/ R. Clayton Mulford

R. Clayton Mulford
    
    Director/s/ Donald A. Sillers, Jr.

Donald A. Sillers, Jr
    
    Director
 59




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##### Table of Contents



INDEX TO EXHIBITS
 No.
    
    Exhibit Description3(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 Quarterly
Report on Form 10-Q, for the quarter ended December 31, 2003, and
incorporated herein by reference).4(a)
    
    Rights Agreement between Peerless Mfg. Co. and Mellon Investor
Services, LLC (formerly ChaseMellon Shareholder Services, L.L.C.),
as Rights Agent (filed as Exhibit 1 to our Registration Statement
on Form 8-A (File No. 0-05214), dated May 22, 1997, and
incorporated herein by reference).4(b)
    
    Amendment to Rights Agreement between Peerless Mfg. Co. and Mellon
Investor Services, LLC, as Rights Agent (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)
    
    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).10(c)
    
    Amendment to Peerless Mfg. Co. 1995 Stock Option and Restricted
Stock Plan 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(d)
    
    Peerless Mfg. Co. 2001 Stock Option and Restricted Stock Plan
(filed as Appendix B to our Proxy Statement on Schedule 14A dated
October 24, 2001, and incorporated herein by reference).10(e)
    
    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).10(f)
    
    Credit Agreement, Guaranty Agreement, Master Revolving Note, and
Security Agreement each dated as of October 30, 2003, by and
between Peerless Mfg. Co. and Comerica Bank (filed as Exhibits
10(a) through 10(d) to our Quarterly Report on Form 10-Q, for the
fiscal quarter ended December 31, 2003, and incorporated herein by
reference).10(g)
    
    Employment Agreement dated July 20, 2001, by and between Peerless
Mfg. Co. and Sherrill Stone (filed as Exhibit 10(i) to our
Quarterly Report on Form 10-Q, for the fiscal quarter ended
September 30, 2001, and incorporated herein by reference).
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##### Table of Contents



INDEX
TO EXHIBITS  CONTINUED
 No.
    
    Exhibit Description10(h)
    
    Agreement dated July 20, 2001, by and between Peerless Mfg. Co. and
Sherrill Stone (filed as Exhibit 10(k) to our Quarterly Report on
Form 10-Q, for the fiscal quarter ended September 30, 2001, and
incorporated herein by reference).10 (i)
    
    Agreement dated August 12, 2002, by and between Peerless Mfg. Co.
and Richard L. Travis, Jr. (filed as Exhibit 10(o) to our Quarterly
Report on Form 10-Q, for the fiscal quarter ended September 30,
2002, and incorporated herein by reference).10 (j)
    
    Employment agreement dated February 11, 2005, by and between
Peerless Mfg. Co. and Richard L. Travis, Jr. (filed as Exhibit
10(f) to our Quarterly Report on Form 10-Q, for the fiscal quarter
ended March 31, 2005, and incorporated herein by reference).10 (k)
    
    Employment Agreement dated July 16, 2003, by and between Peerless
Mfg. Co. and William T. Strohecker (filed as Exhibit 10(m) to our
Quarterly Report on Form 10-Q, for the fiscal quarter ended
September 30, 2003, and incorporated herein by reference).10 (l)
    
    Agreement dated July 16, 2003, by and between Peerless Mfg. Co. and
William T. Strohecker (filed as Exhibit 10(n) to our Quarterly
Report on Form 10-Q, for the fiscal quarter ended September 30,
2003, and incorporated herein by reference).10 (m)
    
    Employment Agreement dated October 10, 2003, by and between
Peerless Mfg. Co. and David Taylor (filed as Exhibit 10(f) to our
Quarterly Report on Form 10-Q, for the fiscal quarter ended
December 31, 2003, and incorporated herein by reference).10 (n)
    
    Employment Agreement dated October 10, 2003, by and between
Peerless Mfg. Co. and Peter J. Burlage (filed as Exhibit 10(e) to
our Quarterly Report on Form 10-Q, for the fiscal quarter ended
December 31, 2003, and incorporated herein by reference).10 (o)
    
    Employment Agreement dated July 1, 2004, by and between Peerless
Mfg. Co. and G. Darwyn Cornwell. (filed as Exhibit 10(q) to our
Annual Report on Form 10-K, for the fiscal year ended June 30,
2004, and incorporated herein by reference).10 (p)
    
    Key Employee Bonus Plan effective as of January 4, 2005 (filed as
Exhibit 10.4 to our current Report on Form 8-K dated February 9,
2005, and incorporated herein by reference).10 (q)
    
    Description of Compensation Payable to Non-employee Directors
(filed as Exhibit 10(b) to our current Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 2005, and incorporated
herein by reference).
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##### Table of Contents



INDEX
TO EXHIBITS  CONTINUED
 No.
    
    Exhibit Description10 (r)
    
    Form of Non-Employee Director Stock Option Agreement (filed as Exhibit
10.1 to our Current Report on Form 8-K on February 9, 2005, and
incorporated herein by reference).10( s)
    
    Form of Chief Executive Officer Stock Option Agreement (filed as
Exhibit 10.2 to our Current Report on Form 8-K on February 9, 2005,
and incorporated herein by reference).10 (t)
    
    Form of Executive Stock Option Agreement (filed as Exhibit 10.3 to our
Current Report on Form 8-K on February 9, 2005, and incorporated herein
by reference).21
    
    Subsidiaries of Peerless Mfg. Co. *23
    
    Consent of Grant Thornton LLP. *31(a)
    
    Rule 13a  14(a)/15d  14(a) Certification of Chief Executive Officer. *31(b)
    
    Rule 13a  14(a)/15d  14(a) Certification of Chief Financial Officer. *32(a)
    
    Section 1350 Certification of Chief Executive Officer. **32(b)
    
    Section 1350 Certification of Chief Financial Officer. **
 
 *
    
    Filed herewith**
    
    Furnished herewith  
 http://www.peerlessmfg.com http://www.sec.gov.
 62