<PAGE>
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                    FORM 10-K

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

                     FOR THE FISCAL YEAR ENDED JUNE 30, 2002

                           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 identification no.)
incorporation or organization)

                   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:


      (Title of Class)                  (Name of each exchange where registered)
COMMON STOCK, $1.00 PAR VALUE                         NASDAQ


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. [ ]

As of September 25, 2002, there were 2,993,134 shares of the registrant's common
stock outstanding, of which 2,595,634 shares, with an aggregate market value of
$20.6 million (based on the average closing bid and ask price as of such date of
$7.95) were held by non-affiliates of the registrant. For the purposes of the
above statement, all directors, officers and stockholders owning in excess of
10% of our common stock are presumed to be affiliates.

                       DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on November 21, 2002 are incorporated by reference into
Part III of this Form 10-K.


<PAGE>
                               TABLE OF CONTENTS

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

         Item 1.    Business........................................................................... 3

         Item 2.    Properties......................................................................... 7

         Item 3.    Legal Proceedings.................................................................. 8

         Item 4.    Submission of Matters to a Vote
                      of Security Holders.............................................................. 8

PART II

         Item 5.    Market for Registrant's Common Equity and
                      Related Stockholder Matters...................................................... 8

         Item 6.    Selected Financial Data............................................................ 9

         Item 7.    Management's Discussion and Analysis of Financial
                      Condition and Results of Operations.............................................. 10

         Item 7A.   Quantitative and Qualitative Disclosures about Market Risk......................... 21

         Item 8.    Consolidated Financial Statements and Supplementary Data........................... 21

         Item 9.    Changes in and Disagreements with Accountants on Accounting
                      and Financial Disclosure......................................................... 21
PART III

         Item 10.   Directors and Executive Officers of the Registrant................................. 21

         Item 11.   Executive Compensation............................................................. 21

         Item 12.   Security Ownership of Certain Beneficial Owners and Management..................... 21

         Item 13.   Certain Relationships and Related Transactions..................................... 21

PART IV

         Item 14.   Exhibits, Financial Statement Schedule,
                       and Reports on Form 8-K......................................................... 22

                      Signatures........................................................................23

                      Certifications....................................................................24
</TABLE>



                                       2
<PAGE>
                                     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 30. References herein to
"fiscal 2000," "fiscal 2001," "fiscal 2002," and "fiscal 2003" refer to our
fiscal years ended June 30, 2000, 2001, 2002, and 2003, respectively.


OPERATING SEGMENTS AND PRODUCTS

      We operate our business through three business segments, the largest of
which is our "Selective Catalytic Reduction Systems" business, which accounted
for approximately 59% of our revenues in fiscal 2002. 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 primary business segment is our gas/liquid filtration business,
which accounted for approximately 28% of our revenues in fiscal 2002. 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
saltwater aerosols from the combustion intake air of shipboard gas turbine and
diesel engines. Separators are also used in nuclear power plants to remove water
from saturated steam.

      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, PMC Acquisition Inc., d/b/a ABCO
Industries ("ABCO"). This segment accounted for approximately 13% of our
revenues in fiscal 2002. This equipment is used to produce steam, which is used
in processes to heat, dry, drive steam turbines, and a variety of other
applications. This manufacturing facility is also used to support the
manufacturing needs of other Peerless products. The Company, as part of its
"restructuring and organizational realignment initiative," will be phasing out
of this business segment during fiscal 2003, and redirecting these resources to
its other business segments: SCR Systems and gas/liquid filtration segments. In
connection therewith, the Company will continue to use this manufacturing
facility to produce its other Peerless products. See also sections entitled
"Restructuring and Organizational Realignment" and "Backlog," under Item 1 -
"Business" section of this Report.

      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.




                                       3
<PAGE>

      Please see Note M - "Industry Segment and Geographic Information," in our
Notes to Consolidated Financial Statements and Item 7 - "Management's Discussion
and Analysis of Financial Condition and Results of Operations" of this Report
for a further disclosure and discussion of certain financial information with
respect to each of our industry segments, SCR Systems, Gas/Liquid Filtration,
and Boilers.


RESTRUCTURING AND ORGANIZATIONAL REALIGNMENT

      During the later part of fiscal 2002, the construction of new merchant
power plants in this country slowed considerably, as questions as to the real
demand for electricity began to surface, coupled with the continued weakness in
the U.S. economy. In addition, recent regulatory uncertainties have caused NOx
reduction initiatives relating to retro-fit projects to be delayed. These
factors resulted in a downturn of new SCR Systems orders during the second half
of fiscal 2002, as well as a decrease in new packaged boiler orders, which
impacted our backlog at June 30, 2002 (see Item 1 - "Business - Backlog" section
of this Report for further discussion on our backlog).

      In response to the slow down of new merchant power plants, continued
weakness in the U.S. and global economies, and recent regulatory and political
uncertainties, the Company in July 2002 initiated its "restructuring and
organizational realignment initiative." The goal of this initiative was designed
to reduce costs, streamline operations, and identify and exit certain
non-critical, marginally performing operating activities, thereby positioning
the Company with a more competitive cost structure vital for its overall
long-term success. The plan included, among other things, the consolidation of
manufacturing facilities and processes, the scaling down of capacities at the
remaining facilities to meet anticipated market requirements and current
economic conditions, divesture of non-strategic business units, and the
realignment of the organization to focus on the Company's two primary business
segments: SCR Systems and gas/liquid filtration. The following actions have
taken place through September 23, 2002:

     o    The Company has realigned its organizational structure to improve the
          efficiency and utilization of its manufacturing, engineering and
          design organizations. As a result, the Company has reduced its
          workforce by approximately 80 employees, or 23%, and plans to make
          further reductions in connection with the execution of this initiative
          during the second quarter of fiscal 2003.

     o    In October 2002, the Company plans to close one of its three
          manufacturing facilities, and transfer the operational activities to
          its remaining two facilities.

     o    The capacities at the remaining two manufacturing facilities will be
          scaled down to be in line with the anticipated market requirements and
          current economic conditions.

     o    The identification of cost components that can be more economically
          outsourced, and the consolidation of certain business process
          outsourcing operations.

     o    The suspension of the boiler operations and redirection of these
          resources to our other two segments.

     o    Redeployment of research and development activities to focus on our
          critical business units.

We expect, after the completion of our restructuring initiatives, during the
later part of calendar year 2002, to reduce our annual operating expenses, by
approximately $7.1 million. We believe that redirecting our resources to focus
on our more profitable segments will give us the flexibility to meet our
customer's current and anticipated needs, without sacrificing our ability to
expand our business to meet future demands, while at the same time positioning
the Company to maximize its current operational efficiencies. The Company plans
to continue to look for ways to cut costs and improve its operational
performance.


                                       4
<PAGE>

MANUFACTURING AND OUTSOURCING

      Our products are fabricated utilizing a combination of in-house
manufacturing, subcontractors and vendors. In fiscal 2001 and 2002, we estimate
manufacturing outsourced to subcontractors accounted for a significant
percentage of our costs of good sold (approximately 35% in fiscal 2002). 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 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.

      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 through our internal sales
force. 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 two fiscal years because the demand for these
environmental control systems tend to peak during the spring and summer months.

      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 two-primary business segments and ABCO is not dependent upon any
single customer or group of customers. The custom-designed and project-specific
nature of our business can cause year-to-year variance in our major customers.
During fiscal 2002, one customer accounted for approximately 13% of our
consolidated revenues, and in fiscal years 2001 and 2000, different customers
accounted for approximately 17% and 19% of our total consolidated revenues for
each of those years, respectively.

      Sales to international customers have been a part of our business for more
than forty years. During fiscal 2002, foreign sales amounted to $15.6 million,
or 14.6% of our total consolidated revenues, compared to sales of $9.4 million,
or 12.0% of our total consolidated revenues during fiscal 2001. The
custom-designed and project-specific nature of our products enables us to sell
to any geographic region. See Item 7A - "Quantitative and Qualitative
Disclosures About Market Risk" and "Factors That May Affect Our Operating
Results and Other Risk Factors" in Item 7 of this Report.


                                       5
<PAGE>
BACKLOG

      Our backlog of uncompleted orders as of June 30, 2002, was approximately
$36 million, compared to $68 million as of June 30, 2001. Our backlog as of
August 31, 2002, was approximately $36 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 $36
million backlog as of June 30, 2002, in excess of 90% is scheduled to be
completed by the end of the current fiscal year. For further discussion on our
backlog and organizational restructuring, please see Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
Item 1 - "Business - Restructuring and Organizational Realignment" sections of
this Report.


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 and filters. 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, engineering and
manufacturing efficient, dependable SCR Systems. We also consider ourselves to
be highly skilled in the technology required to design and apply our high
efficiency vapor/liquid separation and filtration equipment. Our expenditures
for new product development and improvements were approximately $576,000 in
fiscal year 2002, $621,000 in fiscal 2001, and $848,000 in fiscal 2000. In
connection with our restructuring and organizational realignment initiative, we
plan to focus our research and development expenditures during the coming year
on our strategic business units, as such; we expect product development
expenditures to be less than $350,000 in fiscal 2003. See Item 1 - "Business -
Restructuring and Organizational Realignment" section of this Report.

      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, 2002, Peerless and its subsidiaries had 349 employees. None of
our employees are represented by a labor union or are subject to a collective
bargaining agreement. We have experienced no material labor difficulties during
the past year and we believe our employee relations are good.

      As part of the Company's "restructuring and organizational realignment
initiatives," the Company has identified several areas for greater operational
efficiencies and other areas that can be easily out-sourced. As a result, the
Company has significantly reduced the number of its employees since June 30,
2002. As of September 23, 2002, the Company had 269 employees. The Company plans
to continue to monitor its requirements in relation to its resources and make
additional adjustments as are needed. See also Item 1 - "Business -
Restructuring and Organizational Realignment" section of this Report.



                                       6
<PAGE>
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.


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 2002 and 2001. See also "Forward
Looking Statements" and "Factors That May Affect Our Operating Results and Other
Risk Factors" in Item 7 of this Report. For geographic information see Note M of
our Notes to Consolidated Financial Statements attached to this Report.


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 and
separation and filtration products. In addition, we own a manufacturing facility
in Denton, Texas consisting of approximately 22,000 square feet that is used
primarily to manufacture the internal components associated with our
separation/filtration products and our nuclear/marine products. We own an
approximately 78,000 square feet facility in Abilene, Texas that we used to
manufacture our boiler and other 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 expires in
2003. In addition, we lease approximately 2,200 square feet in Halstead, Essex -
England, and 2,800 square feet in Singapore.

      In connection with the Company's restructuring initiatives, the Company,
during the second quarter, intends to consolidate its Dallas manufacturing
operations into its Abilene facility. The Company feels that this consolidation
will potentially reduce the Company's manufacturing costs significantly and will
result in increased utilization of its remaining manufacturing facilities. See
also Item 1 - "Business - Restructuring and Organizational Realignment" of this
Report.

      While we believe our office and manufacturing facilities are adequate and
suitable for our present requirements, we will continue to periodically review
our space requirements and consolidate and dispose of facilities we no longer
require for our business and acquire new space, if our needs so dictate.

      The majority of our facilities are pledged as collateral to secure our
obligations under our revolving line of credit facility. Please see Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" of this Report.



                                       7
<PAGE>
ITEM 3.   LEGAL PROCEEDINGS

      From time to time we are involved in various litigation matters arising in
the ordinary course of our business. We do not believe the disposition of any
current matter will have a material adverse effect on our consolidated financial
position or results of operations.


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

           None Submitted


                                     PART II

Unless otherwise indicated, the share, per share and dividend per share
information reflected in this report have been adjusted to reflect the
Registrant's two-for-one stock split in the form of a stock dividend effective
October 18, 2001.


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. The
share, per share and cash dividend amounts indicated have been adjusted to
reflect the two-for-one stock split effective October 18, 2001.

<TABLE>
<CAPTION>
             FISCAL YEAR                                         HIGH       LOW       CASH DIVIDEND
             -----------                                         ----       ---       -------------
<S>                                                             <C>       <C>             <C>
                    2002
                          First Quarter........................ $22.80    $17.20          $ ---
                          Second Quarter.....................    21.81     15.15            ---
                          Third Quarter.......................   18.85     15.75            ---
                          Fourth Quarter.....................    19.50     15.65            ---
                    2001
                          First Quarter........................ $10.90    $ 7.87         $ .0625
                          Second Quarter.....................     9.66      6.13           .0625
                          Third Quarter.......................    7.85      6.25            ---
                          Fourth Quarter.....................    18.50      6.63            ---
</TABLE>

The last reported sale price of the Common Stock on NASDAQ on September 24, 2002
was $7.80 per share. As of that date, there were approximately 138 record
holders of Common Stock. Cash dividends may be paid, from time to time, 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
Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" of this Report.



                                       8
<PAGE>
ITEM 6.   SELECTED FINANCIAL DATA
          (Dollars in thousands, except share and per share amounts)

      The following table sets forth selected financial data regarding the
Company's results of operations and financial position for, and as of the end
of, each of the years in the five-year period ended June 30, 2002, which are
derived from the audited consolidated financial statements of the Company. The
consolidated financial statements and noted thereto as of June 30, 2002 and
2001, and for the years ended June 30, 2002, 2001 and 2000, and the report of
Grant Thornton LLP thereon are included elsewhere in this Form 10-K. The
selected financial data should be read in conjunction with Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto included
elsewhere herein. The earnings per share, dividends per share, and book value
per share amounts have been adjusted to give effect to the two-for-one stock
split effective October 18, 2001.

<TABLE>
<CAPTION>
                                                     AS OF AND FOR THE YEARS ENDED JUNE 30,
                             ----------------------------------------------------------------------------------------
                               2002       %       2001      %       2000      %      1999      %      1998      %
                             ---------- ------- --------- ------- --------- ------ --------- ------- -------- -------
<S>                           <C>        <C>     <C>       <C>     <C>      <C>     <C>       <C>    <C>       <C>
Operating results:
Revenues                      $107,140   100.0   $78,159   100.0   $58,561  100.0   $40,568   100.0  $43,455   100.0
Cost of revenues                75,918    70.9    54,649    69.9    42,903   73.3    26,296    64.8   28,215    64.9
Gross margin                    31,222    29.1    23,510    30.1    15,658   26.7    14,272    35.2   15,240    35.1
Operating expenses              24,954    23.3    17,608    22.5    13,882   23.7    11,293    27.9   11,595    26.7
Operating income                 6,268     5.9     5,902     7.6     1,776    3.0     2,979     7.3    3,645     8.4
Other income (expenses)            472      .4    -1,027    -1.3      -198    -.3      -133     -.3     -123     -.3
Provision for taxes              2,351     2.2     1,803     2.3       647    1.1       996     2.4    1,072     2.5
Net income                     $ 4,389     4.1   $ 3,072     3.9   $   931    1.6   $ 1,850     4.6  $ 2,450     5.6


Per share data:
Basic earnings per share         $1.47             $1.04             $0.32            $0.63            $0.84
Diluted earnings per share        1.43              1.02              0.32             0.63             0.84
Cash dividends per share                           0.125              0.25             0.25             0.25



Financial position:
Working capital                $17,755           $14,615           $11,938          $11,469          $10,474
Current assets                  41,746            41,731            27,528           20,456           19,795
Total assets                    46,506            46,156            32,121           23,479           22,756
Current liabilities             23,991            27,116            15,590            8,987            9,321
Total liabilities               23,991            28,463            17,372            8,987            9,360
Equity                          22,515            17,693            14,749           14,492           13,396
Book value per share              7.56              6.00              5.05             4.98             4.61
</TABLE>




                                       9
<PAGE>




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


OVERVIEW

      Peerless is a global company providing environmental and separation and
filtration products for the abatement of air pollution, the removal of
contaminants from gases and liquids, and the cogeneration of electricity, and
the manufacturing and sale of packaged boilers through its three principle
business segments - SCR Systems, gas/liquid filtration and boilers.

      SCR Systems. In this business segment, our largest, we design, engineer,
manufacture and sell highly specialized environmental control systems, which are
used for air pollution abatement. These systems convert nitrogen oxide (NOx)
emissions from exhaust gases, caused by burning hydrocarbon fuels, such as coal,
gasoline, natural gas and oil, into harmless nitrogen and water vapor. These
systems are totally integrated systems, complete with instruments, controls and
related values and piping, and are packaged on skids.

      Gas/liquid Filtration. In this business segment, our traditional and
second principal 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 piping systems.
These products are used primarily to remove solid and liquid contaminants from
natural gas and saltwater aerosols from combustion intake air of shipboard gas
turbine and diesel engines.

      Boilers. In our third business segment, we design, engineer, manufacture
and sell packaged boilers and other steam generating equipment. This equipment
is used to produce steam, used for heating, drying, driving steam engines and a
variety of other applications. See also Item 1 - "Business - Restructuring and
Organizational Realignment" of this Report for additional discussion on the
suspension of this business.


FORWARD-LOOKING STATEMENTS

      From time to time, the Company makes oral and written statements that may
constitute "forward-looking statements" (rather than historical facts) as
defined in the Private Securities Litigation Reform Act of 1996 (the "Act") or
by the Securities and Exchange Commission ("SEC") in its rules, regulations and
releases. The Company desires to take advantage of the "safe harbor" provisions
in the Act for forward-looking statements made from time to time, including, but
not limited to, the forward-looking statements made in this Report on Form 10-K
(this "Report"), as well as those made in other filings with the SEC.
Forward-looking statements contained in this Report are based on management's
current plans and expectations and are subject to a number of risks and
uncertainties that could cause actual results to differ materially from those
described in the forward-looking statements. In the preparation of this Report,
where such forward-looking statements appear, the Company has sought to
accompany such statements with meaningful cautionary statements identifying
important factors that could cause actual results to differ materially from
those described in the forward-looking statements. Such factors include, but are
not limited to, the "Factors That May Affect Our Operating Results and Other
Risk Factors," as set forth starting on page 17 of this Report.

      The Company does not have, and expressly disclaims, any obligation to
release publicly any updates or changes in the Company's expectations or changes
in events, conditions, or circumstances on which any forward-looking statement
is based.






                                       10
<PAGE>
RESULTS OF OPERATIONS - CONSOLIDATED

      Revenues. For the 2002 fiscal year, net revenues increased approximately
$28.9 million, or 37.0%, to $107.1 million when compared to $78.2 million in
fiscal 2001. Domestic revenues increased approximately $22.7 million, or 33.0%,
from $68.8 million in fiscal 2001 to $91.5 million in fiscal 2002. Foreign
revenues increased approximately $6.2 million, or 65.9%, from $9.4 million in
fiscal 2001 to $15.6 million in fiscal year 2002. The increase in domestic
revenues continued to be mainly attributable to the continued demand for our SCR
Systems. The increase in our foreign revenues related primarily to increased
demand for our gas/liquid filtration products overseas.

      Net revenues increased approximately $19.6 million, or 33.4%, in fiscal
2001 from $58.6 million in fiscal 2000 to $78.2 million. During fiscal 2001, the
increase in our domestic revenues accounted for all of the increase in our net
revenues. Domestic revenues increased approximately $23.8 million, or 52.9%,
from $45.0 million in fiscal 2000 to $68.8 million in fiscal year 2001. Foreign
revenues decreased approximately $4.2 million, or 30.9%, in fiscal 2001 from
$13.6 million in fiscal 2000 to $9.4 million. The increase in our domestic
revenues during fiscal 2001 was attributable to the increased demand for our SCR
Systems, as SCR System revenues increased $24.8 million, or 87%, from $28.5
million in fiscal 2000 to $53.3 million in fiscal 2001.

      The Company's backlog of unfilled orders was approximately $36 million at
June 30, 2002, compared to $68 million at June 30, 2001 and $29.0 million at
June 30, 2000. The decrease in our backlog, from the prior year-end, is
primarily due to the reduction in the construction of new power plants, recent
environmental regulatory uncertainties, and the current economic climate. All of
these factors have contributed to planned projects being placed on hold, or new
environmental projects being canceled or delayed. These factors resulted in the
reduction in SCR Systems orders booked during the second half of fiscal 2002, as
well as a decrease in new packaged boiler orders. Regulations related to NOx
emissions have in the past resulted in increased sales of our SCR Systems,
either through new-source or retro-fit applications, and we would anticipate
that this trend will continue in the future. In addition, while the construction
of new power plants has seen a significant decline over the past 12 months,
there is expected to be a continued demand for our SCR Systems as new power
plants are built to replace older less efficient plants, and as regulatory
compliance projects are commenced.

      Gross Profit Margin. Our gross profit margins increased $7.7 million, or
32.8%, from $23.5 million in fiscal 2001 to $31.2 million in fiscal 2002. Gross
profit margins, as a percentage of sales, decreased from 30.1% for the year
ended June 30, 2001 to 29.1% for year ended June 30, 2002. The reduced gross
profit percentage was primarily attributable to the increased percentage of our
boiler revenues to the Company's total revenues. In fiscal year 2001, boiler
revenue represented 3.7% of the Company's total revenue. In fiscal year 2002,
this percentage had increased to 13.2%. Traditionally, the Company has
recognized a lower margin on its boiler products in relation to its other
business segments. Therefore, any shift in the Company's sales mix in any
particular period could have an impact on the Company's reported margins for
that period. As discussed in Item 1 - "Operating Segments and Products -
Restructuring and Organizational Realignment", due to the limited margins that
the market is currently allowing for packaged boilers, and the drop in demand
for all boiler products, the Company, during fiscal year 2003, will be
suspending the operations of its boiler business.

      Gross profit margins increased $7.8 million, or 49.7%, from $15.7 million
in fiscal 2000 to $23.5 million in fiscal 2001. As a percentage of revenues,
gross profit margins increased from 26.7% in fiscal 2000 to 30.1% in fiscal
2001. This related primarily to the increase in SCR Systems revenues as a
percentage of total revenues from 48.7% to 68.2%, as traditionally the margins
the Company has been able to realize on its SCR Systems products are higher than
the margins it has been able to recognize on its gas/liquid filtration products.
This increase was partially offset by start-up costs associated with the
Company's introduction of its boiler product line in fiscal 2001.



                                       11
<PAGE>
      Operating Expenses. Operating expenses increased by $7.3 million, or
41.5%, to $25.0 million for fiscal year ended June 30, 2002, compared to $17.6
million for fiscal year 2001. Operational expenses increased $3.7 million, or
26.6%, from $13.9 million for fiscal year 2000 to $17.6 million for fiscal year
2001. Operating expenses, as a percentage of sales, were 23.3%, 22.5%, and 23.7%
for fiscal years 2002, 2001 and 2000, respectively. The increase in the amount
of operating expenses during both fiscal 2001 and 2002 related to additional
engineering and project management costs required for the increased level of SCR
Systems revenues and activities. In addition, general and administrative
expenses were increased to support the overall increase in revenues. See also
Item 1 - "Business - Restructuring and Organizational Realignment" of this
Report.

      Other Income and Expense. Other income and expense changed by
approximately $1.5 million during fiscal year 2002, from a charge to earnings of
approximately $1 million for fiscal year 2001, to an addition to income of
approximately $500,000 for fiscal year 2002, compared to a charge of
approximately $200,000 for fiscal year 2000. The decrease in the current fiscal
year and the increase in the past fiscal year related primarily to the amount of
interest expense incurred in each year. In fiscal year 2002, interest expense
decreased by approximately $777,000 over fiscal 2001, compared to an increase of
approximately $628,000 in fiscal year 2001 over fiscal year 2000. The decrease
in the Company's interest expense during fiscal year 2002 resulted primarily
from having less outstanding under our credit facility during the period, and a
lower effective interest rate. Our installment debt of $1.6 million was prepaid
in full during the first quarter of fiscal 2002, and our average debt
outstanding under our revolving credit facility was approximately $100,000
during fiscal year 2002, compared to an average of $1.8 million and $800,000
under our installment debt, and $5.8 million and $1.4 million outstanding under
our revolving credit facility for our fiscal years ended June 30, 2001 and 2000,
respectively. In addition to the reduction in the Company's interest expense,
the Company during the year had a gain of $84,000 from foreign currency
exchange, versus a loss of $155,000 for fiscal year 2001, and realized a gain on
the sale of its Carrollton, Texas facilities of approximately $265,000 during
the year ended June 30, 2002. For efficiency purposes, the Company consolidated
the Carrollton operations into its Dallas, Texas operations.

      Income Taxes. The effective income tax rate in 2002 was approximately
34.9%, versus approximately 37.0% in fiscal 2001 and 41.0% in fiscal 2000. The
decrease in our effective tax rate for fiscal year 2002 resulted from the
increase in our foreign sales sold through our UK subsidiary, which has a lower
effective tax rate, and our increased FSC (foreign sales corporation) sales,
which are sold through our Barbados subsidiary. For further discussion related
to our income taxes, please see Note K to our Notes to Consolidated Financial
Statements attached to this Report.

      Net Earnings. Net earnings increased to approximately $4.4 million for
2002, or an increase of $1.3 million or 41.9% from $3.1 million for fiscal year
2001. Basic earnings per share increased from $1.04 per share for 2001, to $1.47
per share for 2002. Diluted earnings per share increased from $1.02 per share
for 2001, to $1.43 per share for 2002. For fiscal year 2001, net earnings
increased $2.1 million, or an increase of 229.9% from $931,000 for fiscal year
2000. Basic earnings per share increased from $.32 per share for fiscal 2000, to
$1.04 per share for 2001. Diluted earnings per share increased from $.32 per
share for 2000, to $1.02 per share for 2001.





                                       12
<PAGE>
RESULTS OF OPERATIONS - SEGMENTS

      We are organized on a global basis along the following three lines of
business: SCR Systems, gas/liquid filtration and boilers. Previously, the
Company had two reportable segments - SCR Systems and gas/liquid filtration.
Segment information for fiscal years 2001 and 2000 have been restated on a
comparable basis with fiscal year 2002.

     Revenues. The following table displays revenues by reportable segment
     (dollars in thousands).


<TABLE>
<CAPTION>
                                                            FISCAL YEAR ENDED JUNE 30,
                                         --------------------------------------------------------------------
                                                2002          %           2001        %        2000        %
                                         ------------ ---------- -------------- -------- ----------- --------
<S>                                         <C>            <C>         <C>         <C>      <C>         <C>
               Revenues
                 SCR Systems                $ 63,493       59.3        $53,329     68.2     $28,533     48.7
                 Gas/liquid filtration        29,443       27.5         21,949     28.1      29,990     51.2
                 Boilers                      14,204       13.2          2,881      3.7          38       .1
                                         ------------ ---------- -------------- -------- ----------- --------
                    Total                   $107,140      100.0        $78,159    100.0     $58,561    100.0
                                         ============ ========== ============== ======== =========== ========
</TABLE>


      Revenues from our SCR systems increased $10.2 million, or 19.1%, in fiscal
2002, and $24.8 million, or 87.0% in fiscal 2001. This segment is impacted in a
large degree by the demand for new power and compliance with various NOx
reduction regulations. The increase in SCR Systems revenue during fiscal 2001
and fiscal 2002 related primarily to the increase in the construction of new
merchant power plants in this country to meet the anticipated demand for
electricity. During the later part of fiscal 2002, the construction of new
merchant power plants in this country slowed considerably, as questions as to
the real demand for electricity began to surface, coupled with the continued
weakness in the U.S. economy. In addition, recent regulatory uncertainties have
caused NOx reduction initiatives relating to retro-fit projects to be delayed.
These factors resulted in the downturn of new orders during the second half of
fiscal 2002. As a result, revenues from this segment are anticipated to be
significantly lower for fiscal year 2003. However, the Company feels that the
market for its SCR Systems products will improve once the demand, regulatory,
and economic issues are resolved.

      Gas/liquid filtration revenues increased by $7.5 million, or 34.2% in
fiscal 2002 and decreased $8.0 million, or 26.8% in fiscal 2001. The increase
and decrease in fiscal years 2002 and 2001, respectively, related primarily to
the increase and decrease in the foreign demand for these products over these
years.

      Boiler revenues during fiscal year 2002 increased $11.3 million over
fiscal year 2001. Fiscal 2001 boiler revenues increased $2.8 million over fiscal
2000. The Company entered into the boiler market in the later part of fiscal
year 2001. However, given the relatively low margins that are obtainable on
packaged boiler products, the Company has decided to suspend the operations of
its boiler segment during fiscal 2003, and to re-deploy these assets to service
its other two segments. For further discussion, see also Item 1 - "Business -
Restructuring and Organizational Realignment" of this Report.












                                       13
<PAGE>
      Segment Profit (Loss). Management uses segment profit (loss), which
consists of segment revenues less segment costs and expenses before allocation
of general and administrative costs to measure segment profit or loss. In the
past, the Company did not allocate its unabsorbed manufacturing costs to each
individual segment. Starting in fiscal year 2002, the Company started allocating
all costs associated with the manufacture, sale and design of its products to
each segment. The Company does not allocate its general and administrative
expenses to its individual segments. Therefore, fiscal 2001 and 2000 segment
profit and loss information has been restated to conform to the fiscal year 2002
presentation. The following table displays segment profit (loss) by reportable
segment (dollars in thousands).


<TABLE>
<CAPTION>
                                                                      FISCAL YEAR ENDED JUNE 30,
                                                                   ----------------------------------
                                                                          2002        2001       2000
                                                                    ----------- ----------- ----------
<S>                                                                  <C>         <C>         <C>
              SEGMENT PROFIT (LOSS)
                SCR Systems                                           $12,653     $12,385     $3,793
                 Gas/liquid filtration                                  2,592       1,741      2,634
                 Boilers                                               -1,189      -2,327       -805
                                                                   ----------- ----------- ----------
                    Segment profit (loss)                              14,056      11,799      5,622
                 Unallocated general and administrative
                       expenses                                        -7,788      -5,897     -3,846
                                                                   ----------- ----------- ----------
                 Operating income                                     $ 6,268      $5,902     $1,776
                                                                   =========== =========== ==========
</TABLE>


      SCR Systems segment profit in fiscal 2002 increased $268,000, or 2.2% over
fiscal 2001. Segment profit in fiscal 2001 increased $8.6 million, or 226.5%
over fiscal 2000. As a percentage of SCR Systems revenue, segment profit in SCR
Systems was 19.9%, 23.2% and 13.3%, in fiscal years 2002, 2001 and 2000,
respectively. The decline in the SCR Systems segment profit as a percentage of
sales in the current year related primarily to the addition of engineering and
project management personnel to support the increased level of SCR System
revenue and the increased complexity of assignments, and lower overall margins
due to increased competition in the marketplace.

      Gas/liquid filtration segment profit in fiscal year 2002 increased
$851,000, or 48.9% over fiscal 2001. Segment profit in fiscal year 2001
decreased $893,000, or 33.9% over fiscal year 2000. As a percentage of
gas/liquid filtration revenue, segment profit in gas/liquid filtration was 8.8%,
7.9%, and 8.8%, in fiscal years 2002, 2001 and 2000, respectively. The increase
and decrease in the gas/liquid filtration segment profit relates directly to the
increase and decrease in the segment's revenues.

      The boiler segment recorded a segment loss for fiscal year 2002 of
approximately $1.2 million, which was a decrease of $1.1 million from fiscal
year 2001 loss of approximately $2.3 million. This reduction related directly to
the increase in boiler segment revenues from $2.9 million in fiscal year 2001,
to $14.2 million in fiscal year 2002. See also Item 1 - "Business -
Restructuring and Organizational Realignment" of this Report.

FINANCIAL POSITION

      Assets. Total assets increased to $47 million at June 30, 2002, up from
$46 million at June 30, 2001. The increase in total assets is primarily
comprised of an approximate $2.9 million increase our cost and earnings in
excess of billings on uncompleted contracts and an approximate increase of $1.6
million in our inventory, offset by a $3.5 million decrease in our receivables.
At June 30, 2002, we held cash and short-term investments of $1.7 million, had
working capital of $17.8 million, and a current ratio of 1.73-to-1.00. This
compares with cash and short-term investments of $2.9 million, $14.6 million in
working capital, and a current ratio of 1.54-to-1.00 at June 30, 2001.



                                       14
<PAGE>
      Liabilities and Shareholders' Equity. Total liabilities decreased by
approximately $4.5 million to $24.0 million at June 30, 2002, from $28.5 million
at June 30, 2001. This related primarily from the Company paying off its
long-term debt during the period, approximately $1.6 million, and a reduction in
billings in excess of costs and earnings on uncompleted contracts of
approximately $5.4 million at June 30, 2002, offset by an increase in trade
accounts payable of approximately $2.3 million. Our total liabilities-to-equity
ratio decreased from 1.6-to-1.0 at June 30, 2001, to 1.1-to-1.0 at June 30,
2002, reflecting the reduction in our liabilities and the increase in our
equity.

      Shareholders' equity increased by approximately $4.8 million, from
approximately $17.7 million at June 30, 2001 to $22.5 million at June 30, 2002.
This increase related primarily to our earnings for the year of approximately
$4.4 million.


LIQUIDITY AND CAPITAL RESOURCES

      Our cash and cash equivalents were $1.4 million as of June 30, 2002, and
approximately $2.8 million as of September 20, 2002. Cash provided by operating
activities during fiscal year ended June 30, 2002 was $1.4 million, compared to
$8.5 million for fiscal year ended June 30, 2001.

      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. Billings to customers affect the
balance of billings in excess of costs and earnings or the balance of cost and
earnings in excess of billings, as well as the balance of accounts receivable.
Consequently, we focus on the net amount of these accounts along with accounts
payable, to determine our management of working capital. At June 30, 2002, the
balance of these working capital accounts was $18.0 million compared to $15.5
million at June 30, 2001, reflecting an increase of our investment in these
working capital items of $2.5 million. In addition, we used cash to increase our
inventories and reduce our accrued liabilities, which was offset by our earnings
during the period.

      Cash used in investing activities was approximately $1.2 million for
fiscal year 2002, compared to approximately $343,000 for fiscal 2001. The
increase in cash used for the period related to a net increase in purchases of
property and equipment, which related primarily to refurbishments of our Abilene
facility and new technology equipment, which was offset by the proceeds from the
sale of our Carrollton, Texas facility during fiscal 2002.

      We used approximately $1.4 million in cash related to our financing
activities during fiscal 2002, compared to cash provided by financing activities
of approximately $6.3 million for fiscal year ended June 30, 2001. The current
usage related to the payment in full of our installment debt on our Abilene,
Texas facility of $1.6 million, offset by the proceeds from the issuance of
common stock, pursuant to employee stock options, of approximately $236,000.

      We maintain a $10 million revolving line of credit facility that expires
in October 2003. The credit line carries a floating interest rate based on the
prime or eurodollar rate plus or minus an applicable margin (prime - less .25%,
eurodollar - plus 2.65%), and is secured by substantially all of our assets. The
margin factor is subject to a reduction schedule based on the Company's
obtainment of certain financial performance criteria. As of June 30, 2002, we
had no outstanding balances under the credit line, and $3.2 million outstanding
under letters of credit, leaving us with $6.8 million of availability under the
facility. The facility contains financial covenants, restrictions on capital
expenditures, acquisitions, asset dispositions, and additional debt, as well as
other customary covenants.




                                       15
<PAGE>
      We believe we maintain adequate liquidity to support existing operations
and planned growth, as well as to continue operations during reasonable periods
of unanticipated adversity. See also Item 1 - "Business - Restructuring and
Organizational Realignment" of this Report.

CRITICAL ACCOUNTING POLICIES

      The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Our estimates, judgments and assumptions are continually
evaluated based on available information and experience. Because of the use of
estimates inherent in the financial reporting process, actual results could
differ from those estimates.

      Certain of our accounting policies require higher degree of judgment than
others in their application. These include revenue recognition on long-term
contracts, and accrual for estimated warranty costs. Our policy and related
procedures for revenue recognition on long-term contracts and accrual of
warranty costs are summarized below. In addition, Note A to the Consolidated
Financial Statements includes further discussion on our significant accounting
policies.

      Revenue Recognition. We provide products under long-term, generally
fixed-priced, contracts that may extend up to 18 months in duration. In
connection with these contracts, we follow the guidance contained in AICPA
Statement of Position ("SOP") 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts. SOP 81-1 requires the
use of percentage-of-completion accounting for long-term contracts that contain
enforceable rights regarding services to be provided and received by the
contracting parties, consideration to be exchanged, and the manner and terms of
settlement, assuming reasonably dependable estimates of revenues and expenses
can be made. The percentage-of-completion methodology generally results in the
recognition of reasonably consistent profit margins over the life of a contract.
Amounts recognized in revenue are calculated using the percentage of
construction cost completed, generally on a cumulative cost to total cost basis.
Cumulative revenues recognized may be less or greater than cumulative costs and
profits billed at any point in time during a contract's term. The resulting
difference is recognized as "costs and earnings in excess of billings on
uncompleted contracts" or "billings in excess of costs and earnings on
uncompleted contracts."

      When using the percentage-of-completion method, we must be able to
accurately estimate the total costs we expect to incur on a project in order to
record the proper amount of revenues for that period. The Company continually
updates its estimates of costs and status of each process with its
subcontractors and its manufacturing plants. When it is determined that a loss
will result from the performance of a contract, the entire amount of the loss is
charged against income. The impact of revisions in contract estimates are
recognized on a cumulative catch up basis in the period in which the revisions
are made. In addition, significant portions of the Company's costs are
subcontracted under fixed-price arrangements, thereby reducing the risk of
significant cost overruns on any given project. However, a number of internal
and external factors, including labor rates, plant utilization factors, future
material prices, customer change specifications, and other factors can affect
our cost estimates. While we attempt to reduce the inherent risk relating to
revenue and cost estimates in percentage-of-completion models through corporate
policy, approval and monitoring processes, any estimation process, including
that used in preparing contract accounting models, involves inherent risk.


                                       16
<PAGE>
      Product Warranty. We offer warranties on various lengths to our customers
depending upon the specific product and terms of the customer product agreement.
We typically negotiate varying terms regarding warranty coverage and length of
warranty dependent upon the product involved and customary practices. Our
typical warranties require us to repair or replace defective product during the
warranty period at no cost to the customer. We attempt to obtain back-up
concurrent warranties for major component parts from our suppliers. As of the
balance sheet date, we record an estimate for warranty related costs for
products sold based on historical experience, expectation of future conditions
and the extent of back-up concurrent supplier warranties in place. While we
believe that our estimated warranty reserve is adequate and the judgment applied
is appropriate, the estimated liability for product warranties could differ from
future actual warranty costs due to a number of factors.


NEW ACCOUNTING STANDARDS

      In July 2001, the Financial Accounting Standards Board issued FAS 141
"Business Combinations" ("FAS 141") and FAS 142 "Goodwill and Other Intangible
Assets" ("FAS 142"). FAS 141 addresses the initial recognition and measurement
of goodwill and other intangible assets acquired in a business combination
initiated after June 30, 2001. FAS 142 addresses the initial recognition and
measurement of intangible assets acquired outside of a business combination,
whether acquired individually or with a group of assets, and the accounting and
reporting for goodwill and other intangibles subsequent to their acquisition.
These standards require all future business combinations to be accounted for
using the purchase method of accounting. Goodwill will no longer be amortized
but instead will be subject to impairment tests at least annually. While the
Company will adopt FAS 142 for its fiscal year 2003, it will not have an impact
on our current operations as all of the Company's goodwill is fully amortized.

    In October 2001, the Financial Accounting Standards Board issued FAS 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144").
FAS 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This statement supersedes FAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" ("FAS 121") and related literature and establishes a single accounting
model, based on the framework established in FAS 121, for long-lived assets to
be disposed of by sale. The Company is required to adopt FAS 144 for fiscal
years beginning after December 15, 2001.

    The Company does not believe that the adoption of these standards will have
a material effect on its financial condition or results of operations.


FACTORS THAT MAY AFFECT OUR OPERATING RESULTS AND OTHER RISK FACTORS

    Investing in our common stock involves a high degree of risk. Any of
the following risks could have a material adverse effect on our financial
condition, liquidity, results of operations or prospects, financial or
otherwise. Reference to these factors in the context of a forward-looking
statement or statements shall be deemed to be a statement that any one or more
of the following factors may cause actual results to differ materially from
those in such forward-looking statement or statements. (See "Forward-Looking
Statements" above).



                                       17
<PAGE>
      CHANGES IN THE POWER GENERATION INDUSTRY AND/OR THE ECONOMY COULD HAVE AN
ADVERSE IMPACT ON OUR SALE OF SCR SYSTEMS AND OUR OPERATING RESULTS.

      The demand for our SCR Systems depends to an extent on the continued
construction of power generation plants and upgrade of existing power plants. In
the current year, approximately 59% of our consolidated revenues were from sales
of SCR Systems for new and refurbished power plants. The power generation
industry has experienced cyclical periods of slow growth or decline. Any change
in the power plant industry that results in a decline in the construction of
power plants or a decline in the upgrading of existing power plants could have a
materially adverse impact on our SCR Systems segment revenues and our results of
operations. See sections entitled "Restructuring and Organizational Realignment"
and "Backlog" in Item 1 - "Business" of this Report.

      CHANGES IN CURRENT ENVIRONMENTAL LEGISLATION COULD HAVE AN ADVERSE IMPACT
ON THE SALE OF OUR SCR SYSTEMS AND ON OUR OPERATING RESULTS.

      Laws and regulations governing the discharge of materials into the
environment or otherwise relating to the protection of the environment or human
health have played a part in the increased use of SCR Systems in the United
States. These laws include U.S. federal statutes such as the Resource
Conservation and Recovery Act of 1976, the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, or CERCLA, the Clean Water Act and the
Clean Air Act, and the regulations implementing them, as well as similar laws
and regulations at state and local levels and in other countries. These laws and
regulations may change or other jurisdictions may not adopt similar laws and
regulations. Our SCR Systems business is primarily regulatory driven. This
business will be adversely impacted to the extent that current regulations to
significantly reduce the level of required NOx reduction are repealed, amended
or implementation dates delayed or to the extent that regulatory authorities
minimize enforcement.

      COMPETITION COULD RESULT IN LOWER SALES AND DECREASED MARGINS.

      We operate in highly competitive markets worldwide. Competition could
result in not only a reduction in our sales but also a reduction in the prices
that we can charge for our products. To remain competitive we must be able to
not only anticipate or respond quickly to our customers' needs and enhance and
upgrade our existing products and services to meet those needs, but also
continue to price our products competitively. Our competitors may develop
cheaper, more efficient products or may be willing to charge lower prices for
strategic marketing or to increase market share. Some of our competitors have
more capital and resources than we do and may be better able to take advantage
of acquisition opportunities or adapt more quickly to changes in customer
requirements.

      WE FREQUENTLY ENTER INTO FIXED-PRICED CONTRACTS. IF OUR ACTUAL COSTS
EXCEED OUR ORIGINAL ESTIMATES, OUR PROFITS WILL BE REDUCED.

      The majority of our contracts are on a fixed-price basis. Although we
benefit from cost savings, we have limited ability to recover cost overruns.
Because of the large scale and long duration of our contracts, unanticipated
cost increases may occur as a result of several factors, including, but not
limited to, (1) increases in the cost, or shortages, of components, materials or
labor; (2) unanticipated technical problems; (3) required project modifications
not initiated by the customer; and (4) suppliers' or subcontractors' failure to
perform. These factors may also delay delivery of our products and our contracts
often provide for liquidated damages for late delivery. Unanticipated costs that
we cannot pass on to our customers or the payment of liquidated damages under
fixed contracts will negatively impact our profits.



                                       18
<PAGE>
      OUR BACKLOG MAY NOT BE INDICATIVE OF OUR FUTURE REVENUE.

      Customers may cancel or delay projects for reasons beyond our control. Our
firm orders normally contain cancellation provisions, which permit us to recover
only our costs and a portion of our anticipated profit in the event a customer
cancels its order. If a customer elects to cancel, we may not realize the full
amount of revenues included in our backlog. If projects are delayed, the timing
of our revenues could be affected and projects may remain in our backlog for
extended periods of time. Revenue recognition occurs over long periods of time
and is subject to unanticipated delays. If we receive relatively large orders in
any given quarter, fluctuations in the levels of our quarterly backlog can
result because the backlog in that quarter may reach levels that may not be
sustained in subsequent quarters. Our backlog may not be indicative of our
future revenues.

      OUR ABILITY TO CONDUCT BUSINESS OUTSIDE THE UNITED STATES MAY BE ADVERSELY
AFFECTED BY FACTORS OUTSIDE OUR CONTROL AND OUR REVENUES AND PROFITS FROM
INTERNATIONAL SALES COULD BE ADVERSELY IMPACTED.

      In fiscal 2002, approximately 15.0% of our revenue was derived from sales
outside the United States. Our operations and earnings throughout the world have
been, and may in the future be, affected from time to time in varying degrees by
war, political developments and foreign laws and regulations, such as regional
economic uncertainty, political instability, restrictions, customs and tariffs,
changing regulatory environments and adverse tax consequences. The likelihood of
such occurrences and their overall effect upon us vary greatly from country to
country and are not predictable. These factors may result in a decline in
revenues or profitability and could adversely affect our ability to expand our
business outside the United States.

      OUR FINANCIAL PERFORMANCE MAY VARY SIGNIFICANTLY FROM QUARTER TO QUARTER,
MAKING IT DIFFICULT FOR US TO ESTIMATE FUTURE REVENUE.

      Our quarterly revenues and earnings have varied in the past and are likely
to vary in the future. Our SCR contracts generally stipulate customer specific
delivery terms and may have contract cycles of a year or more, which subjects
them to many factors beyond our control. In addition, these contracts are
significantly larger in size than our typical filtration contracts, which tend
to intensify their impact on our quarterly operating results. Furthermore, as a
significant portion of our operating costs are fixed, an unanticipated decrease
in our SCR revenues, a delay or cancellation of orders in backlog, or a decrease
in the demand for our SCR products, may have a significant impact on our
quarterly operating results. Therefore, our quarterly operating results may be
subject to significant variations and our operating performance in one quarter
may not be a good indicator of our future performance.

      OUR PRODUCTS ARE COVERED BY WARRANTIES. UNANTICIPATED WARRANTY COSTS OR
PRODUCT LIABILITY CLAIMS NOT COVERED BY INSURANCE COULD ADVERSELY AFFECT OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

      We provide warranties on our products generally for terms of three years
or less. These warranties require us to repair or replace faulty products, meet
certain performance standards, among other customary warranty provisions. While
we continually monitor our warranty claims and provide a reserve for our
estimate of potential warranty issues on an on-going basis, an unanticipated
claim could have a material adverse impact on our operations. In some cases, we
may be able to subrogate such a claim back to a subcontractor, if the
subcontractor supplied the defective product or performed the service, but this
may not always be possible. The need to repair or replace products with design
or manufacturing defects could temporarily delay the sale of new products and
could adversely affect our reputation.



                                       19
<PAGE>
      In addition, we may be subject to product liability claims involving
claims of personal injury or property damage. While we maintain product
liability insurance coverage to protect us in the event of such a claim, such
coverage may not be adequate to cover the cost of our defense and the potential
award in the event of a claim. Additionally, a well-publicized actual or
perceived problem could adversely affect our reputation and reduce the demand
for our products.

      LARGE CONTRACTS REPRESENT A SIGNIFICANT PORTION OF OUR ACCOUNTS
RECEIVABLE, WHICH INCREASES OUR EXPOSURE TO CREDIT RISK.

      We continue to closely monitor the credit worthiness of our customers and
have not to date experienced any significant credit losses. Significant portions
of our sales are to customers who place large orders for custom products and
whose activities are related to the power industry. As such, our exposure to
credit risk is affected to some degree by conditions within the power industry
and governmental and/or political conditions. We try to mitigate our exposure to
credit risk, to some extent, by requiring progress payments and letters of
credit. However, as some of our exposure is outside our control, unanticipated
events could have a materially adverse impact on our operating results.

      THE TERMS AND CONDITIONS OF OUR CREDIT FACILITY IMPOSE RESTRICTIONS ON OUR
OPERATIONS. WE MAY NOT BE ABLE TO RAISE ADDITIONAL CAPITAL, IF NEEDED.

      The terms and conditions of our current $10 million revolving credit
facility impose restrictions that affect, among other things, our ability to
incur debt, make capital expenditures, merge, sell assets, make distributions,
or create or incur liens. Availability of our credit facility is also subject to
certain financial covenants. Our ability to comply with the covenants may be
affected by events beyond our control and we cannot assure you that we will
achieve operating results that meet the requirements of the credit agreement. A
breach of any of these covenants could result in a default under our credit
facility. In the event of a default, the bank could elect to declare the
outstanding principal amount of our credit facility, all interest thereon, and
all other amounts payable under our credit facility to be immediately due and
payable.

      Our ability to satisfy any debt obligations will depend upon our future
operating performance, which will be affected by prevailing economic, financial
and business conditions and other factors, some of which are beyond our control.
We anticipate that borrowings from our existing revolving credit facility, or
the refinancing of our revolving credit facility, and cash provided by operating
activities, would provide sufficient funds to finance capital expenditures,
working capital and otherwise meet our operating expenses and service our debt
requirements as they become due. However, in the event that we require
additional capital, there can be no assurance that we will be able to raise such
capital when needed or on satisfactory terms, if at all. See Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operation-Liquidity and Capital Resources".

      OUR BUSINESS IS SUBJECT TO RISKS OF TERRORIST ACTS AND ACTS OF WAR.

      Terrorist acts and acts of war may disrupt our operations, as well as our
customers operations. The recent terrorist attacks on September 11, 2001, have
created economic and political uncertainties and have intensified the global
economic downturn that we are currently facing. Any future terrorist activities,
or any continued military or security operations could further weaken the global
economy and create additional uncertainties forcing our customers to further
reduce their capital spending, or cancel or delay already planned construction
projects, which could have a material adverse impact on our business, operating
results and financial condition.



                                       20
<PAGE>
      OUR COMMON STOCK IS THINLY TRADED, WHICH MAY RESULT IN LOW LIQUIDITY.

      The daily trading volume of our common stock is relatively low and
therefore the liquidity and appreciation in our stock may not meet our
shareholders' expectations. The market price of our common stock could be
adversely impacted as a result of sales by our existing shareholders of a large
number of shares of our common stock in the market, or the perception that such
sales could occur.


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

      We are exposed to foreign currency and interest rate risk. We currently
have not entered into any derivative transactions as a means of hedging our
exposure to interest rate risks. In addition, we have not, in the past, entered
into derivative transactions to hedge our foreign balance sheet accounts or
anticipated revenues. As a result, these assets and revenues are currently
subject to foreign currency fluctuations. While we are not currently in a
borrowing position, and the assets and anticipated revenues (backlog) which are
subject to foreign currency fluctuations are relatively immaterial ($5 million
in assets and $4 million in backlog), and in currencies historically not subject
to significant fluctuations, the Company will continue to monitor its exposure
in these areas.


ITEM 8.   CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

           The information required by this Item begins on page 25 hereof.


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

                None.


                                    PART III


ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

ITEM 11.    EXECUTIVE COMPENSATION.

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

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

      All information required by Items 10, 11, 12 and 13, is incorporated by
reference to the definitive proxy statement for our Annual Meeting of
Shareholders to be held on or about November 21, 2002, which will be filed with
the Securities and Exchange Commission within 120 days after June 30, 2002.



                                       21
<PAGE>
                                     PART IV

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

 (A)(1)  FINANCIAL STATEMENTS

          See Index to Consolidated Financial Statements of Peerless Mfg. Co.
          and Subsidiaries on page 25 of this Report.

 (A)(2)  FINANCIAL STATEMENT SCHEDULES

          The following financial statement schedule of Peerless Mfg. Co. and
          subsidiaries is included.

                 Schedule II - Valuation and Qualifying Accounts - see page 48
of this Report.

          All other schedules for which provision is made in the applicable
          accounting regulation of the Securities and Exchange Commission have
          been omitted because of the absence of the conditions under which they
          would be required or because the information required is included in
          the consolidated financial statements or notes thereto.

 (A)(3)  EXHIBITS

          See Index to Exhibits on page 49 of this Report.

 (B)      REPORTS ON FORM 8-K

         No reports of the Registrant on Form 8-K have been filed with the SEC
during the three months ended June 30, 2002.



                                       22
<PAGE>
                                   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,
                                    President and Chief Executive Officer
Date: September 26, 2002


         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 26, 2002.


/s/ Sherrill Stone                          Chairman of the Board, President and
---------------------------                 Chief Executive Officer
Sherrill Stone


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


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


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


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


/s/ R. Clayton Mulford                      Director
---------------------------
R. Clayton Mulford


                                       23
<PAGE>
                                 CERTIFICATIONS


CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

     I, Sherrill Stone, certify that:

     (1) I have reviewed this Annual Report on Form 10-K of Peerless Mfg. Co.;

     (2) Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Annual
Report; and

     (3) Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Annual Report.


Date: September 26, 2002
                                 /s/ Sherrill Stone
                                ------------------------------------------
                                Sherrill Stone, Chief Executive Officer -
                                Principal Executive Officer



CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

     I, Richard L. Travis, certify that:

     (1) I have reviewed this Annual Report on Form 10-K of Peerless Mfg. Co.;

     (2) Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Annual
Report; and

     (3) Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Annual Report.


Date: September 26, 2002
                                  /s/ Richard L. Travis, Jr.
                                  ---------------------------------------------
                                  Richard L. Travis, Vice President and
                                  Chief Financial Officer - Principal Financial
                                  Officer



                                       24
<PAGE>


                       PEERLESS MFG. CO. AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULE



<TABLE>
<CAPTION>
                                                                                                           PAGE
                                                                                                          NUMBER
                                                                                                          ------
<S>                                                                                                        <C>
Report of Independent Certified Public Accountants..........................................................26

Consolidated Balance Sheets at June 30, 2002 and 2001.......................................................27

Consolidated Statements of Earnings for the years ended June 30, 2002, 2001 and 2000........................29

Consolidated Statements of Changes in Stockholders' Equity for the years ended June 30, 2002, 2001,
  and 2000..................................................................................................30

Consolidated Statements of Cash Flows for the years ended June 30, 2002, 2001 and 2000......................31

Notes to Consolidated Financial Statements..................................................................33

Report of Independent Certified Public Accountants on Financial Schedule....................................47

Schedule II -- Valuation and Qualifying Accounts............................................................48
</TABLE>




                                       25
<PAGE>
               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, 2002 and 2001, and the related consolidated
statements of earnings, changes in stockholders' equity, and cash flows for each
of the three years in the period ended June 30, 2002. 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, 2002 and 2001, and the consolidated results of
their operations and their consolidated cash flows for each of the three years
in the period ended June 30, 2002, in conformity with accounting principles
generally accepted in the United States of America.



                                       /s/ Grant Thornton LLP

Dallas, Texas
August 30, 2002



                                       26
<PAGE>
                       PEERLESS MFG. CO. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)




ASSETS

<TABLE>
<CAPTION>
                                                                                                JUNE 30,
                                                                                   ----------------------------------
                                                                                         2002              2001
                                                                                   ------------------ ---------------
<S>                                                                                          <C>              <C>
Current assets:
  Cash and cash equivalents                                                                  $ 1,386          $2,577
  Short-term investments                                                                         307             300
  Accounts receivable-principally trade, net of allowance for
      uncollectible accounts of $354 and $297 in 2002 and
      2001, respectively                                                                      25,506          28,987
Inventories                                                                                    3,671           2,084

Costs and earnings in excess of billings
  on uncompleted contracts                                                                     9,218           6,328
Deferred income taxes                                                                            933             704
Other                                                                                            725             751
                                                                                             -------          ------
            Total current assets                                                              41,746          41,731
Property, plant and equipment - at cost,
   less accumulated depreciation                                                               4,152           3,365
Deferred income taxes                                                                             17               -
Other assets                                                                                     591           1,060
                                                                                             -------          ------
                     Total assets                                                            $46,506         $46,156
                                                                                             =======         =======
</TABLE>








          See accompanying notes to consolidated financial statements.


                                       27
<PAGE>
                       PEERLESS MFG. CO. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)



LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                                  JUNE 30,
                                                                                   ------------------------------------
                                                                                           2002               2001
                                                                                   ------------------ -----------------
<S>                                                                                         <C>               <C>
Current liabilities:
  Accounts payable - trade                                                                  $ 12,545          $ 10,172
  Current maturities of long-term debt                                                             -               400
  Billings in excess of costs and earnings
   on uncompleted contracts                                                                    4,231             9,618
  Commissions payable                                                                            1,556             1,443
  Income taxes payable                                                                             766             1,754
  Accrued expenses
     Compensation                                                                              2,348             1,816
     Other                                                                                     2,545             1,913
                                                                                            --------          --------
           Total current liabilities                                                          23,991            27,116

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

Deferred income taxes                                                                              -               147

Stockholders' equity:
   Common stock - authorized, 10,000,000
      shares of $1 par value; issued and
      outstanding, 2,991,134 and 2,954,984
      shares in 2002 and 2001, respectively                                                    2,991             2,954
   Additional paid-in capital                                                                  1,720             1,327
   Unamortized value of restricted stock grants                                                  (16)              (35)
   Accumulated other comprehensive loss                                                          (82)              (66)
   Retained earnings                                                                          17,902            13,513
                                                                                            --------          --------
           Total stockholders' equity                                                         22,515            17,693
                                                                                            --------          --------
           Total liabilities and stockholders' equity                                       $ 46,506          $ 46,156
                                                                                            ========          ========
</TABLE>


           See accompanying notes to consolidated financial statements.



                                       28
<PAGE>
                       PEERLESS MFG. CO. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF EARNINGS
                (Dollars in thousands, except per share amounts)


<TABLE>
<CAPTION>
                                                                                  YEAR ENDED JUNE 30,
                                                                     ----------------------------------------------
                                                                          2002               2001          2000
                                                                     ---------------- -------------- --------------
<S>                                                                        <C>              <C>            <C>
Net sales                                                                  $ 107,140        $78,159        $58,561
Cost of goods sold                                                            75,918         54,649         42,903
                                                                           ---------        -------        -------

                       Gross profit                                           31,222         23,510         15,658

Operating expenses:
     Marketing                                                                 8,933          6,613          5,636
     Engineering                                                               8,233          5,098          4,400
     General and administrative                                                7,788          5,897          3,846
                                                                           ---------        -------        -------
                                                                              24,954         17,608         13,882
                                                                           ---------        -------        -------
                       Operating profit                                        6,268          5,902          1,776
                                                                           ---------        -------        -------

Other income (expense)
     Interest income                                                             106            101             38
     Interest expense                                                            (31)          (808)          (180)
     Foreign exchange losses                                                      84           (155)            (7)
     Other, net                                                                  313           (165)           (49)
                                                                           ---------        -------        -------
                                                                                 472         (1,027)          (198)
                                                                           ---------        -------        -------
                       Earnings before income taxes                            6,740          4,875          1,578

Income tax expense (benefit)
     Current                                                                   2,744          2,265            725
     Deferred                                                                   (393)          (462)           (78)
                                                                           ---------        -------        -------
                                                                               2,351          1,803            647
                                                                           ---------        -------        -------
                       Net earnings                                         $ 4,389         $ 3,072         $  931
                                                                           =========        =======        =======

Earnings per common share - basic                                            $  1.47        $  1.04         $ 0.32
                                                                           =========        =======        =======

Earnings per common share - diluted                                          $  1.43        $  1.02         $ 0.32
                                                                           =========        =======        =======
</TABLE>



           See accompanying notes to consolidated financial statements



                                       29
<PAGE>
                       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, 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 ($.50 per share) .............          --             --             --             --             (730)          (730)
Stock options exercised ................             9             75           --             --             --               84
Issuance of restricted stock grants ....             7             74            (81)          --             --             --
Amortization of restricted stock grants           --             --               14           --             --               14
Income tax benefit related to restricted
   Stock plan ..........................          --                3           --             --             --                3
                                              --------       --------       --------       --------       --------       --------
Balances at June 30, 2000 ..............         1,468          2,692            (71)          (149)        10,809         14,749
Net earnings ...........................          --             --             --             --            3,072          3,072
Foreign currency translation adjustment           --             --             --               83           --               83
                                                                                                                         --------
       Total comprehensive income                                                                                           3,155
Dividends ($.50 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
Net earnings ...........................          --             --             --             --            4,389          4,389
Foreign currency translation adjustment           --             --             --              (16)          --              (16)
                                                                                                                         --------
       Total comprehensive income ......                                                                                    4,373
Stock split (2-for-1) ..................         1,477         (1,477)          --             --             --             --
Stock options exercised ................            37            180           --             --             --              217
Amortization of restricted stock grants           --             --               19           --             --               19
Income tax benefit related to restricted
  stock plan ...........................          --              213           --             --             --              213
                                              --------       --------       --------       --------       --------       --------
Balances at June 30, 2002 ..............      $  2,991       $  1,720       $    (16)      $    (82)      $ 17,902       $ 22,515
                                              ========       ========       ========       ========       ========       ========
</TABLE>


           See accompanying notes to consolidated financial statements



                                       30
<PAGE>
                       PEERLESS MFG. CO. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                                    YEAR ENDED JUNE 30,
                                                                                    -----------------------------------------------
                                                                                         2002            2001            2000
                                                                                    --------------- ---------------- --------------
<S>                                                                                    <C>            <C>            <C>
Cash flows from operating activities:
     Net earnings ...............................................................      $  4,389       $  3,072       $    931
     Adjustments to reconcile net earnings
      to net cash provided by (used in)
      operating activities:
           Depreciation and amortization ........................................           682            566            490
           Deferred income taxes ................................................          (393)          (462)           (78)
           Foreign exchange (gain) loss..........................................           (84)           155              7
           Gain on sale of property .............................................          (267)          --               --
           Other ................................................................           346            127             (1)
     Changes in operating assets and liabilities
             Accounts receivable ................................................         3,372        (16,823)          (124)
             Inventories ........................................................        (1,586)         1,236            443
             Cost and earnings in excess
                of billings on uncompleted contracts ............................        (2,890)         3,392         (6,644)
             Other current assets ...............................................            12            (47)            74
             Other assets .......................................................           476            (45)          (223)
             Accounts payable ...................................................         2,408          3,703            845
             Billings in excess of costs
                and earnings on uncompleted contracts ...........................        (5,387)         9,254           (209)
             Commissions payable ................................................           113            458           (220)
             Accrued expenses ...................................................           187          3,917              8
                                                                                      ---------      ---------      ---------
                                                                                         (3,011)         5,431         (5,632)
                                                                                      ---------      ---------      ---------
Net cash provided by (used in)
    operating activities ........................................................         1,378          8,503         (4,701)
Cash flow from investing activities
     Net purchases of short-term investments ....................................            (7)           (27)          --
     Purchase of property and equipment .........................................        (1,561)          (316)        (1,879)
     Proceeds from sale of property .............................................           405           --             --
                                                                                      ---------      ---------      ---------
Net cash used in investing activities ...........................................        (1,163)          (343)        (1,879)
Cash flows from financing activities
     Sale of common stock .......................................................           236            121             84
     Net changes in lines of credit .............................................          --           (5,800)         5,800
     Advances on long-term borrowings ...........................................          --             --            2,827
     Payments on long-term borrowings ...........................................        (1,600)          (227)        (1,000)
     Dividends paid .............................................................          --             (368)          (729)
                                                                                      ---------      ---------      ---------
Net cash provided by (used in)
     financing activities .......................................................      $ (1,364)      $ (6,274)      $  6,982
Effect of exchange rate changes on
     cash and cash equivalents ..................................................           (42)           130            (52)
                                                                                      ---------      ---------      ---------
Net increase (decrease) in cash and cash
     equivalents ................................................................        (1,191)         2,016            350
</TABLE>

          See accompanying notes to consolidated financial statements.



                                       31
<PAGE>
                       PEERLESS MFG. CO. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
                             (Dollars in thousands)


<TABLE>
<CAPTION>
                                                                     YEAR ENDED JUNE 30,
                                                      -----------------------------------------------
                                                        2002               2001                 2000
                                                      ------               ----                 ----
<S>                                                    <C>                    <C>                  <C>
Cash and cash equivalents at
     beginning of year.................                2,577                  561                  211
                                                      ------               ------               ------
Cash and cash equivalents at
     end of year ......................               $1,386               $2,577               $  561
                                                      ======               ======               ======

Supplemental information on cash flows:
Interest paid .........................               $  123               $  744               $  150
Income taxes paid .....................               $3,402               $  105               $  781
</TABLE>






      See accompanying notes to consolidated financial statements.



                                       32
<PAGE>
                       PEERLESS MFG. CO. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                (Dollars in thousands, except per share amounts)



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 (generally 3
to 7 years), principally by the straight-line method. The cost of maintenance
and repairs is expensed as incurred and significant renewals and betterments are
capitalized.

WARRANTY COSTS

The Company provides product warranties for specific product lines and accrues
for estimated future warranty costs in the period in which the revenue is
recognized based on historical experience, expectation of future conditions, and
the extent of backup concurrent supplier warranties in place.










                                       33
<PAGE>
                       PEERLESS MFG. CO. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                (Dollars in thousands, except per share amounts)

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

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.

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 Earnings 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.






                                       34
<PAGE>
                       PEERLESS MFG. CO. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                (Dollars in thousands, except per share amounts)


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.

STOCK SPLIT

In September 2001 the board of directors approved a two-for-one stock split of
the Company's common stock effected in the form of a 100% stock dividend, which
was distributed on October 18, 2001, to shareholders of record on October 8,
2001. All share and per share amounts have been restated to give retroactive
effect to the stock split. In addition, all references in the Consolidated
Financial Statements and Notes to Consolidated Financial Statements, to weighted
average number of shares, per share amounts, cash dividends, and market prices
of the Company's common stock have been restated to give retroactive recognition
to the stock split.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted 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.




                                       35
<PAGE>
                       PEERLESS MFG. CO. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                (Dollars in thousands, except per share amounts)


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. No goodwill resulted from
the acquisition. ABCO is in the business of designing and manufacturing
industrial boilers.


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, 2002, sales to one customer accounted for
approximately 13% of revenues.

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.


NOTE D.   INVENTORIES

         Principal components of inventories are as follows:

<TABLE>
<CAPTION>
                                          JUNE 30,
                               ---------------------------
                                  2002               2001
                               -------              ------
<S>                            <C>                  <C>
Raw materials ..               $2,201               $1,151
Work in progress                1,085                  583
Finished goods                    385                  350
                               ------               ------
                               $3,671               $2,084
                               ======               ======
</TABLE>



                                       36
<PAGE>
                       PEERLESS MFG. CO. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                (Dollars in thousands, except per share amounts)


NOTE E.   PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment is summarized as follows:


<TABLE>
<CAPTION>
                                                                  JUNE 30,
                                                         -------------------------
                                                               2002         2001
                                                         ------------ ------------
<S>                                                           <C>         <C>
 Buildings                                                    $3,806      $ 3,791
 Equipment                                                     4,058        3,300
 Furniture and fixtures                                        2,879        2,404
                                                              ------      -------
                                                              10,743        9,495
     Less accumulated depreciation                            (7,403)      (7,035)
                                                              ------      -------
                                                               3,340        2,460
 Land                                                            812          905
                                                              ------      -------
                                                              $4,152      $ 3,365
                                                              ======      =======
</TABLE>

Depreciation expense for the years ended June 30, 2002, 2001 and 2001 totaled
$682, $566, $490, respectively.


NOTE F.   COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

      The components of uncompleted contracts are as follows:

<TABLE>
<CAPTION>
                                                                        JUNE 30,
                                                          --------------------------------
                                                            2002                    2001
                                                          ---------               --------
<S>                                                       <C>                     <C>
Costs incurred on uncompleted contracts and
  estimated earnings                                      $ 42,371                $ 30,716
Less billings to date                                      (37,384)                (34,006)
                                                          --------                --------
                                                          $  4,987                $ (3,290)
                                                          ========                ========
</TABLE>

      The components of uncompleted contracts are reflected in the balance sheet
at December 21, 2002 and 2001 as follows:

<TABLE>
<CAPTION>
                                                                      JUNE 30,
                                                          -------------------------------
                                                            2002                   2001
                                                          --------               --------
<S>                                                       <C>                    <C>
Costs and earnings in excess of billings on
   uncompleted contracts                                  $ 9,218                $ 6,328
Billings in excess of costs and earnings on
   uncompleted contracts                                   (4,231)                (9,618)
                                                          -------                -------
                                                          $ 4,987                $(3,290)
                                                          =======                =======
</TABLE>




                                       37
<PAGE>
                       PEERLESS MFG. CO. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                (Dollars in thousands, except per share amounts)



NOTE G.   LINES OF CREDIT



Currently we maintain a $10 million revolving line of credit facility that
expires in October 2003. The credit line carries a floating interest rate based
on the prime or eurodollar rate plus or minus an applicable margin (prime - less
0.25%, eurodollar - plus 2.65%), and is secured by substantially all of our
assets. The margin factor is subject to a reduction schedule based on the
Company's obtainment of certain financial performance criteria. As of June 30,
2002, we had no outstanding balance under the credit line, and $3.2 million
outstanding under letters of credit, leaving us with $6.8 million of
availability under the facility. 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.

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.


NOTE H.   LONG-TERM DEBT

As of June 30, 2001, we had a $2.0 million installment note payable, bearing
interest at prime plus 2.5%. This note was utilized to finance the ABCO
acquisition in early 2000. At June 30, 2001, we had $1.6 million outstanding on
the ABCO installment note, all of which was prepaid in full in July 2001.


NOTE I.   STOCKHOLDERS' EQUITY

The Company had a 1985 restricted stock plan (the 1985 Plan), which expired in
December 2000, under which 150,000 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 13,000 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
$19, $36 and $14 in fiscal 2002, 2001, and 2000, 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 240,000 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. At June 30, 2002,
10,900 shares of common stock were available for issuance under the 1995 Plan.



                                       38
<PAGE>
                       PEERLESS MFG. CO. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                (Dollars in thousands, except per share amounts)


NOTE I.   STOCKHOLDERS' EQUITY - CONTINUED

In January 2002, the Company adopted a stock option and restricted stock plan
(the 2001 Plan), which provides for a maximum of 250,000 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. At June 30, 2002,
184,500 shares of common stock were available for issuance under the 2001 Plan.

The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards ("SFAS") 123. It applies Accounting Principals Board
Opinion No. 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,
                                         -------------------------------------------------------
                                           2002                    2001                 2000
                                         ---------               ---------            ----------
<S>                                      <C>                     <C>                  <C>
Net earnings - as reported               $   4,389               $   3,072            $      931
Net earnings - pro forma .                   4,274                   3,066                   836

Basic earnings per share
As reported ..............                    1.47                    1.04                  0.32
Pro forma ................                    1.44                    1.02                  0.28

Diluted earnings per share
As reported ..............                    1.43                    1.02                  0.32
Pro forma ................                    1.39                    1.00                  0.28
</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 48% to 49% for fiscal 2002, 62% to 74% for
fiscal 2001, and 41% to 44% for fiscal 2000; risk-free interest rates ranging
from 4.2% to 4.4% for fiscal 2002, 5.0% to 5.8% for fiscal 2001 and 6.2% to 6.8%
for fiscal 2000; dividend yield of 0%, 0% and 4.2% in fiscal 2002, 2001 and
2000, respectively; and expected lives of five to seven years.




                                       39
<PAGE>
                       PEERLESS MFG. CO. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                (Dollars in thousands, except per share amounts)


NOTE I.   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, 1999 .......                120,000                    5.26
Granted ............................                 85,600                    6.00
Exercised ..........................                (18,000)                   4.67
Canceled ...........................                (28,000)                   6.06
                                                   --------
Outstanding at June 30, 2000 .......                159,600                    5.59
Granted ............................                 61,000                    6.35
Exercised ..........................                (21,000)                   5.80
Canceled ...........................                (17,000)                   5.89
                                                   --------
Outstanding at June 30, 2001 .......                182,600                    5.79
Granted ............................                 68,500                   19.17
Exercised ..........................                (36,150)                   5.96
Canceled ...........................                 (3,000)                  19.50
                                                   --------
Outstanding at June 30, 2002 .......                211,950                    9.89
                                                   ========                   =====
Options exercisable at June 30, 2000                126,350                    5.57
                                                   ========                   =====
Options exercisable at June 30, 2001                135,350                    5.65
                                                   ========                   =====
Options exercisable at June 30, 2002                129,700                    7.07
                                                   ========                   =====
</TABLE>


Weighted average fair value per share of options granted:

            Year ended June 30, 2000                              $1.97
            Year ended June 30, 2001                              $3.99
            Year ended June 30, 2002                              $9.00








                                       40
<PAGE>
                       PEERLESS MFG. CO. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                (Dollars in thousands, except per share amounts)


NOTE I.   STOCKHOLDERS' EQUITY - CONTINUED

The following table summarizes information about stock options at June 30, 2002:


Outstanding

<TABLE>
<CAPTION>
                                                                                              Weighted
     Range of               Number            Weighted average remaining                       average
  Exercise Prices         outstanding        Contractual life (in years)                   exercise price
  ---------------         -----------        ---------------------------                   --------------
<S>                            <C>                        <C>                              <C>
  $4.625                       32,000                     3.6                              $       4.63
  $5.313 - $5.938              23,500                     5.8                                      5.43
  $6.000 - $6.668              90,950                     7.8                                      6.22
  $16.94 - $19.50              65,500                     9.4                                     19.15
                         --------------
                             211,950
                         ==============
</TABLE>



Exercisable

<TABLE>
<CAPTION>
                                                                                              Weighted
     Range of               Number            Weighted average remaining                       average
  Exercise Prices         outstanding         contractual life (in years)                  exercise price
  ---------------         -----------         ---------------------------                  --------------
<S>                            <C>                        <C>                              <C>
  $4.625                       32,000                     3.6                              $       4.63
  $5.313 - $5.938              23,500                     5.8                                      5.43
  $6.000 - $6.668              60,200                     7.4                                      6.17
  $16.94 - $19.50              14,000                     9.4                                     19.34
                         --------------
                             129,700
                         ==============
</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
exercise price of the Rights to $200.00.






                                       41
<PAGE>
                       PEERLESS MFG. CO. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                (Dollars in thousands, except per share amounts)


NOTE J.   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, 2002, 2001 and 2000 was approximately $282,
$191, and $151, respectively.


NOTE K.   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,
                                                       ----------------------------------
                                                           2002                  2001
                                                          ------                -------
<S>                                                      <C>                    <C>
Deferred tax assets
         Restricted stock grants .........               $    10                $    10
         Inventories .....................                    71                     28
        Net operating
            loss carryforwards ...........                   177                    118
         Accrued expenses ................                   706                    450
         Accounts receivable .............                   118                     87
         Other ...........................                    28                     11
                                                         -------                -------
                                                           1,110                    704
Deferred tax liabilities
            Property, plant, and equipment                  (156)                  (144)
         Other ...........................                    (4)                    (3)
                                                         -------                -------
                                                            (160)                  (147)
                                                         -------                -------
                   Net deferred tax asset                $   950                $   557
                                                         =======                =======

</TABLE>
At June 30, 2002 the Company has State net operating loss carry-forwards of
approximately $6.0 million, which can be carried forward indefinitely.

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

<TABLE>
<CAPTION>
                                                                   JUNE 30,
                                                         -------------------------
                                                          2002                2001
                                                         -----               -----
<S>                                                      <C>                 <C>
Current deferred tax asset ...............               $ 933               $ 704
Non-current deferred tax asset (liability)                  17                (147)
                                                         -----               -----
                                                         $ 950               $ 557
                                                         =====               =====
</TABLE>




                                       42
<PAGE>
                       PEERLESS MFG. CO. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                (Dollars in thousands, except per share amounts)


NOTE K.   INCOME TAXES - CONTINUED

The provision for income taxes consisted of the following:

<TABLE>
<CAPTION>

                                                  YEAR ENDED JUNE 30,
                                ------------------------------------------------------
                                   2002                  2001                   2000
                                -------                -------                -------
<S>                             <C>                    <C>                    <C>
Federal
         Current                $ 2,136                $ 1,962                $   599
         Deferred                  (399)                  (536)                  (194)
State                               523                    303                    126
Foreign
         Current                     85                     --                     --
         Deferred                     6                     74                    116
                                -------                -------                -------
                                $ 2,351                $ 1,803                $   647
                                =======                =======                =======
</TABLE>


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

<TABLE>
<CAPTION>
                                                                         YEAR ENDED JUNE 30,
                                                          -------------------------------------------------
                                                          2002                 2001                 2000
                                                          -----                -----                -----
 <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                  3.0                  3.8
     Foreign sales corporation exclusions                 (1.2)                (0.6)                (2.5)
     Adjustment to prior year taxes                         --                   --                  5.4
     Effect of lower foreign tax rate                     (1.1)                (1.0)                (1.4)
     Other                                                  .2                  1.6                  1.7
                                                          ----                 ----                 ----
Income tax expense at effective rate                      34.9%                37.0%                41.0%
                                                          ====                 ====                 ====
</TABLE>



NOTE L.   EARNINGS PER SHARE

Summarized basic and diluted earnings per common share for each of the three
years ended June 30, 2002 is as follows: Earnings and share amounts are in
thousands.

<TABLE>
<CAPTION>
                                     2002                               2001                                2000
                    ------------------------------------- ---------------------------------- ---------------------------------
                                                  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               $ 4,389         2,978     $ 1.47    $ 3,072        2,947     $ 1.04      $ 931       2,918      $0.32
    Effect of
    Dilutive
    Options                  --           102     (0.04)        --            55     (0.02)         --          22         --
                    ------------ ------------- ---------- ---------- ------------ ---------- ---------- ----------- ----------
Diluted earnings
Per share               $ 4,389         3,080     $ 1.43    $ 3,072        3,002      $1.02      $ 931       2,940      $0.32
                    ============ ============= ========== ========== ============ ========== ========== =========== ==========
</TABLE>

For fiscal 2002, 2001 and 2000, stock options covering 30, 25 and 12 shares,
respectively were excluded in the computations of diluted earnings per share
because their effect was antidilutive.





                                       43
<PAGE>
                       PEERLESS MFG. CO. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                (Dollars in thousands, except per share amounts)



NOTE M.   INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION

The Company identifies reportable segments based on management responsibility
within the corporate structure. The Company has three reportable industry
segments: SCR Systems, gas/liquid filtration and boilers. 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. The boiler segment
provides packaged boilers used to produce steam, used for heating, drying,
driving steam engines and a variety of other applications

Segment profit and loss is based on revenue less direct costs of the segment
before allocation of general, administrative, research and development costs.
All inter-company transfers between segments have been eliminated. In the past,
the Company did not allocate its unabsorbed manufacturing costs to each
individual segment. Starting in fiscal year 2002, the Company started allocating
all costs associated with the manufacture, sale and design of its products to
each segment. Fiscal year 2001 and 2000 information has been restated to conform
to fiscal year 2002 presentation. Segment information and reconciliation to
operating profit for the years ended June 30, 2002, 2001, and 2000 are presented
below. Note that the Company does not allocate general and administrative
expenses ("unallocated overhead"), assets, expenditures for assets or
depreciation expense on a segment basis for internal management reporting, and
therefore such information is not presented.

<TABLE>
<CAPTION>
                                                      GAS/LIQUID                  UNALLOCATED
                                            SCR       FILTRATION     BOILERS       OVERHEAD       CONSOLIDATED
                                        --------      ----------    --------      -----------     ------------
<S>                                     <C>             <C>         <C>                 <C>        <C>
2002
Net sales from customers                $ 63,493        $ 29,443    $ 14,204            $   -      $ 107,140
Segment profit (loss)                     12,653           2,592     (1,189)          (7,788)          6,268

2001
Net sales from customers                $ 53,329        $ 21,949     $ 2,881            $   -       $ 78,159
Segment profit (loss)                     12,385           1,741     (2,327)          (5,897)          5,902

2000
Net sales from customers                $ 28,533        $ 29,990       $  38            $   -       $ 58,561
Segment profit (loss)                      3,793           2,634       (805)          (3,846)          1,776
</TABLE>



                                       44
<PAGE>
                       PEERLESS MFG. CO. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                (Dollars in thousands, except per share amounts)

NOTE M.   INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION - CONTINUED

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, 2002, 2001 and 2000 is as follows:

<TABLE>
<CAPTION>
                                          UNITED
                                          STATES           EUROPE         ELIMINATIONS       CONSOLIDATED
                                      --------------- ----------------- -----------------  -----------------
<S>                                        <C>               <C>              <C>                <C>
2002
---------
Net sales to unaffiliated
        customers                          $  99,470         $   7,670        $        -         $  107,140
Transfers between
         geographic areas                        962                 -             (962)                  -
                                      --------------- ----------------- -----------------  -----------------
Total                                      $ 100,432         $   7,670        $    (962)         $  107,140
                                      --------------- ----------------- -----------------  -----------------
Identifiable long-lived assets             $   4,098         $      54        $        -         $    4,152
                                      =============== ================= =================  =================

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
                                      =============== ================= =================  =================

</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.



                                       45
<PAGE>
                       PEERLESS MFG. CO. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                (Dollars in thousands, except per share amounts)


NOTE N.  QUARTERLY CONSOLIDATED FINANCIAL INFORMATION -- UNAUDITED


<TABLE>
<CAPTION>
                                                          FISCAL 2002
                                 ---------------------------------------------------------------
                                   FIRST        SECOND         THIRD         FOURTH
                                  QUARTER      QUARTER        QUARTER        QUARTER      TOTAL
                                 --------      --------       -------       --------    --------
<S>                              <C>           <C>            <C>           <C>         <C>
Net sales                        $23,709       $26,210        $28,864       $28,357     $107,140
Gross profit                       6,966         7,404          8,485         8,367       31,222
% of net sales                     29.4%         28.2%          29.4%         29.5%        29.1%
Operating income                   1,224         1,282          1,811         1,951        6,268
% of net sales                      5.2%          4.9%           6.3%          6.9%         5.9%
Net earnings                        $768          $948         $1,187        $1,486       $4,389
% of net sales                      3.2%          3.6%           4.1%          5.2%         4.1%

Net earnings
   per share
      Basic                        $0.26         $0.32          $0.40         $0.49        $1.47
      Diluted                      $0.25         $0.31          $0.38         $0.48        $1.43

</TABLE>


<TABLE>
<CAPTION>
                                                          FISCAL 2001
                                 ---------------------------------------------------------------
                                   FIRST        SECOND         THIRD         FOURTH
                                  QUARTER      QUARTER        QUARTER        QUARTER      TOTAL
                                 --------      --------       -------       --------    --------
<S>                              <C>           <C>            <C>           <C>         <C>

Net sales                        $11,059       $16,383        $18,229       $32,488      $78,159
Gross profit                       3,077         4,382          5,406        10,645       23,510
% of net sales                     27.8%         26.7%          29.7%         32.8%        30.1%
Operating income (loss)            (539)           460          1,056         4,925        5,902
% of net sales                     -4.9%          2.8%           5.8%         15.2%         7.6%
Net earnings (loss)               ($532)          $132           $444        $3,028       $3,072
% of net sales                     -4.8%          0.8%           2.4%          9.3%         3.9%

Net earnings (loss)
   per share
      Basic                      ($0.18)         $0.04          $0.15         $1.03        $1.04
      Diluted                    ($0.18)         $0.04          $0.15         $1.01        $1.02
</TABLE>




                                       46
<PAGE>
    REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON FINANCIAL SCHEDULE



Board of Directors
Peerless Mfg. Co.

In connection with our audit of the consolidated financial statements of
Peerless Mfg. Co. and Subsidiaries referred to in our report dated August 30,
2002, which is included in Part II of this form, we have also audited Schedule
II for each of the three years in the period ended June 30, 2002. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.



                                       /s/ Grant Thornton LLP


Dallas, Texas
August 30, 2002




                                       47
<PAGE>
                       PEERLESS MFG. CO. AND SUBSIDIARIES
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                   JUNE 30TH,
                             (Dollars in thousands)




<TABLE>
<CAPTION>
                                                      Balance at                Additions                                 Balance at
                                                                      -------------------------------
                                                      Beginning        Charged to       Charged to                            End
                          Description                 of Period          Expense           Other         Deductions        of Period
                                                                                         Accounts
              ------------------------------------  ---------------   --------------   --------------   --------------    ----------
<S>                                                   <C>                  <C>          <C>                  <C>            <C>
              2002
              Allowance for uncollectible accounts    $     297            133                -               76            $  354

              2001
              Allowance for uncollectible accounts    $     778             54                -              535            $  297

              2000
              Allowance for uncollectible accounts    $     685            163                                70            $  778


</TABLE>



                                       48
<PAGE>
                                PEERLESS MFG. CO.
                         2002 ANNUAL REPORT ON FORM 10-K

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>

        EXHIBIT
          NO.                                                  EXHIBIT 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)                   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(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).
</TABLE>


                                       49
<PAGE>
                                PEERLESS MFG. CO.
                         2002 ANNUAL REPORT ON FORM 10-K

                          INDEX TO EXHIBITS - CONTINUED

<TABLE>
<CAPTION>

        EXHIBIT
          NO.                                                  EXHIBIT DESCRIPTION
     ---------------         ----------------------------------------------------------------------------------------
<S>                          <C>

     10(f)                   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 (filed as
                             Exhibit 10(h) to our annual Report on Form 10-K for the fiscal year ended June 30,
                             2001, and incorporated herein by reference).

     10(g)                   Employment Agreement dated July 20, 2001, by and between Peerless Mfg. Co. and
                             Sherrill Stone and the company (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).

     10(h)                   Employment Agreement dated July 20, 2001, by and between Peerless Mfg. Co. and Roy
                             Cuny (filed as Exhibit 10(j) 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 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(j)                   Agreement dated July 20, 2001, by and between Peerless Mfg. Co. and Roy Cuny (filed as
                             Exhibit 10(l) to our Quarterly Report on Form 10-Q, for the fiscal quarter ended
                             September 30, 2001 and incorporated herein by reference).

     10(k)                   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(l)                   Employment Agreement dated February 4, 2002, by and between Peerless Mfg. Co. and
                             Richard L. Travis (filed as Exhibit 10(m) to our Quarterly Report on Form 10-Q, for
                             the fiscal quarter ended March 31, 2002 and incorporated herein by reference).

     10(m)                   Agreement dated February 2, 2002, by and between Peerless Mfg. Co. and Richard L.
                             Travis (filed as Exhibit 10(n) to our Quarterly Report on Form 10-Q, for the fiscal
                             quarter ended March 31, 2002 and incorporated herein by reference).

     21                      Subsidiaries of Peerless Mfg. Co.*

     23                      Consent of Grant Thornton LLP*

     99.1                    Certification of Mr. Sherrill Stone, Chief Executive Officer**

     99.2                    Certification of Mr. Richard L. Travis, Chief Financial Officer**
</TABLE>

----------------------------
*     Filed herewith
**    This certification accompanies this Report pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company
      for purposes of Section 18 of the Securities Exchange Act of 1934, as
      amended



                                       50