##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
 For the Quarterly Period Ended December 31, 2006
 OR
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
 For the Transition Period from  to
 Commission File Number 0-5214
 PEERLESS MFG. CO.
  Texas
    
    75-0724417(State or Other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)
 2819 Walnut Hill Lane, Dallas, Texas
    
    75229(Address of Principal Executive Offices)
    
    (Zip code)
 (214) 357-6181
 þ o
  o o þ
 o þ




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##### 



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED December 31, 2006
 TABLE OF CONTENTS
 PageNumberPART I: FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets at December 31, 2006 (unaudited)
and June 30, 2006
    
    
    4Unaudited Condensed Consolidated Statements of Operations for the three and
six months ended December 31, 2006 and 2005
    
    
    5Unaudited Condensed Consolidated Statements of Cash Flows for the
six months ended December 31, 2006 and 2005
    
    
    6Unaudited Condensed Consolidated Statements of Shareholders Equity and Comprehensive
Income (Loss) for the six months ended December 31, 2006 and 2005
    
    
    7Notes to the Condensed Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    37Item 4. Controls and Procedures
    
    
    37PART II: OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    38Item 1A. Risk Factors
    
    
    38Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    39Item 3. Defaults Upon Senior Securities
    
    
    39Item 4. Submission of Matters to a Vote of Security Holders
    
    
    39Item 5. Other Information
    
    
    39Item 6. Exhibits
    
    
    40SIGNATURES
    
    
    41Agreement for PurchaseRule 13a-14(a)/15(d)-14(a) Certification of CEORule 13a-14(a)/15(d)-14(a) Certification of CFOSection 1350 Certification of CEOSection 1350 Certification of CFO
  Page 2




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FORWARD-LOOKING STATEMENTS
  
    
    changes in the power generation industry and/or the economy;
    
    changes in the price, supply or demand for natural gas;
    
    changes in current environmental legislation;
    
    increased competition;
    
    changes in our ability to conduct business outside the United States, including
changes in foreign laws and regulations;
    
    decreased demand for our products;
    
    the effects of U.S. involvement in hostilities with other countries and large-scale
acts of terrorism, or the threat of hostilities or terrorist acts;
    
    the effects of natural disasters; and
    
    loss of the services of any of our senior management or other key employees.
  Page 3




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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 PEERLESS MFG. CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
 December 31
    
    
    June 30,2006
    
    
    2006(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,243
    
    
    $
    6,411Restricted cash
    
    
    2,741
    
    
    
    Accounts receivable-principally trade  net of
allowance for doubtful accounts of $462 at
December 31, 2006 and at June 30, 2006
    
    
    14,615
    
    
    
    16,463Inventories
    
    
    5,475
    
    
    
    4,871Costs and earnings in excess of billings
on uncompleted contracts
    
    
    11,265
    
    
    
    13,891Assets held for sale
    
    
    767
    
    
    
    767Deferred income taxes
    
    
    1,338
    
    
    
    1,338Other current assets
    
    
    1,063
    
    
    
    1,431Total current assets
    
    
    43,507
    
    
    
    45,172Property, plant and equipment  net
    
    
    1,984
    
    
    
    2,140Other assets
    
    
    823
    
    
    
    845Deferred income taxes
    
    
    6
    
    
    
    2Total assets
    
    $
    46,320
    
    
    $
    48,159LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    9,942
    
    
    $
    13,860Billings in excess of costs and earnings
on uncompleted contracts
    
    
    2,816
    
    
    
    2,601Commissions payable
    
    
    1,012
    
    
    
    1,238Income taxes payable
    
    
    171
    
    
    
    75Product warranties
    
    
    658
    
    
    
    626Accrued liabilities and other
    
    
    3,666
    
    
    
    3,842Total current liabilities
    
    
    18,265
    
    
    
    22,242Commitments and contingenciesShareholders equity:Common stock
    
    
    3,194
    
    
    
    3,134Additional paid-in capital
    
    
    4,182
    
    
    
    3,143Accumulated other comprehensive income
    
    
    376
    
    
    
    245Retained earnings
    
    
    20,303
    
    
    
    19,395Total shareholders equity
    
    
    28,055
    
    
    
    25,917Total liabilities and shareholders equity
    
    $
    46,320
    
    
    $
    48,159
 See accompanying notes to the condensed consolidated financial statements.
 Page 4




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PEERLESS MFG. CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  (In thousands, except per share amounts)
 Three months ended
    
    
    Six months endedDecember 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues
    
    $
    14,091
    
    
    $
    11,534
    
    
    $
    28,729
    
    
    $
    23,176Cost of goods sold
    
    
    9,587
    
    
    
    8,388
    
    
    
    19,830
    
    
    
    17,677Gross profit
    
    
    4,504
    
    
    
    3,146
    
    
    
    8,899
    
    
    
    5,499Operating expensesSales and marketing
    
    
    1,644
    
    
    
    1,565
    
    
    
    3,366
    
    
    
    3,107Engineering and project management
    
    
    955
    
    
    
    820
    
    
    
    1,788
    
    
    
    1,646General and administrative
    
    
    1,375
    
    
    
    2,087
    
    
    
    2,563
    
    
    
    3,2253,974
    
    
    
    4,472
    
    
    
    7,717
    
    
    
    7,978Operating income (loss)
    
    
    530
    
    
    
    (1,326
    )
    
    
    1,182
    
    
    
    (2,479
    )Other incomeInterest income
    
    
    73
    
    
    
    50
    
    
    
    135
    
    
    
    103Foreign exchange gain
    
    
    101
    
    
    
    29
    
    
    
    82
    
    
    
    57Other income
    
    
    
    
    
    
    47
    
    
    
    
    
    
    
    79174
    
    
    
    126
    
    
    
    217
    
    
    
    239Earnings (loss) from continuing operations
before income taxes
    
    
    704
    
    
    
    (1,200
    )
    
    
    1,399
    
    
    
    (2,240
    )Income tax (expense) benefit
    
    
    (247
    )
    
    
    408
    
    
    
    (491
    )
    
    
    759Net earnings (loss) from continuing operations
    
    
    457
    
    
    
    (792
    )
    
    
    908
    
    
    
    (1,481
    )Discontinued operationsLoss from discontinued operations
    
    
    
    
    
    
    (50
    )
    
    
    
    
    
    
    (50
    )Income tax benefit
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    17Net loss from discontinued operations
    
    
    
    
    
    
    (33
    )
    
    
    
    
    
    
    (33
    )Net earnings (loss)
    
    $
    457
    
    
    $
    (825
    )
    
    $
    908
    
    
    $
    (1,514
    )BASIC EARNINGS (LOSS) PER SHAREEarnings (loss) from continuing operations
    
    $
    0.14
    
    
    $
    (0.26
    )
    
    $
    0.29
    
    
    $
    (0.49
    )Loss from discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.01
    )Basic earnings (loss) per share
    
    $
    0.14
    
    
    $
    (0.27
    )
    
    $
    0.29
    
    
    $
    (0.50
    )DILUTED EARNINGS (LOSS) PER SHAREEarnings (loss) from continuing operations
    
    $
    0.14
    
    
    $
    (0.26
    )
    
    $
    0.28
    
    
    $
    (0.49
    )Loss from discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.01
    )Diluted earnings (loss) per share
    
    $
    0.14
    
    
    $
    (0.27
    )
    
    $
    0.28
    
    
    $
    (0.50
    )
 See accompanying notes to the condensed consolidated financial statements.
 Page 5




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PEERLESS MFG. CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (In thousands)
 Six months ended December 31,2006
    
    
    2005Cash flows from operating activities:Net earnings (loss)
    
    $
    908
    
    
    $
    (1,514
    )Adjustments to reconcile net earnings (loss) from operations to
net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    339
    
    
    
    218Deferred income taxes
    
    
    (4
    )
    
    
    Provision for bad debts
    
    
    
    
    
    
    144Provision for warranty expense
    
    
    124
    
    
    
    159Inventory valuation reserve
    
    
    94
    
    
    
    105Foreign exchange gain
    
    
    (82
    )
    
    
    (57
    )Gain on sale of equipment
    
    
    
    
    
    
    (22
    )Stock based compensation
    
    
    126
    
    
    
    79Excess tax benefits from stock-based payment arrangements
    
    
    (229
    )
    
    
    (134
    )Changes in operating assets and liabilities of continuing operations:Accounts receivable
    
    
    1,850
    
    
    
    (260
    )Inventories
    
    
    (694
    )
    
    
    (2,146
    )Costs and earnings in excess of billings on uncompleted
contracts
    
    
    2,647
    
    
    
    517Other current assets
    
    
    368
    
    
    
    (887
    )Other assets
    
    
    22
    
    
    
    (82
    )Accounts payable
    
    
    (3,902
    )
    
    
    1,051Billings in excess of costs and earnings on uncompleted
contracts
    
    
    215
    
    
    
    1,583Commissions payable
    
    
    (226
    )
    
    
    120Product warranties
    
    
    (92
    )
    
    
    (307
    )Income taxes payable
    
    
    325
    
    
    
    Accrued liabilities and other
    
    
    (89
    )
    
    
    283Net cash provided by (used in) operating activities of continuing operations:
    
    
    1,700
    
    
    
    (1,150
    )Cash flow from investing activities of continuing operations:Increase in restricted cash
    
    
    (2,741
    )
    
    
    Proceeds from the sale of equipment
    
    
    
    
    
    
    32Purchases of property and equipment
    
    
    (183
    )
    
    
    (29
    )Net cash provided by (used in) investing activities of continuing operations:
    
    
    (2,924
    )
    
    
    3Cash flows from financing activities of continuing operations:Proceeds from exercise of stock options
    
    
    744
    
    
    
    264Excess tax benefits from stock-based payment arrangements
    
    
    229
    
    
    
    134Net cash provided by financing activities of continuing operations
    
    
    973
    
    
    
    398Cash flow from discontinued operations:Cash used in operating activities
    
    
    
    
    
    
    (5
    )Net cash used in discontinued operations
    
    
    
    
    
    
    (5
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    83
    
    
    
    (2
    )Net decrease in cash and cash equivalents
    
    
    (168
    )
    
    
    (756
    )Cash and cash equivalents at beginning of period
    
    
    6,411
    
    
    
    8,277Cash and cash equivalents at end of period
    
    $
    6,243
    
    
    $
    7,521
 See accompanying notes to the condensed consolidated financial statements.
 Page 6




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PEERLESS MFG. CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY ANDCOMPREHENSIVE INCOME (LOSS)  (In thousands)
 AccumulatedAdditional
    
    
    Other
    
    
    
    
    
    
    TotalNo. of
    
    
    Common
    
    
    Paid-in
    
    
    Comprehensive
    
    
    Retained
    
    
    ShareholdersShares
    
    
    Stock
    
    
    Capital
    
    
    Income
    
    
    Earnings
    
    
    EquityBalance at July 1, 2006
    
    
    3,134
    
    
    $
    3,134
    
    
    $
    3,143
    
    
    $
    245
    
    
    $
    19,395
    
    
    $
    25,917Comprehensive incomeNet earnings from continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    908
    
    
    
    908Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    131
    
    
    
    
    
    
    
    131Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,039Restricted stock grant amortization
    
    
    
    
    
    
    
    
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    21Stock options expense
    
    
    
    
    
    
    
    
    
    
    105
    
    
    
    
    
    
    
    
    
    
    
    105Stock options exercised
    
    
    60
    
    
    
    60
    
    
    
    684
    
    
    
    
    
    
    
    
    
    
    
    744Income tax benefit related to stock
options exercised
    
    
    
    
    
    
    
    
    
    
    229
    
    
    
    
    
    
    
    
    
    
    
    229Balance at December 31, 2006
    
    
    3,194
    
    
    $
    3,194
    
    
    $
    4,182
    
    
    $
    376
    
    
    $
    20,303
    
    
    $
    28,055Balance at July 1, 2005
    
    
    3,036
    
    
    $
    3,036
    
    
    $
    2,114
    
    
    $
    171
    
    
    $
    18,969
    
    
    $
    24,290Comprehensive lossNet loss from continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,481
    )
    
    
    (1,481
    )Net loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33
    )
    
    
    (33
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (58
    )
    
    
    
    
    
    
    (58
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,572
    )Issuance of restricted stock
    
    
    10
    
    
    
    10
    
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    Restricted stock grant amortization
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    8Stock option expense
    
    
    
    
    
    
    
    
    
    
    71
    
    
    
    
    
    
    
    
    
    
    
    71Stock options exercised
    
    
    40
    
    
    
    40
    
    
    
    224
    
    
    
    
    
    
    
    
    
    
    
    264Income tax benefit related to stock
options exercised
    
    
    
    
    
    
    
    
    
    
    134
    
    
    
    
    
    
    
    
    
    
    
    134Balance at December 31, 2005
    
    
    3,086
    
    
    $
    3,086
    
    
    $
    2,541
    
    
    $
    113
    
    
    $
    17,455
    
    
    $
    23,195
 See accompanying notes to the condensed consolidated financial statements.
 Page 7




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006  (Amounts in thousands, except per share amounts)
 1. Basis of Presentation
    2. New Accounting Standards
    Page 8




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006  (Amounts in thousands, except per share amounts)
 3. Accounts Receivable
   Three months ended
    
    
    Six months endedDecember 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Balance at beginning of period
    
    $
    518
    
    
    $
    466
    
    
    $
    462
    
    
    $
    352Bad debt expense
    
    
    (56
    )
    
    
    30
    
    
    
    
    
    
    
    144Accounts written off, net
    
    
    
    
    
    
    (272
    )
    
    
    
    
    
    
    (272
    )Balance at end of period
    
    $
    462
    
    
    $
    224
    
    
    $
    462
    
    
    $
    224
 4. Inventories
   December 31,
    
    
    June 30,2006
    
    
    2006Material and component parts
    
    $
    5,130
    
    
    $
    4,417Work in progress
    
    
    615
    
    
    
    626Finished goods
    
    
    258
    
    
    
    2626,003
    
    
    
    5,305Reserve for obsolete and
slow-moving inventory
    
    
    (528
    )
    
    
    (434
    )$
    5,475
    
    
    $
    4,871
 Page 9




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006  (Amounts in thousands, except per share amounts)
 4. Inventories  Continued
  Three months ended
    
    
    Six months endedDecember 31,
    
    
    December, 312006
    
    
    2005
    
    
    2006
    
    
    2005Balance at beginning of period
    
    $
    490
    
    
    $
    370
    
    
    $
    434
    
    
    $
    318Additions
    
    
    38
    
    
    
    53
    
    
    
    94
    
    
    
    105Amounts written off
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at end of period
    
    $
    528
    
    
    $
    423
    
    
    $
    528
    
    
    $
    423
 5. Revenue Recognition and Cost and Earnings on Uncompleted Contracts
 Accounting for Performance of
Construction-Type and Certain Production-Type Contracts
   December 31,
    
    
    June 30,2006
    
    
    2006Costs incurred on uncompleted contracts and
estimated earnings
    
    $
    50,673
    
    
    $
    43,448Less billings to date
    
    
    (42,224
    )
    
    
    (32,158
    )$
    8,449
    
    
    $
    11,290
 Page 10




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006  (Amounts in thousands, except per share amounts)
 5. Revenue Recognition and Cost and Earnings on Uncompleted Contracts  Continued
  December 31,
    
    
    June 30,2006
    
    
    2006Costs and earnings in excess of billings on
uncompleted contracts
    
    $
    11,265
    
    
    $
    13,891Billings in excess of costs and earnings on
uncompleted contracts
    
    
    (2,816
    )
    
    
    (2,601
    )$
    8,449
    
    
    $
    11,290
 6 Assets Held for Sale
   December 31,
    
    
    June 30,2006
    
    
    2006Buildings & improvements
    
    $
    2,768
    
    
    $
    2,768Equipment
    
    
    152
    
    
    
    152Furniture and fixtures
    
    
    13
    
    
    
    132,933
    
    
    
    2,933Less accumulated depreciation
    
    
    (2,794
    )
    
    
    (2,794
    )139
    
    
    
    139Land
    
    
    628
    
    
    
    628$
    767
    
    
    $
    767
 7. Product Warranties
  Page 11




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006  (Amounts in thousands, except per share amounts)
 7. Product Warranties  Continued
  Three months ended
    
    
    Six months endedDecember 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Balance at beginning of period
    
    $
    639
    
    
    $
    916
    
    
    $
    626
    
    
    $
    845Provision for warranty
expenses
    
    
    55
    
    
    
    17
    
    
    
    124
    
    
    
    159Warranty charges
    
    
    (36
    )
    
    
    (236
    )
    
    
    (92
    )
    
    
    (307
    )Balance at end of period
    
    $
    658
    
    
    $
    697
    
    
    $
    658
    
    
    $
    697
 8. Contingencies
   9. Accrued Liabilities and Other
  December 31,
    
    
    June 30,2006
    
    
    2006Accrued start-up expense
    
    $
    1,846
    
    
    $
    1,717Accrued compensation
    
    
    667
    
    
    
    1,094Accrued professional, legal and other expenses
    
    
    496
    
    
    
    531Sales and use taxes payable
    
    
    25
    
    
    
    3Other
    
    
    632
    
    
    
    497$
    3,666
    
    
    $
    3,842
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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006  (Amounts in thousands, except share and per share amounts)
 10. Stock Based Compensation
      Page 13




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006  (Amounts in thousands, except share and per share amounts)
 10. Stock Based Compensation  Continued
  Three Months Ended
    
    Six Months EndedDecember 31,
    
    December 31,2006
    
    2005
    
    2006
    
    2005Expected volatility
    
    
    44.5
    %
    
    
    52.6
    %
    
    
    44.5
    %
    
    
    52.6
    %Expected term (years)
    
    
    4.92
    
    
    
    5.66
    
    
    
    4.92
    
    
    
    5.66Risk free interest rate
    
    
    5.11
    %
    
    
    4.12
    %
    
    
    5.11
    %
    
    
    4.12
    %Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %Weighted average grant
date fair value
    
    $
    10.89
    
    
    $
    8.99
    
    
    $
    10.89
    
    
    $
    8.99
  Three months ended
    
    Six months endedDecember 31,
    
    December 31,2006
    
    2005
    
    2006
    
    2005Earnings from continuing
operations before income taxes
    
    $
    79
    
    
    $
    49
    
    
    $
    105
    
    
    $
    71Earnings from continuing operations
    
    
    51
    
    
    
    32
    
    
    
    68
    
    
    
    47Net earnings
    
    
    51
    
    
    
    32
    
    
    
    68
    
    
    
    47Basic and diluted net earnings
per common share
    
    $
    0.02
    
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    0.02
 Page 14




---



##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006  (Amounts in thousands, except share and per share amounts)
 10. Stock Based Compensation  Continued
  2006
    
    2005Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    ExerciseNo. of Options
    
    Price
    
    No. of Options
    
    PriceBalance at July 1,
    
    
    143,650
    
    
    $
    14.02
    
    
    
    237,950
    
    
    $
    11.22Granted
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Exercised
    
    
    (32,400
    )
    
    $
    13.77
    
    
    
    (250
    )
    
    $
    12.64Forfeited before
vesting
    
    
    
    
    
    $
    
    
    
    
    (2,800
    )
    
    $
    14.02Forfeited after vesting
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Balance at September 30,
    
    
    111,250
    
    
    $
    14.09
    
    
    
    234,900
    
    
    $
    11.18Granted
    
    
    5,000
    
    
    $
    23.80
    
    
    
    4,000
    
    
    $
    16.95Exercised
    
    
    (27,488
    )
    
    $
    10.83
    
    
    
    (39,750
    )
    
    $
    6.56Forfeited before
vesting
    
    
    
    
    
    $
    
    
    
    
    (25,000
    )
    
    $
    12.94Forfeited after vesting
    
    
    
    
    
    $
    
    
    
    
    (500
    )
    
    $
    19.50Balance at December 31,
    
    
    88,762
    
    
    $
    15.64
    
    
    
    173,650
    
    
    $
    12.10Exercisable at end of period
    
    
    49,601
    
    
    $
    15.36
    
    
    
    140,600
    
    
    $
    11.69
   Page 15




---



##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006  (Amounts in thousands, except share and per share amounts)
 10. Stock Based Compensation  Continued
  Three months ended
    
    Six months endedDecember 31,
    
    December 31,2006
    
    2005
    
    2006
    
    2005Total cash received
    
    $
    298
    
    
    $
    261
    
    
    $
    744
    
    
    $
    264Income tax benefits
    
    $
    120
    
    
    $
    134
    
    
    $
    229
    
    
    $
    134Total intrinsic
value of options
exercised
    
    $
    385
    
    
    $
    148
    
    
    $
    707
    
    
    $
    150
  Three months ended
    
    Six months endedDecember 31, 2006
    
    December 31, 2006Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageGrant Date
    
    
    
    
    
    Grant DateNo. of Options
    
    Fair Value
    
    No. of Options
    
    Fair ValueUnvested at beginning of period
    
    
    45,286
    
    
    $
    6.75
    
    
    
    45,286
    
    
    $
    6.75New Grants
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Vested
    
    
    (6,125
    )
    
    $
    6.44
    
    
    
    (6,125
    )
    
    $
    6.44Forfeited
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Unvested at end of period
    
    
    39,161
    
    
    $
    6.80
    
    
    
    39,161
    
    
    $
    6.80
   Page 16




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006  (Amounts in thousands, except share and per share amounts)
 10. Stock Based Compensation  Continued
  Three months ended
    
    Six months endedDecember 31, 2006
    
    December 31, 2006Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageGrant Date
    
    
    
    
    
    Grant DateNo. of Shares
    
    Fair Value
    
    No. of Shares
    
    Fair ValueBalance at
beginning of period
    
    
    10,000
    
    
    $
    17.06
    
    
    
    10,000
    
    
    $
    17.06New Grants
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Vested
    
    
    (2,500
    )
    
    $
    17.06
    
    
    
    (2,500
    )
    
    $
    17.06Forfeited
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Balance at end of
period
    
    
    7,500
    
    
    $
    17.06
    
    
    
    7,500
    
    
    $
    17.06
  11. Discontinued Operations
  Three months ended
    
    
    Six months endedDecember 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Cost of goods sold
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gross loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating expenses
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    50Operating loss
    
    
    
    
    
    
    (50
    )
    
    
    
    
    
    
    (50
    )Income tax benefit
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    17Net loss from operations
    
    $
    
    
    
    $
    (33
    )
    
    $
    
    
    
    $
    (33
    )Basic and diluted loss per share
    
    $
    
    
    
    $
    (0.01
    )
    
    $
    
    
    
    $
    (0.01
    )
 Page 17




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006  (Amounts in thousands, except per share amounts)
 12. Earnings (Loss) Per Share
  Three months ended
    
    
    Six months endedDecember 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Net earnings (loss) from continuing operations
    
    $
    457
    
    
    $
    (792
    )
    
    $
    908
    
    
    $
    (1,481
    )Loss from discontinued operations
    
    
    
    
    
    
    (33
    )
    
    
    
    
    
    
    (33
    )Net earnings (loss)
    
    $
    457
    
    
    $
    (825
    )
    
    $
    908
    
    
    $
    (1,514
    )Basic weighted average common shares outstanding
    
    
    3,170
    
    
    
    3,045
    
    
    
    3,149
    
    
    
    3,041Effect of dilutive options
    
    
    32
    
    
    
    
    
    
    
    47
    
    
    
    Diluted weighted average common shares outstanding
    
    
    3,202
    
    
    
    3,045
    
    
    
    3,196
    
    
    
    3,041BASIC EARNINGS (LOSS) PER SHAREEarnings (loss) from continuing operations
    
    $
    0.14
    
    
    $
    (0.26
    )
    
    $
    0.29
    
    
    $
    (0.49
    )Loss from discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.01
    )Net earnings (loss) per share
    
    $
    0.14
    
    
    $
    (0.27
    )
    
    $
    0.29
    
    
    $
    (0.50
    )DILUTED LOSS PER SHAREEarnings (loss) from continuing operations
    
    $
    0.14
    
    
    $
    (0.26
    )
    
    $
    0.28
    
    
    $
    (0.49
    )Loss from discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.01
    )Net earnings (loss) per share
    
    $
    0.14
    
    
    $
    (0.27
    )
    
    $
    0.28
    
    
    $
    (0.50
    )
  Page 18




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006  (Amounts in thousands, except per share amounts)
 13. Segment Information
   Three months ended,
    
    
    Six months ended,December 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2006
    
    
    2005RevenuesEnvironmental
    
    $
    2,550
    
    
    $
    3,629
    
    
    $
    7,164
    
    
    $
    6,895Separation / Filtration
    
    
    11,541
    
    
    
    7,905
    
    
    
    21,565
    
    
    
    16,281Consolidated
    
    $
    14,091
    
    
    $
    11,534
    
    
    $
    28,729
    
    
    $
    23,176Operating income (loss)Environmental
    
    $
    (138
    )
    
    $
    272
    
    
    $
    794
    
    
    $
    (9
    )Separation / Filtration
    
    
    2,043
    
    
    
    489
    
    
    
    2,951
    
    
    
    755Reconciling items
    
    
    (1,375
    )
    
    
    (2,087
    )
    
    
    (2,563
    )
    
    
    (3,225
    )Consolidated
    
    $
    530
    
    
    $
    (1,326
    )
    
    $
    1,182
    
    
    $
    (2,479
    )
 Page 19




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006  (Amounts in thousands, except per share amounts)
 14. Lines of Credit
   15. Supplemental Cash Flow Information
  Three months ended
    
    Six months endedDecember 31,
    
    December 31,2006
    
    2005
    
    2006
    
    2005Income tax paid
    
    $
    150
    
    
    $
    
    
    
    $
    460
    
    
    $
    Income tax refunds
received
    
    $
    (297
    )
    
    $
    (150
    )
    
    $
    (297
    )
    
    $
    (150
    )
 Page 20




---



##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
DECEMBER 31, 2006  (Amounts in thousands, except per share amounts)
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
  Environmental Systems.
 Separation / Filtration Systems.
 Critical Accounting Policies
   Revenue Recognition
 Page 21




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
DECEMBER 31, 2006  (Amounts in thousands, except per share amounts)
   Product Warranties
 Allowance for Doubtful Accounts
 Reserve for Obsolete and Slow-Moving Inventory
 Page 22




---



##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
DECEMBER 31, 2006  (Amounts in thousands, except per share amounts)
  Deferred Tax Asset  Valuation Allowance
 Page 23




---



##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
DECEMBER 31, 2006  (Amounts in thousands, except per share amounts)
 Results of Operations
  Three months ended
    
    Six months endedDecember 31,
    

December 31,2006
    
    2005
    
    2006
    
    2005Net revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    68.0
    
    
    
    72.7
    
    
    
    69.0
    
    
    
    76.3Gross profit
    
    
    32.0
    
    
    
    27.3
    
    
    
    31.0
    
    
    
    23.7Operating expenses
    
    
    28.2
    
    
    
    38.8
    
    
    
    26.9
    
    
    
    34.4Operating earnings (loss)
    
    
    3.8
    
    
    
    (11.5
    )
    
    
    4.1
    
    
    
    (10.7
    )Other income
    
    
    1.2
    
    
    
    1.1
    
    
    
    0.8
    
    
    
    1.0Net earnings (loss) from continuing
operations before income taxes
    
    
    5.0
    
    
    
    (10.4
    )
    
    
    4.9
    
    
    
    (9.7
    )Income tax benefit (expense)
    
    
    (1.8
    )
    
    
    3.5
    
    
    
    (1.7
    )
    
    
    3.3Net earnings (loss) from continuing operations
    
    
    3.2
    
    
    
    (6.9
    )
    
    
    3.2
    
    
    
    (6.4
    )Loss from discontinued operations, net of tax
    
    
    
    
    
    
    (0.3
    )
    
    
    
    
    
    
    (0.1
    )Net earnings (loss)
    
    
    3.2
    %
    
    
    (7.2
    )%
    
    
    3.2
    %
    
    
    (6.5
    )%
      Page 24




---



##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
DECEMBER 31, 2006  (Amounts in thousands, except per share amounts)
 Three Months Ended December 31, 2006 Compared to Three Months Ended December 31, 2005
 Results of Operations  Consolidated
 Revenues
  Three months ended December 31,2006
    
    % of Total
    
    
    2005
    
    % of TotalDomestic
    
    $
    7,826
    
    
    
    55.5
    %
    
    $
    4,962
    
    
    
    43.0
    %International
    
    
    6,265
    
    
    
    44.5
    %
    
    
    6,572
    
    
    
    57.0
    %Total revenues
    
    $
    14,091
    
    
    
    100.0
    %
    
    $
    11,534
    
    
    
    100.0
    %
  Gross Profit
  Three months ended December 31,2006
    
    % of Revenue
    
    
    2005
    
    % of RevenueRevenues
    
    $
    14,091
    
    
    
    100.0
    %
    
    $
    11,534
    
    
    
    100.0
    %Cost of goods sold
    
    
    9,587
    
    
    
    68.0
    %
    
    
    8,388
    
    
    
    72.7
    %Gross profit
    
    $
    4,504
    
    
    
    32.0
    %
    
    $
    3,146
    
    
    
    27.3
    %
  Page 25




---



##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
DECEMBER 31, 2006  (Amounts in thousands, except per share amounts)
 Operating Expenses
  Three months ended December 31,2006
    
    % of Sales
    
    
    2005
    
    % of SalesSales and marketing
    
    $
    1,644
    
    
    
    11.7
    %
    
    $
    1,565
    
    
    
    13.6
    %Engineering & project
management
    
    
    955
    
    
    
    6.8
    %
    
    
    820
    
    
    
    7.1
    %General and administrative
    
    
    1,375
    
    
    
    9.7
    %
    
    
    2,087
    
    
    
    18.1
    %Total operating expenses
    
    $
    3,974
    
    
    
    28.2
    %
    
    $
    4,472
    
    
    
    38.8
    %
  Other Income
  Three months ended December 31,2006
    
    % of Sales
    
    
    2005
    
    % of SalesInterest income
    
    $
    73
    
    
    
    0.5
    %
    
    $
    50
    
    
    
    0.4
    %Foreign exchange gain
    
    
    101
    
    
    
    0.7
    %
    
    
    29
    
    
    
    0.3
    %Other income
    
    
    
    
    
    
    0.0
    %
    
    
    47
    
    
    
    0.4
    %Total other income
    
    $
    174
    
    
    
    1.2
    %
    
    $
    126
    
    
    
    1.1
    %
  Page 26




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
DECEMBER 31, 2006  (Amounts in thousands, except per share amounts)
  Income Taxes
  Net Earnings (Loss) from Continuing Operations
  Discontinued Operations
 Discontinued Operations
 Net Earnings (Loss)
  Results of Operations  Segments
  Page 27




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
DECEMBER 31, 2006  (Amounts in thousands, except per share amounts)
 Environmental Systems
   Three months ended December 31,2006
    
    2005Revenue
    
    $
    2,550
    
    
    $
    3,629Operating income (loss)
    
    $
    (138
    )
    
    $
    272Operating income (loss) as % of revenue
    
    
    (5.4
    )%
    
    
    7.5
    %
    Separation / Filtration Systems
  Page 28




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
DECEMBER 31, 2006  (Amounts in thousands, except per share amounts)
  Three months ended December 31,2006
    
    2005Revenue
    
    $
    11,541
    
    
    $
    7,905Operating income
    
    $
    2,043
    
    
    $
    489Operating income as % of revenue
    
    
    17.7
    %
    
    
    6.2
    %
    Corporate Level Expenses
  Page 29




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
DECEMBER 31, 2006  (Amounts in thousands, except per share amounts)
 Six Months Ended December 31, 2006 Compared to Six Months Ended December 31, 2005
 Results of Operations  Consolidated
 Revenues
  Six months ended December 312006
    
    % of Total
    
    
    2005
    
    % of TotalDomestic
    
    $
    15,431
    
    
    
    53.7
    %
    
    $
    11,533
    
    
    
    49.8
    %International
    
    
    13,298
    
    
    
    46.3
    %
    
    
    11,643
    
    
    
    50.2
    %Total revenues
    
    $
    28,729
    
    
    
    100.0
    %
    
    $
    23,176
    
    
    
    100.0
    %
  Gross Profit
  Six months ended December 31,2006
    
    % of Revenue
    
    
    2005
    
    % of RevenueRevenues
    
    $
    28,729
    
    
    
    100.0
    %
    
    $
    23,176
    
    
    
    100.0
    %Cost of goods sold
    
    
    19,830
    
    
    
    69.0
    %
    
    
    17,677
    
    
    
    76.3
    %Gross profit
    
    $
    8,899
    
    
    
    31.0
    %
    
    $
    5,499
    
    
    
    23.7
    %
  Page 30




---



##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
DECEMBER 31, 2006  (Amounts in thousands, except per share amounts)
 Operating Expenses
  Six months ended December 31,2006
    
    % of Sales
    
    
    2005
    
    % of SalesSales and marketing
    
    $
    3,366
    
    
    
    11.7
    %
    
    $
    3,107
    
    
    
    13.4
    %Engineering & project
management
    
    
    1,788
    
    
    
    6.3
    %
    
    
    1,646
    
    
    
    7.1
    %General and administrative
    
    
    2,563
    
    
    
    8.9
    %
    
    
    3,225
    
    
    
    13.9
    %Total operating expenses
    
    $
    7,717
    
    
    
    26.9
    %
    
    $
    7,978
    
    
    
    34.4
    %
  Other Income
  Six months ended December 31,2006
    
    % of Sales
    
    
    2005
    
    % of SalesInterest income
    
    $
    135
    
    
    
    0.5
    %
    
    $
    103
    
    
    
    0.4
    %Foreign exchange gain
    
    
    82
    
    
    
    0.3
    %
    
    
    57
    
    
    
    0.2
    %Other income
    
    
    
    
    
    
    0.0
    %
    
    
    79
    
    
    
    0.4
    %Total other income
    
    $
    217
    
    
    
    0.8
    %
    
    $
    239
    
    
    
    1.0
    %
  Page 31




---



##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
DECEMBER 31, 2006  (Amounts in thousands, except per share amounts)
  Income Taxes
  Net Earnings (Loss) from Continuing Operations
  Discontinued Operations
 Discontinued
Operations
 Net Earnings (Loss)
  Results of Operations  Segments
  Page 32




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
DECEMBER 31, 2006  (Amounts in thousands, except per share amounts)
 Environmental Systems
   Six months ended December 31,2006
    
    2005Revenue
    
    $
    7,164
    
    
    $
    6,895Operating income (loss)
    
    $
    794
    
    
    $
    (9
    )Operating income (loss) as % of revenue
    
    
    11.1
    %
    
    
    (0.1
    )%
    Separation / Filtration Systems
  Page 33




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
DECEMBER 31, 2006  (Amounts in thousands, except per share amounts)
  Six months ended December 31,2006
    
    2005Revenue
    
    $
    21,565
    
    
    $
    16,281Operating income
    
    $
    2,951
    
    
    $
    755Operating income as % of revenue
    
    
    13.7
    %
    
    
    4.6
    %
    Corporate Level Expenses
  Contingencies
  Page 34




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
DECEMBER 31, 2006  (Amounts in thousands, except per share amounts)
  Backlog
  Financial Position
 Assets.
 Liabilities and Shareholders Equity.
 Liquidity and Capital Resources
   Page 35




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
DECEMBER 31, 2006  (Amounts in thousands, except per share amounts)
        New Accounting Standards
  Page 36




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
DECEMBER 31, 2006  (Amounts in thousands, except per share amounts)
   
 Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
   
 Item 4.
    
    Controls and Procedures
   Page 37




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
DECEMBER 31, 2006  (Amounts in thousands, except per share amounts)
     
 PART II. OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings
  
 Item 1A.
    
    Risk Factors
  Page 38




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
DECEMBER 31, 2006  (Amounts in thousands, except share and per share amounts)
 Items 2 and 3 are not applicable and have been omitted.
 
 Item 4.
    
    Submission of Matters to a Vote of Security Holders
  Total Vote
    
    
    
    
    
    AnnualTotal Vote
    
    Withheld
    
    
    
    
    
    Meetingfor Each
    
    from Each
    
    Class of
    
    when TermDirector
    
    Director
    
    Director
    
    ExpiresKenneth R. Hanks
    
    
    3,114,201
    
    
    
    5,358
    
    
    Class I
    
    
    2007Howard G.
Westerman, Jr.
    
    
    3,114,201
    
    
    
    5,358
    
    
    Class II
    
    
    2008Peter J. Burlage
    
    
    3,114,103
    
    
    
    5,456
    
    
    Class III
    
    
    2009Sherrill Stone
    
    
    3,114,103
    
    
    
    5,456
    
    
    Class III
    
    
    2009
   For
    
    
    3,075,394Against
    
    
    40,391Abstain
    
    
    3,774
 
 Item 5 is not applicable and has been omitted.
 Page 39




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
DECEMBER 31, 2006  (Amounts in thousands, except share and per share amounts)
 
 Item 6.
    
    Exhibits
   ExhibitNumber
    
    Exhibit10 (a)
    
    Agreement for Purchase between Peerless Mfg. Co. and
Dallas Rapid Area Transit.31(a)
    
    Rule 13a  14(a)/15d  14(a) Certification of Chief
Executive Officer.31(b)
    
    Rule 13a  14(a)/15d  14(a) Certification of Chief
Financial Officer.32(a)
    
    Section 1350 Certification of Chief Executive Officer.32(b)
    
    Section 1350 Certification of Chief Financial Officer.
 Page 40




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
DECEMBER 31, 2006  (Amounts in thousands, except share and per share amounts)
 
 Signatures
  PEERLESS MFG. CO.Date: February 13, 2007
    /s/ Peter J. BurlagePeter J. BurlagePresident and Chief Executive
Officer
(Principal Executive Officer)Date:  February 13, 2007
    /s/ Henry G. Schopfer, IIIHenry G. Schopfer, IIIChief Financial Officer
(Principal Financial and Accounting Officer) Page 41