##### 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, 2005
 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
  o þ




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##### 



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
 TABLE OF CONTENTS
 PageNumberPART I: FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets at December 31, 2005 (unaudited) and June 30, 2005
    
    
    3Unaudited Condensed Consolidated Statements of Operations for the three and six
months ended December 31, 2005 and 2004
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the
six months ended December 31, 2005 and 2004
    
    
    5Notes to the Condensed Consolidated Financial Statements
    
    
    6Item 2.Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    40Item 4. Controls and Procedures
    
    
    40PART II: OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    41Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    41Item 3.
Defaults Upon Senior Securities
    
    
    41Item 4. Submission of Matters to a Vote of Security Holders
    
    
    41Item 5.
Other Information
    
    
    41Item 6. Exhibits
    
    
    42SIGNATURES
    
    
    43Employment AgreementAgreementRule 13a-14(a)/15d-14(a) Certification of CEORule 13a-14(a)/15d-14(a) Certification of CFOSection 1350 Certification of CEOSection 1350 Certification of CFO
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 PEERLESS MFG. CO. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands)
 December 31, 2005
    
    
    June 30, 2005(unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    7,521
    
    
    $
    8,277Accounts receivable  principally trade  net of
allowance of uncollectible accounts of $224 at
December 31, 2005 and $352 at June 30, 2005
    
    
    11,729
    
    
    
    11,613Inventories, net
    
    
    5,338
    
    
    
    3,297Costs and earnings in excess of billings
on uncompleted contracts
    
    
    9,623
    
    
    
    10,140Deferred income taxes
    
    
    1,163
    
    
    
    1,163Other   net
    
    
    2,228
    
    
    
    1,206Total current assets
    
    
    37,602
    
    
    
    35,696Property, plant and equipment  net
    
    
    3,116
    
    
    
    3,315Other assets
    
    
    866
    
    
    
    784Other assets of discontinued operations
    
    
    9
    
    
    
    9$
    41,593
    
    
    $
    39,804LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccount payable  trade
    
    $
    9,623
    
    
    $
    8,572Billings in excess of costs and earnings
on uncompleted contracts
    
    
    3,664
    
    
    
    2,081Commissions payable
    
    
    882
    
    
    
    762Product warranties
    
    
    697
    
    
    
    845Accrued liabilities and other
    
    
    3,341
    
    
    
    3,058Liabilities of discontinued operations
    
    
    101
    
    
    
    106Total current liabilities
    
    
    18,308
    
    
    
    15,424Deferred income
taxes
    
    
    90
    
    
    
    90Shareholders equityCommon stock
    
    
    3,086
    
    
    
    3,036Additional paid-in capital
    
    
    2,705
    
    
    
    2,114Other
    
    
    (51
    )
    
    
    171Retained earnings
    
    
    17,455
    
    
    
    18,969Total shareholders equity
    
    
    23,195
    
    
    
    24,290Total liabilities and shareholders equity
    
    $
    41,593
    
    
    $
    39,804
 See accompanying notes to the consolidated financial statements. 3
    Table of Contents   PEERLESS MFG. CO. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share amounts)
  Three months ended
    
    
    Six months endedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues
    
    $
    11,534
    
    
    $
    10,844
    
    
    $
    23,176
    
    
    $
    22,062Cost of goods sold
    
    
    8,388
    
    
    
    7,905
    
    
    
    17,677
    
    
    
    15,908Gross profit
    
    
    3,146
    
    
    
    2,939
    
    
    
    5,499
    
    
    
    6,154Operating expensesSales and marketing
    
    
    1,565
    
    
    
    1,407
    
    
    
    3,107
    
    
    
    2,882Engineering and project management
    
    
    820
    
    
    
    881
    
    
    
    1,646
    
    
    
    1,832General and administrative
    
    
    2,087
    
    
    
    1,357
    
    
    
    3,225
    
    
    
    2,4124,472
    
    
    
    3,645
    
    
    
    7,978
    
    
    
    7,126Operating loss
    
    
    (1,326
    )
    
    
    (706
    )
    
    
    (2,479
    )
    
    
    (972
    )Other income (expense)Foreign exchange gain
    
    
    29
    
    
    
    4
    
    
    
    57
    
    
    
    65Other income (expense)  net
    
    
    97
    
    
    
    (1
    )
    
    
    182
    
    
    
    39126
    
    
    
    3
    
    
    
    239
    
    
    
    104Loss from continuing operations before income taxes
    
    
    (1,200
    )
    
    
    (703
    )
    
    
    (2,240
    )
    
    
    (868
    )Income tax benefit
    
    
    408
    
    
    
    239
    
    
    
    759
    
    
    
    295Net loss from continuing operations
    
    
    (792
    )
    
    
    (464
    )
    
    
    (1,481
    )
    
    
    (573
    )Discontinued operationsLoss from discontinued operations
    
    
    (50
    )
    
    
    (50
    )
    
    
    (50
    )
    
    
    (80
    )Income tax benefit
    
    
    17
    
    
    
    17
    
    
    
    17
    
    
    
    27Net loss from discontinued operations
    
    
    (33
    )
    
    
    (33
    )
    
    
    (33
    )
    
    
    (53
    )Net loss
    
    $
    (825
    )
    
    $
    (497
    )
    
    $
    (1,514
    )
    
    $
    (626
    )BASIC LOSS PER SHARELoss from continuing operations
    
    $
    (0.26
    )
    
    $
    (0.15
    )
    
    $
    (0.49
    )
    
    $
    (0.19
    )Loss from discontinued operations
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.02
    )Basic loss per share
    
    $
    (0.27
    )
    
    $
    (0.16
    )
    
    $
    (0.50
    )
    
    $
    (0.21
    )DILUTED LOSS PER SHARELoss from continuing operations
    
    $
    (0.26
    )
    
    $
    (0.15
    )
    
    $
    (0.49
    )
    
    $
    (0.19
    )Loss from discontinued operations
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.02
    )Diluted loss per share
    
    $
    (0.27
    )
    
    $
    (0.16
    )
    
    $
    (0.50
    )
    
    $
    (0.21
    )
 See accompanying notes to the consolidated financial statements.
 4




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
  Six months ended December 31,2005
    
    
    2004Cash flows from operating activities:Net loss
    
    $
    (1,514
    )
    
    $
    (626
    )Net loss from discontinued operations
    
    
    (33
    )
    
    
    (53
    )Net loss from continuing operations
    
    
    (1,481
    )
    
    
    (573
    )Adjustments to reconcile net loss from continuing operations
to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    218
    
    
    
    335Provision for bad debts
    
    
    144
    
    
    
    218Provision for warranty expense
    
    
    159
    
    
    
    206Inventory valuation reserve
    
    
    105
    
    
    
    22Foreign exchange gain
    
    
    (57
    )
    
    
    (65
    )Gain on sale of property
    
    
    (22
    )
    
    
    Stock based compensation
    
    
    71
    
    
    
    Other
    
    
    8
    
    
    
    70Changes in operating assets and liabilities:Accounts receivable
    
    
    (260
    )
    
    
    211Inventories
    
    
    (2,146
    )
    
    
    (250
    )Costs and earnings in excess of billings on uncompleted contracts
    
    
    517
    
    
    
    3,802Other current assets
    
    
    (887
    )
    
    
    (249
    )Other assets
    
    
    (82
    )
    
    
    233Accounts payable
    
    
    1,051
    
    
    
    (1,202
    )Billings in excess of costs and earnings on uncompleted contracts
    
    
    1,583
    
    
    
    1,528Commissions payable
    
    
    120
    
    
    
    (41
    )Product warranties
    
    
    (307
    )
    
    
    (204
    )Excess tax benefits from stock-based payment arrangements
    
    
    (134
    )
    
    
    (37
    )Income taxes payable
    
    
    
    
    
    
    (525
    )Accrued liabilities and other
    
    
    283
    
    
    
    (230
    )Net cash provided by (used in) operating activities of continuing operations
    
    
    (1,117
    )
    
    
    3,249Cash flow from investing activities:Purchases of property and equipment
    
    
    (29
    )
    
    
    (231
    )Proceeds from the sale of equipment
    
    
    32
    
    
    
    Net cash provided by (used in) investing activities of continuing operations
    
    
    3
    
    
    
    (231
    )Cash flows from financing activities:Proceeds from sale of common stock
    
    
    264
    
    
    
    118Excess tax benefits from stock-based payment arrangements
    
    
    134
    
    
    
    37Net cash provided by financing activities of continuing operations
    
    
    398
    
    
    
    155Net cash used in discontinued operations
    
    
    (38
    )
    
    
    (93
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (2
    )
    
    
    5Net increase (decrease) in cash and cash equivalents
    
    
    (756
    )
    
    
    3,085Cash and cash equivalents at beginning of period
    
    
    8,277
    
    
    
    4,119Cash and cash equivalents at end of period
    
    $
    7,521
    
    
    $
    7,204
 See accompanying notes to consolidated financial statements.
 5




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Basis of Presentation
   Unless otherwise noted, all dollar and share amounts are in thousands, except per share amounts.
 2. Accounts Receivable
  6




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 2. Accounts Receivable  Continued
  Three months ended
    
    
    Six months endedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Balance at beginning of period
    
    $
    466
    
    
    $
    231
    
    
    $
    352
    
    
    $
    431Bad debt expense
    
    
    30
    
    
    
    196
    
    
    
    144
    
    
    
    218Accounts written off, net
    
    
    (272
    )
    
    
    
    
    
    
    (272
    )
    
    
    (222
    )Balance at end of period
    
    $
    224
    
    
    $
    427
    
    
    $
    224
    
    
    $
    427
 3. Inventories
   December 31,
    
    
    June 30,2005
    
    
    2005Material and component parts
    
    $
    4,665
    
    
    $
    3,027Work in progress
    
    
    779
    
    
    
    232Finished goods
    
    
    317
    
    
    
    3565,761
    
    
    
    3,615Reserve for obsolete and slow-moving inventory
    
    
    (423
    )
    
    
    (318
    )$
    5,338
    
    
    $
    3,297
  Three months ended
    
    
    Six months endedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Balance at beginning of period
    
    $
    370
    
    
    $
    202
    
    
    $
    318
    
    
    $
    196Additions
    
    
    53
    
    
    
    16
    
    
    
    105
    
    
    
    22Amounts written off
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at end of period
    
    $
    423
    
    
    $
    218
    
    
    $
    423
    
    
    $
    218
 7




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 4.
Revenue Recognition and Cost and Earnings on Uncompleted
Contracts
 Accounting for Performance of
Construction-Type and Certain Production-Type Contracts
   December 31,
    
    
    June 30,2005
    
    
    2005Costs incurred on uncompleted contracts and
estimated earnings
    
    $
    32,144
    
    
    $
    34,978Less billings to date
    
    
    (26,185
    )
    
    
    (26,919
    )$
    5,959
    
    
    $
    8,059
  December 31,
    
    
    June 30,2005
    
    
    2005Costs and earnings in excess of billings on
uncompleted contracts
    
    $
    9,623
    
    
    $
    10,140Billings in excess of costs and earnings on
uncompleted contracts
    
    
    (3,664
    )
    
    
    (2,081
    )$
    5,959
    
    
    $
    8,059
 8




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 5.
Product Warranties
  Three months ended
    
    
    Six months endedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Balance at beginning of period
    
    $
    916
    
    
    $
    980
    
    
    $
    845
    
    
    $
    982Provision for warranty expenses
    
    
    17
    
    
    
    47
    
    
    
    159
    
    
    
    206Warranty charges
    
    
    (236
    )
    
    
    (43
    )
    
    
    (307
    )
    
    
    (204
    )Balance at end of period
    
    $
    697
    
    
    $
    984
    
    
    $
    697
    
    
    $
    984
 6. Contingencies
    9




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 7. Accrued Liabilities
  December 31,
    
    
    June 30,2005
    
    
    2005Accrued start-up expense
    
    $
    1,070
    
    
    $
    974Accrued compensation
    
    
    634
    
    
    
    691Sales and use tax payable
    
    
    711
    
    
    
    523Accrued property tax expense
    
    
    209
    
    
    
    111Other
    
    
    717
    
    
    
    759$
    3,341
    
    
    $
    3,058
 8. Stock Based Compensation
     10




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 8. Stock Based Compensation  Continued
  Three months ended
    
    
    Six months endedDecember 31, 2004
    
    
    December 31, 2004Net loss, as reported
    
    $
    (497
    )
    
    $
    (626
    )Deduct: Total stock-based employee compensation
expense determined using the fair value based method for all awards, net of tax
    
    
    (46
    )
    
    
    (70
    )Pro forma net loss
    
    $
    (543
    )
    
    $
    (696
    )Loss per share:Basic  as reported
    
    $
    (0.16
    )
    
    $
    (0.21
    )Basic  pro forma
    
    $
    (0.18
    )
    
    $
    (0.23
    )Diluted  as reported
    
    $
    (0.16
    )
    
    $
    (0.21
    )Diluted  pro forma
    
    $
    (0.18
    )
    
    $
    (0.23
    )
  Weighted
    
    
    AggregateWeighted
    
    
    Average
    
    
    Grant DateAverage
    
    
    Remaining
    
    
    Fair# of Options
    
    
    Exercise
    
    
    Term
    
    
    Value(exact quantity)
    
    
    Price
    
    
    (in years)
    
    
    (in thousands)Balance at July 1, 2005
    
    
    237,950
    
    
    $
    11.22Granted
    
    
    
    
    
    $
    Exercised
    
    
    (250
    )
    
    $
    12.64Canceled
    
    
    (2,800
    )
    
    $
    14.02Forfeited
    
    
    
    
    
    $
    Balance at September 30, 2005
    
    
    234,900
    
    
    $
    11.18
    
    
    
    6.03
    
    
    $
    1,259Granted
    
    
    4,000
    
    
    $
    16.95Exercised
    
    
    (39,750
    )
    
    $
    6.56Canceled
    
    
    (25,000
    )
    
    $
    12.94Forfeited
    
    
    (500
    )
    
    $
    19.50Balance at December 31, 2005
    
    
    173,650
    
    
    $
    12.10
    
    
    
    6.27
    
    
    $
    993Exercisable at December 31, 2005
    
    
    140,600
    
    
    $
    11.69
    
    
    
    5.71
    
    
    $
    797
 11




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 8. Stock Based Compensation  Continued
   Three Months Ended
    
    Six Months EndedDecember 31,
    
    December 31,2005
    
    2004
    
    2005
    
    2004Expected volatility
    
    52.6%
    
    46.4%
    
    52.6%
    
    46.4%Expected term (years)
    
    5.66
    
    5.00
    
    5.66
    
    5.00Risk free interest rate
    
    4.12%
    
    4.00%
    
    4.12%
    
    4.00%Dividend yield
    
    0.00%
    
    0.00%
    
    0.00%
    
    0.00%Weighted average grant
date fair value
    
    $8.99
    
    $6.78
    
    $8.99
    
    $6.78
  Three months ended
    
    Six months endedDecember 31, 2005
    
    December 31, 2005Weighted
    
    
    
    WeightedAverage
    
    
    
    Average# of Options
    
    Grant Date
    
    # of Options
    
    Grant Date(exact quantity)
    
    Fair Value
    
    (exact quantity)
    
    Fair ValueNon vested at beginning of
period
    
    64,300
    
    $6.00
    
    70,100
    
    $5.98New Grants
    
    
    
    
    
    
    
    Vested
    
    (6,250)
    
    $6.44
    
    (9,250)
    
    $6.20Canceled
    
    (25,000)
    
    $5.95
    
    (27,800)
    
    $5.94Non vested at end of period
    
    33,050
    
    $5.95
    
    33,050
    
    $5.95
  12




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 8. Stock Based Compensation  Continued
  Three months ended
    
    Six months endedDecember 31,
    
    December 31,2005
    
    2004
    
    2005
    
    2004Total cash received
    
    $261
    
    $53
    
    $264
    
    $118Income tax benefits
    
    $134
    
    $5
    
    $134
    
    $37Total grant-date fair value
    
    $148
    
    $30
    
    $150
    
    $66
 9. Discontinued Operations
   Three months ended
    
    
    Six months endedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Cost of goods sold
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    75Gross loss
    
    
    
    
    
    
    (50
    )
    
    
    
    
    
    
    (75
    )Operating expenses
    
    
    50
    
    
    
    
    
    
    
    50
    
    
    
    5Operating loss
    
    
    (50
    )
    
    
    (50
    )
    
    
    (50
    )
    
    
    (80
    )Income tax benefit
    
    
    17
    
    
    
    17
    
    
    
    17
    
    
    
    27Net loss from operations
    
    $
    (33
    )
    
    $
    (33
    )
    
    $
    (33
    )
    
    $
    (53
    )Diluted loss per share
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
  December 31,
    
    
    June 30,2005
    
    
    2005AssetsEquipment  net of accumulated depreciation of $11
at December 31, 2005 and June 30, 2005.
    
    $
    9
    
    
    $
    9Total assets of discontinued operations
    
    $
    9
    
    
    $
    9LiabilitiesProduct warranties and other reserves
    
    $
    101
    
    
    $
    106Total current liabilities of discontinued operations
    
    $
    101
    
    
    $
    106
 13




---



##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 10. Comprehensive Loss
  Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net loss from continuing operations
    
    $
    (792
    )
    
    $
    (464
    )
    
    $
    (1,481
    )
    
    $
    (573
    )Net loss from discontinued operations
    
    
    (33
    )
    
    
    (33
    )
    
    
    (33
    )
    
    
    (53
    )Foreign currency translation adjustment
    
    
    (21
    )
    
    
    129
    
    
    
    (59
    )
    
    
    120Comprehensive loss
    
    $
    (846
    )
    
    $
    (368
    )
    
    $
    (1,573
    )
    
    $
    (506
    )
 11. Loss Per Share
 Certain loss per share amounts may not total
due to rounding.
 Three months ended
    
    
    Six months endedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net loss from continuing operations
    
    $
    (792
    )
    
    $
    (464
    )
    
    $
    (1,481
    )
    
    $
    (573
    )Loss from discontinued operations
    
    
    (33
    )
    
    
    (33
    )
    
    
    (33
    )
    
    
    (53
    )Net loss
    
    $
    (825
    )
    
    $
    (497
    )
    
    $
    (1,514
    )
    
    $
    (626
    )Basic weighted average common shares outstanding
    
    
    3,045
    
    
    
    3,030
    
    
    
    3,041
    
    
    
    3,022Effect of dilutive options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted weighted average common shares outstanding
    
    
    3,045
    
    
    
    3,030
    
    
    
    3,041
    
    
    
    3,022BASIC LOSS PER SHARELoss from continuing operations
    
    $
    (0.26
    )
    
    $
    (0.15
    )
    
    $
    (0.49
    )
    
    $
    (0.19
    )Loss from discontinued operations
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.02
    )Net loss per share
    
    $
    (0.27
    )
    
    $
    (0.16
    )
    
    $
    (0.50
    )
    
    $
    (0.21
    )DILUTED LOSS PER SHARELoss from continuing operations
    
    $
    (0.26
    )
    
    $
    (0.15
    )
    
    $
    (0.49
    )
    
    $
    (0.19
    )Loss from discontinued operations
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.02
    )Net loss per share
    
    $
    (0.27
    )
    
    $
    (0.16
    )
    
    $
    (0.50
    )
    
    $
    (0.21
    )
  14




---



##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 12. Segment Information
   Separation
    
    General &Environmental
    
    Filtration
    
    AdministrativeSystems
    
    Systems
    
    Expenses
    
    ConsolidatedThree months ended December 31, 2005Net revenues from customers
    
    $
    3,629
    
    
    $
    7,905
    
    
    
    
    
    
    $
    11,534Segment profit (loss)
    
    
    272
    
    
    
    489
    
    
    
    (2,087
    )
    
    
    (1,326
    )Three months ended December 31, 2004Net revenues from customers
    
    $
    4,987
    
    
    $
    5,857
    
    
    
    
    
    
    $
    10,844Segment profit (loss)
    
    
    1,210
    
    
    
    (559
    )
    
    
    (1,357
    )
    
    
    (706
    )Six months ended December 31, 2005Net revenues from customers
    
    $
    6,895
    
    
    $
    16,281
    
    
    
    
    
    
    $
    23,176Segment profit (loss)
    
    
    (9
    )
    
    
    755
    
    
    
    (3,225
    )
    
    
    (2,479
    )Six months ended December 31, 2004Net revenues from customers
    
    $
    8,977
    
    
    $
    13,085
    
    
    
    
    
    
    $
    22,062Segment profit (loss)
    
    
    1,274
    
    
    
    166
    
    
    
    (2,412
    )
    
    
    (972
    )
 15




---



##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 13. Industry Segment and Geographic Information
  United
    
    
    UnitedStates
    
    
    Kingdom
    
    
    Eliminations
    
    
    ConsolidatedThree months ended December 31, 2005Net sales to unaffiliated customers
    
    $
    8,537
    
    
    $
    2,997
    
    
    $
    
    
    
    $
    11,534Transfers between geographic areas
    
    
    179
    
    
    
    
    
    
    
    (179
    )
    
    
    Total
    
    $
    8,716
    
    
    $
    2,997
    
    
    $
    (179
    )
    
    $
    11,534Identifiable long-lived assets
    
    $
    3,062
    
    
    $
    54
    
    
    $
    
    
    
    $
    3,116Three months ended December 31, 2004Net sales to unaffiliated customers
    
    $
    9,619
    
    
    $
    1,225
    
    
    $
    
    
    
    $
    10,844Transfers between geographic areas
    
    
    (79
    )
    
    
    
    
    
    
    79
    
    
    
    Total
    
    $
    9,540
    
    
    $
    1,225
    
    
    $
    79
    
    
    $
    10,844Identifiable long-lived assets
    
    $
    2,866
    
    
    $
    83
    
    
    $
    
    
    
    $
    2,949Six months ended December 31, 2005Net sales to unaffiliated customers
    
    $
    17,881
    
    
    $
    5,295
    
    
    $
    
    
    
    $
    23,176Transfers between geographic areas
    
    
    210
    
    
    
    
    
    
    
    (210
    )
    
    
    Total
    
    $
    18,091
    
    
    $
    5,295
    
    
    $
    (210
    )
    
    $
    23,176Identifiable long-lived assets
    
    $
    3,062
    
    
    $
    54
    
    
    $
    
    
    
    $
    3,116Six months ended December 31, 2004Net sales to unaffiliated customers
    
    $
    18,600
    
    
    $
    3,462
    
    
    $
    
    
    
    $
    22,062Transfers between geographic areas
    
    
    681
    
    
    
    
    
    
    
    (681
    )
    
    
    Total
    
    $
    19,281
    
    
    $
    3,462
    
    
    $
    (681
    )
    
    $
    22,062Identifiable long-lived assets
    
    $
    2,866
    
    
    $
    83
    
    
    $
    
    
    
    $
    2,949
   16




---



##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 14. Lines of Credit
    15. Supplemental cash flow Information
  Three months ended
    
    Six months endedDecember 31.
    
    December 31.2005
    
    2004
    
    2005
    
    2004Income taxes paid (received)
    
    $
    (150
    )
    
    $
    150
    
    
    $
    (150
    )
    
    $
    660
 17




---



##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
   Overview
  Environmental Systems.
 Separation Filtration Systems.
 18




---



##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
 Critical Accounting Policies
   Revenue Recognition
  Product Warranties.
 19




---



##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
  Allowance for Doubtful Accounts.
 Reserve for Obsolete and Slow-Moving Inventory.
 Deferred Tax Asset  Valuation Allowance.
 20




---



##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
 Results of Operations
  Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    72.7
    
    
    
    72.9
    
    
    
    76.3
    
    
    
    72.1Gross profit
    
    
    27.3
    
    
    
    27.1
    
    
    
    23.7
    
    
    
    27.9Operating expenses
    
    
    38.8
    
    
    
    33.6
    
    
    
    34.4
    
    
    
    32.3Operating loss
    
    
    (11.5
    )
    
    
    (6.5
    )
    
    
    (10.7
    )
    
    
    (4.4
    )Other income
    
    
    1.1
    
    
    
    
    
    
    
    1.0
    
    
    
    0.5Net loss from continuing
operations before income taxes
    
    
    (10.4
    )
    
    
    (6.5
    )
    
    
    (9.7
    )
    
    
    (3.9
    )Income tax benefit
    
    
    3.5
    
    
    
    2.2
    
    
    
    3.3
    
    
    
    1.3Net loss from continuing operations
    
    
    (6.9
    )
    
    
    (4.3
    )
    
    
    (6.4
    )
    
    
    (2.6
    )Loss from discontinued operations, net of tax
    
    
    (0.3
    )
    
    
    (0.3
    )
    
    
    (0.1
    )
    
    
    (0.2
    )Net loss
    
    
    (7.2
    )%
    
    
    (4.6
    )%
    
    
    (6.5
    )%
    
    
    (2.8
    )%
 Three Months Ended December 31, 2005 Compared to Three Months Ended December 31, 2004
 Results
of Operations  Consolidated
 Revenues.
 Three months endedDecember 31,2005




    % of Total
    
    
    2004


    % of TotalDomestic
    
    $
    4,962
    
    
    
    43.0
    %
    
    $
    6,024
    
    
    
    55.6
    %International
    
    $
    6,572
    
    
    
    57.0
    %
    
    $
    4,820
    
    
    
    44.4
    %Total
    
    $
    11,534
    
    
    
    100.0
    %
    
    $
    10,844
    
    
    
    100.0
    %
  21




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
  Gross Profit Margin .
 Three months endedDecember 31,2005
    
    
    % of Sales
    
    
    2004
    
    
    % of SalesSelling margin
    
    $
    3,876
    
    
    
    33.6
    %
    
    $
    3,358
    
    
    
    31.0
    %Unabsorbed manufacturing
    
    $
    (587
    )
    
    
    -5.1
    %
    
    $
    (467
    )
    
    
    -4.3
    %Warranty and start up costs
    
    $
    (143
    )
    
    
    -1.2
    %
    
    $
    48
    
    
    
    0.4
    %Gross profit margin
    
    $
    3,146
    
    
    
    27.3
    %
    
    $
    2,939
    
    
    
    27.1
    %
   22




---



##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
 Operating Expenses.
 Three months endedDecember 31,2005


    % of Sales
    
    
    2004


    % of SalesSales and marketing
    
    $
    1,565
    
    
    
    13.6
    %
    
    $
    1,407
    
    
    
    13.0
    %Engineering & project management
    
    
    820
    
    
    
    7.1
    %
    
    
    881
    
    
    
    8.1
    %General and administrative
    
    
    2,087
    
    
    
    18.1
    %
    
    
    1,357
    
    
    
    12.5
    %Total operating expenses
    
    $
    4,472
    
    
    
    38.8
    %
    
    $
    3,645
    
    
    
    33.6
    %
  Other Income and Expense.
 Three months endedDecember 31,2005


    % of Sales
    
    
    2004


    % of SalesForeign exchange gain
    
    $
    29
    
    
    
    0.3
    %
    
    $
    4
    
    
    
    0.0
    %Other income (expense), net
    
    
    97
    
    
    
    0.8
    %
    
    
    (1
    )
    
    
    0.0
    %Total other income
    
    $
    126
    
    
    
    1.1
    %
    
    $
    3
    
    
    
    0.0
    %
  23




---



##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
 Income Taxes.
  Net Loss from Continuing Operations.
 Three months endedDecember 31,2005
    
    % of Sales
    
    2004
    
    % of SalesLoss from continuing operations
    
    $
    (792
    )
    
    
    -6.9
    %
    
    $
    (464
    )
    
    
    -4.3
    %Basic loss per share
    
    $
    (0.26
    )
    
    
    
    
    
    $
    (0.15
    )Diluted loss per share
    
    $
    (0.26
    )
    
    
    
    
    
    $
    (0.15
    )
  Discontinued Operations.
  24




---



##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
 Net Loss.
 Three months endedDecember 31,2005


    % of Sales
    
    2004

    % of SalesNet loss
    
    $
    (825
    )
    
    
    -7.2
    %
    
    $
    (497
    )
    
    
    -4.6
    %Basic loss per share
    
    $
    (0.27
    )
    
    
    
    
    
    $
    (0.16
    )Diluted loss per share
    
    $
    (0.27
    )
    
    
    
    
    
    $
    (0.16
    )
  Six Months Ended December 31, 2005 Compared to Six Months Ended December 31, 2004
 Results
of Operations  Consolidated
 Revenues.
 Six months endedDecember 31,2005
    
    % of Total
    
    
    2004
    
    % of TotalDomestic
    
    $
    11,533
    
    
    
    49.8
    %
    
    $
    13,397
    
    
    
    60.7
    %International
    
    $
    11,643
    
    
    
    50.2
    %
    
    $
    8,665
    
    
    
    39.3
    %Total
    
    $
    23,176
    
    
    
    100.0
    %
    
    $
    22,062
    
    
    
    100.0
    %
  25




---



##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
 Gross Profit Margin .
 Six months endedDecember 31,2005
    
    % of Sales
    
    
    2004
    
    % of SalesSelling margin
    
    $
    7,498
    
    
    
    32.3
    %
    
    $
    7,154
    
    
    
    32.4
    %Unabsorbed manufacturing
    
    $
    (1,233
    )
    
    
    -5.3
    %
    
    $
    (808
    )
    
    
    -3.6
    %Warranty and start up costs
    
    $
    (766
    )
    
    
    -3.3
    %
    
    $
    (192
    )
    
    
    -0.9
    %Gross profit margin
    
    $
    5,499
    
    
    
    23.7
    %
    
    $
    6,154
    
    
    
    27.9
    %
   Operating Expenses.
 Six months endedDecember 31,2005
    
    % of Sales
    
    
    2004
    
    % of SalesSales and marketing
    
    $
    3,107
    
    
    
    13.4
    %
    
    $
    2,882
    
    
    
    13.1
    %Engineering & project management
    
    
    1,646
    
    
    
    7.1
    %
    
    
    1,832
    
    
    
    8.3
    %General and administrative
    
    
    3,225
    
    
    
    13.9
    %
    
    
    2,412
    
    
    
    10.9
    %Total operating expenses
    
    $
    7,978
    
    
    
    34.4
    %
    
    $
    7,126
    
    
    
    32.3
    %
 26




---



##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
  Other Income.
 Six months endedDecember 31,2005
    
    % of Sales
    
    
    2004
    
    % of SalesForeign exchange gain
    
    $
    57
    
    
    
    0.2
    %
    
    $
    65
    
    
    
    0.3
    %Other income, net
    
    
    182
    
    
    
    0.8
    %
    
    
    39
    
    
    
    0.2
    %Total other income
    
    $
    239
    
    
    
    1.0
    %
    
    $
    104
    
    
    
    0.5
    %
  Income Taxes.
  27




---



##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
 Net Loss from Continuing Operations.
 Six months endedDecember 31,2005
    
    % of Sales
    
    2004
    
    % of SalesLoss from continuing operations
    
    $
    (1,481
    )
    
    
    -6.4
    %
    
    $
    (573
    )
    
    
    -2.6
    %Basic loss per share
    
    $
    (0.49
    )
    
    
    
    
    
    $
    (0.19
    )Diluted loss per share
    
    $
    (0.49
    )
    
    
    
    
    
    $
    (0.19
    )
  Discontinued Operations.
  Net Loss.
 Six months endedDecember 31,2005
    
    % of Sales
    
    2004
    
    % of SalesNet loss
    
    $
    (1,514
    )
    
    
    -6.5
    %
    
    $
    (626
    )
    
    
    -2.8
    %Basic loss per share
    
    $
    (0.50
    )
    
    
    
    
    
    $
    (0.21
    )Diluted loss per share
    
    $
    (0.50
    )
    
    
    
    
    
    $
    (0.21
    )
  28




---



##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
 Results
of Operations  Segments
  Environmental Systems.
 Separation Filtration Systems.
 Revenue .
 Three months ended
    
    
    Six months endedDecember 31,
    
    
    December 31,2005
    
    %
    
    
    2004
    
    %
    
    
    2005
    

    %
    
    
    2004
    
    %Environmental Systems
    
    $
    3,629
    
    
    
    31.5
    %
    
    $
    4,987
    
    
    
    46.0
    %
    
    $
    6,895
    
    
    
    29.8
    %
    
    $
    8,977
    
    
    
    40.7
    %Separation Filtration Systems
    
    
    7,905
    
    
    
    68.5
    %
    
    
    5,857
    
    
    
    54.0
    %
    
    
    16,281
    
    
    
    70.2
    %
    
    
    13,085
    
    
    
    59.3
    %Total
    
    $
    11,534
    
    
    
    100.0
    %
    
    $
    10,844
    
    
    
    100.0
    %
    
    $
    23,176
    
    
    
    100.0
    %
    
    $
    22,062
    
    
    
    100.0
    %
  29




---



##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
   Segment Profit.
 Three months ended
    
    
    Six months endedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Environmental Systems
    
    $
    272
    
    
    $
    1,210
    
    
    $
    (9
    )
    
    $
    1,274Separation Filtration Systems
    
    
    489
    
    
    
    (559
    )
    
    
    755
    
    
    
    166Total
    
    
    761
    
    
    
    651
    
    
    
    746
    
    
    
    1,440General and administrative expenses
    
    
    (2,087
    )
    
    
    (1,357
    )
    
    
    (3,225
    )
    
    
    (2,412
    )Operating loss
    
    $
    (1,326
    )
    
    $
    (706
    )
    
    $
    (2,479
    )
    
    $
    (972
    )
  Environmental Systems.
 30




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
  1.
    
    Decrease in selling margin. Our selling margin decreased by
approximately 5.0% of sales in the first six months of fiscal 2006, compared to
the first six months of fiscal 2005. This decrease is primarily attributable to
an adjustment in the second quarter of fiscal 2005 related primarily to certain
control deficiencies discovered by management. See Part II, Item 9A 
Controls and Procedures of our Annual Report on Form 10-K for the year ended
June 30, 2005 for further discussion regarding the control deficiency. The
decrease in selling margin is also attributable to increased competitive market
conditions, combined with increased cost of component parts.2.
    
    Start-up and warranty expenses, as percentage of sales. Actual
start-up and warranty expenses were approximately $429,000, or 6.2% of revenue
in the first six months of fiscal 2006 compared to $146,000, or 1.6% of revenue
in the first six months of fiscal 2005. The increase in expense during fiscal
2006 relates predominately to the operation of mechanical equipment outside the
customary operating parameters. The solution required changes to the operating
procedures to ensure the problem does not recur. Although not all of the units
installed in these unique operating conditions have failed, the modified
operating procedures
will be circulated to all installed systems to ensure the project owners are
aware of the potential risk of future claims that may not fall within our
warranty period.3.
    
    Operational expenses, as a percentage of sales. As part of our
on-going cost control monitoring, our operational expenses have continued to
decline from approximately $1.8 million in the first six months of fiscal 2005,
to $1.5 million in the first six months of fiscal 2006. However, due to
declines in this segments revenue that exceeded its expense reductions over
these periods, expenses, as a percentage of sales, have actually increased from
20.1% in the first six months of fiscal 2005, to 22.3% in the first six months
of fiscal 2006.
 Separation Filtration Systems
 1.
    
    Increase in selling margin.Our selling margin increased by
approximately 3.4% of sales in the first six months of fiscal 2006, compared to
the first six months of fiscal 2005. This increase is primarily attributable
to an adjustment in the second quarter of fiscal 2005 related to certain
control deficiencies discovered by management. See Part II, Item 9A 
Controls and Procedures of our Annual Report on Form 10-K for the year ended
June 30, 2005 for further discussion regarding the control deficiency.
 31




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
 2.
    
    Operational expenses, as a percentage of sales. As part of our
on-going cost control monitoring, our operational expenses, as a percentage of
sales, have continued to decline. As a percentage of sales, operational
expenses have decreased from 22.2% in the first six months of fiscal 2005, to
19.7% in the first six months of fiscal 2006.3.
    
    Start-up and warranty expenses, as a percentage of sales.
Actual start-up and warranty expenses were approximately $337,000, or 2.1% of
revenue in the first six months of fiscal 2006 compared to approximately
$46,000, or 0.4% of revenue in the first six months of fiscal 2005. The
increase in expense during the first six months of fiscal 2006 is predominantly
attributable to a specific mechanical component failure supplied to operate in
high temperature conditions.
 Market Outlook
 Environmental Systems.
 Separation Filtration Systems.
 Contingencies
  32




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
    Backlog
  Financial Position
 Assets.
 Liabilities and Shareholders Equity.
 33




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
  Liquidity and Capital Resources
        34




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
    Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
  Factors That May Affect Our Operating Results and Other Risk Factors
  Changes in the power generation industry and/or the economy could have an adverse impact on sales
of our Environmental Systems and our operating results.
  35




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
 Changes in the price, supply or demand for natural gas could have an adverse impact on our sales of
Separation Filtration Systems and our operating results.
  Changes in current environmental legislation could have an adverse impact on the sale of our
Environmental Systems and on our operating results.
  Competition could result in lower sales and decreased margin.
  We enter into fixed-priced contracts. If our actual costs exceed our original estimates, our
profits will be reduced.
  36




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
  Our backlog may not be indicative of our future revenue.
  Our ability to conduct business outside the United States may be adversely affected by factors
outside of our control and our revenues and profits from international sales could be adversely
impacted.
  Our financial performance may vary significantly from period to period, making it difficult to
estimate future revenue.
  Our gross profit margin is affected by shifts in our product mix.
  37




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
  Our products are covered by warranties. Unanticipated warranty costs for defective products could
adversely affect our financial condition and results of operations and reputation.
  Product liability claims not covered by insurance could adversely affect our financial condition
and results of operations.
  Large contracts represent a significant portion of our accounts receivable, which increases our
exposure to credit risk.
  Changes in billing terms can increase our exposure to working capital and credit risk.
  38




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
 The terms and conditions of our credit facility impose restrictions on our operations. We may not
be able to raise additional capital, if needed.
   Our business is subject to risks of terrorist acts, acts of war and natural disasters.
  Our common stock is thinly traded, which may result in low liquidity.
  The inability of our engineering and/or manufacturing operations to sufficiently scale up
operations in the short term, in response to unexpected spikes in orders with short cycle times,
directly impacts our ability to optimize absorption of our manufacturing overhead expense.
  39




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
 Our customers may require us to execute portions of our projects in their local countries.
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 4. Controls and Procedures
    40
    Table of Contents  PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
  
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  Items 2, 3, and 5 are not applicable and have been omitted.
 
 Item 4. Submission of Matters to a Vote of Security Holders
    41
    Table of Contents  PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2005
 
 Item 6. Exhibits
   ExhibitNumber
    
    Exhibit3(a)
    
    Articles of Incorporation, as amended to date (filed as Exhibit 3(a) to
our Quarterly Report on Form 10-Q (file No. 0-5214) for the fiscal
quarter ended December 31, 1997, and incorporated herein by reference).3(b)
    
    Bylaws, as amended to date (filed as Exhibit 3(b) to our Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30, 2004, and
incorporated herein by reference).4(a)
    
    Rights Agreement dated May 22, 1997 between Peerless Mfg. Co. and Mellon
Investor Services, LLC (formerly ChaseMellon Shareholder Services,
L.L.C.), as Rights Agent (filed as Exhibit 1 to our Registration
Statement on Form 8-A (file No. 0-5214), dated May 22, 1997, and
incorporated herein by reference).4(b)
    
    Amendment to Rights Agreement dated August 23, 2001, between Peerless
Mfg. Co. and Mellon Investor Services, LLC, as Rights Agent (filed as
Exhibit 2 to our Registration Statement on Form 8-A dated August 30,
2001, and incorporated herein by reference).10(a)
    
    Employment Agreement dated October 31, 2005, by and
between Peerless Mfg. Co. and Peter J. Burlage. *10(b)
    
    Agreement dated October 18, 2005, by and
between Peerless Mfg. Co. and Henry G. Schopfer, III. *31(a)
    
    Rule 13a  14(a)/15d  14(a) Certification of Chief
Executive Officer. *31(b)
    
    Rule 13a  14(a)/15d  14(a) Certification of Chief
Financial Officer. *32(a)
    
    Section 1350 Certification of Chief Executive Officer. **32(b)
    
    Section 1350 Certification of Chief Financial Officer. **
 
 *
    
    Filed herewith**
    
    Furnished herewith 42
    Table of Contents  Signatures
  PEERLESS MFG. CO.Date: February 14, 2006
    /s/ Sherrill StoneSherrill StoneChairman and Chief Executive OfficerDate: February 14, 2006
    /s/ Henry G. Schopfer, IIIHenry G. Schopfer, IIIChief Financial Officer
(Principal Financial and Accounting Officer) 43