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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-Q

(Mark One)

|[X]
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
|-------------------------------------------------------------------------------------------

For the Quarterly Period Ended December 31, 2003



|[   ]
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.

(Exact Name of Registrant as Specified in Its Charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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

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(Registrants Telephone Number, Including Area Code)




Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
[X] No [  ]


Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes
[  ] No [X]


As of February 12, 2004, there were 3,002,784 shares of the registrants
common stock outstanding.



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TABLE OF CONTENTS



|                                             |                                                                                               |                                                |  |  |  |  |  | 
|-------------------------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION               
|                                             | Item 1. Financial Statements                                                                 
|                                             |                                                                                               | CONSOLIDATED BALANCE SHEETS                   
|                                             |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS         
|                                             |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS         
|                                             |                                                                                               | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                                             | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                             | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                             | Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION                  
|                                             | Item 1. Legal Proceedings                                                                    
|                                             | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                             | Item 6. Exhibits and Reports on Form 8-K                                                     
|Signatures                                  
|Bylaws, as Amended to Date                  
|Credit Agreement                            
|Guaranty Agreement                          
|Master Revolving Note                       
|Security Agreement                          
|Employment Agreement - Peter J. Burlage     
|Employment Agreement - David Taylor         
|Certification of CEO Pursuant to Rule 13a-14
|Certification of CFO Pursuant to Rule 13a-14
|Certification of CEO Pursuant to Section 906
|Certification of CFO Pursuant to Section 906



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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

TABLE OF CONTENTS

|                              |                                                                                                               |  |    |    | 
|----------------------------- | ------------------------------------------------------------------------------------------------------------- |  | -- | -- | 
|PART I: FINANCIAL INFORMATION |                                                                                                               |  |    |   
|                              | Item 1. Financial Statements                                                                                  |  |    |    | 
|                              | Consolidated Balance Sheets at December 31, 2003 (unaudited)
and June 30, 2003                                |  |    | 3  | 
|                              | Unaudited Consolidated Statements of Operations for the three
and six months ended December 31, 2003 and 2002 |  |    | 4  | 
|                              | Unaudited Consolidated Statements of Cash Flows for
the six months ended December 31, 2003 and 2002           |  |    | 5  | 
|                              | Notes to the Consolidated Financial Statements                                                                |  |    | 6  | 
|                              | Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations                 |  |    | 13 | 
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                                            |  |    | 26 | 
|                              | Item 4. Controls and Procedures                                                                               |  |    | 26 | 
|PART II: OTHER INFORMATION    |                                                                                                               |  |    |   
|                              | Item 1. Legal Proceedings                                                                                     |  |    | 27 | 
|                              | Item 2. Changes in Securities and Use of Proceeds                                                             |  |    | 27 | 
|                              | Item 3. Defaults Upon Senior Securities                                                                       |  |    | 27 | 
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                                   |  |    | 27 | 
|                              | Item 5. Other Information                                                                                     |  |    | 27 | 
|                              | Item 6. Exhibits and Reports on Form 8-K                                                                      |  |    | 28 | 
|SIGNATURES                    |                                                                                                               |  | 30 |   

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PART I. FINANCIAL INFORMATION







Item 1. Financial Statements

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

|                                        |                                                                                                                                         |                                            |                                      |        |        |              |        |          |        |  |  | 
|--------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------ | ------ | ------ | ------------ | ------ | -------- | ------ |  |  | 
|                                        |                                                                                                                                         |                                            |                                      |        |        | December 31, |        | June 30,
|                                        |                                                                                                                                         |                                            |                                      |        |        | 2003         |        | 2003    
|                                        |                                                                                                                                         |                                            |                                      |        |        |              |        |         
|                                        |                                                                                                                                         |                                            |                                      |        |        | (unaudited)  |        |          |        | 
|ASSETS                                  |                                                                                                                                         |                                            |                                      |        |        |              |        |         
|Current assets                          |                                                                                                                                         |                                            |                                      |        |        |              |        |         
|                                        | Cash and cash equivalents                                                                                                               |                                            | $                                    | 7,960  |        |              | $      | 6,680    |       
|                                        | Short term investments                                                                                                                  |                                            |                                      | 311    |        |              |        | 309      |       
|                                        | Accounts
receivable - principally trade - net of
allowance for doubtful accounts of $383 at
December 31, 2003 and $402 at June 30, 2003 |                                            |                                      | 11,292 |        |              |        | 14,916   |       
|                                        | Inventories                                                                                                                             |                                            |                                      | 2,899  |        |              |        | 3,215    |       
|                                        | Costs and earnings in excess of billings
on uncompleted contracts                                                                       |                                            |                                      | 10,280 |        |              |        | 7,589    |       
|                                        | Deferred income taxes                                                                                                                   |                                            |                                      | 1,445  |        |              |        | 1,445    |       
|                                        | Other                                                                                                                                   |                                            |                                      | 561    |        |              |        | 1,098    |       
|                                        | Current assets of discontinued operations                                                                                               |                                            |                                      | 2,121  |        |              |        | 2,760    |       
|                                        |                                                                                                                                         |                                            |                                      |        |        |              |        |         
|                                        |                                                                                                                                         | Total current assets                       |                                      |        | 36,869 |              |        |          | 38,012 | 
|Property, plant and equipment  net     |                                                                                                                                         |                                            | 3,254                                |        |        |              | 3,400  |         
|Other assets                            |                                                                                                                                         |                                            | 1,009                                |        |        |              | 989    |         
|Other assets of discontinued operations |                                                                                                                                         |                                            | 9                                    |        |        |              | 151    |         
|                                        |                                                                                                                                         |                                            |                                      |        |        |              |        |         
|                                        |                                                                                                                                         | $                                          | 41,141                               |        |        | $            | 42,552 |         
|                                        |                                                                                                                                         |                                            |                                      |        |        |              |        |         
|                                        |                                                                                                                                         |                                            | LIABILITIES AND SHAREHOLDERS EQUITY |        |        |              |        |          |        |  | 
|Current liabilities                     |                                                                                                                                         |                                            |                                      |        |        |              |        |         
|                                        | Accounts payable  trade                                                                                                                |                                            | $                                    | 11,057 |        |              | $      | 12,661   |       
|                                        | Billings in excess of costs and earnings
on uncompleted contracts                                                                       |                                            |                                      | 1,084  |        |              |        | 2,027    |       
|                                        | Commissions payable                                                                                                                     |                                            |                                      | 975    |        |              |        | 1,041    |       
|                                        | Income taxes payable                                                                                                                    |                                            |                                      | 752    |        |              |        | 53       |       
|                                        | Product warranties                                                                                                                      |                                            |                                      | 771    |        |              |        | 846      |       
|                                        | Accrued liabilities and other                                                                                                           |                                            |                                      | 2,164  |        |              |        | 2,749    |       
|                                        | Current liabilities of discontinued operations                                                                                          |                                            |                                      | 559    |        |              |        | 864      |       
|                                        |                                                                                                                                         |                                            |                                      |        |        |              |        |         
|                                        |                                                                                                                                         | Total current liabilities                  |                                      |        | 17,362 |              |        |          | 20,241 | 
|Shareholders equity                    |                                                                                                                                         |                                            |                                      |        |        |              |        |         
|                                        | Common stock                                                                                                                            |                                            |                                      | 3,003  |        |              |        | 2,999    |       
|                                        | Additional paid-in capital                                                                                                              |                                            |                                      | 1,800  |        |              |        | 1,771    |       
|                                        | Other                                                                                                                                   |                                            |                                      | 181    |        |              |        | 18       |       
|                                        | Retained earnings                                                                                                                       |                                            |                                      | 18,795 |        |              |        | 17,523   |       
|                                        |                                                                                                                                         |                                            |                                      |        |        |              |        |         
|                                        |                                                                                                                                         | Total shareholders equity                 |                                      |        | 23,779 |              |        |          | 22,311 | 
|                                        |                                                                                                                                         |                                            |                                      |        |        |              |        |         
|                                        |                                                                                                                                         | Total liabilities and shareholders equity |                                      | $      | 41,141 |              |        | $        | 42,552 | 
|                                        |                                                                                                                                         |                                            |                                      |        |        |              |        |         

See accompanying notes to the consolidated financial statements.

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PEERLESS MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS(Dollars in thousands, except per share amounts)(Unaudited)

|                                                                                                                                                                                |  |                                            |                                   |   |                    |      |                  |   |       |       |        |   |       |      |        |   |       |       |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------ | --------------------------------- | - | ------------------ | ---- | ---------------- | - | ----- | ----- | ------ | - | ----- | ---- | ------ | - | ----- | ----- | -
|                                                                                                                                                                                |  |                                            |                                   |   | Three Months Ended |      | Six Months Ended
|                                                                                                                                                                                |  |                                            |                                   |   | December 31,       |      | December 31,    
|                                                                                                                                                                                |  |                                            |                                   |   | 2003               |      | 2002             |   | 2003  |       | 2002  
|                                                                                                                                                                                |  |                                            |                                   |   |                    |      |                  |   |       |       |       
|Revenues                                                                                                                                                                        |  | $                                          | 16,429                            |   |                    | $    | 20,011           |   |       | $     | 33,236 |   |       | $    | 33,287 |  
|Cost of goods sold                                                                                                                                                              |  |                                            | 11,884                            |   |                    |      | 15,535           |   |       |       | 23,885 |   |       |      | 25,538 |  
|                                                                                                                                                                                |  |                                            |                                   |   |                    |      |                  |   |       |       |        |   |       |      |        |  
|Gross profit                                                                                                                                                                    |  |                                            | 4,545                             |   |                    |      | 4,476            |   |       |       | 9,351  |   |       |      | 7,749  |  
|Operating expenses                                                                                                                                                              |  |                                            |                                   |   |                    |      |                  |   |       |       |        |   |       |      |        |  
|                                                                                                                                                                                |  | Sales and marketing                        |                                   |   | 1,409              |      |                  |   | 1,413 |       |        |   | 3,012 |      |        |   | 2,999 |      
|                                                                                                                                                                                |  | Engineering and project
management         |                                   |   | 1,037              |      |                  |   | 1,071 |       |        |   | 2,131 |      |        |   | 2,744 |      
|                                                                                                                                                                                |  | General and administrative                 |                                   |   | 1,278              |      |                  |   | 1,317 |       |        |   | 2,236 |      |        |   | 2,501 |      
|                                                                                                                                                                                |  | Restructuring expense                      |                                   |   |                   |      |                  |   |      |       |        |   |      |      |        |   | 483   |      
|                                                                                                                                                                                |  |                                            |                                   |   |                    |      |                  |   |       |       |        |   |       |      |        |  
|                                                                                                                                                                                |  |                                            | 3,724                             |   |                    |      | 3,801            |   |       |       | 7,379  |   |       |      | 8,727  |  
|                                                                                                                                                                                |  |                                            |                                   |   |                    |      |                  |   |       |       |        |   |       |      |        |  
|Operating income (loss)                                                                                                                                                         |  |                                            | 821                               |   |                    |      | 675              |   |       |       | 1,972  |   |       |      | (978   | )
|Other income                                                                                                                                                                    |  |                                            |                                   |   |                    |      |                  |   |       |       |        |   |       |      |        |  
|                                                                                                                                                                                |  | Foreign exchange gain (loss)               |                                   |   | 94                 |      |                  |   | (28   | )     |        |   | 47    |      |        |   | (91   | )    
|                                                                                                                                                                                |  | Other income, net                          |                                   |   | 15                 |      |                  |   | 91    |       |        |   | 32    |      |        |   | 132   |      
|                                                                                                                                                                                |  |                                            |                                   |   |                    |      |                  |   |       |       |        |   |       |      |        |  
|                                                                                                                                                                                |  |                                            | 109                               |   |                    |      | 63               |   |       |       | 79     |   |       |      | 41     |  
|                                                                                                                                                                                |  |                                            |                                   |   |                    |      |                  |   |       |       |        |   |       |      |        |  
|Earnings (loss) from continuing operations
before income taxes                                                                                                                  |  |                                            | 930                               |   |                    |      | 738              |   |       |       | 2,051  |   |       |      | (937   | )
|Income tax expense (benefit)                                                                                                                                                    |  |                                            | 321                               |   |                    |      | 270              |   |       |       | 702    |   |       |      | (350   | )
|                                                                                                                                                                                |  |                                            |                                   |   |                    |      |                  |   |       |       |        |   |       |      |        |  
|Net earnings (loss) from continuing operations                                                                                                                                  |  |                                            | 609                               |   |                    |      | 468              |   |       |       | 1,349  |   |       |      | (587   | )
|Discontinued operations (Note 5  Discontinued Operations)
Loss from discontinued operations,
(including gain on disposal of $140 for the
six months ended December 31, 2003) |  |                                            | (217                              | ) |                    |      | (789             | ) |       |       | (118   | ) |       |      | (1,246 | )
|                                                                                                                                                                                |  | Income tax benefit                         |                                   |   | (75                | )    |                  |   | (295  | )     |        |   | (41   | )    |        |   | (464  | )    
|                                                                                                                                                                                |  |                                            |                                   |   |                    |      |                  |   |       |       |        |   |       |      |        |  
|Net loss from discontinued operations                                                                                                                                           |  |                                            | (142                              | ) |                    |      | (494             | ) |       |       | (77    | ) |       |      | (782   | )
|                                                                                                                                                                                |  |                                            |                                   |   |                    |      |                  |   |       |       |        |   |       |      |        |  
|Net earnings (loss)                                                                                                                                                             |  | $                                          | 467                               |   |                    | $    | (26              | ) |       | $     | 1,272  |   |       | $    | (1,369 | )
|                                                                                                                                                                                |  |                                            |                                   |   |                    |      |                  |   |       |       |        |   |       |      |        |  
|BASIC EARNINGS (LOSS) PER SHARE                                                                                                                                                 |  |                                            |                                   |   |                    |      |                  |   |       |       |        |   |       |      |        |  
|                                                                                                                                                                                |  | Earnings (loss) from continuing operations |                                   | $ | 0.20               |      |                  | $ | 0.16  |       |        | $ | 0.45  |      |        | $ | (0.20 | )    
|                                                                                                                                                                                |  | Loss from discontinued operations          |                                   |   | (0.05              | )    |                  |   | (0.17 | )     |        |   | (0.03 | )    |        |   | (0.26 | )    
|                                                                                                                                                                                |  |                                            |                                   |   |                    |      |                  |   |       |       |        |   |       |      |        |  
|                                                                                                                                                                                |  |                                            | Basic earnings (loss) per share   |   | $                  | 0.16 |                  |   | $     | (0.01 | )      |   | $     | 0.42 |        |   | $     | (0.46 | )
|                                                                                                                                                                                |  |                                            |                                   |   |                    |      |                  |   |       |       |        |   |       |      |        |  
|DILUTED EARNINGS (LOSS) PER SHARE                                                                                                                                               |  |                                            |                                   |   |                    |      |                  |   |       |       |        |   |       |      |        |  
|                                                                                                                                                                                |  | Earnings (loss) from continuing operations |                                   | $ | 0.20               |      |                  | $ | 0.15  |       |        | $ | 0.44  |      |        | $ | (0.20 | )    
|                                                                                                                                                                                |  | Loss from discontinued operations          |                                   |   | (0.05              | )    |                  |   | (0.16 | )     |        |   | (0.03 | )    |        |   | (0.26 | )    
|                                                                                                                                                                                |  |                                            |                                   |   |                    |      |                  |   |       |       |        |   |       |      |        |  
|                                                                                                                                                                                |  |                                            | Diluted earnings (loss) per share |   | $                  | 0.15 |                  |   | $     | (0.01 | )      |   | $     | 0.42 |        |   | $     | (0.46 | )
|                                                                                                                                                                                |  |                                            |                                   |   |                    |      |                  |   |       |       |        |   |       |      |        |  

See accompanying notes to the consolidated financial statements.

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PEERLESS MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS(Dollars in thousands)(Unaudited)

|                                                                   |                                                                                            |                                                                   |       |                  |        |      |       |        |        |  
|------------------------------------------------------------------ | ------------------------------------------------------------------------------------------ | ----------------------------------------------------------------- | ----- | ---------------- | ------ | ---- | ----- | ------ | ------ | -
|                                                                   |                                                                                            |                                                                   |       | Six Months Ended
|                                                                   |                                                                                            |                                                                   |       | December 31,    
|                                                                   |                                                                                            |                                                                   |       | 2003             |        | 2002
|                                                                   |                                                                                            |                                                                   |       |                  |        |     
|Cash flows from operating activities:                              |                                                                                            |                                                                   |       |                  |        |      |       |       
|                                                                   | Net earnings (loss)                                                                        |                                                                   | $     | 1,272            |        |      | $     | (1,369 | )     
|                                                                   |                                                                                            | Net loss from discontinued operations                             |       |                  | 77     |      |       |        | 782    |  
|                                                                   |                                                                                            |                                                                   |       |                  |        |      |       |        |       
|                                                                   | Net earnings (loss) from continuing operations                                             |                                                                   |       | 1,349            |        |      |       | (587   | )     
|                                                                   | Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities: |                                                                   |       |                  |        |      |       |        |       
|                                                                   |                                                                                            | Depreciation and amortization                                     |       |                  | 369    |      |       |        | 391    |  
|                                                                   |                                                                                            | Bad debt expense                                                  |       |                  | 72     |      |       |        | 460    |  
|                                                                   |                                                                                            | Foreign exchange (gain) loss                                      |       |                  | (47    | )    |       |        | 91     |  
|                                                                   |                                                                                            | Other                                                             |       |                  | (2     | )    |       |        | (5     | )
|                                                                   | Changes in operating assets and liabilities                                                |                                                                   |       |                  |        |      |       |        |       
|                                                                   |                                                                                            | Accounts receivable                                               |       |                  | 3,777  |      |       |        | 8,600  |  
|                                                                   |                                                                                            | Inventories                                                       |       |                  | 321    |      |       |        | 162    |  
|                                                                   |                                                                                            | Costs and earnings in excess of billings on uncompleted contracts |       |                  | (2,691 | )    |       |        | 2,191  |  
|                                                                   |                                                                                            | Other current assets                                              |       |                  | 567    |      |       |        | (434   | )
|                                                                   |                                                                                            | Other assets                                                      |       |                  | (20    | )    |       |        | (185   | )
|                                                                   |                                                                                            | Accounts payable                                                  |       |                  | (1,547 | )    |       |        | (2,578 | )
|                                                                   |                                                                                            | Billings in excess of costs and earnings uncompleted contracts    |       |                  | (943   | )    |       |        | (342   | )
|                                                                   |                                                                                            | Commissions payable                                               |       |                  | (66    | )    |       |        | (474   | )
|                                                                   |                                                                                            | Product warranties                                                |       |                  | (75    | )    |       |        | 41     |  
|                                                                   |                                                                                            | Taxes Payable                                                     |       |                  | 699    |      |       |        | (766   | )
|                                                                   |                                                                                            | Accrued expenses and other                                        |       |                  | (575   | )    |       |        | (1,936 | )
|                                                                   |                                                                                            |                                                                   |       |                  |        |      |       |        |       
|                                                                   |                                                                                            |                                                                   | (161  | )                |        |      | 4,816 |       
|                                                                   |                                                                                            |                                                                   |       |                  |        |      |       |       
|Net cash provided by operating activities of continuing operations |                                                                                            |                                                                   | 1,188 |                  |        |      | 4,229 |       
|Cash flow from investing activities:                               |                                                                                            |                                                                   |       |                  |        |      |       |       
|                                                                   |                                                                                            | Net purchases of property and equipment                           |       |                  | (222   | )    |       |        | (96    | )
|                                                                   |                                                                                            |                                                                   |       |                  |        |      |       |        |       
|Net cash used in investing activities of continuing operations     |                                                                                            |                                                                   | (222  | )                |        |      | (96   | )     
|Cash flows from financing activities:                              |                                                                                            |                                                                   |       |                  |        |      |       |       
|                                                                   |                                                                                            | Proceeds from issuance of common stock                            |       |                  | 35     |      |       |        | 50     |  
|                                                                   |                                                                                            |                                                                   |       |                  |        |      |       |        |       
|Net cash provided by financing activities of continuing operations |                                                                                            |                                                                   | 35    |                  |        |      | 50    |       
|Net cash provided by (used in) discontinued operations             |                                                                                            |                                                                   | 248   |                  |        |      | (606  | )     
|Effect of exchange rate changes on
cash and cash equivalents       |                                                                                            |                                                                   | 31    |                  |        |      | (18   | )     
|                                                                   |                                                                                            |                                                                   |       |                  |        |      |       |        |       
|Net increase in cash and cash equivalents                          |                                                                                            |                                                                   | 1,280 |                  |        |      | 3,559 |       
|Cash and cash equivalents at beginning of period                   |                                                                                            |                                                                   | 6,680 |                  |        |      | 1,386 |       
|                                                                   |                                                                                            |                                                                   |       |                  |        |      |       |        |       
|Cash and cash equivalents at end of period                         |                                                                                            | $                                                                 | 7,960 |                  |        | $    | 4,945 |       
|                                                                   |                                                                                            |                                                                   |       |                  |        |      |       |        |       

See accompanying notes to the consolidated financial statements.

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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | Basis of Presentation
|-- |  | ---------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The accompanying consolidated financial statements of Peerless Mfg.
Co. and Subsidiaries (hereafter referred to as the Company, we, us,
our) have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information. The consolidated financial statements of the Company as of
December 31, 2003, and for the three and six months ended December 31,
2003 and 2002 are unaudited and, in the opinion of management, contain
all adjustments necessary for the fair presentation of the financial
position and results of operations of the Company for the interim
periods. These consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in
the Companys Annual Report on Form 10-K for the year ended June 30,
2003. The results of operations for the three and six months ended
December 31, 2003 are not necessarily indicative of the results to be
expected for the entire year (see Item 2  Managements Discussion and
Analysis of Financial Condition and Results of Operations - Factors That
May Affect Our Operating Results and Other Risk Factors). The Companys
fiscal year ends on June 30th. References herein to fiscal 2002, fiscal
2003 and fiscal 2004 refer to our fiscal years ended June 30, 2002, 2003
and 2004, respectively.
|
| | In connection
with the sale of our Boiler operations (see Note 4 
Discontinued Operations), the current year financial information has
been presented, and the prior year financial information has been
restated, to report the discontinued operation in accordance with SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | Certain fiscal 2003 items have been reclassified to conform to the
fiscal 2004 presentation. All dollar and share amounts are in thousands,
except per share amounts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             



|2. |  | Inventories
|-- |  | -----------



| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | Inventories are stated at the lower of cost (first-in, first-out) or
market. Principal components of inventories are as follows:

|                  |  |              |       |          |  |   |       | 
|----------------- |  | ------------ | ----- | -------- |  | - | ----- | 
|                  |  | December 31, |       | June 30,
|                  |  | 2003         |       | 2003    
|                  |  |              |       |         
|Raw materials     |  | $            | 2,222 |          |  | $ | 2,322 | 
|Work in process   |  |              | 365   |          |  |   | 581   | 
|Finished goods    |  |              | 312   |          |  |   | 312   | 
|                  |  |              |       |          |  |   |       | 
|Total inventories |  | $            | 2,899 |          |  | $ | 3,215 | 
|                  |  |              |       |          |  |   |       | 

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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003



|3. |  | Product Warranties
|-- |  | ------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company warrants that its products will be free from defects in
materials and workmanship and will conform to agreed upon specifications,
typically for a period of 12 months from installation or 18 months after
shipment, whichever occurs first, depending upon the specific product and
terms of the customer agreement. Typical warranties require the Company
to repair or replace defective products during the warranty period at no
cost to the customer. The Company attempts to obtain back-up concurrent
warranties for major component parts from our suppliers. The Company
provides for the estimated cost of product warranties, based upon
historical experience by product type, expectation of future conditions
and the extent of back-up concurrent supplier warranties in place, at the
time the product revenue is recognized. If these factors, or other
factors affecting warranty costs differ from our estimates, revisions to
the estimated product warranty liability are made accordingly.
|
| | Product warranty activity for the three and six months ended
December 31, 2003 and 2002 is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|                                       |  |                    |      |                  |  |      |      |      |  |   |      |   |  |   |      |  
|-------------------------------------- |  | ------------------ | ---- | ---------------- |  | ---- | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                       |  | Three Months Ended |      | Six Months Ended
|                                       |  | December 31,       |      | December 31,    
|                                       |  | 2003               |      | 2002             |  | 2003 |      | 2002
|                                       |  |                    |      |                  |  |      |      |     
|Balance at the beginning of the period |  | $                  | 702  |                  |  | $    | 795  |      |  | $ | 846  |   |  | $ | 627  |  
|Provision for warranty expense         |  |                    | 368  |                  |  |      | 462  |      |  |   | 355  |   |  |   | 868  |  
|Warranty charges                       |  |                    | (299 | )                |  |      | (589 | )    |  |   | (430 | ) |  |   | (827 | )
|                                       |  |                    |      |                  |  |      |      |      |  |   |      |   |  |   |      |  
|Balance at the end of the period       |  | $                  | 771  |                  |  | $    | 668  |      |  | $ | 771  |   |  | $ | 668  |  
|                                       |  |                    |      |                  |  |      |      |      |  |   |      |   |  |   |      |  

4.     Discontinued Operations



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the first quarter of fiscal 2004, the Board of Directors
authorized the divestiture and the Company sold its Boiler business unit.
In connection with the sale, the Company sold assets with a net book
value of approximately $110, for $250, resulting in a gain on disposal of
$140. Please see Item 2 - Managements Discussion and Analysis of
Financial Condition and Results of Operations - Restructuring and
Organizational Realignment of this Report.

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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

4.     Discontinued
Operations - continued



| |                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------
| | The following represents a summary of operating results and the gain
on disposition of the Boiler segment presented as discontinued
operations:

|                               |                          |   |                    |       |                  |   |      |       |      |   |     |       |   |   |       |        |  
|------------------------------ | ------------------------ | - | ------------------ | ----- | ---------------- | - | ---- | ----- | ---- | - | --- | ----- | - | - | ----- | ------ | -
|                               |                          |   | Three Months Ended |       | Six Months Ended
|                               |                          |   | December 31,       |       | December 31,    
|                               |                          |   | 2003               |       | 2002             |   | 2003 |       | 2002
|                               |                          |   |                    |       |                  |   |      |       |     
|Revenues                       |                          | $ |                   |       |                  | $ | 731  |       |      | $ | 360 |       |   | $ | 1,909 |       
|Cost of goods sold             |                          |   | 206                |       |                  |   | 831  |       |      |   | 378 |       |   |   | 2,046 |       
|                               |                          |   |                    |       |                  |   |      |       |      |   |     |       |   |   |       |       
|                               | Gross margin loss        |   |                    | (206  | )                |   |      | (100  | )    |   |     | (18   | ) |   |       | (137   | )
|Operating expenses             |                          |   | 11                 |       |                  |   | 691  |       |      |   | 240 |       |   |   | 1,093 |       
|                               |                          |   |                    |       |                  |   |      |       |      |   |     |       |   |   |       |       
|                               | Operating loss           |   |                    | (217  | )                |   |      | (791  | )    |   |     | (258  | ) |   |       | (1,230 | )
|Other (income) expense         |                          |   |                   |       |                  |   | (2   | )     |      |   |    |       |   |   | 16    |       
|Income tax benefit             |                          |   | (75                | )     |                  |   | (295 | )     |      |   | (89 | )     |   |   | (464  | )     
|                               |                          |   |                    |       |                  |   |      |       |      |   |     |       |   |   |       |       
|                               | Net loss from operations |   |                    | (142  | )                |   |      | (494  | )    |   |     | (169  | ) |   |       | (782   | )
|Gain on disposal, net of taxes |                          |   |                   |       |                  |   |     |       |      |   | 92  |       |   |   |      |       
|                               |                          |   |                    |       |                  |   |      |       |      |   |     |       |   |   |       |       
|                               | Net loss                 |   | $                  | (142  | )                |   | $    | (494  | )    |   | $   | (77   | ) |   | $     | (782   | )
|                               |                          |   |                    |       |                  |   |      |       |      |   |     |       |   |   |       |       
|Diluted loss per share         |                          |   |                    |       |                  |   |      |       |      |   |     |       |   |   |       |       
|                               | Net loss from operations |   | $                  | (0.05 | )                |   | $    | (0.16 | )    |   | $   | (0.06 | ) |   | $     | (0.26  | )
|                               |                          |   |                    |       |                  |   |      |       |      |   |     |       |   |   |       |       
|                               | Net gain on disposal     |   | $                  |      |                  |   | $    |      |      |   | $   | 0.03  |   |   | $     |       |  
|                               |                          |   |                    |       |                  |   |      |       |      |   |     |       |   |   |       |       
|                               | Net loss                 |   | $                  | (0.05 | )                |   | $    | (0.16 | )    |   | $   | (0.03 | ) |   | $     | (0.26  | )
|                               |                          |   |                    |       |                  |   |      |       |      |   |     |       |   |   |       |       



| |                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------
| | The current and non-current assets and liabilities of the
discontinued Boiler segment as of December 31, 2003 and June 30, 2003 are
as follows:

|                                                                                                                                            |                |   |              |   |          |   |       |     | 
|------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | - | ------------ | - | -------- | - | ----- | --- | 
|                                                                                                                                            |                |   | December 31, |   | June 30,
|                                                                                                                                            |                |   | 2003         |   | 2003    
|                                                                                                                                            |                |   |              |   |         
|Accounts receivable, principally trade - net of
allowance for uncollectible accounts of $800
at December 31, 2003 and $650 at June 30, 2003 |                | $ | 2,058        |   |          | $ | 2,631 |    
|Other                                                                                                                                       |                |   | 63           |   |          |   | 129   |    
|                                                                                                                                            |                |   |              |   |          |   |       |    
|Current assets of discontinued operations                                                                                                   |                |   | 2,121        |   |          |   | 2,760 |    
|                                                                                                                                            | Equipment, net |   |              | 9 |          |   |       | 30  | 
|                                                                                                                                            | Others         |   |              |  |          |   |       | 121 | 
|                                                                                                                                            |                |   |              |   |          |   |       |    
|Total assets of discontinued operations                                                                                                     |                | $ | 2,130        |   |          | $ | 2,911 |    
|                                                                                                                                            |                |   |              |   |          |   |       |    
|Accounts payable                                                                                                                            |                | $ | 136          |   |          | $ | 336   |    
|Commissions payable                                                                                                                         |                |   | 35           |   |          |   | 78    |    
|Product warranties                                                                                                                          |                |   | 148          |   |          |   | 148   |    
|Accrued liabilities and other                                                                                                               |                |   | 240          |   |          |   | 302   |    
|                                                                                                                                            |                |   |              |   |          |   |       |    
|Total current liabilities of discontinued operations                                                                                        |                | $ | 559          |   |          | $ | 864   |    
|                                                                                                                                            |                |   |              |   |          |   |       |    

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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

5.     Contingencies



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Included in our discontinued operations is a $2.2 million receivable
(before allowance for doubtful accounts) due from a customer that filed a
plan of reorganization under Chapter 11 of the United States Bankruptcy
Code. The Company has been classified as an unsecured creditor under
such filing. However, the customer has reportedly assigned all its
rights, claims, duties and defenses under our contract to the projects
owner. The Company has obtained outside counsel to help with the
collection of this receivable and have filed a statutory lien on the
refinery where our equipment was installed. In addition, the Company has
filed a lawsuit to perfect our lien interest against the owner of the
refinery, and also to pursue our contractual claims against the owner as
assignee of the customer. The Company has also been informed that the
owner/assignee intends to allege counterclaims in the lawsuit. While the
Company believes its lien and its contractual claims will be found to be
valid, no assurances can be given. The Company intends to continue to
vigorously pursue the collection of this receivable and believes that it
will be collected.
|
| | During the quarter, the Company has had negotiations with the owner
to resolve this matter, and based on these negotiations, expects to have
this matter resolved by the end of its third quarter of fiscal 2004. In
addition, the Company does not expect to have to provide any additional
reserve with respect to this receivable. However, as the matter has not
been finalized, the disclosure of the following risks are still
appropriate: In the event that our lien is held to be invalid, or if the
receivable or a significant portion thereof is deemed to be not
collectible; and/or if the owner/assignee is able to successfully assert
counterclaims, we will be required to write down the receivable to its
net realizable value. To the extent that our existing allowance for
doubtful accounts is not adequate to cover this write down, the
additional reserve required will be a charge against the Companys
results of discontinued operations.                                                                                                                                                                                                                      



|6. |  | Comprehensive Income (Loss).
|-- |  | ----------------------------



| |                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Comprehensive income (loss) is defined as all changes in equity
during a period, except those resulting from investments by owners and
distributions to owners. The components of comprehensive income (loss)
were as follows:

|                                               |  |                    |      |                  |  |      |      |      |  |   |       |   |  |   |        |  
|---------------------------------------------- |  | ------------------ | ---- | ---------------- |  | ---- | ---- | ---- |  | - | ----- | - |  | - | ------ | -
|                                               |  | Three Months Ended |      | Six Months Ended
|                                               |  | December 31,       |      | December 31,    
|                                               |  | 2003               |      | 2002             |  | 2003 |      | 2002
|                                               |  |                    |      |                  |  |      |      |     
|Net earnings (loss) from continuing operations |  | $                  | 609  |                  |  | $    | 468  |      |  | $ | 1,349 |   |  | $ | (587   | )
|Net loss from discontinued operations          |  |                    | (142 | )                |  |      | (494 | )    |  |   | (77   | ) |  |   | (782   | )
|Foreign currency translation adjustment        |  |                    | 145  |                  |  |      | 27   |      |  |   | 162   |   |  |   | 50     |  
|                                               |  |                    |      |                  |  |      |      |      |  |   |       |   |  |   |        |  
|Comprehensive income (loss)                    |  | $                  | 612  |                  |  | $    | 1    |      |  | $ | 1,434 |   |  | $ | (1,319 | )
|                                               |  |                    |      |                  |  |      |      |      |  |   |       |   |  |   |        |  

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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003



|7. |  | Earning (Loss) Per Share
|-- |  | ------------------------

Basic earnings (loss) per share have been computed by dividing net
earnings (loss) by the weighted average number of common shares outstanding
during the period. Diluted earnings (loss) per share reflect the potential
dilution that could occur if options or other contracts to issue common shares
were exercised or converted into common stock. The following table sets forth
the computation for basic and diluted earnings (loss) per share for the periods
indicated. Certain earnings per share amounts may not total due to rounding.

|                                                 |                                                    |   |                    |       |                  |   |       |       |      |   |       |       |  |   |       |        |  
|------------------------------------------------ | -------------------------------------------------- | - | ------------------ | ----- | ---------------- | - | ----- | ----- | ---- | - | ----- | ----- |  | - | ----- | ------ | -
|                                                 |                                                    |   | Three Months Ended |       | Six Months Ended
|                                                 |                                                    |   | December 31,       |       | December 31,    
|                                                 |                                                    |   | 2003               |       | 2002             |   | 2003  |       | 2002
|                                                 |                                                    |   |                    |       |                  |   |       |       |     
|Net earnings (loss) from continuing operations   |                                                    | $ | 609                |       |                  | $ | 468   |       |      | $ | 1,349 |       |  | $ | (587  | )     
|Loss from discontinued operations                |                                                    |   | (142               | )     |                  |   | (494  | )     |      |   | (77   | )     |  |   | (782  | )     
|                                                 |                                                    |   |                    |       |                  |   |       |       |      |   |       |       |  |   |       |       
|                                                 | Net earnings (loss)                                |   | $                  | 467   |                  |   | $     | (26   | )    |   | $     | 1,272 |  |   | $     | (1,369 | )
|                                                 |                                                    |   |                    |       |                  |   |       |       |      |   |       |       |  |   |       |       
|Basic weighted average common shares outstanding |                                                    |   | 3,002              |       |                  |   | 2,994 |       |      |   | 3,000 |       |  |   | 2,993 |       
|Effect of dilutive options                       |                                                    |   | 45                 |       |                  |   | 34    |       |      |   | 42    |       |  |   |      |       
|                                                 |                                                    |   |                    |       |                  |   |       |       |      |   |       |       |  |   |       |       
|                                                 | Diluted weighted average common shares outstanding |   |                    | 3,047 |                  |   |       | 3,028 |      |   |       | 3,042 |  |   |       | 2,993  |  
|                                                 |                                                    |   |                    |       |                  |   |       |       |      |   |       |       |  |   |       |       
|Net earnings (loss) per share - basic:           |                                                    |   |                    |       |                  |   |       |       |      |   |       |       |  |   |       |       
|Earnings (loss) from continuing operations       |                                                    | $ | 0.20               |       |                  | $ | 0.16  |       |      | $ | 0.45  |       |  | $ | (0.20 | )     
|Loss from discontinued operations                |                                                    |   | (0.05              | )     |                  |   | (0.17 | )     |      |   | (0.03 | )     |  |   | (0.26 | )     
|                                                 |                                                    |   |                    |       |                  |   |       |       |      |   |       |       |  |   |       |       
|                                                 | Net earnings (loss) per share                      |   | $                  | 0.16  |                  |   | $     | (0.01 | )    |   | $     | 0.42  |  |   | $     | (0.46  | )
|                                                 |                                                    |   |                    |       |                  |   |       |       |      |   |       |       |  |   |       |       
|Net earnings (loss) per share - diluted:         |                                                    |   |                    |       |                  |   |       |       |      |   |       |       |  |   |       |       
|Earnings (loss) from continuing operations       |                                                    | $ | 0.20               |       |                  | $ | 0.15  |       |      | $ | 0.44  |       |  | $ | (0.20 | )     
|Loss from discontinued operations                |                                                    | $ | (0.05              | )     |                  |   | (0.16 | )     |      |   | (0.03 | )     |  |   | (0.26 | )     
|                                                 |                                                    |   |                    |       |                  |   |       |       |      |   |       |       |  |   |       |       
|                                                 | Net earnings (loss) per share                      |   | $                  | 0.15  |                  |   | $     | (0.01 | )    |   | $     | 0.42  |  |   | $     | (0.46  | )
|                                                 |                                                    |   |                    |       |                  |   |       |       |      |   |       |       |  |   |       |       

The weighted average common shares outstanding-diluted computation
excluded 101 outstanding stock options for the three and six months
ended December 31, 2003, because their impact would be
anti-dilutive. Likewise, the weighted average common shares
outstanding-diluted computation excluded 62 and 193 outstanding stock options
for the three and six months ended December 31, 2002, respectively, because
their impact would be anti-dilutive.



|8. |  | Line of Credit
|-- |  | --------------

On October 31, 2003, the Company entered into a $12.5 million revolving
credit facility that expires on October 31, 2006. The facility carries a
floating interest rate based on the prime or Euro rate plus or minus an
applicable margin (Euro plus 1.75% at December 31, 2003), and is secured by
substantially all the Companys domestic assets. At December 31, 2003, we had
$4.1 million outstanding under letters of credit and no outstanding loans,
leaving us $8.4 million of availability under our facility.

The facility contains financial covenants, certain restrictions on capital
expenditures, acquisitions, asset dispositions, dividends and additional debt,
as well as other customary covenants. As of December 31, 2003, the Company was
in compliance with all financial and other covenants under this credit
facility.

10



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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003



|9. |  | Stock-Based Compensation
|-- |  | ------------------------

In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure (SFAS 148) which amends
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123). SFAS 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation and requires disclosures in annual and
interim financial statements of the effects of stock-based compensation as
reflected below.

The Company continues to account for its stock options under the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25 Accounting for Stock Issued to Employees, and related Interpretations.
No stock-based employee compensation expense related to the Companys stock
options is reflected in the net earnings (loss), as all options granted under
the plan had an exercise price equal to the market value of the underlying
common stock on the date of grant. The following table illustrates the effect
on net earnings (loss) and earnings (loss) per share if the Company had applied
the fair value recognition provisions of SFAS 123 to stock-based compensation.

|                                                                                                                             |                       |   |                    |      |                  |   |      |       |      |   |       |      |  |   |        |       |  
|---------------------------------------------------------------------------------------------------------------------------- | --------------------- | - | ------------------ | ---- | ---------------- | - | ---- | ----- | ---- | - | ----- | ---- |  | - | ------ | ----- | -
|                                                                                                                             |                       |   | Three Months Ended |      | Six Months Ended
|                                                                                                                             |                       |   | December 31,       |      | December 31,    
|                                                                                                                             |                       |   | 2003               |      | 2002             |   | 2003 |       | 2002
|                                                                                                                             |                       |   |                    |      |                  |   |      |       |     
|Net earnings (loss), as reported                                                                                             |                       | $ | 467                |      |                  | $ | (26  | )     |      | $ | 1,272 |      |  | $ | (1,369 | )    
|Less total stock-based employee compensation expense determined
using the fair value based method for all awards, net of tax |                       |   | (102               | )    |                  |   | (16  | )     |      |   | (123  | )    |  |   | (40    | )    
|                                                                                                                             |                       |   |                    |      |                  |   |      |       |      |   |       |      |  |   |        |      
|Pro forma net earnings (loss)                                                                                                |                       | $ | 365                |      |                  | $ | (42  | )     |      | $ | 1,149 |      |  | $ | (1,409 | )    
|                                                                                                                             |                       |   |                    |      |                  |   |      |       |      |   |       |      |  |   |        |      
|Net earnings (loss) per share:                                                                                               |                       |   |                    |      |                  |   |      |       |      |   |       |      |  |   |        |      
|                                                                                                                             | Basic - as reported   |   | $                  | 0.16 |                  |   | $    | (0.01 | )    |   | $     | 0.42 |  |   | $      | (0.46 | )
|                                                                                                                             |                       |   |                    |      |                  |   |      |       |      |   |       |      |  |   |        |      
|                                                                                                                             | Basic - pro forma     |   | $                  | 0.12 |                  |   | $    | (0.01 | )    |   | $     | 0.38 |  |   | $      | (0.47 | )
|                                                                                                                             |                       |   |                    |      |                  |   |      |       |      |   |       |      |  |   |        |      
|                                                                                                                             | Diluted - as reported |   | $                  | 0.15 |                  |   | $    | (0.01 | )    |   | $     | 0.42 |  |   | $      | (0.46 | )
|                                                                                                                             |                       |   |                    |      |                  |   |      |       |      |   |       |      |  |   |        |      
|                                                                                                                             | Diluted - pro forma   |   | $                  | 0.12 |                  |   | $    | (0.01 | )    |   | $     | 0.38 |  |   | $      | (0.47 | )
|                                                                                                                             |                       |   |                    |      |                  |   |      |       |      |   |       |      |  |   |        |      



|10. |  | Supplemental Cash Flow Information
|--- |  | ----------------------------------

Net cash flows from operating activities reflects cash payments for
interest and income taxes as follows:

|                  |  |                  |   |      |  |   |     | 
|----------------- |  | ---------------- | - | ---- |  | - | --- | 
|                  |  | Six Months Ended
|                  |  | December 31,    
|                  |  | 2003             |   | 2000
|                  |  |                  |   |     
|Interest paid     |  | $                |  |      |  | $ |    | 
|Income taxes paid |  | $                |  |      |  | $ | 428 | 

11



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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003



|11. |  | Segment Information
|--- |  | -------------------

The Company identifies reportable segments based on management
responsibility within the corporate structure. The Company has two reportable
industry segments: Environmental Systems and Separation Filtration Systems.
The main product of the Environmental Systems segment is its Selective
Catalytic Reduction Systems, referred to as SCR Systems. These environmental
control systems are used for air pollution abatement and convert nitrogen oxide
(NOx) emissions from exhaust gases caused by burning hydrocarbon fuels such as
coal, gasoline, natural gas and oil. Along with the SCR Systems, this segment
also offers systems to reduce other pollutants such as carbon monoxide (CO) and
particulate matter. The Company combines these systems with other components,
such as instruments, controls and related valves and piping, to offer its
customers a totally integrated system. The Separation Filtration Systems
segment produces specialized products known as separators or filters which
are used for a variety of purposes in cleaning gases and liquids as they move
through piping systems. These products are used primarily to remove solid and
liquid contaminants from natural gas and saltwater aerosols from combustion
intake air of shipboard gas turbine and diesel engines. In addition,
Separators are also used in nuclear power plants to remove water from saturated
steam. The Company previously had three-reportable segments, its third segment
 Boilers was suspended during the first quarter of fiscal 2003 and
discontinued during the first quarter of fiscal 2004. Please see Item 2 -
Managements Discussion and Analysis of Financial Condition and Results of
Operations - Restructuring and Organizational Realignment and
Note 4 
Discontinued Operations of this Report.

Segment profit and loss is based on revenue less direct expenses of the
segment before allocation of general and administrative costs. All
inter-company transfers between segments have been eliminated. Segment
information and reconciliation to operating profit (loss) for the three and six
months ended December 31, 2003 and 2002 are presented below. Note that the
Company does not allocate general and administrative and restructuring expenses
(unallocated overhead), assets, expenditures for assets or depreciation
expense on a segment basis for internal management reporting, and therefore
such information is not presented. Certain information for the first and
second quarters of fiscal 2003 has been restated to be on a comparable basis
with the first and second quarters of fiscal 2004 presentation.

|                                     |  |               |        |            |  |             |        |              |  |   |        |   |  |   |        |  
|------------------------------------ |  | ------------- | ------ | ---------- |  | ----------- | ------ | ------------ |  | - | ------ | - |  | - | ------ | -
|                                     |  |               |        |            |  | Separation  |        |              |  |   |        |   |  |  
|                                     |  | Environmental |        | Filtration |  | Unallocated |        |              |  |  
|                                     |  | Systems       |        | Systems    |  | overhead    |        | Consolidated
|                                     |  |               |        |            |  |             |        |             
|Three months ended
December 31, 2003 |  |               |        |            |  |             |        |              |  |   |        |   |  |   |        |  
|Revenue from customers               |  | $             | 8,930  |            |  | $           | 7,499  |              |  | $ |       |   |  | $ | 16,429 |  
|Segment profit (loss)                |  | $             | 1,494  |            |  | $           | 605    |              |  | $ | (1,278 | ) |  | $ | 821    |  
|Three months ended
December 31, 2002 |  |               |        |            |  |             |        |              |  |   |        |   |  |   |        |  
|Revenue from customers               |  | $             | 12,506 |            |  | $           | 7,505  |              |  | $ |       |   |  | $ | 20,011 |  
|Segment profit (loss)                |  | $             | 802    |            |  | $           | 1,190  |              |  | $ | (1,317 | ) |  | $ | 675    |  
|Six months ended
December 31, 2003   |  |               |        |            |  |             |        |              |  |   |        |   |  |   |        |  
|Revenue from customers               |  | $             | 19,009 |            |  | $           | 14,227 |              |  | $ |       |   |  | $ | 33,236 |  
|Segment profit (loss)                |  | $             | 3,229  |            |  | $           | 979    |              |  | $ | (2,236 | ) |  | $ | 1,972  |  
|Six months ended
December 31, 2002   |  |               |        |            |  |             |        |              |  |   |        |   |  |   |        |  
|Revenue from customers               |  | $             | 19,449 |            |  | $           | 13,838 |              |  | $ |       |   |  | $ | 33,287 |  
|Segment profit (loss)                |  | $             | 376    |            |  | $           | 1,630  |              |  | $ | (2,984 | ) |  | $ | (978   | )

12



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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003




ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Forward-Looking Statements

From time to time, we make oral and written statements that may constitute
forward-looking statements (rather than historical facts) as defined in the
Private Securities Litigation Reform Act of 1996 or by the Securities and
Exchange Commission in its rules, regulations and releases, including
statements regarding our expectations, hopes, beliefs, intentions or strategies
regarding the future. We desire to take advantage of the safe harbor
provisions in the Private Securities Litigation Reform Act of 1996 for
forward-looking statements made from time to time, including, but not limited
to, the forward-looking statements made in this Report on Form 10-Q, as well as
those made in our other filings with the SEC. Forward-looking statements
contained in this Report are based on managements current plans and
expectations and are subject to a number of risks and uncertainties that could
cause actual results to differ materially from those described in the
forward-looking statements. In the preparation of this Report, where such
forward-looking statements appear, we have sought to accompany such statements
with meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those described in the
forward-looking statements. Such factors include, but are not limited to, the
Factors That May Affect Our Operating Results and Other Risk Factors, as set
forth starting on page 22 of this Report.

All forward-looking statements included in this Report are based on
information available to us on the date hereof, and we expressly disclaim any
obligation to release publicly any updates or changes in the forward-looking
statements, whether as a result of changes in events, conditions, or
circumstances on which any forward-looking statement is based.

Overview

We are a global company providing environmental, separation and filtration
products for the abatement of air pollution and the removal of contaminants
from gases and liquids through our two business segments  Environmental
Systems and Separation Filtration Systems. During the first quarter of fiscal
2003, we suspended the operations of our Boiler business and in connection with
its sale, we discontinued this business unit during the first quarter of fiscal
2004. See Restructuring and Organizational Realignment following for
additional discussion on the suspension and discontinuance of this business
unit.

Environmental Systems. In this business segment, which represented 57.2%
of our consolidated year-to-date revenues from continuing operations, we
design, engineer, manufacture and sell highly specialized environmental control
systems, which are used for air pollution abatement. Our main product,
Selective Catalytic Reduction systems, referred to as SCR Systems, is used to
convert nitrogen oxide (NOx) emissions from exhaust gases, caused by burning
hydrocarbon fuels, such as coal, gasoline, natural gas and oil, into harmless
nitrogen and water vapor. These systems are totally integrated, complete with
instruments, controls and related values and piping. In this segment, we also
offer systems to reduce other pollutants, such as carbon monoxide (CO) and
particulate matter.

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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

Separation Filtration Systems.In this business segment, which
represented 42.8% of our consolidated year-to-date revenues from continuing
operations, we design, engineer, manufacture and sell specialized products
known as separators or filters which are used for a variety of purposes in
cleaning gases and liquids as they move through piping systems. These products
are used primarily to remove solid and liquid contaminants from natural gas and
saltwater aerosols from combustion intake air of shipboard gas turbine and
diesel engines. Separators are also used in nuclear power plants to remove
water from saturated steam.

Restructuring and Organizational Realignment

During fiscal 2002, the construction of new merchant power plants in the
United States slowed considerably, as doubts emerged regarding the actual
demand for electricity began to surface, coupled with the continued weakness in
the United States economy. In addition, regulatory uncertainties caused NOx
reduction initiatives relating to retrofit projects to be delayed. As a
response to the slowdown of new merchant power plants, continued weakness in
the United States and global economies, and regulatory and political
uncertainties, in July 2002 we initiated a restructuring and organizational
realignment initiative. The goal of this initiative was to reduce costs,
streamline operations, and identify and exit certain non-critical, marginally
performing operating activities, thereby positioning us with a more competitive
cost structure vital for our overall long-term success. In connection
therewith, we identified our Boiler unit as a non-critical, marginally
performing business segment and suspended new orders during fiscal 2003. This
unit was sold during the first part of fiscal 2004, and in connection therewith
the financial information has been restated to present this operation as a
discontinued business unit.

We believe that the result of these initiatives, including the redirection
of our resources and focus on our two principal segments, has positioned us to
maximize our current operational efficiencies and allow us the flexibility to
meet our customers current and anticipated needs, without sacrificing our
ability to expand our business to meet future demand. While the initial phase
of our restructuring and organizational realignment initiatives have been
completed, we continue to look for ways to improve our operational efficiencies
and performance.

Critical Accounting Policies

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

Certain of our accounting policies require a higher degree of judgment
than others in their application. These include revenue recognition on
long-term contracts, accrual for estimated warranty costs and allowance for
doubtful accounts. Our policies and related procedures for revenue recognition
on long-term contracts, accrual of warranty costs and allowance for doubtful
accounts are summarized below.

Revenue Recognition.We provide products under long-term, generally
fixed-priced, contracts that may extend up to 18 months, or longer, in
duration. In connection with these contracts, we follow the guidance contained
in AICPA Statement of Position (SOP) 81-1, Accounting for Performance of

14



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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

Construction-Type and Certain Production-Type Contracts. SOP 81-1 requires
the use of percentage-of-completion accounting for long-term contracts that contain enforceable
rights regarding services to be provided and received by the contracting
parties, consideration to be exchanged, and the manner and terms of settlement,
assuming reasonably dependable estimates of revenues and expenses can be made.
The percentage-of-completion methodology generally results in the recognition
of reasonably consistent profit margins over the life of a contract. Amounts
recognized in revenue are calculated using the percentage of construction cost
completed, generally on a cumulative cost to total cost basis. Cumulative
revenues recognized may be less or greater than cumulative costs and profits
billed at any point in time during a contracts term. The resulting difference
is recognized as costs and earnings in excess of billings on uncompleted
contracts or billings in excess of costs and earnings on uncompleted
contracts.

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

Product Warranties. We offer warranty periods of various lengths to our
customers depending upon the specific product and terms of the customer
agreement, typically for a period of 12 months from installation or 18 months
after shipment, whichever occurs first. We negotiate varying terms regarding
warranty coverage and length of warranty dependent upon the product involved
and customary practices. In general, our warranties require us to repair or
replace defective products during the warranty period at no cost to the
customer. We attempt to obtain back-up concurrent warranties for major
component parts from our suppliers. As of each balance sheet date, we record
an estimate for warranty related costs for products sold based on historical
experience, expectation of future conditions and the extent of back-up
concurrent supplier warranties in place. While we believe that our estimated
warranty reserve is adequate and the judgment applied is appropriate, due to a
number of factors, our estimated liability for product warranties could differ
from future actual warranty costs incurred.

Allowance for Doubtful Accounts.We maintain an allowance for doubtful
accounts to reflect estimated losses resulting from the inability of customers
to make required payments. On an ongoing basis, we evaluate the collectibility
of accounts receivable based upon historical collection trends, current
economic factors and the assessment of the collectibility of specific accounts.
We evaluate the collectibility of specific accounts using a combination of
factors, including the age of the outstanding balances, evaluation of
customers current and past financial condition and credit scores, recent
payment history, current economic environment and discussions with our project
managers and with the customers directly.

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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

Results of Operations

The following table displays our statements of operations as a percentage
of net revenues:

|                                                                   |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |   
|------------------------------------------------------------------ |  | ------------------ | ----- | ---------------- |  | ---- | ----- | ---- |  |  | ----- | - |  |  | ----- | --
|                                                                   |  | Three Months Ended |       | Six Months Ended
|                                                                   |  | December 31,       |       | December 31,    
|                                                                   |  | 2003               |       | 2002             |  | 2003 |       | 2002
|                                                                   |  |                    |       |                  |  |      |       |     
|Net revenues                                                       |  |                    | 100.0 | %                |  |      | 100.0 | %    |  |  | 100.0 | % |  |  | 100.0 | % 
|Cost of revenues                                                   |  |                    | 72.3  |                  |  |      | 77.6  |      |  |  | 71.9  |   |  |  | 76.7  |   
|                                                                   |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |   
|Gross margin                                                       |  |                    | 27.7  |                  |  |      | 22.4  |      |  |  | 28.1  |   |  |  | 23.3  |   
|Operating expenses                                                 |  |                    | 22.7  |                  |  |      | 19.0  |      |  |  | 22.2  |   |  |  | 24.7  |   
|Restructuring expenses                                             |  |                    |      |                  |  |      |      |      |  |  |      |   |  |  | 1.5   |   
|                                                                   |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |   
|                                                                   |  |                    | 22.7  |                  |  |      | 19.0  |      |  |  | 22.2  |   |  |  | 26.2  |   
|                                                                   |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |   
|Operating income (loss)                                            |  |                    | 5.0   |                  |  |      | 3.4   |      |  |  | 5.9   |   |  |  | (2.9  | ) 
|Other income                                                       |  |                    | 0.7   |                  |  |      | 0.3   |      |  |  | 0.2   |   |  |  | 0.1   |   
|                                                                   |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |   
|Net earnings (loss) from continuing
operations before income taxes |  |                    | 5.7   |                  |  |      | 3.7   |      |  |  | 6.1   |   |  |  | (2.8  | ) 
|Income tax expense (benefit)                                       |  |                    | 2.0   |                  |  |      | 1.3   |      |  |  | 2.1   |   |  |  | (1.0  | ) 
|                                                                   |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |   
|Earnings (loss) from continuing operations,
net of tax             |  |                    | 3.7   |                  |  |      | 2.4   |      |  |  | 4.0   |   |  |  | (1.8  | ) 
|Loss from discontinued operations,
net of tax                      |  |                    | (0.9  | )                |  |      | (2.5  | )    |  |  | (0.2  | ) |  |  | (2.3  | ) 
|                                                                   |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |   
|Net earnings (loss)                                                |  |                    | 2.8   | %                |  |      | (0.1  | )%   |  |  | 3.8   | % |  |  | (4.1  | )%
|                                                                   |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |   

Three Months Ended December 31, 2003 Compared to Three Months Ended December 31, 2002

Revenues.Net revenues from continuing operations decreased by
approximately $3.6 million, or 18.0%, from $20.0 million for the three months
ended December 31, 2002 to $16.4 million for the three months ended December
31, 2003. The decrease in revenues during the period related primarily to a
decrease in our Environmental Systems revenues, which decreased from $12.5
million to $8.9 million, or 28.8%.

Gross Profit.Our gross profit increased approximately $70,000, or 1.6%,
from $4.48 million for the three months ended December 31, 2002 to $4.55
million for the three months ended December 31, 2003. Our gross profit, as a
percentage of sales, increased from 22.4% for the three months ended December
31, 2002 to 27.7% for the three months ended December 31, 2003. Our reported
margins, during a particular period, may be impacted by three primary factors:
(i) sales volume, (ii) lower start-up and warranty costs and (iii) shifts in
our product mix. As we manufacture a significant portion of our products,
fluctuations in revenues, from quarter to quarter or year to year, may impact
our manufacturing absorption factors, which will directly impact our reported
margins. During the quarter, in comparison to the same quarter last year and
as a percentage of revenue, we experienced an unfavorable variance in our
manufacturing absorption of approximately 3%, and a favorable variance in our
start-up and warranty costs of approximately 5%. In addition to the foregoing,
as noted earlier, our reported margins in any given
quarter can be impacted by shifts in our product mix. Certain of our
products historically have higher margins than others, and certain of our
products historically have a much higher internally manufactured cost
component; as a result, shifts in the composition of our sales can have a
significant impact on our reported margins either at the selling margin level
or through a negative or positive impact on our manufacturing absorption. All
of these factors, to some degree, impacted our margins in the current quarter.

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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

Operating Expenses.For the second quarter of fiscal 2004, operating
expenses from continuing operations decreased by approximately $100,000, or
2.6%, to approximately $3.7 million, compared to $3.8 million for the second
quarter of fiscal 2003. Operating expenses, as a percentage of sales, were
22.7% for the second quarter of fiscal 2004, compared to 19.0% for the second
quarter of fiscal 2003. The decrease in the amount of operating expenses
during the quarter was due to our continued initiative to look for ways to
improve our operational efficiencies and performance during these challenging
times. The increase as a percentage of sales is due to the decrease in
revenues in the current quarter compared to the same quarter last year. See
also Item 2 - Managements Discussion and Analysis of Financial Condition and
Results of Operation  Restructuring and Organizational Realignment of this
Report.

Other Income and Expense.Other income and expense items increased by
approximately $46,000, from income of approximately $63,000 for the second
quarter of fiscal 2003, to income of $109,000 for the second quarter of fiscal
2004. We realized foreign currency exchange gains of approximately $94,000
during the current quarter, compared to exchange losses of $28,000 for the same
quarter last year, or a positive impact on our operation of approximately
$122,000. This was offset by a decrease in rental, interest and other
miscellaneous income of approximately $76,000.

Income Taxes.The Companys effective income tax rate was approximately
34% and 37% for the three months ended December 31, 2003 and 2002,
respectively. The decrease in our effective tax rate for the current quarter,
compared to the same quarter last year, resulted from an increased portion of
our income subject to either a lower foreign tax rate or foreign sales income
exclusions.

Net Earnings (Loss) from Continuing Operations.Net earnings from
continuing operations were approximately $609,000, or 3.7% of sales for the
three months ended December 31, 2003, compared to approximately $468,000, or
2.4% sales for the same period last year. Basic earnings per share from
continuing operations increased from earnings of $0.16 per share for the three
months ended December 31, 2002, to earnings of $0.20 per share for three months
ended December 31, 2003. Diluted earnings per share from continuing operations
increased from earnings of $0.15 per share for the three months ended December
31, 2002, to earnings of $0.20 per share for the three months ended December
31, 2003.

Discontinued Operations.Net loss from discontinued operations for the
three months ended December 31, 2003 was $142,000, compared to a net loss of
$494,000 for the same period last year. Loss per basic share from discontinued
operations was ($0.05) per share for the three months ended December 31, 2003,
compared to a loss of ($0.17) per share for the same period last year. Diluted
loss per share from discontinued operations was ($.05) per share for the three
months ended December 31, 2003, compared to a loss of ($0.16) per share for the
same period last year.

Net Earnings (Loss).As a result of the above factors, net earnings
were approximately $467,000, or 2.8% of sales, for the three months ended
December 31, 2003, compared to a net loss of approximately $26,000, or (0.1%)
sales for the same period last year. Basic earnings per share increased from a
loss of ($0.01) per share for the three months ended December 31, 2002, to
earnings of $0.16 per share for the same quarter this fiscal year. Diluted
earnings per share increased from a loss of ($0.01) per share, for the three
months ended December 31, 2002, to earnings of $0.15 per share for the same
quarter this fiscal year.

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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

Six Months Ended December 31, 2003 Compared to Six Months Ended December 31,
2002

Revenues.Net revenues from continuing operations decreased by
approximately $100,000, or 0.3%, from $33.3 million for the six months ended
December 31, 2002, to $33.2 million for the six months ended December 31, 2003.
The decrease in revenues during the period related primarily to a decrease in
our Environmental Systems revenues, which decreased from $19.4 million to $19.0
million, or 2.1%. This was offset by an increase in our Separation Filtration
Systems revenue, which increased from $13.8 million to $14.2 million, or 2.9%.

Gross Profit.Our gross profit increased $1.7 million, or 22.1%, from
$7.7 million for the six months ended December 31, 2002, to $9.4 million for
the six months ended December 31, 2003. Our gross profit, as a percentage of
sales, increased from 23.3% for the six months ended December 31, 2002 to 28.1%
for the six months ended December 31, 2003. Our reported margins during the
current period were impacted by three primary factors: (i) sales volume, (ii)
lower start-up and warranty costs and (iii) shifts in our product mix. As we
manufacture a significant portion of our products, fluctuations in revenues,
from quarter to quarter or year to year, may impact our manufacturing
absorption factors, which will directly impact our reported margins. During
the period, in comparison to the same quarter last year and as a percentage of
sales, we experienced an unfavorable variance in our manufacturing absorption
of approximately 2%, and a favorable variance in our start-up and warranty
costs of 4%. In addition to the foregoing, as noted earlier, our reported
margins in any given period can be impacted by shifts in our product mix.
Certain of our products historically have higher margins than others, and
certain of our products historically have a much higher internally manufactured
cost component; as a result, shifts in the composition of our sales can have a
significant impact on our reported margins either at the selling margin level
or through a negative or positive impact on our manufacturing absorption. All
of these factors, to some degree, impacted our margins in the current quarter.

Operating Expenses.For the six months ended December 31, 2003, operating
expenses from continuing operations decreased by $1.3 million, or 14.9%, to
$7.4 million, compared to $8.7 million for the same period last year.
Operating expenses, as a percentage of sales, were 22.2% for the six months
ended December 31, 2003, compared to 26.2% for the same period last year. The
decrease in the amount of operating expenses during the current fiscal year was
due to the implementation of our restructuring and organization realignment
initiative, which began during fiscal 2003. As a result of this initiative,
our sales and marketing expenses remained constant at 9%, our engineering and
project management expenses decreased from 8.2% to 6.4%, and our general,
administrative and restructuring expenses decreased from 9.0% to 6.7% for the
six months ended December 31, 2002 and 2003, respectively. See also Item 2
- Managements Discussion and Analysis of Financial Condition and Results of
Operation  Restructuring and Organizational Realignment of this Report.

Other Income and Expense.Other income and expense items increased by
approximately $38,000, from income of approximately $41,000 for the six months
ended December 31, 2002, to income of $79,000 for the six months ended December
31, 2003. We realized foreign currency exchange gains of approximately $47,000
during the current fiscal year, compared to exchange losses of $91,000 for the
same period last year, or a positive impact on our operations of $138,000.
This was offset by a decrease in rental, interest and miscellaneous income of
approximately $100,000.

Income Taxes.The Companys effective income tax rate was approximately
34% and 37% for the six months ended December 31, 2003 and 2002, respectively.
The decrease in our effective tax rate for the current period, compared to the
same period last year, resulted from an increased portion of our income subject
to either a lower foreign tax rate or foreign sales income exclusions.

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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

Net Earnings (Loss) from Continuing Operations.Net income from
continuing operations was approximately $1.3 million, or 4.0% of sales, for the
six months ended December 31, 2003, compared to a net loss of approximately
$587,000, or (1.8%) sales, for the same period last year. Basic earnings per
share from continuing operations increased from a loss of ($0.20) per share for
the six months ended December 31, 2002, to earnings of $0.45 per share for six
months ended December 31, 2003. Diluted earnings per share from continuing
operations increased from a loss of ($0.20) per share for the six months ended
December 31, 2002, to earnings of $0.44 per share for the six months ended
December 31, 2003.

Discontinued Operations.Net loss from discontinued operations for the
six months ended December 31, 2003 was $77,000, compared to a net loss of
$782,000 for the same period last year. Included in our net loss for the six
months ended December 31, 2003 was a net gain related to the disposal of our
boiler operations of approximately $92,000 ($140,000 gain less taxes of
$48,000). Basic and diluted loss per share from discontinued operations was
($0.03) per share for the period ended December 31, 2003, compared to a loss of
($0.26) per share for the same period last year.

Net Earnings (Loss).As a result of the above factors, net earnings
were approximately $1.3 million, or 3.8% of sales, for the six months ended
December 31, 2003, compared to a net loss of approximately $1.4 million, or
(4.1%) sales, for the same period last year. Basic earnings per share
increased from a loss of ($0.46) per share for the six months ended December
31, 2002, to earnings of $0.42 per share for the same period this fiscal year.
Diluted earnings per share increased from a loss of ($0.46) per share for the
six months ended December 31, 2002, to earnings of $0.42 per share for the same
period this fiscal year.

Results of Operations  Segments

Currently we are organized on a global basis along two lines of business:
Environmental Systems, and Separation Filtration Systems. The Company had
three reportable segments for fiscal 2003: Environmental Systems, Separation
Filtration Systems and Boilers for fiscal 2003. The Boiler operation was sold
during the first quarter of fiscal 2004 and has therefore been classified as a
discontinued operation in the Companys financial statements.

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

|         |                               |  |                    |        |                  |  |      |       |   |  |      |        |   |  |      |       |   |  |   |        |  |  |  |       |   |  |   |        |  |  |  |       |  
|-------- | ----------------------------- |  | ------------------ | ------ | ---------------- |  | ---- | ----- | - |  | ---- | ------ | - |  | ---- | ----- | - |  | - | ------ |  |  |  | ----- | - |  | - | ------ |  |  |  | ----- | -
|         |                               |  | Three Months Ended |        | Six Months Ended
|         |                               |  | December 31,       |        | December 31,    
|         |                               |  | 2003               |        | %                |  | 2002 |       | % |  | 2003 |        | % |  | 2002 |       | %
|         |                               |  |                    |        |                  |  |      |       |   |  |      |        |   |  |      |       |  
|Revenues |                               |  |                    |        |                  |  |      |       |   |  |      |        |   |  |      |       |   |  |   |        |  |  |  |       |   |  |   |        |  |  |  |      
|         | Environmental Systems         |  | $                  | 8,930  |                  |  |      | 54.4  |   |  | $    | 12,506 |   |  |      | 62.5  |   |  | $ | 19,009 |  |  |  | 57.2  |   |  | $ | 19,449 |  |  |  | 58.4  |  
|         | Separation Filtration Systems |  |                    | 7,499  |                  |  |      | 45.6  |   |  |      | 7,505  |   |  |      | 37.5  |   |  |   | 14,227 |  |  |  | 42.8  |   |  |   | 13,838 |  |  |  | 41.6  |  
|         |                               |  |                    |        |                  |  |      |       |   |  |      |        |   |  |      |       |   |  |   |        |  |  |  |       |   |  |   |        |  |  |  |       |  
|         | Total                         |  | $                  | 16,429 |                  |  |      | 100.0 | % |  | $    | 20,011 |   |  |      | 100.0 | % |  | $ | 33,236 |  |  |  | 100.0 | % |  | $ | 33,287 |  |  |  | 100.0 | %
|         |                               |  |                    |        |                  |  |      |       |   |  |      |        |   |  |      |       |   |  |   |        |  |  |  |       |   |  |   |        |  |  |  |       |  

Revenues from our Environmental Systems decreased by approximately $3.6
million, or 28.8%, from $12.5 million for the three months ended December 31,
2002, to $8.9 million for the three months ended December 31, 2003. Revenues
from our Environmental Systems decreased by approximately
$400,000, or 2.1%, from $19.4 million for the six months ended December
31, 2002, to $19.0 million for the six months ended December 31, 2003.

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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

Revenues from our Separation Filtration Systems for the three months ended
December 31, 2003 were in line with our revenues for the same period last year,
both at approximately $7.5 million. Revenues from our Separation Filtration
Systems for the six months increased by approximately $389,000 million, or
2.8%, from $13.8 million for the six months ended December 31, 2002 to $14.2
million for the six months ended December 31, 2003. On a comparative basis, we
saw our international sales increase by approximately 19.5% and our domestic
sales decrease by approximately 6.4% for the six months ended December 31,
2003, respectively. A lack of new or refurbishments to existing natural gas
pipelines in North America continues to have a major impact on our domestic
sales.

Segment Profit (Loss).Management uses segment profits (loss), which
consists of segment revenues less segment costs and expenses before allocation
of general and administrative costs to measure segment profits or loss. The
Company does not allocate its general and administrative expenses to its
individual segments. The following table displays segment profits (loss) by
reportable segment (dollars in thousands).

|                      |                                                 |       |   |                    |       |                  |   |        |       |      |   |        |       |  |   |        |       | 
|--------------------- | ----------------------------------------------- | ----- | - | ------------------ | ----- | ---------------- | - | ------ | ----- | ---- | - | ------ | ----- |  | - | ------ | ----- | 
|                      |                                                 |       |   | Three Months Ended |       | Six Months Ended
|                      |                                                 |       |   | December 31,       |       | December 31,    
|                      |                                                 |       |   | 2003               |       | 2002             |   | 2003   |       | 2002
|                      |                                                 |       |   |                    |       |                  |   |        |       |     
|Segment profit (loss) |                                                 |       |   |                    |       |                  |   |        |       |      |   |        |       |  |   |       
|                      | Environmental Systems                           |       | $ | 1,494              |       |                  | $ | 802    |       |      | $ | 3,229  |       |  | $ | 376    |      
|                      | Separation Filtration Systems                   |       |   | 605                |       |                  |   | 1,190  |       |      |   | 979    |       |  |   | 1,630  |      
|                      |                                                 |       |   |                    |       |                  |   |        |       |      |   |        |       |  |   |        |      
|                      |                                                 | Total |   | $                  | 2,099 |                  |   | $      | 1,992 |      |   |        | 4,208 |  |   |        | 2,006 | 
|                      | Unallocated general and administrative
expenses |       |   | (1,278             | )     |                  |   | (1,317 | )     |      |   | (2,236 | )     |  |   | (2,984 | )    
|                      |                                                 |       |   |                    |       |                  |   |        |       |      |   |        |       |  |   |        |      
|                      | Operating income (loss)                         |       | $ | 821                |       |                  | $ | 675    |       |      | $ | 1,972  |       |  | $ | (978   | )    
|                      |                                                 |       |   |                    |       |                  |   |        |       |      |   |        |       |  |   |        |      

Environmental Systems profits in the second quarter of fiscal 2004
increased by $692,000, from a profit of $802,000 for the three months ended
December 31, 2002, to a profit of approximately $1.5 million for the same
quarter this fiscal year. As a percentage of Environmental Systems revenue,
our operational performance increased from a segment profit of 6.4%, to a
segment profit of 16.7%, for the three months ended December 31, 2002 and 2003,
respectively. Environmental Systems profits for the six months ended December
31, 2003 increased by approximately $2.9 million, from a profit of
approximately $376,000 for the six months ended December 31, 2002, to a profit
of approximately $3.2 million for the same period this fiscal year. As a
percentage of Environmental Systems revenue, our operational performance
increased from a segment profit of 1.9% for the six months ended December 31,
2002, to a segment profit of 17.0% for the same period in fiscal 2004. The
increase in our Environmental Systems operational performance during the
current fiscal year related primarily to the decrease in start-up and
commissioning costs of SCR projects, and a reduction in this segments
operational expenses in connection with our restructuring and organizational
realignment initiative.

Separation Filtration Systems profits decreased in the second quarter of
fiscal year 2004 by approximately $585,000, or 49.2%, from a profit of
approximately $1.2 million for the second quarter of
fiscal 2003, to a profit of $605,000 for the same quarter this fiscal
year. As a percentage of Separation Filtration Systems revenue, our
operational performance decreased from a segment profit of 15.9%, to a segment
profit of 8.1%, for the three months ended December 31, 2002 and 2003,
respectively. Separation Filtration Systems profits decreased in the six
months ended December 31, 2003 by

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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

approximately $651,000, or 39.9%, from a
profit of approximately $1.6 million for six months ended December 31, 2003, to
a profit of $979,000 for the same period this fiscal year. As a percentage of
Separation Filtration Systems revenue, our operational performance decreased
from a segment profit of 11.8%, to a segment profit of 6.9%, for the six months
ended December 31, 2002 and 2003, respectively. The decrease in our Separation
Filtration Systems operational performance during this period relates to the
increased component of international sales, where we tend to realize a lower
profit margin than domestically, and the general softness in the North American
market.

Backlog

The Companys backlog of unfilled orders was approximately $40 million at
December 31, 2003, compared to $45 million at December 31, 2002, and $38
million at September 30, 2003. Our backlog at December 31, 2003 when compared
to our backlog at December 31, 2002 has been impacted by two main factors: (i)
the suspension of our boiler business, which impacted our backlog by
approximately $1.5 million, and (ii) the completion of a substantial contract,
approximately $14 million, during the later part of fiscal 2003 and the first
part of fiscal 2004. While we are beginning to see some stability in our
backlog, we feel that the reduction in the construction of new power plants,
environmental regulatory uncertainties, the lack of new natural gas pipeline
construction in North America, and the on-going economic climate all continue
to have an impact on our sales and backlog. The adoption of regulations
related to NOx emissions have in the past resulted in increased sales of our
Environmental Systems, either through new-source or retrofit applications, and
we would anticipate that this trend will continue in the future as compliance
dates approach and regulatory uncertainties are resolved. In addition, while
the construction of new power plants has seen a significant decline
from the levels 24 months ago, there is expected to be a continued demand for our
Environmental Systems as new power plants are built to replace older, less
efficient plants, and as regulatory compliance projects are commenced.

Financial Position

Assets.Total assets decreased by approximately $1.5 million, or 3.5%,
from $42.6 million at June 30, 2003 to $41.1 million at December 31, 2003. The
decrease in our assets during this period resulted primarily from a decrease in
our receivables, which can be attributed to improved collections (approximate
turnover in days has decreased from 80 days to 60 days). At December 31, 2003,
we held cash and short-term investments of $8.3 million, had working capital of
$19.5 million, and had current ratio of 2.12-to-1.0. This compares with cash
and short-term investments of $7.0 million, $17.8 million in working capital,
and a current ratio of 1.88-to-1.0 at June 30, 2003. The increase in our
current ratio was a result of a 3.0% decrease in our current assets, compared
to a 14.2% decrease in our current liabilities.

Liabilities and Shareholders Equity.Total liabilities decreased by
approximately $2.8 million, or 13.9%, from $20.2 million at June 30, 2003 to
$17.4 million at December 31, 2003. This related primarily to a decrease in
our accounts payable of approximately $1.6 million, and a decrease in our
accrued liabilities of approximately $600,000, which related to the reduction
in our operational expenses. The increase in our equity of approximately $1.5
million, or 6.7%, from $22.3 million at June 30, 2002, to $23.8 million at
December 31, 2003, resulted primarily from our earnings for the period. As a
result, our debt-to-equity ratio decreased from .91-to-1.0 at June 30, 2003, to
..73-to-1.0 at December 31, 2003.

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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

Liquidity and Capital Resources

Our cash and cash equivalents were $8.0 million as of December 31, 2003,
compared to $6.7 million at June 30, 2003. Cash provided by continuing
operating activities for the period ended December 31, 2003 was approximately
$1.2 million, compared to $4.2 million for the same period last year.

Because we are engaged in the business of manufacturing custom systems,
our progress billing practices are event-oriented rather than date-oriented,
and vary from contract to contract. We customarily bill our customers after
the occurrence of project milestones. Billings to customers affect the balance
of billings in excess of costs and earnings or the balance of cost and earnings
in excess of billings, as well as the balance of accounts receivable.
Consequently, we focus on the net amount of these accounts along with accounts
payable, to determine our management of working capital. The balance of these
working capital accounts was approximately $9.4 million at December 31, 2003
and $7.8 million at June 30, 2003, representing an increase in our investment
in these working capital items of approximately $1.6 million. In addition,
operational cash was provided from our earnings from continuing operations and
reductions in our receivables and inventories. We used cash for operational
purposes during the period to decrease our payables and accrued expenses.

Cash used in investing activities was approximately $222,000 for the
period ended December 31, 2003, compared to approximately $96,000 for the same
period last year. The increase in cash used during the current fiscal year
related to an increase in capital expenditures, which related principally to
the purchase of a new trade booth and plant refurbishments.

We had
approximately $35,000 of cash provided by financing activities
during the current period, and $50,000 during the same period last year. The
cash provided by financing activities, during both these periods, related to
the cash received from the issuance of common stock pursuant to our employee
stock options.

On October 31, 2003, we entered into a $12.5 million revolving credit
facility that expires on October 31, 2006. The facility carries a floating
interest rate based on the prime or Euro rate plus or minus an applicable
margin (Euro plus 1.75% at December 31, 2003), and is secured by substantially
all our domestic assets. At December 31, 2003, we had $4.1 million outstanding
under letters of credit and no loans outstanding, leaving us $8.4 million of
availability under our facility. The facility contained financial covenants,
certain restrictions on capital expenditures, acquisitions, asset dispositions,
dividends and additional debt, as well as other customary covenants. As of
December 31, 2003, the Company was in compliance with all financial and other
covenants under the credit facility.

We believe that we maintain adequate liquidity to support our existing
operations and our planned growth, as well as to continue operations during
reasonable periods of adversity.

Factors That May Affect Our Operating Results and Other Risk Factors

Investing in our common stock involves a high degree of risk. Any of the
following risks could have a material adverse effect on our financial
condition, liquidity and results of operations or prospects, financial or
otherwise. Reference to these factors in the context of a forward-looking
statement or statements shall be deemed to be a statement that any one or more
of the following factors may cause
actual results to differ materially from those in such forward-looking
statement or statements. See Item 2

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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

- Managements Discussion and Analysis of
Financial Condition and Results of Operations - Forward-Looking Statements of
this Report.

Changes in the power generation industry and/or the economy could have an
adverse impact on our sales of Environmental Systems and our operating results.

The demand for our Environmental Systems depends to an extent on the
continued construction of power generation plants and the upgrade of existing
power plants. The power generation
industry has experienced cyclical periods of slow growth or decline. Any
change in the power plant industry that results in a decline in the
construction of power plants or a decline in the upgrading of existing power
plants could have a materially adverse impact on our Environmental Systems
revenues and our results of operations. See Item 2 -  Managements
Discussion and Analysis of Financial Condition and Results of Operations of
this Report.

Changes in current environmental legislation could have an adverse impact
on the sale of our Environmental Systems and on our operating results.

Our Environmental Systems business is primarily regulatory driven. Laws
and regulations governing the discharge of pollutants into the environment or
otherwise relating to the protection of the environment or human health have
played a significant part in the increased use of Environmental Systems in the
United States. These laws include U.S. federal statutes such as the Resource
Conservation and Recovery Act of 1976, the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, or CERCLA, the Clean Water
Act and the Clean Air Act, and the regulations implementing them, as well as
similar laws and regulations at state and local levels and in other countries.
These laws and regulations may change or other jurisdictions may not adopt
similar laws and regulations. This business will be adversely impacted to the
extent that current regulations requiring the reduction of NOx and
Ozone emissions are
repealed, amended or implementation dates delayed or to the extent that
regulatory authorities minimize enforcement. See Item 2 - Managements
Discussion and Analysis of Financial Condition and Results of Operations of
this Report.

Competition could result in lower sales and decreased margins.

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

We enter into fixed-priced contracts. If our actual costs exceed our
original estimates, our profits will be reduced.

The majority of our contracts are on a fixed-price basis. Although we
benefit from cost savings, we have limited ability to recover cost overruns.
Because of the large scale and long duration of our contracts, unanticipated
cost increases may occur as a result of several factors, including, but not
limited to, increases in the cost, or shortages of components, materials or
labor; unanticipated technical problems,

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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

required project modifications not initiated by the customer, and
suppliers or subcontractors failure to perform. These factors could delay
delivery of our products and our contracts often provide for liquidated damages
for late delivery. Unanticipated costs that we cannot pass on to our customers
or the payment of liquidated damages under fixed contracts would negatively
impact our profits.

Our backlog may not be indicative of our future revenue.

Customers may cancel or delay projects for reasons beyond our control.
Our orders normally contain cancellation provisions, which permit us to recover
only our costs and a portion of our anticipated profit in the event a customer
cancels an order. If a customer elects to cancel, we may not realize the full
amount of revenues included in our backlog. If projects are delayed, the
timing of our revenues could be affected and projects may remain in our backlog
for extended periods of time. Revenue recognition occurs over long periods of
time and is subject to unanticipated delays. If we receive relatively large
orders in any given quarter, fluctuations in the levels of our quarterly
backlog can result because the backlog in that quarter may reach levels that
may not be sustained in subsequent quarters. Our backlog may not be indicative
of our future revenues. See Item 2 - Managements Discussion and Analysis of
Financial Condition and Results of Operations of this Report.

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

Our financial performance may vary significantly from quarter to quarter,
making it difficult to estimate future revenue.

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

Our margins are affected by shifts in our product mix.

Certain of our products have higher margins than others. Consequently,
changes in the composition of our sales between products from
quarter-to-quarter or from period-to-period can have a significant impact on
our reported margins. Certain of our products also have a higher internally
manufactured cost component, and therefore changes from quarter-to-quarter or
from period-to-period can com

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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

Our products are covered by warranties. Unanticipated warranty costs for
defective products could adversely affect our financial condition and results
of operations and reputation.

We provide warranties on our products generally for a period of 12 months
from installation or 18 months from shipment, whichever occurs first. These
warranties require us to repair or replace faulty products and meet certain
performance standards, among other customary warranty provisions. While we
continually monitor our warranty claims and provide a reserve for estimated
warranty issues on an on-going basis, an unanticipated claim could have a
material adverse impact on our operations. In some cases, we may be able to
subrogate a claim back to a subcontractor, if the subcontractor supplied the
defective product or performed the service, but this may not always be
possible. The need to repair or replace products with design or manufacturing
defects could temporarily delay the sale of new products, reduce our profits
and could adversely affect our reputation. See Note 3  Product Warranties
of this Report for further discussion and analysis of our product warranties.

Product liability claims not covered by insurance could adversely affect
our financial condition and results of operations.

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

Large contracts represent a significant portion of our accounts
receivable, which increases our exposure to credit risk.

We continue to closely monitor the credit worthiness of our customers.
Significant portions of our sales are to customers who place large orders for
custom products and whose activities are related to the power industry. As
such, our exposure to credit risk is affected to some degree by conditions
within the power industry and governmental and/or political conditions. We try
to mitigate our exposure to credit risk, to some extent, by requiring progress
payments and letters of credit. However, as some of our exposure is outside of
our control, unanticipated events could have a materially adverse impact on our
operating results.

The terms and conditions of our credit facility impose restrictions on our
operations. We may not be able to raise additional capital, if needed.

The terms and conditions of our $12.5 million revolving credit facility
impose certain restrictions on our ability to incur debt, make capital
expenditures, merge, sell assets, make distributions, or create or incur liens,
among other things. Availability of our credit facility is also subject to
certain financial covenants, including a minimum level of shareholders equity.
Our ability to comply with the covenants may be affected by events beyond our
control and we cannot assure that we will achieve operating results meeting the
requirements of the credit agreement. A breach of any of these covenants could
result in a default under our credit facility. In the event of a default, the
bank could elect to declare the outstanding principal amount of our credit
facility, all interest thereon, and all other amounts payable under our credit
facility to be immediately due and payable.

Our ability to satisfy any debt obligations will depend upon our future
operating performance, which will be affected by prevailing economic, financial
and business conditions and other factors, some of which are beyond our
control. We anticipate that borrowings from our existing revolving credit
facility, or the refinancing of our revolving credit facility, and cash
provided by operating activities, should

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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

provide sufficient funds to finance
capital expenditures, working capital and otherwise meet our operating
expenses and service our debt requirements as they become due. However,
in the event that we require additional capital, there can be no assurance that
we will be able to raise such capital when needed or on satisfactory terms, if
at all.

Our business is subject to risks of terrorist acts and acts of war.

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

Our common stock is thinly traded, which may result in low liquidity.

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




Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Our primary market risk exposures are in the areas of interest rate risk
and foreign currency exchange rate risk. We feel our risk to interest rate
fluctuations is nominal, as our investments are short-term in nature and we are
currently not in a borrowing position. Our exposure to currency exchange rate
fluctuations has been, and is expected to continue to be, modest as foreign
contracts payable in currencies other than US dollars are performed, for the
most part, in the local currency and therefore provide a natural hedge
against currency fluctuations. We, on occasion, will purchase derivative
transactions with respect to foreign contracts that do not contain a natural
hedge, but the impact of any fluctuation in the exchange rates in these hedged
currencies would be expected to have an immaterial impact on our financial
operations. The impact of currency exchange rate movements on inter-company
transactions has been, and is expected to continue to be, immaterial. We did
not have any material derivative transactions outstanding as of December 31,
2003.




Item 4. Controls and Procedures

The Company, under the supervision and with the participation of the
Companys management, including the Companys Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the design and operation
of the Companys disclosure controls and procedures. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer have concluded that the
Companys disclosure controls and procedures were effective as of December 31,
2003 to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Securities Exchange Act of 1934, as
amended (the 1934 Act) is recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms.

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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

There were no changes in the Companys internal control over financial
reporting during the Companys fiscal quarter ended December 31, 2003 that have
materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.




PART II. OTHER INFORMATION




Item 1. Legal Proceedings

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

Items 2, 3, and 5 are not applicable and have been omitted




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

The following matters were submitted to a vote of securities holders at
the Annual Meeting of Shareholders held on November 20, 2003. A total of
2,884,851 shares (approximately 96% of all shares entitled to vote) were
represented by proxy or ballot at the meeting.



| | 1. |  | The shareholders elected the following Class III Directors
to serve for a three-year term expiring at the annual meeting of
shareholders in 2006, or until their successors are elected and
qualified.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                           |  |     |           |         |  |          |   |  |  |  |        | 
|-------------------------- |  | --- | --------- | ------- |  | -------- | - |  |  |  | ------ | 
|                           |  | FOR |           | AGAINST |  | WITHHELD
|                           |  |     |           |         |  |         
|Mr. Donald A. Sillers, Jr. |  |     | 2,858,360 |         |  |          |  |  |  |  | 26,491 | 
|Mr. Sherrill Stone         |  |     | 2,868,460 |         |  |          |  |  |  |  | 16,391 | 



| | 2. |  | The shareholders ratified the selection of Grant Thornton
LLP to serve as the Companys independent accountants for the fiscal
year ending June 30, 2004. A vote of 2,872,814 FOR, 8,937 AGAINST,
and 3,100 ABSTAINING approved the matter.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003




Item 6. Exhibits and Reports on Form 8-K



|(a) |  | Exhibits
|--- |  | --------



| |                                                         
| | --------------------------------------------------------
| | The following exhibits are filed as part of this report.

|        |  |                                                                                                                                                                                                                                                                                           
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                           
|Number  |  | Exhibit                                                                                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                           
|3(a)    |  | Articles of Incorporation, as amended to date (filed as
Exhibit 3 (a) to our report on Form 10-Q for the fiscal quarter
ended December 31, 1997, and incorporated herein by reference).                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                           
|3(b)    |  | Bylaws, as amended to date.*                                                                                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                           
|4(a)    |  | Rights Agreement dated May 22, 1997 between Peerless Mfg.
Co. and Mellon Investor Services, LLC (formerly ChaseMellon
Shareholder Services, LLC), as Rights Agent (filed as Exhibit 1 to
our Registration Statement on Form 8-A 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/A dated August 30, 2001, and incorporated herein by
reference).                           
|        |  |                                                                                                                                                                                                                                                                                           
|10(a)   |  | Credit Agreement by and between Comerica Bank and Peerless
Mfg. Co., dated October 30, 2003 (including all exhibits but
excluding all schedules). ***                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                           
|10(b)   |  | Guaranty Agreement by and between Comerica Bank and PMC
Acquisition, Inc., dated October 30, 2003. *                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                           
|10(c)   |  | Master Revolving Note by and between Comerica Bank and
Peerless Mfg. Co., dated October 30, 2003. *                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                           
|10(d)   |  | Security Agreement by and between Comerica Bank and Peerless
Mfg. Co., dated October 30, 2003. *                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                           
|10(e)   |  | Employment Agreement, dated October 10, 2003, by and between
Peerless Mfg. Co. and Peter J. Burlage. *                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                           
|10(f)   |  | Employment Agreement, dated October 10, 2003, by and between
Peerless Mfg. Co. and David Taylor. *                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                           
|31(a)   |  | Certification of Chief Executive Officer pursuant to Rule
13a-14 of the Securities Exchange Act of 1934, as amended
(adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002). *                                                                                                

28



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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

|      |  |                                                                                                                                                                                           
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31(b) |  | Certification of Chief Financial Officer pursuant to Rule
13a-14 of the Securities Exchange Act of 1934, as amended
(adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002). *
|      |  |                                                                                                                                                                                           
|32(a) |  | Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350 (as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002). **                                    
|      |  |                                                                                                                                                                                           
|32(b) |  | Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 (as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002). **                                    



---

|*     |  | Filed herewith                                                                                                                                                                                                                                                         
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|* *   |  | Furnished herewith                                                                                                                                                                                                                                                     
|     
|* * * |  | Filed herewith. The schedules to
this Credit Agreement were omitted. A description of each omitted
schedule is included with the Credit Agreement. The Company agrees to
furnish a copy of any omitted schedule to the Securities and Exchange
Commission upon request.



| | (b) |  | Reports on Form 8-K.
| | --- |  | --------------------



| |                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On November 10, 2003, the Registrant filed a Report on Form
8-K to file a press release announcing its financial results for
the first quarter of fiscal year ending June 30, 2004, which
information was furnished and not filed with the Commission.



| |                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On February 11, 2004, the Registrant filed a Report on Form
8-K to file a press release announcing its financial results for
the second quarter of fiscal year ending June 30, 2004, which
information was furnished and not filed with the Commission.

29



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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003




Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                        |  |                                             
|----------------------- |  | --------------------------------------------
|                        |  | PEERLESS MFG. CO.                           
|                        |  |                                             
|Date: February 13, 2004 |  | /s/ Sherrill Stone                          
|                        |  |                                             
|                        |  | Sherrill Stone                              
|                        |  | Chairman and Chief Executive Officer        
|                        |  |                                             
|Date: February 13, 2004 |  | /s/ Richard L. Travis                       
|                        |  |                                             
|                        |  | Richard L. Travis, Chief Financial Officer  
|                        |  | (Principal Financial and Accounting Officer)

30