<PAGE>
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   ----------

                                    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 SEPTEMBER 30, 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)

<Table>
<S>                                                                      <C>
                           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)
</Table>

                                 (214) 357-6181
              (Registrant's Telephone Number, Including Area Code)

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

        Yes      No  X
            ---     ---

As of November 12, 2003 there were 3,002,534 shares of the registrant's common
stock outstanding.

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



                                       1
<PAGE>



                       PEERLESS MFG. CO. AND SUBSIDIARIES
                                    FORM 10-Q
                     FOR THE PERIOD ENDED SEPTEMBER 30, 2003


                                TABLE OF CONTENTS


<Table>
<S>                                                                                                             <C>
PART I:  FINANCIAL INFORMATION

         ITEM 1.    FINANCIAL STATEMENTS

         Consolidated Balance Sheets at September 30, 2003 (unaudited)
         and June 30, 2003................................................................................       3

         Unaudited Consolidated Statements of Operations for the three
         months ended September 30, 2003 and 2002.........................................................       4

         Unaudited Consolidated Statements of Cash Flows for
         the three months ended September 30, 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...................................................      14

         ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ...........................      27

         ITEM 4.    CONTROLS AND PROCEDURES ..............................................................      28

PART II:.OTHER INFORMATION

         ITEM 1.    LEGAL PROCEEDINGS.....................................................................      28

         ITEM 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS.............................................      28

         ITEM 3.    DEFAULTS UPON SENIOR SECURITIES.......................................................      28

         ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................      28

         ITEM 5.    OTHER INFORMATION.....................................................................      28

         ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K......................................................      28

SIGNATURES................................................................................................      30
</Table>



                                       2
<PAGE>


                          PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                       PEERLESS MFG. CO. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)

<Table>
<Caption>
                                                                    September 30,     June 30,
                                                                         2003           2003
                                                                    -------------   -------------
                                                                     (unaudited)
<S>                                                                 <C>             <C>
                             ASSETS
Current assets
     Cash and cash equivalents                                      $       7,600   $       6,680
     Short term investments                                                   310             309
     Accounts receivable - principally trade - net of
        allowance for doubtful accounts of $315 at
        September 30, 2003 and $402 at June 30, 2003                       15,582          14,916
     Inventories                                                            3,915           3,215
     Costs and earnings in excess of billings
        on uncompleted contracts                                            9,115           7,589
     Deferred income taxes                                                  1,445           1,445
     Other                                                                  1,145           1,098
     Current assets of discontinued operations                              2,264           2,760
                                                                    -------------   -------------
        Total current assets                                               41,376          38,012

Property, plant and equipment - net                                         3,352           3,400
Other assets                                                                  985           1,110
Other assets of discontinued operations                                        28              30
                                                                    -------------   -------------
                                                                    $      45,741   $      42,552
                                                                    =============   =============

              LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
     Account payable - trade                                        $      14,992   $      12,661
     Billings in excess of costs and earnings
        on uncompleted contracts                                            2,027           2,027
     Commissions payable                                                    1,165           1,041
     Income taxes payable                                                     470              53
     Product warranties                                                       702             846
     Accrued liabilities and other                                          2,652           2,749
     Current liabilities of discontinued operations                           583             864
                                                                    -------------   -------------
        Total current liabilities                                          22,591          20,241

Shareholders' equity
     Common stock                                                           3,001           2,999
     Additional paid-in capital                                             1,785           1,771
     Other                                                                     36              18
     Retained earnings                                                     18,328          17,523
                                                                    -------------   -------------
        Total shareholders' equity                                         23,150          22,311
                                                                    -------------   -------------
        Total liabilities and shareholders' equity                  $      45,741   $      42,552
                                                                    =============   =============
</Table>


        See accompanying notes to the consolidated financial statements.



                                       3
<PAGE>



                       PEERLESS MFG. CO. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

<Table>
<Caption>
                                                                Three Months Ended
                                                                  September 30,
                                                              2003              2002
                                                          -------------    -------------
<S>                                                       <C>              <C>
Revenues                                                  $      16,807    $      13,276
Cost of goods sold                                               12,001           10,003
                                                          -------------    -------------
Gross profit                                                      4,806            3,273
Operating expenses
    Sales and marketing                                           1,603            1,586
    Engineering and project
       management                                                 1,094            1,673
    General and administrative                                      958            1,184
    Restructuring expense                                            --              483
                                                          -------------    -------------
                                                                  3,655            4,926
                                                          -------------    -------------
Operating income (loss)                                           1,151           (1,653)

Other income (expense)
    Foreign exchange loss                                           (47)             (63)
    Other income, net                                                17               41
                                                          -------------    -------------
                                                                    (30)             (22)
                                                          -------------    -------------
Earnings (loss) from continuing operations
    before income taxes                                           1,121           (1,675)
Income tax expense (benefit)                                        381             (620)
                                                          -------------    -------------
Net earnings (loss) from continuing operations                      740           (1,055)

Discontinued operations (Note 5)
    Earnings (loss) from discontinued operations
    (including gain on disposal of $140 in 2003)                     99             (457)
    Income tax expense (benefit)                                     34             (169)
                                                          -------------    -------------
Net earnings (loss) from discontinued operations                     65             (288)
                                                          -------------    -------------
Net earnings (loss)                                       $         805    $      (1,343)
                                                          =============    =============

BASIC EARNINGS (LOSS) PER SHARE
  Earnings (loss) from continuing operations              $        0.25    $       (0.35)
  Earnings (loss) from discontinued operations                     0.02            (0.10)
                                                          -------------    -------------
      Basic earnings (loss) per share                     $        0.27    $       (0.45)
                                                          =============    =============

DILUTED EARNINGS (LOSS) PER SHARE
  Earnings (loss) from continuing operations              $        0.24    $       (0.35)
  Earnings (loss) from discontinued operations                     0.02            (0.10)
                                                          -------------    -------------
      Diluted earnings (loss) per share                   $        0.26    $       (0.45)
                                                          =============    =============
</Table>


        See accompanying notes to the consolidated financial statements.


                                       4
<PAGE>



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

<Table>
<Caption>
                                                                                         Three Months Ended
                                                                                            September 30,
                                                                                       2003             2002
                                                                                   -------------    -------------
<S>                                                                                <C>              <C>
Cash flows from operating activities:
     Net earnings (loss)                                                           $         805    $      (1,343)
        Net (earnings) loss from discontinued operations                                     (65)             288
                                                                                   -------------    -------------
     Net earnings (loss) from continuing operations                                          740           (1,055)
     Adjustments to reconcile net earnings (loss)
        to net cash provided by operating activities:
        Depreciation and amortization                                                        191              147
        Bad debt expense                                                                      69               30
        Foreign exchange loss                                                                 47               63
        Other                                                                                  4               22
     Changes in operating assets and liabilities
        Accounts receivable                                                                 (598)           5,369
        Inventories                                                                         (701)              96
        Costs and earnings in excess of billings on uncompleted contracts                 (1,526)           4,600
        Other current assets                                                                 (50)            (371)
        Other assets                                                                         125               57
        Accounts payable                                                                   2,317           (3,560)
        Billings in excess of costs and earnings uncompleted contracts                        --             (782)
        Commissions payable                                                                  124             (187)
        Product warranties                                                                  (144)             168
        Accrued expenses and other                                                           320           (2,097)
                                                                                   -------------    -------------
                                                                                             178            3,555
                                                                                   -------------    -------------
Net cash provided by operating activities of continuing operations                           918            2,500

Cash flow from investing activities:
        Net purchases of property and equipment                                             (143)             (32)
        Proceeds from sale of property                                                        (1)              --
                                                                                   -------------    -------------
Net cash used in investing activities of continuing operations                              (144)             (32)

Cash flows from financing activities:
        Proceeds from issuance of common stock                                                13               13
                                                                                   -------------    -------------
Net cash provided by financing activities of continuing operations                            13               13

Net cash provided by (used in) discontinued operations                                       132             (210)

Effect of exchange rate changes on
        cash and cash equivalents                                                              1              (10)
                                                                                   -------------    -------------
Net increase in cash and cash equivalents                                                    920            2,261

Cash and cash equivalents at beginning of period                                           6,680            1,386
                                                                                   -------------    -------------

Cash and cash equivalents at end of period                                         $       7,600    $       3,647
                                                                                   =============    =============
</Table>


        See accompanying notes to the consolidated financial statements.




                                       5
<PAGE>



                       PEERLESS MFG. CO. AND SUBSIDIARIES
                                    FORM 10-Q
                     FOR THE PERIOD ENDED SEPTEMBER 30, 2003


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 September 30, 2003, and for the three months ended
         September 30, 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 months ended
         September 30, 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"
         following). 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 5 - "Discontinued
         Operations"), the current year financial information has been presented
         and the prior year financial information has been restated to report
         such as a 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.       NEW ACCOUNTING STANDARDS

                  In November 2002, FASB reached a consensus on Emerging Issues
         Task Force ("EITF") Issue 00-21, "Accounting for Revenue Arrangements
         with Multiple Deliverables." The guidance in this Issue is effective
         for revenue arrangements entered into in fiscal years beginning after
         June 15, 2003. The Issue addresses certain aspects of the accounting by
         a vendor for arrangements under which it will perform multiple
         revenue-generating activities and whether, as a result, there is
         embedded more than one earnings process for revenue recognition
         purposes. We do not expect the adoption of this pronouncement to have a
         material impact on our financial condition or results of our
         operations.

                  In April 2003, FASB issued Statement No. 149, "Amendment of
         Statement 133 on Derivative Instruments and Hedging Activities." FASB
         Statement No. 149 requires that contracts with comparable
         characteristics be accounted for similarly. The Statement clarifies the
         circumstances in which a contract with an initial net investment meets
         the characteristics of a derivative, and when a derivative contains a
         financing component and amends certain other existing pronouncements.
         This Statement is effective for contracts entered into or modified
         after June 30, 2003. We do not expect the adoption of this
         pronouncement to have a material impact on our financial condition or
         results of our operations.



                                       6
<PAGE>



                       PEERLESS MFG. CO. AND SUBSIDIARIES
                                    FORM 10-Q
                     FOR THE PERIOD ENDED SEPTEMBER 30, 2003


2.       NEW ACCOUNTING STANDARDS - CONTINUED

                  In May 2003, the FASB issued SFAS No. 150, "Accounting for
         Certain Financial Instruments with Characteristics of Both Liabilities
         and Equity." SFAS No. 150 establishes standards for how an issuer
         classifies and measures certain financial instruments with
         characteristics of both liabilities and equity. Many of these
         instruments were previously classified as equity. SFAS No. 150 requires
         that an issuer classify a financial instrument that is within its scope
         as a liability, or as an asset in some circumstances. This Statement
         applies to three types of freestanding financial instruments, other
         than outstanding shares. One type is mandatory redeemable shares, which
         the issuing company is obligated to buy back in exchange for cash or
         assets; a second type includes put options and forward purchase
         contracts that require or may require the issuer to buy back some of
         its shares in exchange for cash or other assets; and the third type is
         obligations that can be settled with shares, the monetary value of
         which is fixed, ties solely or predominantly to a variable such as a
         market index, or varies inversely with the value of the issuer's
         shares. SFAS No. 150 does not apply to features embedded in a financial
         instrument that is not a derivative in its entirety.

                  SFAS No. 150 is effective for financial instruments entered
         into or modified after May 31, 2003, and otherwise is effective at the
         beginning of the first interim period beginning after June 15, 2003. We
         will implement SFAS No. 150 in our first quarter of fiscal year 2004.
         We have not, nor do we expect to enter into any transactions that would
         be covered by SFAS No. 150 and therefore the adoption of the Statement
         is not expected to have a material impact on our financial statements.


3.       INVENTORIES

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


<Table>
<Caption>
                                      September 30,      June 30,
                                          2003             2003
                                      -------------   -------------
<S>                                   <C>             <C>
Raw materials                         $       2,907   $       2,322
Work in process                                 717             581
Finished goods                                  291             312
                                      -------------   -------------
Total inventories                     $       3,915   $       3,215
                                      =============   =============
</Table>

4.       PRODUCT WARRANTIES

                  The Company warrants that its products will be free from
         defects in materials and workmanship and will conform to agreed upon
         specifications at the time of delivery and typically for a period of 18
         to 36 months from the date of customer acceptance, 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 on



                                       7
<PAGE>



                       PEERLESS MFG. CO. AND SUBSIDIARIES
                                    FORM 10-Q
                     FOR THE PERIOD ENDED SEPTEMBER 30, 2003


4.       PRODUCT WARRANTIES - CONTINUED

         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. Should these factors, or
         other factors affecting warranty costs differ from our estimates,
         revisions to the estimated product warranty liability are made.

                  Product warranty activity for the three months ended September
         30, 2003 and 2002, are as follows:

<Table>
<Caption>
                                                      Three Months Ended
                                                        September 30,
                                                    2003             2002
                                                -------------    -------------
<S>                                             <C>              <C>
Balance at the beginning of the period          $         846    $         627
Provision for warranty expense                            (13)             406
Warranty charges                                         (131)            (238)
                                                -------------    -------------
Balance at the end of the period                $         702    $         795
                                                =============    =============
</Table>

5.       DISCONTINUED OPERATIONS

                  During fiscal 2003, the Board authorized the suspension of the
         Boiler business unit. In September 2003, the Board of Directors
         authorized the divestiture and the Company sold its Boiler operations.
         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.

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

<Table>
<Caption>
                                                     Three Months Ended
                                                        September 30,
                                                    2003               2002
                                                -------------    -------------
<S>                                             <C>              <C>
Revenues                                        $         360    $       1,178
Cost of goods sold                                        172            1,215
                                                -------------    -------------
    Gross profit (loss)                                   188              (37)
Operating expenses                                        229              402
                                                -------------    -------------
    Operating loss                                        (41)            (439)
Other expense                                              --               18
Income tax benefit                                        (14)            (169)
                                                -------------    -------------
    Net loss from operations                              (27)            (288)
Gain on disposal, net of taxes                             92               --
                                                -------------    -------------
    Net earnings (loss)                         $          65    $        (288)
                                                =============    =============

Diluted earnings (loss) per share
    Net loss from operations                    $       (0.01)   $       (0.10)
                                                =============    =============
    Net gain on disposal                        $        0.03    $          --
                                                =============    =============
    Net earnings (loss)                         $        0.02    $       (0.10)
                                                =============    =============
</Table>




                                       8
<PAGE>



                       PEERLESS MFG. CO. AND SUBSIDIARIES
                                    FORM 10-Q
                     FOR THE PERIOD ENDED SEPTEMBER 30, 2003


5.       DISCONTINUED OPERATIONS - CONTINUED

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

<Table>
<Caption>
                                                                    September 30,     June 30,
                                                                        2003            2003
                                                                    -------------   -------------
<S>                                                                 <C>             <C>
Accounts receivable, principally trade - net of
    allowance for  uncollectible accounts of $800
    at September 30, 2003 and $650 at June 30, 2003                 $       2,201   $       2,631
Inventories                                                                    --               3
Costs and earnings in excess of billings on
    uncompleted contracts                                                      63             126
                                                                    -------------   -------------
Current assets of discontinued operations                                   2,264           2,760
    Equipment, net                                                             28              30
                                                                    -------------   -------------
Total assets of discontinued operations                             $       2,292   $       2,790
                                                                    =============   =============

Accounts payable                                                    $         136   $         336
Commissions payable                                                            74              78
Product warranties                                                            148             148
Accrued liabilities and other                                                 225             302
                                                                    -------------   -------------
Total current liabilities of discontinued operations                $         583   $         864
                                                                    =============   =============
</Table>


6.       CONTINGENCIES

                  Included in our discontinued operations is a $2.2 million
         receivable due from a customer that recently filed a plan of
         reorganization under Chapter 11 of the United States Bankruptcy Code
         (original amount of the contract was approximately $6.1 million). We
         have been classified as an unsecured creditor under such filing.
         However, the customer/debtor has reportedly assigned all its rights,
         claims, duties and defenses under our contract to the project's owner,
         who has apparently assumed such rights, claims, duties and defenses. We
         have 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, we have 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/debtor. We have also been informed that the owner/assignee
         intends to allege counterclaims in the lawsuit. While we have reason to
         believe that our lien and our contractual claims will be found to be
         valid, no assurances can be given. We intend to vigorously pursue the
         collection of this receivable and believe that it will be collected. 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.



                                       9
<PAGE>


                       PEERLESS MFG. CO. AND SUBSIDIARIES
                                    FORM 10-Q
                     FOR THE PERIOD ENDED SEPTEMBER 30, 2003


     7.  EARNINGS (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.


<Table>
<Caption>
                                                                    Three Months Ended
                                                                      September 30,
                                                                    2003           2002
                                                               -------------   -------------
<S>                                                            <C>             <C>
Net earnings (loss) from continuing operations                 $         740   $      (1,055)
Net earnings (loss) from discontinued operations                          65            (288)
                                                               -------------   -------------
Net earnings (loss)                                            $         805   $      (1,343)
                                                               =============   =============

Basic weighted average common shares outstanding                       2,999           2,992
Effect of dilutive options                                                38              --
                                                               -------------   -------------
Diluted weighted average common shares outstanding                     3,037           2,992
                                                               =============   =============

Net earnings (loss) per share - basic:
Earnings (loss) from continuing operations                     $        0.25   $       (0.35)
Earnings (loss) from discontinued operations                            0.02           (0.10)
                                                               -------------   -------------
   Net earnings (loss) per share                               $        0.27   $       (0.45)
                                                               =============   =============

Net earnings (loss) per share - diluted:
Earnings (loss) from continuing operations                     $        0.24   $       (0.35)
Earnings (loss) from discontinued operations                            0.02           (0.10)
                                                               -------------   -------------
   Net earnings (loss) per share                               $        0.26   $       (0.45)
                                                               =============   =============
</Table>


                  The weighted average common shares outstanding-diluted
         computation excluded 65 and 210 outstanding stock options for the three
         months ended September 30, 2003 and 2002, respectively, because their
         impact would be anti-dilutive.



                                       10
<PAGE>



                       PEERLESS MFG. CO. AND SUBSIDIARIES
                                    FORM 10-Q
                     FOR THE PERIOD ENDED SEPTEMBER 30, 2003


8.       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:

<Table>
<Caption>
                                                               Three Months Ended
                                                                  September 30,
                                                              2003            2002
                                                          -------------   -------------
<S>                                                       <C>             <C>
Net earnings (loss) from continuing operations            $         740   $      (1,055)
Net earnings (loss) from discontinued operations                     65            (288)
Foreign currency translation adjustment                              17              23
                                                          -------------   -------------
Comprehensive income (loss)                               $         822   $      (1,320)
                                                          =============   =============
</Table>

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.


<Table>
<Caption>
                                                                                   Three Months Ended
                                                                                      September 30,
                                                                                  2003               2002
                                                                              -------------   -------------
<S>                                                                           <C>             <C>
Net earnings (loss), as reported                                              $         805   $      (1,343)
Less total stock-based employee compensation expense determined
  using the fair value based method for all awards, net of tax                          (21)            (24)
                                                                              -------------   -------------
Pro forma net earnings (loss)                                                 $         784   $      (1,367)
                                                                              =============   =============

Net earnings (loss) per share:
  Basic - as reported                                                         $        0.27   $       (0.45)
                                                                              =============   =============
  Basic - pro forma                                                           $        0.26   $       (0.46)
                                                                              =============   =============
  Diluted - as reported                                                       $        0.26   $       (0.45)
                                                                              =============   =============
  Diluted - pro forma                                                         $        0.26   $       (0.46)
                                                                              =============   =============
</Table>



                                       11
<PAGE>



                       PEERLESS MFG. CO. AND SUBSIDIARIES
                                    FORM 10-Q
                     FOR THE PERIOD ENDED SEPTEMBER 30, 2003


10.      LINE OF CREDIT

                  The Company maintained a $10 million revolving credit facility
         that expired on October 31, 2003. The credit line carried a floating
         interest rate based on the prime or Euros rate plus or minus an
         applicable margin (Euros plus 2.00% at September 30, 2003), and was
         secured by substantially all of the Company's assets. As of September
         30, 2003, the Company had no outstanding loans under the credit
         facility; it had $3.6 million outstanding under letters of credit,
         leaving it $6.4 million of availability under its facility. The
         facility contained financial covenants, restrictions on capital
         expenditures, acquisitions, asset dispositions, and additional debt, as
         well as other customary covenants. As of September 30, 2003, the
         Company was in compliance with all financial and other covenants of
         this loan agreement.

                  On October 31, 2003, the Company entered into a new $12.5
         million revolving credit facility that expires on October 31, 2006. The
         facility carries a floating interest rate based on the prime or Euros
         rate plus or minus an applicable margin (Euros plus 1.75% on October
         31, 2003), and is secured by substantially all the Company's domestic
         assets. The facility contains financial covenants, and certain
         restrictions on capital expenditures, acquisitions, asset dispositions
         and additional debt, as well as other customary covenants.



11.      SUPPLEMENTAL CASH FLOW INFORMATION

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


<Table>
<Caption>
                                         Three Months Ended
                                           September 30,
                                         2003         2002
                                      ----------   ----------
<S>                                   <C>          <C>
Interest paid                         $       --   $       --
Income taxes paid                     $       40   $      461
</Table>




                                       12
<PAGE>


                       PEERLESS MFG. CO. AND SUBSIDIARIES
                                    FORM 10-Q
                     FOR THE PERIOD ENDED SEPTEMBER 30, 2003


12.      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 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. 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 5 - "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 months ended September 30, 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 quarter of fiscal
         2003 has been restated to be on a comparable basis with the first
         quarter of fiscal 2004 presentation.

<Table>
<Caption>
                                                       Separation
                                  Environmental        Filtration        Unallocated
                                    Systems              Systems           overhead          Consolidated
                                  -------------        -----------       ------------       ------------
<S>                               <C>                  <C>               <C>                <C>
Three months ended
September 30, 2003
-------------------------------
Revenue from customers                $ 10,079            $ 6,728                               $ 16,807

Segment profit (loss)                    1,735                374              (958)               1,151

Three months ended
September 30, 2002
-------------------------------
Revenue from customers                 $ 6,943            $ 6,333                               $ 13,276

Segment profit (loss)                     (426)               440            (1,667)              (1,653)
</Table>




                                       13
<PAGE>



                       PEERLESS MFG. CO. AND SUBSIDIARIES
                                    FORM 10-Q
                     FOR THE PERIOD ENDED SEPTEMBER 30, 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 23 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 and separation and
filtration products for the abatement of air pollution and the removal of
contaminants from gases and liquids through our two principal 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 59% of
our consolidated first quarter fiscal 2004 revenues, 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.




                                       14
<PAGE>


                       PEERLESS MFG. CO. AND SUBSIDIARIES
                                    FORM 10-Q
                     FOR THE PERIOD ENDED SEPTEMBER 30, 2003


      Separation Filtration Systems. In this business segment, which represented
39% of our consolidated first quarter fiscal 2004 revenues, 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.

      Boilers. In this discontinued business segment, which represented 2% of
our consolidated first quarter fiscal 2004 revenues, we designed, engineered,
manufactured and sold packaged boilers and other steam generating equipment.
This equipment is used to produce steam, used for heating, drying, driving steam
engines and a variety of other applications. See "Restructuring and
Organizational Realignment" following for additional discussion on the
suspension and discontinuance of this business unit.

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, recent regulatory uncertainties have 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 recent regulatory and
political uncertainties, in July 2002 we initiated our "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. The plan
included, among other things, the consolidation of manufacturing facilities and
processes, the scaling down of capacities at the remaining facilities to meet
anticipated market requirements and current economic conditions, suspension of
non-strategic business units, and the realignment of the organization to focus
on our two primary business segments: Environmental Systems and Separation
Filtration. In connection therewith, we suspended the operations of our Boiler
unit during the first quarter of fiscal 2003 and sold this business unit during
the first quarter of fiscal 2004, and as such have presented this as
discontinued operations for the periods presented.

      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 during these challenging times.


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



                                       15
<PAGE>


                       PEERLESS MFG. CO. AND SUBSIDIARIES
                                    FORM 10-Q
                     FOR THE PERIOD ENDED SEPTEMBER 30, 2003


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
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 the 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. We typically 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.



                                       16
<PAGE>


                       PEERLESS MFG. CO. AND SUBSIDIARIES
                                    FORM 10-Q
                     FOR THE PERIOD ENDED SEPTEMBER 30, 2003


      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. See Item 2 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
of this Report.

RESULTS OF OPERATIONS

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


<Table>
<Caption>
                                                            Three Months Ended
                                                               September 30,
                                                            2003             2002
                                                     -------------     -------------
<S>                                                  <C>               <C>
Net revenues                                               100.0 %           100.0 %
Cost of revenues                                              71.4              75.3
                                                     -------------     -------------
      Gross margin                                            28.6              24.7
Operating expenses                                            21.7              33.5
Restructuring expenses                                          --               3.6
                                                     -------------     -------------
                                                              21.7              37.1
                                                     -------------     -------------
      Operating income (loss)                                  6.9             (12.4)
Other income (expense)                                        (0.2)             (0.2)
                                                     -------------     -------------
      Net earnings (loss) from continuing
      operations before income taxes                           6.7             (12.6)

Income tax expense (benefit)                                   2.3              (4.7)
                                                     -------------     -------------
      Earnings (loss) from  continuing operations,
              net of tax                                       4.4              (7.9)
Earnings (loss) from discontinued operations,
        net of tax                                             0.4              (2.2)

                                                     -------------     -------------
      Net earnings (loss)                                      4.8%            (10.1)%
                                                     =============     =============
</Table>


THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2002

RESULTS OF OPERATIONS - CONSOLIDATED

      Revenues. Net revenues from continuing operations increased by
approximately $3.5 million, or 26.3%, from $13.3 million for the three months
ended September 30, 2002 to $16.8 million for the three months ended September
30, 2003. The increase in revenues during the period related primarily to an
increase in our Environmental Systems revenues, which increased from $6.9
million to $10.1 million, or 46.4%, and to an increase in our Separation
Filtration Systems revenues, which increased from $6.3 million to $6.7 million,
or 6.4%.



                                       17
<PAGE>


                       PEERLESS MFG. CO. AND SUBSIDIARIES
                                    FORM 10-Q
                     FOR THE PERIOD ENDED SEPTEMBER 30, 2003


      The Company's backlog of unfilled orders was approximately $38 million at
September 30, 2003, compared to $38 million at September 30, 2002 and $40
million at June 30, 2003. 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, and the current economic climate all
continue to have a significant impact on our domestic sales and backlog. All of
these factors have contributed to planned projects being placed on hold or
production rescheduled, and new environmental and gas treatment projects being
canceled or delayed. In addition, our backlog at September 30, 2003 has been
impacted by our decision to suspend our Boiler business during fiscal 2003. At
September 30, 2003 we did not have any Boiler orders in our backlog, compared to
approximately $2.0 million in Boiler orders in our backlog at September 30,
2002. 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 over the past 24 months, 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.

      Gross Profit. Our gross profit increased $1.5 million, or 45.5%, from $3.3
million for the three months ended September 30, 2002 to $4.8 million for the
three months ended September 30, 2003. Our gross profit, as a percentage of
sales, increased from 24.7% for the three months ended September 30, 2002 to
28.6% for the three months ended September 30, 2003. Our reported margins during
the current period were impacted by three primary factors: higher sales volume,
lower start-up and warranty costs and 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. Our start-up and
warrants costs during the quarter were 2% lower, as a percentage of sales,
compared to the same period last year. In addition, certain of our products
historically have higher margins than others; as a result, shifts in the
composition of our sales can have a significant impact on our reported margins.
This was a factor during this quarter of fiscal 2004, as our Environmental
Systems revenues, which historically have higher gross profit margins,
represented 60.0% of our total revenues from continuing operations compared with
52.3% for the same quarter last year.

      Operating Expenses. For the first quarter of fiscal 2004, operating
expenses from continuing operations decreased by $1.3 million, or 26.5%, to $3.6
million, compared to $4.9 million for first quarter of fiscal 2003. Operating
expenses, as a percentage of sales, were 21.7% for the first quarter of fiscal
2004, compared to 37.1% for the first quarter of fiscal 2003. The decrease in
the amount of operating expenses during the first quarter of fiscal 2004 was due
to the implementation of our restructuring and organizational realignment
initiative, which began during fiscal 2003. As a result of this initiative, as a
percentage of sales, our sales and marketing expenses decreased from 11.9% to
9.5%, our engineering and project management expenses decreased from 12.6% to
6.5% and our general, administrative and restructuring expenses decreased from
12.6% to 5.7%, for the three months ended September 30, 2002 and 2003,
respectively. During the first quarter of fiscal 2003, in connection with this
initiative, we incurred approximately $500,000 in severance payments and related
costs. Excluding these costs, operating expenses, as a percentage of sales,
would have been 33.5% for the three months ended September 30, 2002. 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 changed by
approximately $8,000 from an expense of approximately $22,000 for the first
quarter of fiscal year 2003 to and expense of $30,000 for the first quarter of
fiscal year 2004. We realized foreign currency exchange losses of



                                       18
<PAGE>


                       PEERLESS MFG. CO. AND SUBSIDIARIES
                                    FORM 10-Q
                     FOR THE PERIOD ENDED SEPTEMBER 30, 2003


approximately $47,000 during the current quarter compared to approximately
$63,000 for the same quarter last year.

      Income Taxes. The Company's effective income tax rate was approximately
34.0% and 37.0% for the three months ended September 30, 2003 and 2002,
respectively. The decrease in our effective tax rate for the current quarter,
compared to the same quarter last year, resulted from the increased portion of
our income in this quarter which was either subject to a lower foreign tax rate
or foreign sales income exclusions.

      Net Earnings (loss) from Continuing Operations. Net earnings from
continuing operations were approximately $740,000, or 4.4% of sales, for the
three months ended September 30, 2003 compared to a net loss of approximately
$1.1 million, or 7.9% sales, for the same period last year. Basic earnings per
share from continuing operations increased from a loss of $0.35 per share for
the three months ended September 30, 2003, to net earnings of $0.25 per share
for three months ended September 30, 2003. Diluted earnings per share from
continuing operations increased from a loss of $0.35 per share for the quarter
ended September 30, 2002, to net earnings of $0.24 per share for the quarter
ended September 30, 2003.

      Discontinued Operations. Earnings from discontinued operations for the
three months ended September 30, 2003 were $65,000, compared to a net loss of
$288,000 for the same period last year. Included in our net earnings for the
quarter ended September 30, 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). Earnings (loss) per basic and diluted share, from discontinued
operations, were $.02 per share for the quarter ended September 30, 2003, and a
loss $.10 per share for the same period last year.

      Net Earnings (loss). As a result of the above factors, net earnings were
approximately $805,000, or 4.8% of sales, for the three months ended September
30, 2003, compared to a net loss of approximately $1.3 million, or 10.1% sales,
for the same period last year. Basic earnings per share increased from a loss of
$0.45 per share for the three months ended September 30, 2002, to net earnings
of $0.27 per share for the same quarter this fiscal year. Diluted earnings per
share increased from a loss of $0.45 per share for the three months ended
September 30, 2002, to net earnings of $0.26 per share for same quarter 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 - 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).

<Table>
<Caption>
                                                               Three Months Ended
                                                                  September 30,
                                                2003             %             2002               %
                                           -------------   -------------   -------------   -------------
<S>                                        <C>             <C>             <C>             <C>
Revenues
   Environmental Systems                   $      10,079            60.0   $       6,943            52.3
   Separation Filtration Systems                   6,728            40.0           6,333            47.7
                                           -------------   -------------   -------------   -------------
     Total                                 $      16,807           100.0   $      13,276           100.0
                                           =============   =============   =============   =============
</Table>



                                       19
<PAGE>



      Revenues from our Environmental Systems increased by approximately $3.2
million, or 46.4%, from $6.9 million for the three months ended September 30,
2002, to $10.1 million for the three months ended September 30, 2003. The
increase related primarily to the substantial completion of several large
Environmental Systems contracts in our backlog at June 30, 2003.

      Separation Filtration Systems revenues increased by approximately
$400,000, or 6.4%, from $6.3 million for the three months ended September 30,
2002 to $6.7 million for the three months ended September 30, 2003. On a
comparative basis, the Company saw its international sales increase by
approximately $1.2 million, or 54.5%, and saw its domestic and Canadian sales
decline by approximately $800,000, or 19.5%. The continued weakness in the U.S.
economy continues to have a major impact on our domestic sales.

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

<Table>
<Caption>
                                                                        Three Months Ended
                                                                            September 30,
                                                                        2003              2002
                                                                    -------------    -------------
<S>                                                                 <C>              <C>
Segment profit (loss)
    Environmental Systems                                           $       1,735    $        (426)
    Separation Filtration Systems                                             374              440
                                                                    -------------    -------------
      Total                                                                 2,109               14
    Unallocated general and administrative
        expenses                                                             (958)          (1,667)
                                                                    -------------    -------------
    Operating income (loss)                                         $       1,151    $      (1,653)
                                                                    =============    =============
</Table>


      Environmental Systems profit in the first quarter of fiscal 2004 increased
by $2.1 million, from a loss of approximately $426,000 for the three months
ended September 30, 2002, to a profit of approximately $1.7 million for the same
quarter this fiscal year. As a percentage of Environmental Systems revenue, our
operational performance increased from a segment loss of 6.1% to a segment
profit of 17.2%. The increase in our Environmental Systems operational
performance during the current fiscal year related primarily to the increase in
this segment's revenues during the period and the resulting impact on our
manufacturing and operational efficiencies.

      Separation Filtration Systems profit in the first quarter of fiscal year
2004 decreased approximately $66,000, or 15.0%, from a profit of approximately
$440,000 for the first quarter of fiscal 2003 to a profit of $374,000 for the
same quarter this fiscal year. As a percentage of Separation Filtration Systems
revenue, our operational performance decreased from a segment profit of 6.9%, to
a segment profit of 5.6% for the three months ended September 30, 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 net margin than
domestically.




                                       20
<PAGE>



                       PEERLESS MFG. CO. AND SUBSIDIARIES
                                    FORM 10-Q
                     FOR THE PERIOD ENDED SEPTEMBER 30, 2003


FINANCIAL POSITION

      Assets. Total assets increased by approximately $3.1 million, or 7.3%,
from $42.6 million at June 30, 2003 to $45.7 million at September 30, 2003. The
increase in our assets during this period resulted primarily from the increase
in our receivables and inventories, which can be attributed to the increase in
our business. At September 30, 2003, we held cash and short-term investments of
$7.9 million, had working capital of $18.8 million, and a current ratio of
1.83-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 slight decline in our current ratio was a result of an 8.9% increase
in our current assets compared to an 11.9% increase in our current liabilities.

      Liabilities and Shareholders' Equity. Total liabilities increased by
approximately $2.4 million, or 11.9%, from $20.2 million at June 30, 2003 to
$22.6 million at September 30, 2003. This related primarily to an increase our
accounts payable of approximately $2.3 million, which related to the increase in
our business. The increase in our equity of approximately $840,000, or 3.8%,
from $22.3 million at June 30, 2002 to $23.2 million at September 30, 2003
resulted primarily from our earnings for the period. As a result, our
debt-to-equity ratio increased slightly from .91-to-1.0 at June 30, 2003 to
..98-to-1.0 at September 30, 2003.


      LIQUIDITY AND CAPITAL RESOURCES

         Our cash and cash equivalents were $7.6 million as of September 30,
2003, compared to $6.7 million at June 30, 2003. Cash provided by continuing
operating activities during the first quarter of fiscal year 2004 was
approximately $918,000, compared to $2.5 million for the first quarter of fiscal
year 2003.

      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 $7.7 million at September 30, 2003 and $7.8
million at June 30, 2003, representing a decrease in our investment in these
working capital items of approximately $100,000. In addition, operationally cash
was provided from our earnings from continuing operations and reductions in
other assets and increases in other liabilities. We used cash for operational
purposes, during the period, to increase our inventories due to the increase in
our business.

      Cash used in investing activities was approximately $144,000 for the three
months ended September 30, 2003, compared to approximately $32,000 for the same
period last year. The increase in cash used during the current fiscal year
related to a increase in capital expenditures during this period.

      We had approximately $13,000 of cash provided by financing activities
during both the current and prior period. 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.



                                       21
<PAGE>


                       PEERLESS MFG. CO. AND SUBSIDIARIES
                                    FORM 10-Q
                     FOR THE PERIOD ENDED SEPTEMBER 30, 2003


      We maintained a $10 million revolving credit facility that expired on
October 31, 2003. The credit line carried a floating interest rate based on the
prime or Euros rate plus or minus an applicable margin (Euros plus 2.00% at
September 30, 2003), and was secured by substantially all our assets. As of
September 30, 2003, we had no outstanding loans under the credit facility; we
had $3.6 million outstanding under letters of credit, leaving us $6.4 million of
availability under our facility. The facility contained financial covenants,
restrictions on capital expenditures, acquisitions, asset dispositions, and
additional debt, as well as other customary covenants. As of September 30, 2003,
the Company was in compliance with all financial and other covenants of this
loan agreement.

      On October 31, 2003, we entered into a new $12.5 million revolving credit
facility that expires on October 31, 2006. The facility carries a floating
interest rate based on the prime or Euros rate plus or minus an applicable
margin (Euros plus 1.75% on October 31, 2003), and is secured by substantially
all our domestic assets. The facility contains financial covenants, and certain
restrictions on capital expenditures, acquisitions, asset dispositions and
additional debt, as well as other customary covenants.

        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 unanticipated adversity.

      Included in our discontinued operations is a $2.2 million receivable due
from a customer that recently filed a plan of reorganization under Chapter 11 of
the United States Bankruptcy Code (original amount of the contract was
approximately $6.1 million). We have been classified as an unsecured creditor
under such filing. However, the customer/debtor has reportedly assigned all its
rights, claims, duties and defenses under our contract to the project's owner,
who has apparently assumed such rights, claims, duties and defenses. We have
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, we have 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/debtor. We have also been informed that the
owner/assignee intends to allege counterclaims in the lawsuit. While we have
reason to believe that our lien and our contractual claims will be found to be
valid, no assurances can be given. We intend to vigorously pursue the collection
of this receivable and believe that it will be collected. 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 asset 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 our results of discontinued
operations. Such an event could have a material adverse impact on our financial
condition and reported results, and in addition, could potentially trigger a
violation of our loan covenants. While we would attempt, and have reason to
believe that we would be able, to obtain a waiver for such violations, or find
other lending alternatives, no assurances can be given that we would be
successful in such endeavors.

NEW ACCOUNTING STANDARDS

         In November 2002, FASB reached a consensus on Emerging Issues Task
Force ("EITF") Issue 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables." The guidance in this Issue is effective for revenue arrangements
entered into in fiscal years beginning after June 15, 2003. The Issue addresses
certain aspects of the accounting by a vendor for arrangements under which it
will perform multiple revenue-generating activities and whether, as a result,
there is embedded more than one earnings



                                       22
<PAGE>


                       PEERLESS MFG. CO. AND SUBSIDIARIES
                                    FORM 10-Q
                     FOR THE PERIOD ENDED SEPTEMBER 30, 2003


process for revenue recognition purposes. We do not expect the adoption of this
pronouncement to have a material impact on our financial condition or results of
our operations.


         In April 2003, FASB issued Statement No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." FASB Statement No. 149
requires that contracts with comparable characteristics be accounted for
similarly. The Statement clarifies the circumstances in which a contract with an
initial net investment meets the characteristics of a derivative, and when a
derivative contains a financing component and amends certain other existing
pronouncements. This Statement is effective for contracts entered into or
modified after June 30, 2003. We do not expect the adoption of this
pronouncement to have a material impact on our financial condition or results of
our operations.

         In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. Many
of these instruments were previously classified as equity. SFAS No. 150 requires
that an issuer classify a financial instrument that is within its scope as a
liability, or as an asset in some circumstances. This Statement applies to three
types of freestanding financial instruments, other than outstanding shares. One
type is mandatory redeemable shares, which the issuing company is obligated to
buy back in exchange for cash or assets; a second type includes put options and
forward purchase contracts that require or may require the issuer to buy back
some of its shares in exchange for cash or other assets; and the third type is
obligations that can be settled with shares, the monetary value of which is
fixed, ties solely or predominantly to a variable such as a market index, or
varies inversely with the value of the issuer's shares. SFAS No. 150 does not
apply to features embedded in a financial instrument that is not a derivative in
its entirety.

         SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. We will implement SFAS No.
150 in our first quarter of fiscal year 2004. We have not, nor do we expect to
enter into any transactions that would be covered by SFAS No. 150 and therefore
the adoption of the Statement is not expected to have a material impact on our
financial statements.


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 - "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. In first quarter of fiscal 2004, approximately 59% of our
consolidated revenues were derived from sales of Environmental Systems for new
and refurbished power plants, compared to approximately 48% for the same period
in fiscal 2003.



                                       23
<PAGE>


                       PEERLESS MFG. CO. AND SUBSIDIARIES
                                    FORM 10-Q
                     FOR THE PERIOD ENDED SEPTEMBER 30, 2003


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 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, (1) increases in the cost, or shortages of components, materials or
labor; (2) unanticipated technical problems; (3) required project modifications
not initiated by the customer; and (4) suppliers' or subcontractors' failure to
perform. These factors 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.



                                       24
<PAGE>



                       PEERLESS MFG. CO. AND SUBSIDIARIES
                                    FORM 10-Q
                     FOR THE PERIOD ENDED SEPTEMBER 30, 2003


      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.




                                       25
<PAGE>



                       PEERLESS MFG. CO. AND SUBSIDIARIES
                                    FORM 10-Q
                     FOR THE PERIOD ENDED SEPTEMBER 30, 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 terms of three years
or less. 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 and
have not, to date, experienced any significant credit losses. Significant
portions of our sales are to customers who place large orders for custom
products and whose activities are related to the power industry. As such, our
exposure to credit risk is affected to some degree by conditions within the
power industry and governmental and/or political conditions. We try to mitigate
our exposure to credit risk, to some extent, by requiring progress payments and
letters of credit. However, as some of our exposure is outside of our control,
unanticipated events could have a materially adverse impact on our operating
results. See Item 2 - "Management's Discussion and Analysis of Financial
Condition and Results of Operation - Liquidity and Capital Resources" of this
Report.

      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 new $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. As of September 30, 2003 we were in
compliance with all terms and conditions of our $10 million credit facility,
which expired on October 31,



                                       26
<PAGE>



                       PEERLESS MFG. CO. AND SUBSIDIARIES
                                    FORM 10-Q
                     FOR THE PERIOD ENDED SEPTEMBER 30, 2003


2003. We were also in compliance with all terms and conditions of our new credit
facility, which commenced on October 31, 2003. See Note 10 - "Line of Credit" of
this Report for additional discussion on our old and new credit facility.

      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 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
derivative transactions outstanding as of September 30, 2003.



                                       27
<PAGE>


                       PEERLESS MFG. CO. AND SUBSIDIARIES
                                    FORM 10-Q
                     FOR THE PERIOD ENDED SEPTEMBER 30, 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 September 30,
2003 to ensure that information required to be disclosed by the Company in
reports that it files or submits under the 1934 Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms.
      There were no changes in the Company's internal control over financial
reporting during the Company's fiscal quarter ended September 30, 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, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits

                  The following exhibits are filed as part of this report.

<Table>
<Caption>
         Exhibit
         Number   Exhibit
         -------  -------
<S>               <C>
           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 (filed as Exhibit 3 (b) to our
                  report on Form 10-K for the fiscal year ended June 30, 1997,
                  and incorporated herein by reference).

           4(a)   Rights Agreement dated May 22, 1997 between Peerless Mfg. Co.
                  and Mellon Investor Services, LLC (formerly Chase Mellon
                  Shareholder Services, LLC), as
</Table>



                                       28
<PAGE>


                       PEERLESS MFG. CO. AND SUBSIDIARIES
                                    FORM 10-Q
                     FOR THE PERIOD ENDED SEPTEMBER 30, 2003


<Table>
<S>               <C>
                  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(m)   Employment Agreement dated July 16, 2003, by and between
                  Peerless Mfg. Co. and William T. Strohecker. *

          10(n)   Agreement dated July 16, 2003, by and between Peerless Mfg.
                  Co. and William T. Strohecker. *

          31.1    Certification of Chief Executive Officer pursuant to Section
                  302 of the Sarbanes-Oxley Act of 2002. *

          31.2    Certification of Chief Financial Officer pursuant to Section
                  302 of the Sarbanes-Oxley Act of 2002. *

          32.1    Certification of Chief Executive Officer pursuant to Section
                  906 of the Sarbanes-Oxley Act of 2002. **

         32.2     Certification of Chief Financial Officer pursuant to Section
                  906 of the Sarbanes-Oxley Act of 2002. **
</Table>

----------
*   Filed herewith

** Furnished herewith


       (b)  Reports on Form 8-K.

                  On September 19, 2003, the Registrant filed a Report on Form
            8-K to file a press release announcing its financial results for the
            fourth quarter and for the year ended June 30, 2003, which
            information was "furnished" and not "filed" with the Commission.

                  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.



                                       29
<PAGE>



                                   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: November 14, 2003          /s/ Sherrill Stone
      -----------------          --------------------------------------------
                                 Sherrill Stone
                                 Chairman and Chief Executive Officer


Date: November 14, 2003          /s/ Richard L. Travis
      -----------------          --------------------------------------------
                                 Richard L. Travis, Chief Financial Officer
                                 (Principal Financial and Accounting Officer)



                                       30