##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
 For the Quarterly Period Ended December 31, 2007
 OR
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
 For the Transition Period from  to
 Commission
File Number 001-33453
 PEERLESS MFG. CO.
  Texas
    
    75-0724417(State or Other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)14651 North Dallas Parkway, Suite 500, Dallas, Texas
    
    75254(Address of Principal Executive Offices)
    
    (Zip code)
 (214) 357-6181
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



TABLE OF CONTENTS
 PageNumberPART I: FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets at December 31, 2007 (unaudited)
and June 30, 2007
    
    
    4Unaudited Consolidated Statements of Earnings for the three and six months
ended December 31, 2007 and 2006
    
    
    5Unaudited Consolidated Statements of Cash Flows for the
six months ended December 31, 2007 and 2006
    
    
    6Unaudited Consolidated Statements of Shareholders Equity for the
six months ended December 31, 2007 and 2006
    
    
    7Notes to the Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    34Item 4. Controls and Procedures
    
    
    34PART II: OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    35Item 1A. Risk Factors
    
    
    35Item 4. Submission of Matters to a Vote of Security Holders
    
    
    36Item 6. Exhibits
    
    
    37SIGNATURES
    
    
    38Rule 13a-14(a)/15d-14(a) Certification of Chief Executive OfficerRule 13a-14(a)/15d-14(a) Certification of Chief Financial OfficerSection 1350 Certification of Chief Executive OfficerSection 1350 Certification of Chief Financial Officer
  Page 2




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




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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 PEERLESS MFG. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
 December 31,
    
    
    June 30,2007
    
    
    2007(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    26,820
    
    
    $
    17,015Restricted cash
    
    
    2,782
    
    
    
    2,811Accounts receivable-principally trade  net of
allowance for doubtful accounts of $465 at
December 31, 2007 and June 30, 2007
    
    
    19,752
    
    
    
    21,329Inventories
    
    
    5,778
    
    
    
    3,919Costs and earnings in excess of billings
on uncompleted contracts
    
    
    25,917
    
    
    
    15,976Deferred income taxes
    
    
    1,393
    
    
    
    1,410Other current assets
    
    
    1,547
    
    
    
    1,646Total current assets
    
    
    83,989
    
    
    
    64,106Property, plant and equipment  net
    
    
    3,930
    
    
    
    3,747Other assets
    
    
    229
    
    
    
    818Total assets
    
    $
    88,148
    
    
    $
    68,671LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    23,854
    
    
    $
    17,217Billings in excess of costs and earnings
on uncompleted contracts
    
    
    7,658
    
    
    
    6,970Commissions payable
    
    
    1,955
    
    
    
    1,401Income taxes payable
    
    
    3,298
    
    
    
    1,576Product warranties
    
    
    960
    
    
    
    641Accrued liabilities and other
    
    
    7,578
    
    
    
    5,679Total current liabilities
    
    
    45,303
    
    
    
    33,484Deferred income taxes
    
    
    1,005
    
    
    
    1,010Other non current liabilities
    
    
    947
    
    
    
    640Commitments and contingenciesShareholders equity:Common stock  authorized, 10,000,000 shares
of $1 par value; issued and outstanding,
6,484,338 and 6,439,644 shares at December 31, 2007
and June 30, 2007, respectively
    
    
    6,484
    
    
    
    6,440Additional paid-in capital
    
    
    1,967
    
    
    
    1,359Accumulated other comprehensive income
    
    
    408
    
    
    
    431Retained earnings
    
    
    32,034
    
    
    
    25,307Total shareholders equity
    
    
    40,893
    
    
    
    33,537Total liabilities and shareholders equity
    
    $
    88,148
    
    
    $
    68,671
 See accompanying notes to consolidated financial statements.
 Page 4




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PEERLESS MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS  (In thousands, except per share amounts)
 Three months ended
    
    
    Six months endedDecember 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues
    
    $
    37,086
    
    
    $
    14,091
    
    
    $
    67,104
    
    
    $
    28,729Cost of goods sold
    
    
    24,668
    
    
    
    9,587
    
    
    
    44,301
    
    
    
    19,830Gross profit
    
    
    12,418
    
    
    
    4,504
    
    
    
    22,803
    
    
    
    8,899Operating expensesSales and marketing
    
    
    3,036
    
    
    
    1,597
    
    
    
    5,453
    
    
    
    3,266Engineering and project
management
    
    
    1,319
    
    
    
    1,002
    
    
    
    2,451
    
    
    
    1,888General and administrative
    
    
    2,821
    
    
    
    1,375
    
    
    
    4,873
    
    
    
    2,5637,176
    
    
    
    3,974
    
    
    
    12,777
    
    
    
    7,717Operating income
    
    
    5,242
    
    
    
    530
    
    
    
    10,026
    
    
    
    1,182Other income (expense)Interest income
    
    
    315
    
    
    
    73
    
    
    
    682
    
    
    
    135Foreign exchange gain (loss)
    
    
    (102
    )
    
    
    101
    
    
    
    (33
    )
    
    
    82Other income (loss)  net
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    
    213
    
    
    
    174
    
    
    
    640
    
    
    
    217Earnings before income taxes
    
    
    5,455
    
    
    
    704
    
    
    
    10,666
    
    
    
    1,399Income tax expense
    
    
    (1,905
    )
    
    
    (247
    )
    
    
    (3,730
    )
    
    
    (491
    )Net earnings
    
    $
    3,550
    
    
    $
    457
    
    
    $
    6,936
    
    
    $
    908Earnings per share  basic
    
    $
    0.55
    
    
    $
    0.07
    
    
    $
    1.08
    
    
    $
    0.14Earnings per share  diluted
    
    $
    0.55
    
    
    $
    0.07
    
    
    $
    1.07
    
    
    $
    0.14
 Note: December 31, 2006 earnings per share amounts adjusted for
June 2007 two-for-one stock split in the form of a dividend.
 See accompanying notes to consolidated financial statements.
 Page 5




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PEERLESS MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS  (In thousands)
 Six months ended December 31,2007
    
    
    2006Cash flows from operating activities:Net earnings
    
    $
    6,936
    
    
    $
    908Adjustments to reconcile net earnings to
net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    386
    
    
    
    339Deferred income taxes
    
    
    12
    
    
    
    (4
    )Deferred rent expense
    
    
    98
    
    
    
    Provision for warranty expenses
    
    
    335
    
    
    
    124Inventory valuation reserve
    
    
    204
    
    
    
    94Foreign exchange (gain) loss
    
    
    33
    
    
    
    (82
    )Stock based compensation
    
    
    610
    
    
    
    126Excess tax benefits from stock-based payment arrangements
    
    
    (15
    )
    
    
    (229
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    1,557
    
    
    
    1,850Inventories
    
    
    (2,065
    )
    
    
    (694
    )Costs and earnings in excess of billings on uncompleted contracts
    
    
    (9,987
    )
    
    
    2,647Other current assets
    
    
    98
    
    
    
    368Other assets
    
    
    589
    
    
    
    22Accounts payable
    
    
    6,612
    
    
    
    (3,902
    )Billings in excess of costs and earnings on uncompleted contracts
    
    
    688
    
    
    
    215Commissions payable
    
    
    554
    
    
    
    (226
    )Product warranties
    
    
    (16
    )
    
    
    (92
    )Income taxes payable
    
    
    1,737
    
    
    
    325Accrued liabilities and other
    
    
    1,898
    
    
    
    (89
    )Net cash provided by operating activities:
    
    
    10,264
    
    
    
    1,700Cash flow from investing activities:Increase in restricted cash
    
    
    
    
    
    
    (2,741
    )Purchases of property and equipment
    
    
    (569
    )
    
    
    (183
    )Net cash used in investing activities:
    
    
    (569
    )
    
    
    (2,924
    )Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    27
    
    
    
    744Excess tax benefits from stock-based payment arrangements
    
    
    15
    
    
    
    229Net cash provided by financing activities
    
    
    42
    
    
    
    973Effect of exchange rate changes on cash and cash equivalents
    
    
    68
    
    
    
    83Net increase (decrease) in cash and cash equivalents
    
    
    9,805
    
    
    
    (168
    )Cash and cash equivalents at beginning of period
    
    
    17,015
    
    
    
    6,411Cash and cash equivalents at end of period
    
    $
    26,820
    
    
    $
    6,243
 See accompanying notes to the consolidated financial statements.
 Page 6




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PEERLESS MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY  (In thousands)
 Six months ended December 31,2007
    
    
    2006Common stockBalance at beginning of period
    
    $
    6,440
    
    
    $
    6,268Common stock issued
    
    $
    42Stock options exercised
    
    
    2
    
    
    
    118Balance at end of period
    
    
    6,484
    
    
    
    6,386Additional paid-in capitalBalance at beginning of period
    
    
    1,359
    
    
    
    9Common stock issued
    
    
    390
    
    
    
    Stock options exercised
    
    
    25
    
    
    
    626Income tax benefit related to stock options exercised
    
    
    15
    
    
    
    229Stock-based compensation expense
    
    
    178
    
    
    
    126Balance at end of period
    
    
    1,967
    
    
    
    990Accumulated other comprehensive incomeBalance at beginning of period
    
    
    431
    
    
    
    245Foreign currency translation adjustment
    
    
    (23
    )
    
    
    131Balance at end of period
    
    
    408
    
    
    
    376Retained earningsBalance at beginning of period
    
    
    25,307
    
    
    
    19,395Cumulative effect of a change in accounting principle
(adoption of FIN No. 48)
    
    
    (209
    )
    
    
    Net earnings
    
    
    6,936
    
    
    
    908Balance at end of period
    
    
    32,034
    
    
    
    20,303Total shareholders equity
    
    $
    40,893
    
    
    $
    28,055
 Note: December 31, 2006 common stock and additional paid-in capital amounts adjusted for
June 2007 two-for-one stock split in the form of a dividend.
 See accompanying notes to consolidated financial statements.
 Page 7




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007  (Amounts in thousands, except share and per share amounts)
 1. Basis of Presentation
   2. New Accounting Standards
  Fair Value
Measurements
 The Fair
Value Option for Financial Assets and Financial Liabilities
 Page 8




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007  (Amounts in thousands, except share and per share amounts)
 2. New Account Standards  Continued
  Business Combinations
 3. Accounts Receivable
   Three months ended
    
    
    Six months endedDecember 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Balance at beginning of period
    
    $
    465
    
    
    $
    518
    
    
    $
    465
    
    
    $
    462Bad debt expense
    
    
    
    
    
    
    (56
    )
    
    
    
    
    
    
    Accounts written off, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at end of period
    
    $
    465
    
    
    $
    462
    
    
    $
    465
    
    
    $
    462
 4. Inventories
  Page 9




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007  (Amounts in thousands, except share and per share amounts)
 4. Inventories  Continued
  December 31,
    
    
    June 30,2007
    
    
    2007Raw material and component parts
    
    $
    4,374
    
    
    $
    3,652Work in progress
    
    
    1,804
    
    
    
    613Finished goods
    
    
    242
    
    
    
    1866,420
    
    
    
    4,451Inventory reserves
    
    
    (642
    )
    
    
    (532
    )$
    5,778
    
    
    $
    3,919
  Three months ended
    
    
    Six months endedDecember 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Balance at beginning of period
    
    $
    691
    
    
    $
    490
    
    
    $
    532
    
    
    $
    434Additions
    
    
    45
    
    
    
    38
    
    
    
    204
    
    
    
    94Amounts written off
    
    
    (94
    )
    
    
    
    
    
    
    (94
    )
    
    
    Balance at end of period
    
    $
    642
    
    
    $
    528
    
    
    $
    642
    
    
    $
    528
 5. Revenue Recognition and Cost and Earnings on Uncompleted Contracts
   Page 10




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007  (Amounts in thousands, except share and per share amounts)
 5. Revenue Recognition and Cost and Earnings on Uncompleted Contracts  Continued
   December 31,
    
    
    June 30,2007
    
    
    2007Costs incurred on uncompleted contracts and
estimated earnings
    
    $
    116,935
    
    
    $
    70,527Less billings to date
    
    
    (98,676
    )
    
    
    (61,521
    )$
    18,259
    
    
    $
    9,006
  December 31,
    
    
    June 30,2007
    
    
    2007Costs and earnings in excess of billings on
uncompleted contracts
    
    $
    25,917
    
    
    $
    15,976Billings in excess of costs and earnings on
uncompleted contracts
    
    
    (7,658
    )
    
    
    (6,970
    )$
    18,259
    
    
    $
    9,006
 6. Product Warranties
   Page 11




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007  (Amounts in thousands, except share and per share amounts)
 6. Product Warranties  Continued
 Three months ended
    
    
    Six months endedDecember 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Balance at beginning of period
    
    $
    947
    
    
    $
    639
    
    
    $
    641
    
    
    $
    626Provision for warranty expenses
    
    
    19
    
    
    
    55
    
    
    
    335
    
    
    
    124Warranty charges
    
    
    (6
    )
    
    
    (36
    )
    
    
    (16
    )
    
    
    (92
    )Balance at end of period
    
    $
    960
    
    
    $
    658
    
    
    $
    960
    
    
    $
    658
 7. Accrued Liabilities and Other
  December 31,
    
    
    June 30,2007
    
    
    2007Accrued start-up expense
    
    $
    3,323
    
    
    $
    2,095Accrued compensation
    
    
    1,695
    
    
    
    1,755Accrued professional, legal and other expenses
    
    
    581
    
    
    
    1,555Sales and use taxes payable
    
    
    28
    
    
    
    24Other
    
    
    1,951
    
    
    
    250$
    7,578
    
    
    $
    5,679
 8. Income Taxes
  Page 12




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007  (Amounts in thousands, except share and per share amounts)
 9. Comprehensive Income
  Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Net earnings from continuing operations
    
    $
    3,550
    
    
    $
    457
    
    
    $
    6,936
    
    
    $
    908Foreign currency translation adjustment
    
    
    (60
    )
    
    
    101
    
    
    
    (23
    )
    
    
    131Comprehensive income
    
    $
    3,490
    
    
    $
    558
    
    
    $
    6,913
    
    
    $
    1,039
 10. Stock Based Compensation
      Page 13




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007  (Amounts in thousands, except share and per share amounts)
 10. Stock Based Compensation  Continued
  2007
    
    2006Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    ExerciseNo. of Options
    
    Price
    
    No. of Options
    
    PriceBalance at July 1,
    
    
    147,874
    
    
    $
    7.68
    
    
    
    143,650
    
    
    $
    7.01Granted
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Exercised
    
    
    
    
    
    $
    
    
    
    
    (32,400
    )
    
    $
    6.89Forfeited before vesting
    
    
    (8,900
    )
    
    $
    7.66
    
    
    
    
    
    
    $
    Forfeited after vesting
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Balance at September 30,
    
    
    138,974
    
    
    $
    7.68
    
    
    
    111,250
    
    
    $
    7.05Granted
    
    
    
    
    
    $
    
    
    
    
    5,000
    
    
    $
    11.90Exercised
    
    
    (2,400
    )
    
    $
    11.54
    
    
    
    (27,488
    )
    
    $
    5.42Forfeited before vesting
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Forfeited after vesting
    
    
    (1,700
    )
    
    $
    6.60
    
    
    
    
    
    
    $
    Balance at December 31,
    
    
    134,874
    
    
    $
    7.62
    
    
    
    88,762
    
    
    $
    7.82Exercisable at end of period
    
    
    94,324
    
    
    $
    7.28
    
    
    
    49,601
    
    
    $
    7.68
   Three months ended
    
    Six months endedDecember 31,
    
    December 31,2007
    
    2006
    
    2007
    
    2006Total cash received
    
    $
    27
    
    
    $
    298
    
    
    $
    27
    
    
    $
    744Income tax benefits
    
    $
    15
    
    
    $
    120
    
    
    $
    15
    
    
    $
    229Total intrinsic value of options exercised
    
    $
    64
    
    
    $
    385
    
    
    $
    64
    
    
    $
    707
  Page 14




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007  (Amounts in thousands, except share and per share amounts)
 10. Stock Based Compensation  Continued
 Summary of Unvested Stock OptionsThree months ended December
    
    
    Six months ended December31, 2007
    
    
    31, 2007Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageGrant Date
    
    
    
    
    
    
    Grant DateNo. of Options
    
    
    Fair Value
    
    
    No. of Options
    
    
    Fair ValueUnvested at beginning of
period
    
    
    50,400
    
    
    $
    3.41
    
    
    
    59,300
    
    
    $
    3.41New grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vested
    
    
    (9,850
    )
    
    
    3.22
    
    
    
    (9,850
    )
    
    
    3.22Forfeited
    
    
    
    
    
    
    
    
    
    
    (8,900
    )
    
    
    3.31Unvested at end of period
    
    
    40,550
    
    
    
    3.48
    
    
    
    40,550
    
    
    
    3.48
   Summary of Restricted Stock AwardsThree months ended December
    
    
    Six months ended December31, 2007
    
    
    31, 2007Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageGrant Date
    
    
    
    
    
    
    Grant DateNo. of Shares
    
    
    Fair Value
    
    
    No. of Shares
    
    
    Fair ValueBalance at beginning of
period
    
    
    67,894
    
    
    $
    16.53
    
    
    
    37,600
    
    
    $
    12.17Granted
    
    
    12,000
    
    
    
    36.01
    
    
    
    43,094
    
    
    
    25.69Vested
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    (800
    )
    
    
    12.49Balance at end of period
    
    
    79,894
    
    
    
    17.06
    
    
    
    79,894
    
    
    
    17.06
  Page 15




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007  (Amounts in thousands, except per share amounts)
 11. Earnings Per Share
 (the
number of shares and earnings per share have been adjusted for our two-for-one stock split in June
2007):
 Three months ended
    
    
    Six months endedDecember 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Net earnings
    
    $
    3,550
    
    
    $
    457
    
    
    $
    6,936
    
    
    $
    908Basic weighted average common shares outstanding
    
    
    6,410
    
    
    
    6,340
    
    
    
    6,406
    
    
    
    6,298Effect of dilutive options and restricted stock awards
    
    
    97
    
    
    
    63
    
    
    
    78
    
    
    
    94Diluted weighted average common shares outstanding
    
    
    6,507
    
    
    
    6,403
    
    
    
    6,484
    
    
    
    6,392Earnings per share  basic
    
    $
    0.55
    
    
    $
    0.07
    
    
    $
    1.08
    
    
    $
    0.14Earnings per share  diluted
    
    $
    0.55
    
    
    $
    0.07
    
    
    $
    1.07
    
    
    $
    0.14
  12. Segment Information
   Page 16




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007  (Amounts in thousands, except share and per share amounts)
 12. Segment Information   Continued
  Three months ended,
    
    
    Six months ended,December 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006RevenuesEnvironmental
    
    $
    19,869
    
    
    $
    2,550
    
    
    $
    36,164
    
    
    $
    7,164Separation / Filtration
    
    
    17,217
    
    
    
    11,541
    
    
    
    30,940
    
    
    
    21,565Consolidated
    
    $
    37,086
    
    
    $
    14,091
    
    
    $
    67,104
    
    
    $
    28,729Operating income (loss)Environmental
    
    $
    5,227
    
    
    $
    (138
    )
    
    $
    9,876
    
    
    $
    794Separation / Filtration
    
    
    2,836
    
    
    
    2,043
    
    
    
    5,023
    
    
    
    2,951Reconciling items
    
    
    (2,821
    )
    
    
    (1,375
    )
    
    
    (4,873
    )
    
    
    (2,563
    )Consolidated
    
    $
    5,242
    
    
    $
    530
    
    
    $
    10,026
    
    
    $
    1,182
 13. Supplemental Cash Flow Information
  Three months ended
    
    Six months endedDecember 31,
    
    December 31,2007
    
    2006
    
    2007
    
    2006Income tax paid
    
    $
    
    
    
    $
    150
    
    
    $
    2,000
    
    
    $
    460Income tax refunds
received
    
    $
    
    
    
    $
    297
    
    
    $
    
    
    
    $
    297
 14. Lines of Credit
  Page 17




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007  (Amounts in thousands, except share and per share amounts)
 14. Lines of Credit  Continued
   Page 18




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
December 31, 2007  (Amounts in thousands, except share and per share amounts)
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
  Environmental Systems.
 Separation Filtration Systems.
 Critical Accounting Policies
   Revenue Recognition
 Page 19




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
December 31, 2007  (Amounts in thousands, except share and per share amounts)
   Product Warranties
 Allowance for Doubtful Accounts
 Reserve for Obsolete and Slow-Moving Inventory
 Page 20




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
December 31, 2007  (Amounts in thousands, except share and per share amounts)
 Results of Operations
  Three months ended
    
    Six months endedDecember 31,
    
    December 31,2007
    
    2006
    
    2007
    
    2006Net revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    66.5
    
    
    
    68.0
    
    
    
    66.0
    
    
    
    69.0Gross profit
    
    
    33.5
    
    
    
    32.0
    
    
    
    34.0
    
    
    
    31.0Operating expenses
    
    
    19.3
    
    
    
    28.2
    
    
    
    19.1
    
    
    
    26.9Operating income
    
    
    14.2
    
    
    
    3.8
    
    
    
    14.9
    
    
    
    4.1Other income
    
    
    0.6
    
    
    
    1.2
    
    
    
    1.0
    
    
    
    0.8Earnings before income taxes
    
    
    14.8
    
    
    
    5.0
    
    
    
    15.9
    
    
    
    4.9Income tax expense
    
    
    (5.2
    )
    
    
    (1.8
    )
    
    
    (5.6
    )
    
    
    (1.7
    )Net earnings
    
    
    9.6
    %
    
    
    3.2
    %
    
    
    10.3
    %
    
    
    3.2
    %
      Page 21




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
December 31, 2007  (Amounts in thousands, except share and per share amounts)
 Three Months Ended December 31, 2007 Compared to Three Months Ended December 31, 2006
 Results of Operations  Consolidated
 Revenues
  Three months ended December 31,2007
    
    
    % of Total
    
    
    2006
    


    
    % of TotalDomestic
    
    $
    21,973
    
    
    
    59.2
    %
    
    $
    7,826
    
    
    
    55.5
    %International
    
    
    15,113
    
    
    
    40.8
    %
    
    
    6,265
    
    
    
    44.5
    %Total revenues
    
    $
    37,086
    
    
    
    100.0
    %
    
    $
    14,091
    
    
    
    100.0
    %
   Gross Profit
  Three months ended December 31,2007
    
    
    % of Revenues
    
    
    2006
    
    
    % of RevenuesRevenues
    
    $
    37,086
    
    
    
    100.0
    %
    
    $
    14,091
    
    
    
    100.0
    %Cost of goods sold
    
    
    24,668
    
    
    
    66.5
    %
    
    
    9,587
    
    
    
    68.0
    %Gross profit
    
    $
    12,418
    
    
    
    33.5
    %
    
    $
    4,504
    
    
    
    32.0
    %
  Page 22




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
December 31, 2007  (Amounts in thousands, except share and per share amounts)
 Operating Expenses
  Three months ended December 31,2007
    
    
    % of Revenues
    
    
    2006
    
    
    % of RevenuesSales and marketing
    
    $
    3,036
    
    
    
    8.2
    %
    
    $
    1,597
    
    
    
    11.3
    %Engineering & project management
    
    
    1,319
    
    
    
    3.5
    %
    
    
    1,002
    
    
    
    7.1
    %General and administrative
    
    
    2,821
    
    
    
    7.6
    %
    
    
    1,375
    
    
    
    9.8
    %Total operating expenses
    
    $
    7,176
    
    
    
    19.3
    %
    
    $
    3,974
    
    
    
    28.2
    %
  Other Income and Expense
  Three months ended December 31,2007
    
    
    % of Revenues
    
    
    2006
    
    
    % of RevenuesInterest income
    
    $
    315
    
    
    
    0.9
    %
    
    $
    73
    
    
    
    0.5
    %Foreign exchange gain (loss)
    
    
    (102
    )
    
    
    (0.3
    )%
    
    
    101
    
    
    
    0.7
    %Other income, net
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %Total other income
    
    $
    213
    
    
    
    0.6
    %
    
    $
    174
    
    
    
    1.2
    %
  Page 23




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
December 31, 2007  (Amounts in thousands, except share and per share amounts)
 Income Taxes
  Net Earnings
  Results of Operations  Segments
  Environmental Systems
   Three months ended December 31,2007
    
    2006Revenues
    
    $
    19,869
    
    
    $
    2,550Operating income (loss)
    
    $
    5,227
    
    
    $
    (138
    )Operating income (loss) as % of
revenues
    
    
    26.3
    %
    
    
    (5.4
    )%
   Page 24




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
December 31, 2007  (Amounts in thousands, except share and per share amounts)
  Separation Filtration Systems
  :
 Three months ended December 31,2007
    
    2006Revenues
    
    $
    17,217
    
    
    $
    11,541Operating income
    
    $
    2,836
    
    
    $
    2,043Operating income as % of revenues
    
    
    16.5
    %
    
    
    17.7
    %
    Page 25




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
December 31, 2007  (Amounts in thousands, except share and per share amounts)
  Corporate Level Expenses
  Page 26




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
December 31, 2007  (Amounts in thousands, except share and per share amounts)
 Six Months Ended December 31, 2007 Compared to Six Months Ended December 31, 2006
 Results of Operations  Consolidated
 Revenues
  Six months ended December 31,2007
    
    
    % of Total
    
    
    2006
    
    
    % of TotalDomestic
    
    $
    43,025
    
    
    
    64.1
    %
    
    $
    15,431
    
    
    
    53.7
    %International
    
    
    24,079
    
    
    
    35.9
    %
    
    
    13,298
    
    
    
    46.3
    %Total revenues
    
    $
    67,104
    
    
    
    100.0
    %
    
    $
    28,729
    
    
    
    100.0
    %
   Gross Profit
  Six months ended December 31,2007
    
    
    % of Revenues
    
    
    2006
    
    
    % of RevenuesRevenues
    
    $
    67,104
    
    
    
    100.0
    %
    
    $
    28,729
    
    
    
    100.0
    %Cost of goods sold
    
    
    44,301
    
    
    
    66.0
    %
    
    
    19,830
    
    
    
    69.0
    %Gross profit
    
    $
    22,803
    
    
    
    34.0
    %
    
    $
    8,899
    
    
    
    31.0
    %
  Page 27




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
December 31, 2007  (Amounts in thousands, except share and per share amounts)
 Operating Expenses
  Six months ended December 31,2007
    
    
    % of Revenues
    
    
    2006
    
    
    % of RevenuesSales and marketing
    
    $
    5,453
    
    
    
    8.1
    %
    
    $
    3,266
    
    
    
    11.4
    %Engineering & project management
    
    
    2,451
    
    
    
    3.7
    %
    
    
    1,888
    
    
    
    6.6
    %General and administrative
    
    
    4,873
    
    
    
    7.3
    %
    
    
    2,563
    
    
    
    8.9
    %Total operating expenses
    
    $
    12,777
    
    
    
    19.1
    %
    
    $
    7,717
    
    
    
    26.9
    %
  Other Income and Expense
  Six months ended December 31,2007
    
    
    % of Revenues
    
    
    2006
    
    
    % of RevenuesInterest income
    
    $
    682
    
    
    
    1.0
    %
    
    $
    135
    
    
    
    0.5
    %Foreign exchange gain (loss)
    
    
    (33
    )
    
    
    0.0
    %
    
    
    82
    
    
    
    0.3
    %Other income, net
    
    
    (9
    )
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %Total other income
    
    $
    640
    
    
    
    1.0
    %
    
    $
    217
    
    
    
    0.8
    %
  Page 28




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
December 31, 2007  (Amounts in thousands, except share and per share amounts)
 Income Taxes
  Net Earnings
  Results of Operations  Segments
  Environmental Systems
   Six months ended December 31,2007
    
    2006Revenues
    
    $
    36,164
    
    
    $
    7,164Operating income
    
    $
    9,876
    
    
    $
    794Operating income as % of revenues
    
    
    27.3
    %
    
    
    11.1
    %
  Page 29




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
December 31, 2007  (Amounts in thousands, except share and per share amounts)
   Separation Filtration Systems
  :
 Six months ended December 31,2007
    
    2006Revenues
    
    $
    30,940
    
    
    $
    21,565Operating income
    
    $
    5,023
    
    
    $
    2,951Operating income as % of revenues
    
    
    16.2
    %
    
    
    13.7
    %
   Page 30




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
December 31, 2007  (Amounts in thousands, except share and per share amounts)
  Corporate Level Expenses
  Contingencies
    Backlog
  Page 31




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
December 31, 2007  (Amounts in thousands, except share and per share amounts)
 Financial Position
 Assets.
 Liabilities and Shareholders Equity.
 Liquidity and Capital Resources
     Page 32




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
December 31, 2007  (Amounts in thousands, except share and per share amounts)
      New Accounting Standards
  Fair
Value Measurements
 The
Fair Value Option for Financial Assets and Financial Liabilities
 Page 33




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
December 31, 2007  (Amounts in thousands, except share and per share amounts)
  Business Combinations
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
   
 Item 4. Controls and Procedures
  Page 34




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
December 31, 2007  (Amounts in thousands, except share and per share amounts)
     
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  Page 35




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
December 31, 2007  (Amounts in thousands, except share and per share amounts)
 
 Item 4. Submission of Matters to a Vote of Security Holders
   Total Vote
    
    
    
    
    
    AnnualTotal Vote
    
    Withheld
    
    
    
    
    
    Meetingfor Each
    
    from Each
    
    Class of
    
    when TermDirector
    
    Director
    
    Director
    
    ExpiresKenneth R. Hanks
    
    
    6,132,055
    
    
    
    237,472
    
    
    Class I
    
    
    2010R. Clayton Mulford
    
    
    6,121,055
    
    
    
    248,472
    
    
    Class I
    
    
    2010
   For
    
    4,030,439Against
    
    274,996Abstain
    
    113,228
  For
    
    4,111,738Against
    
    276,053Abstain
    
    30,872
  For
    
    6,212,723Against
    
    68,826Abstain
    
    87,978
 Page 36




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
December 31, 2007  (Amounts in thousands, except share and per share amounts)
 
 Item 6. Exhibits
   ExhibitNumber
    
    Exhibit10(a)
    
    Peerless Mfg. Co. 2007 Stock Inventive Plan (filed as
Exhibit 10.1 to our Current Report on Form 8-K filed
with the Securities and Exchange Commission on November
16, 2007, and incorporated herein by reference).10(b)
    
    Form of Nonqualified Stock Option Award Agreement under
the Peerless Mfg. Co. 2007 Stock Incentive Plan (filed
as Exhibit 10.2 to our Current Report on Form 8-K filed
with the Securities and Exchange Commission on November
16, 2007, and incorporated herein by reference).10(c)
    
    Form of Restricted Stock Award Agreement for Employees
under the Peerless Mfg. Co. 2007 Stock Incentive Plan
(filed as Exhibit 10.3 to our Current Report on Form 8-K
filed with the Securities and Exchange Commission on
November 16, 2007, and incorporated herein by
reference).10(d)
    
    Form of Restricted Stock Award Agreement for
Non-Employee Directors under the Peerless Mfg. Co. 2007
Stock Incentive Plan (filed as Exhibit 10.4 to
our Current Report on Form 8-K filed with the Securities
and Exchange Commission on November 16, 2007, and
incorporated herein by reference).31(a)
    
    Rule 13a  14(a)/15d  14(a) Certification of Chief
Executive Officer.31(b)
    
    Rule 13a  14(a)/15d  14(a) Certification of Chief
Financial Officer.32(a)
    
    Section 1350 Certification of Chief Executive Officer.32(b)
    
    Section 1350 Certification of Chief Financial Officer.
 Page 37




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
December 31, 2007  (Amounts in thousands, except share and per share amounts)
 
 Signatures
  PEERLESS MFG. CO.Date:  February 11, 2008
    /s/ Peter J. BurlagePeter J. BurlagePresident and Chief Executive Officer
(Principal Executive Officer)Date:  February 11, 2008
    /s/ Henry G. Schopfer, IIIHenry G. Schopfer, IIIChief Financial Officer
(Principal Financial and Accounting Officer) Page 38