##### 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 March 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  (Registrants Telephone Number, Including Area Code)
 þ o
  o o þ
 o þ




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##### 



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED March 31, 2007
 TABLE OF CONTENTS
 PageNumberPART I: FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets at March 31, 2007 (unaudited)
and June 30, 2006
    
    
    4Unaudited Condensed Consolidated Statements of Operations for the three and
nine months ended March 31, 2007 and 2006
    
    
    5Unaudited Condensed Consolidated Statements of Cash Flows for the
nine months ended March 31, 2007 and 2006
    
    
    6Unaudited Condensed Consolidated Statements of Shareholders Equity and Comprehensive
Income (Loss) for the nine months ended March 31, 2007 and 2006
    
    
    7Notes to the Condensed Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    38Item 4. Controls and Procedures
    
    
    38PART II: OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    39Item 1A. Risk Factors
    
    
    40Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    40Item 3. Defaults Upon Senior Securities
    
    
    40Item 4. Submission of Matters to a Vote of Security Holders
    
    
    40Item 5. Other Information
    
    
    40Item 6. Exhibits
    
    
    40SIGNATURES
    
    
    41Employment Agreement - David TaylorRule 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
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands)
 March 31,
    
    
    June 30,2007
    
    
    2006(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,930
    
    
    $
    6,411Restricted cash
    
    
    2,755
    
    
    
    Accounts receivable-principally trade  net of
allowance for doubtful accounts of $462 at
March 31, 2007 and at June 30, 2006
    
    
    24,410
    
    
    
    16,463Inventories
    
    
    5,217
    
    
    
    4,871Costs and earnings in excess of billings
on uncompleted contracts
    
    
    11,402
    
    
    
    13,891Assets held for sale
    
    
    736
    
    
    
    767Deferred income taxes
    
    
    1,338
    
    
    
    1,338Other current assets
    
    
    1,781
    
    
    
    1,431Total current assets
    
    
    51,569
    
    
    
    45,172Property, plant and equipment  net
    
    
    2,038
    
    
    
    2,140Other assets
    
    
    1,020
    
    
    
    845Deferred income taxes
    
    
    25
    
    
    
    2Total assets
    
    $
    54,652
    
    
    $
    48,159LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    11,193
    
    
    $
    13,860Billings in excess of costs and earnings
on uncompleted contracts
    
    
    7,788
    
    
    
    2,601Commissions payable
    
    
    1,138
    
    
    
    1,238Income taxes payable
    
    
    682
    
    
    
    75Product warranties
    
    
    557
    
    
    
    626Accrued liabilities and other
    
    
    4,029
    
    
    
    3,842Total current liabilities
    
    
    25,387
    
    
    
    22,242Commitments and contingenciesShareholders equity:Common stock
    
    
    3,210
    
    
    
    3,134Additional paid-in capital
    
    
    4,381
    
    
    
    3,143Accumulated other comprehensive income
    
    
    389
    
    
    
    245Retained earnings
    
    
    21,285
    
    
    
    19,395Total shareholders equity
    
    
    29,265
    
    
    
    25,917Total liabilities and shareholders equity
    
    $
    54,652
    
    
    $
    48,159
 See accompanying notes to the condensed consolidated financial statements.
 Page 4




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PEERLESS MFG. CO. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share amounts)
  Three months ended
    
    
    Nine months endedMarch 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues
    
    $
    20,191
    
    
    $
    18,121
    
    
    $
    48,920
    
    
    $
    41,297Cost of goods sold
    
    
    13,597
    
    
    
    12,778
    
    
    
    33,427
    
    
    
    30,455Gross profit
    
    
    6,594
    
    
    
    5,343
    
    
    
    15,493
    
    
    
    10,842Operating expensesSales and marketing
    
    
    2,247
    
    
    
    1,662
    
    
    
    5,613
    
    
    
    4,769Engineering and project management
    
    
    1,112
    
    
    
    914
    
    
    
    2,900
    
    
    
    2,560General and administrative
    
    
    1,814
    
    
    
    1,314
    
    
    
    4,377
    
    
    
    4,5395,173
    
    
    
    3,890
    
    
    
    12,890
    
    
    
    11,868Operating income (loss)
    
    
    1,421
    
    
    
    1,453
    
    
    
    2,603
    
    
    
    (1,026
    )Other income (expense)Interest income
    
    
    109
    
    
    
    76
    
    
    
    244
    
    
    
    179Foreign exchange gain (loss)
    
    
    (1
    )
    
    
    (24
    )
    
    
    81
    
    
    
    33Other income (expense), net
    
    
    (16
    )
    
    
    11
    
    
    
    (16
    )
    
    
    9092
    
    
    
    63
    
    
    
    309
    
    
    
    302Earnings (loss) from continuing operations before income taxes
    
    
    1,513
    
    
    
    1,516
    
    
    
    2,912
    
    
    
    (724
    )Income tax (expense) benefit
    
    
    (531
    )
    
    
    (513
    )
    
    
    (1,022
    )
    
    
    246Net earnings (loss) from continuing operations
    
    
    982
    
    
    
    1,003
    
    
    
    1,890
    
    
    
    (478
    )Discontinued operationsLoss from discontinued operations
    
    
    
    
    
    
    (133
    )
    
    
    
    
    
    
    (183
    )Income tax benefit
    
    
    
    
    
    
    45
    
    
    
    
    
    
    
    62Net loss from discontinued operations
    
    
    
    
    
    
    (88
    )
    
    
    
    
    
    
    (121
    )Net earnings (loss)
    
    $
    982
    
    
    $
    915
    
    
    $
    1,890
    
    
    $
    (599
    )BASIC EARNINGS (LOSS) PER SHARE *Earnings (loss) from continuing operations
    
    $
    0.31
    
    
    $
    0.32
    
    
    $
    0.60
    
    
    $
    (0.16
    )Loss from discontinued operations
    
    
    
    
    
    
    (0.03
    )
    
    
    
    
    
    
    (0.04
    )Basic earnings (loss) per share
    
    $
    0.31
    
    
    $
    0.30
    
    
    $
    0.60
    
    
    $
    (0.20
    )DILUTED EARNINGS (LOSS) PER SHAREEarnings (loss) from continuing operations
    
    $
    0.30
    
    
    $
    0.32
    
    
    $
    0.59
    
    
    $
    (0.16
    )Loss from discontinued operations
    
    
    
    
    
    
    (0.03
    )
    
    
    
    
    
    
    (0.04
    )Diluted earnings (loss) per share
    
    $
    0.30
    
    
    $
    0.29
    
    
    $
    0.59
    
    
    $
    (0.20
    )
 
 *
    
    Certain earnings (loss) per share amounts may not total due to rounding. See accompanying notes to the condensed consolidated financial statements.
 Page 5




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PEERLESS MFG. CO. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
  Nine months ended March 31,2007
    
    
    2006Cash flows from operating activities:Net earnings (loss)
    
    $
    1,890
    
    
    $
    (599
    )Adjustments to reconcile net earnings (loss) from operations to
net cash used in operating activities:Depreciation and amortization
    
    
    481
    
    
    
    496Deferred income taxes
    
    
    (23
    )
    
    
    Provision for bad debts
    
    
    
    
    
    
    218Provision for warranty expense
    
    
    97
    
    
    
    216Inventory valuation reserve
    
    
    127
    
    
    
    130Foreign exchange gain
    
    
    (81
    )
    
    
    (33
    )Gain on sale of equipment
    
    
    
    
    
    
    (22
    )Stock based compensation
    
    
    134
    
    
    
    94Amortization of restricted stock
    
    
    45
    
    
    
    21Excess tax benefits from stock-based payment arrangements
    
    
    (248
    )
    
    
    (145
    )Changes in operating assets and liabilities of continuing operations:Accounts receivable
    
    
    (7,933
    )
    
    
    (1,879
    )Inventories
    
    
    (470
    )
    
    
    (2,539
    )Costs and earnings in excess of billings on uncompleted contracts
    
    
    2,517
    
    
    
    (572
    )Other current assets
    
    
    (350
    )
    
    
    (596
    )Other assets
    
    
    (175
    )
    
    
    (92
    )Accounts payable
    
    
    (2,621
    )
    
    
    3,067Billings in excess of costs and earnings on uncompleted contracts
    
    
    5,187
    
    
    
    314Commissions payable
    
    
    (100
    )
    
    
    261Income taxes payable
    
    
    855
    
    
    
    Product warranties
    
    
    (166
    )
    
    
    (319
    )Accrued liabilities and other
    
    
    250
    
    
    
    (523
    )Net cash used in operating activities of continuing operations:
    
    
    (584
    )
    
    
    (2,502
    )Cash flow from investing activities of continuing operations:Increase in restricted cash
    
    
    (2,755
    )
    
    
    Proceeds from the sale of equipment
    
    
    
    
    
    
    32Purchases of property and equipment
    
    
    (348
    )
    
    
    (209
    )Net cash used in investing activities of continuing operations:
    
    
    (3,103
    )
    
    
    (177
    )Cash flows from financing activities of continuing operations:Proceeds from exercise of stock options
    
    
    887
    
    
    
    485Excess tax benefits from stock-based payment arrangements
    
    
    248
    
    
    
    145Net cash provided by financing activities of continuing operations
    
    
    1,135
    
    
    
    630Cash flow from discontinued operations:Cash provided by operating activities
    
    
    
    
    
    
    114Net cash provided by discontinued operations
    
    
    
    
    
    
    114Effect of exchange rate changes on cash and cash equivalents
    
    
    71
    
    
    
    1Net decrease in cash and cash equivalents
    
    
    (2,481
    )
    
    
    (1,934
    )Cash and cash equivalents at beginning of period
    
    
    6,411
    
    
    
    8,277Cash and cash equivalents at end of period
    
    $
    3,930
    
    
    $
    6,343
 See accompanying notes to the condensed consolidated financial statements.
 Page 6




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PEERLESS MFG. CO. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF
SHAREHOLDERS EQUITY AND 
COMPREHENSIVE INCOME (LOSS)
 (In thousands)
  AccumulatedAdditional
    
    
    Other
    
    
    
    
    
    
    TotalNo. of
    
    
    Common
    
    
    Paid-in
    
    
    Comprehensive
    
    
    Retained
    
    
    ShareholdersShares
    
    
    Stock
    
    
    Capital
    
    
    Income
    
    
    Earnings
    
    
    EquityBalance at July 1, 2005
    
    
    3,036
    
    
    $
    3,036
    
    
    $
    2,114
    
    
    $
    171
    
    
    $
    18,969
    
    
    $
    24,290Comprehensive lossNet earnings from continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    541
    
    
    
    541Net loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (115
    )
    
    
    (115
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74
    
    
    
    
    
    
    
    74Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500Issuance of restricted stock
    
    
    10
    
    
    
    10
    
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    Restricted stock grant amortization
    
    
    
    
    
    
    
    
    
    
    29
    
    
    
    
    
    
    
    
    
    
    
    29Stock option expense
    
    
    
    
    
    
    
    
    
    
    118
    
    
    
    
    
    
    
    
    
    
    
    118Stock options exercised
    
    
    88
    
    
    
    88
    
    
    
    586
    
    
    
    
    
    
    
    
    
    
    
    674Income tax benefit related to stock
options exercised
    
    
    
    
    
    
    
    
    
    
    306
    
    
    
    
    
    
    
    
    
    
    
    306Balance at June 30, 2006
    
    
    3,134
    
    
    $
    3,134
    
    
    $
    3,143
    
    
    $
    245
    
    
    $
    19,395
    
    
    $
    25,917Balance at July 1, 2006
    
    
    3,134
    
    
    $
    3,134
    
    
    $
    3,143
    
    
    $
    245
    
    
    $
    19,395
    
    
    $
    25,917Comprehensive incomeNet earnings from continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,890
    
    
    
    1,890Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    144
    
    
    
    
    
    
    
    144Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,034Issuance of restricted stock
    
    
    8
    
    
    
    8
    
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    Restricted stock grant amortization
    
    
    
    
    
    
    
    
    
    
    45
    
    
    
    
    
    
    
    
    
    
    
    45Stock option expense
    
    
    
    
    
    
    
    
    
    
    134
    
    
    
    
    
    
    
    
    
    
    
    134Stock options exercised
    
    
    68
    
    
    
    68
    
    
    
    819
    
    
    
    
    
    
    
    
    
    
    
    887Income tax benefit related to stock
options exercised
    
    
    
    
    
    
    
    
    
    
    248
    
    
    
    
    
    
    
    
    
    
    
    248Balance at March 31, 2007
    
    
    3,210
    
    
    $
    3,210
    
    
    $
    4,381
    
    
    $
    389
    
    
    $
    21,285
    
    
    $
    29,265
 See accompanying notes to the condensed consolidated financial statements.
 Page 7




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PEERLESS MFG. CO. AND SUBSIDIARIES
 
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31, 2007
 (Amounts in thousands, except share and per share amounts)
 1. Basis of Presentation
    2. New Accounting Standards
    Page 8




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007  (Amounts in thousands, except share and per share amounts)
 2. New Accounting Standards  Continued
  3. Accounts Receivable
   Three months ended
    
    
    Nine months endedMarch 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Balance at beginning of period
    
    $
    462
    
    
    $
    224
    
    
    $
    462
    
    
    $
    352Provision for bad debts
    
    
    
    
    
    
    74
    
    
    
    
    
    
    
    218Accounts written off, net
    
    
    
    
    
    
    (36
    )
    
    
    
    
    
    
    (308
    )Balance at end of period
    
    $
    462
    
    
    $
    262
    
    
    $
    462
    
    
    $
    262
 4. Inventories
  Page 9




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007  (Amounts in thousands, except share and per share amounts)
 4. Inventories  Continued
   March 31,
    
    
    June 30,2007
    
    
    2006Material and component parts
    
    $
    4,718
    
    
    $
    4,417Work in progress
    
    
    668
    
    
    
    626Finished goods
    
    
    392
    
    
    
    2625,778
    
    
    
    5,305Reserve for obsolete and slow-moving inventory
    
    
    (561
    )
    
    
    (434
    )$
    5,217
    
    
    $
    4,871
  Three months ended
    
    
    Nine months endedMarch 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Balance at beginning of period
    
    $
    528
    
    
    $
    423
    
    
    $
    434
    
    
    $
    318Additions
    
    
    33
    
    
    
    25
    
    
    
    127
    
    
    
    130Amounts written off
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at end of period
    
    $
    561
    
    
    $
    448
    
    
    $
    561
    
    
    $
    448
 5. Revenue Recognition and Cost and Earnings on Uncompleted Contracts
  Page 10




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PEERLESS MFG. CO. AND SUBSIDIARIES  NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  MARCH 31, 2007  (Amounts in thousands, except share and per share amounts)
 5. Revenue Recognition and Cost and Earnings on Uncompleted Contracts  Continued
   March 31,
    
    
    June 30,2007
    
    
    2006Costs incurred on uncompleted contracts and
estimated earnings
    
    $
    55,699
    
    
    $
    43,448Less billings to date
    
    
    (52,085
    )
    
    
    (32,158
    )$
    3,614
    
    
    $
    11,290
  March 31,
    
    
    June 30,2007
    
    
    2006Costs and earnings in excess of billings on
uncompleted contracts
    
    $
    11,402
    
    
    $
    13,891Billings in excess of costs and earnings on
uncompleted contracts
    
    
    (7,788
    )
    
    
    (2,601
    )$
    3,614
    
    
    $
    11,290
 6 Assets Held for Sale
   March 31,
    
    
    June 30,2007
    
    
    2006Buildings & improvements
    
    $
    2,768
    
    
    $
    2,768Equipment
    
    
    152
    
    
    
    152Furniture and fixtures
    
    
    13
    
    
    
    132,933
    
    
    
    2,933Less accumulated depreciation
    
    
    (2,794
    )
    
    
    (2,794
    )139
    
    
    
    139Land
    
    
    597
    
    
    
    628$
    736
    
    
    $
    767
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PEERLESS MFG. CO. AND SUBSIDIARIES  NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  MARCH 31, 2007  (Amounts in thousands, except share and per share amounts)
 7. Product Warranties
   Three months ended
    
    
    Nine months endedMarch 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Balance at beginning of period
    
    $
    658
    
    
    $
    697
    
    
    $
    626
    
    
    $
    845Provision for warranty expense
    
    
    (27
    )
    
    
    57
    
    
    
    97
    
    
    
    216Warranty charges
    
    
    (74
    )
    
    
    (12
    )
    
    
    (166
    )
    
    
    (319
    )Balance at end of period
    
    $
    557
    
    
    $
    742
    
    
    $
    557
    
    
    $
    742
 8. Contingencies
   9. Accrued Liabilities and Other
  March 31,
    
    
    June 30,2007
    
    
    2006Accrued start-up expense
    
    $
    2,073
    
    
    $
    1,717Accrued compensation
    
    
    552
    
    
    
    1,094Accrued professional, legal and other expenses
    
    
    489
    
    
    
    531Sales and use taxes payable
    
    
    4
    
    
    
    3Other
    
    
    911
    
    
    
    497$
    4,029
    
    
    $
    3,842
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PEERLESS MFG. CO. AND SUBSIDIARIES  NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  MARCH 31, 2007  (Amounts in thousands, except share and per share amounts)
 10. Stock Based Compensation
      Page 13




---



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PEERLESS MFG. CO. AND SUBSIDIARIES  NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  MARCH 31, 2007  (Amounts in thousands, except share and per share amounts)
 10. Stock Based Compensation  Continued
  Three months ended
    
    Nine months endedMarch 31,
    
    March 31,2007
    
    2006
    
    2007
    
    2006Expected volatility
    
    
    
    
    
    
    47.7
    %
    
    
    44.5
    %
    
    
    47.7%-52.6
    %Expected term (years)
    
    
    
    
    
    
    4.05
    
    
    
    4.92
    
    
    
    4.05-5.66Risk free interest rate
    
    
    
    
    
    
    4.63
    %
    
    
    5.11
    %
    
    
    4.12%-4.63
    %Dividend yield
    
    
    
    
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %Weighted average grant
date fair value
    
    $
    
    
    
    $
    7.88
    
    
    $
    10.89
    
    
    $
    8.08
  Three months ended
    
    Nine months endedMarch 31,
    
    March 31,2007
    
    2006
    
    2007
    
    2006Earnings from continuing operations before income taxes
    
    $
    29
    
    
    $
    23
    
    
    $
    134
    
    
    $
    94Net earnings from continuing operations
    
    
    19
    
    
    
    15
    
    
    
    87
    
    
    
    62Net earnings
    
    
    19
    
    
    
    15
    
    
    
    87
    
    
    
    62Basic and diluted earnings per share
    
    $
    0.01
    
    
    $
    
    
    
    $
    0.03
    
    
    $
    0.02
  Page 14




---



##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES  NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  MARCH 31, 2007  (Amounts in thousands, except share and per share amounts)
 10. Stock Based Compensation  Continued
  Fiscal Year 2007
    
    
    Fiscal Year 2006Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    ExerciseNo. of Options
    
    
    Price
    
    
    No. of Options
    
    
    PriceBalance at July 1
    
    
    143,650
    
    
    $
    14.02
    
    
    
    237,950
    
    
    $
    11.22Granted
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Exercised
    
    
    (32,400
    )
    
    $
    13.77
    
    
    
    (250
    )
    
    $
    12.64Forfeited before vesting
    
    
    
    
    
    $
    
    
    
    
    (2,800
    )
    
    $
    14.02Forfeited after vesting
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Balance at September 30
    
    
    111,250
    
    
    $
    14.09
    
    
    
    234,900
    
    
    $
    11.18Granted
    
    
    5,000
    
    
    $
    23.80
    
    
    
    4,000
    
    
    $
    16.95Exercised
    
    
    (27,488
    )
    
    $
    10.83
    
    
    
    (39,750
    )
    
    $
    6.56Forfeited before vesting
    
    
    
    
    
    $
    
    
    
    
    (25,000
    )
    
    $
    12.94Forfeited after vesting
    
    
    
    
    
    $
    
    
    
    
    (500
    )
    
    $
    19.50Balance at December 31
    
    
    88,762
    
    
    $
    15.64
    
    
    
    173,650
    
    
    $
    12.10Granted
    
    
    
    
    
    $
    
    
    
    
    18,000
    
    
    $
    18.39Exercised
    
    
    (8,500
    )
    
    $
    16.93
    
    
    
    (15,375
    )
    
    $
    14.36Forfeited before vesting
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Forfeited after vesting
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Balance at March 31
    
    
    80,262
    
    
    $
    15.51
    
    
    
    176,275
    
    
    $
    12.54Exercisable at end of period
    
    
    50,612
    
    
    $
    15.28
    
    
    
    130,364
    
    
    $
    11.49
  Page 15




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES  NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  MARCH 31, 2007  (Amounts in thousands, except share and per share amounts)
 10. Stock Based Compensation  Continued
  Three months ended
    
    Nine months endedMarch 31,
    
    March 31,2007
    
    2006
    
    2007
    
    2006Total cash received
    
    $
    143
    
    
    $
    221
    
    
    $
    887
    
    
    $
    485Income tax benefits
    
    $
    19
    
    
    $
    11
    
    
    $
    248
    
    
    $
    145Total intrinsic value of options exercised
    
    $
    87
    
    
    $
    109
    
    
    $
    794
    
    
    $
    259
  Three months ended
    
    
    Nine months endedMarch 31, 2007
    
    
    March 31, 2007Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageGrant Date
    
    
    
    
    
    
    Grant DateNo. of Options
    
    
    Fair Value
    
    
    No. of Options
    
    
    Fair ValueUnvested at beginning of period
    
    
    39,161
    
    
    $
    6.80
    
    
    
    45,286
    
    
    $
    6.75New Grants
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Vested
    
    
    (9,511
    )
    
    $
    6.71
    
    
    
    (15,636
    )
    
    $
    6.60Forfeited
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Unvested at end of period
    
    
    29,650
    
    
    $
    6.83
    
    
    
    29,650
    
    
    $
    6.83
   Page 16




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES  NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  MARCH 31, 2007  (Amounts in thousands, except share and per share amounts)
 10. Stock Based Compensation  Continued
  Three months ended
    
    
    Nine months endedMarch 31, 2007
    
    
    March 31, 2007Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageGrant Date
    
    
    
    
    
    
    Grant DateNo. of Shares
    
    
    Fair Value
    
    
    No. of Shares
    
    
    Fair ValueBalance at beginning of period
    
    
    7,500
    
    
    $
    17.06
    
    
    
    10,000
    
    
    $
    17.06New Grants
    
    
    8,300
    
    
    $
    24.98
    
    
    
    8,300
    
    
    $
    24.98Vested
    
    
    
    
    
    $
    
    
    
    
    (2,500
    )
    
    $
    17.06Forfeited
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Balance at end of period
    
    
    15,800
    
    
    $
    21.22
    
    
    
    15,800
    
    
    $
    21.22
  11. Discontinued Operations
  Three months ended
    
    
    Nine months endedMarch 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Cost of goods sold
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gross loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating expenses
    
    
    
    
    
    
    133
    
    
    
    
    
    
    
    183Operating loss
    
    
    
    
    
    
    (133
    )
    
    
    
    
    
    
    (183
    )Income tax benefit
    
    
    
    
    
    
    45
    
    
    
    
    
    
    
    62Net loss from operations
    
    $
    
    
    
    $
    (88
    )
    
    $
    
    
    
    $
    (121
    )Basic and diluted loss per share
    
    $
    
    
    
    $
    (0.03
    )
    
    $
    
    
    
    $
    (0.04
    )
 Page 17




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES  NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  MARCH 31, 2007  (Amounts in thousands, except per share amounts)
 12. Earnings (Loss) Per Share
  Three months ended
    
    
    Nine months endedMarch 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Net earnings (loss) from continuing operations
    
    $
    982
    
    
    $
    1,003
    
    
    $
    1,890
    
    
    $
    (478
    )Loss from discontinued operations
    
    
    
    
    
    
    (88
    )
    
    
    
    
    
    
    (121
    )Net earnings (loss)
    
    $
    982
    
    
    $
    915
    
    
    $
    1,890
    
    
    $
    (599
    )Basic weighted average common shares outstanding
    
    
    3,190
    
    
    
    3,088
    
    
    
    3,163
    
    
    
    3,056Effect of dilutive options
    
    
    34
    
    
    
    48
    
    
    
    42
    
    
    
    Diluted weighted average common shares outstanding
    
    
    3,224
    
    
    
    3,136
    
    
    
    3,205
    
    
    
    3,056BASIC EARNINGS (LOSS) PER SHAREEarnings (loss) from continuing operations
    
    $
    0.31
    
    
    $
    0.32
    
    
    $
    0.60
    
    
    $
    (0.16
    )Loss from discontinued operations
    
    
    
    
    
    
    (0.03
    )
    
    $
    
    
    
    
    (0.04
    )Net earnings (loss) per share
    
    $
    0.31
    
    
    $
    0.30
    
    
    $
    0.60
    
    
    $
    (0.20
    )DILUTED EARNINGS (LOSS) PER SHAREEarnings (loss) from continuing operations
    
    $
    0.30
    
    
    $
    0.32
    
    
    $
    0.59
    
    
    $
    (0.16
    )Loss from discontinued operations
    
    
    
    
    
    
    (0.03
    )
    
    
    
    
    
    
    (0.04
    )Net earnings (loss) per share
    
    $
    0.30
    
    
    $
    0.29
    
    
    $
    0.59
    
    
    $
    (0.20
    )
  Page 18




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007  (Amounts in thousands, except per share amounts)
 13. Segment Information
   Three months ended
    
    
    Nine months endedMarch 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006RevenuesEnvironmental
    
    $
    8,847
    
    
    $
    6,490
    
    
    $
    16,011
    
    
    $
    13,385Separation / Filtration
    
    
    11,344
    
    
    
    11,631
    
    
    
    32,909
    
    
    
    27,912Consolidated
    
    $
    20,191
    
    
    $
    18,121
    
    
    $
    48,920
    
    
    $
    41,297Operating income (loss)Environmental
    
    $
    1,457
    
    
    $
    1,384
    
    
    $
    2,251
    
    
    $
    1,375Separation / Filtration
    
    
    1,778
    
    
    
    1,383
    
    
    
    4,729
    
    
    
    2,138Reconciling items
    
    
    (1,814
    )
    
    
    (1,314
    )
    
    
    (4,377
    )
    
    
    (4,539
    )Consolidated
    
    $
    1,421
    
    
    $
    1,453
    
    
    $
    2,603
    
    
    $
    (1,026
    )
 14. Supplemental Cash Flow Information
  Three months ended
    
    Nine months endedMarch 31,
    
    March 31,2007
    
    2006
    
    2007
    
    2006Income tax paid
    
    $
    21
    
    
    $
    
    
    
    $
    481
    
    
    $
    Income tax refunds
received
    
    $
    
    
    
    $
    
    
    
    $
    (297
    )
    
    $
    (150
    )
 Page 19




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007  (Amounts in thousands, except per share amounts)
 15. Lines of Credit
   16. Subsequent Events
    Page 20




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007  (Amounts in thousands, except per share amounts)
 16. Subsequent Events  Continued
  Page 21




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
MARCH 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 22




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
MARCH 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 23




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
MARCH 31, 2007  (Amounts in thousands, except share and per share amounts)
  Deferred Tax Asset  Valuation Allowance
 Page 24




---



##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
MARCH 31, 2007  (Amounts in thousands, except share and per share amounts)
 Results of Operations
  Three months ended
    
    Nine months endedMarch 31,
    
    March 31,2007
    
    2006
    
    2007
    
    2006Net revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    67.3
    
    
    
    70.5
    
    
    
    68.3
    
    
    
    73.7Gross profit
    
    
    32.7
    
    
    
    29.5
    
    
    
    31.7
    
    
    
    26.3Operating expenses
    
    
    25.7
    
    
    
    21.5
    
    
    
    26.4
    
    
    
    28.8Operating earnings (loss)
    
    
    7.0
    
    
    
    8.0
    
    
    
    5.3
    
    
    
    (2.5
    )Other income
    
    
    0.5
    
    
    
    0.3
    
    
    
    0.7
    
    
    
    0.7Net earnings (loss) from continuing
operations before income taxes
    
    
    7.5
    
    
    
    8.3
    
    
    
    6.0
    
    
    
    (1.8
    )Income tax benefit (expense)
    
    
    (2.6
    )
    
    
    (2.8
    )
    
    
    (2.1
    )
    
    
    0.6Net earnings (loss) from continuing operations
    
    
    4.9
    
    
    
    5.5
    
    
    
    3.9
    
    
    
    (1.2
    )Loss from discontinued operations, net of tax
    
    
    
    
    
    
    (0.5
    )
    
    
    
    
    
    
    (0.3
    )Net earnings (loss)
    
    
    4.9
    %
    
    
    5.0
    %
    
    
    3.9
    %
    
    
    (1.5
    )%
      Page 25




---



##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
MARCH 31, 2007  (Amounts in thousands, except share and per share amounts)
 Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006
 Results of Operations  Consolidated
 Revenues
  Three months ended March 31,2007
    
    
    % of Total
    
    
    2006
    
    
    % of TotalDomestic
    
    $
    13,931
    
    
    
    69.0
    %
    
    $
    11,365
    
    
    
    62.7
    %International
    
    
    6,260
    
    
    
    31.0
    %
    
    
    6,756
    
    
    
    37.3
    %Total revenues
    
    $
    20,191
    
    
    
    100.0
    %
    
    $
    18,121
    
    
    
    100.0
    %
  Gross Profit
  Three months ended March 31,2007
    
    
    % of Revenue
    
    
    2006
    
    
    % of RevenueRevenues
    
    $
    20,191
    
    
    
    100.0
    %
    
    $
    18,121
    
    
    
    100.0
    %Cost of goods sold
    
    
    13,597
    
    
    
    67.3
    %
    
    
    12,778
    
    
    
    70.5
    %Gross profit
    
    $
    6,594
    
    
    
    32.7
    %
    
    $
    5,343
    
    
    
    29.5
    %
  Page 26




---



##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
MARCH 31, 2007  (Amounts in thousands, except share and per share amounts)
 Operating Expenses
  Three months ended March 31,2007
    
    
    % of Revenue
    
    
    2006
    
    
    % of RevenueSales and marketing
    
    $
    2,247
    
    
    
    11.1
    %
    
    $
    1,662
    
    
    
    9.2
    %Engineering & project management
    
    
    1,112
    
    
    
    5.5
    %
    
    
    914
    
    
    
    5.0
    %General and administrative
    
    
    1,814
    
    
    
    9.0
    %
    
    
    1,314
    
    
    
    7.3
    %Total operating expenses
    
    $
    5,173
    
    
    
    25.6
    %
    
    $
    3,890
    
    
    
    21.5
    %
  Other Income
  Three months ended March 31,2007
    
    
    % of Revenue
    
    
    2006
    
    
    % of RevenueInterest income
    
    $
    109
    
    
    
    0.5
    %
    
    $
    76
    
    
    
    0.4
    %Foreign exchange loss
    
    
    (1
    )
    
    
    0.0
    %
    
    
    (24
    )
    
    
    -0.1
    %Other income (expense), net
    
    
    (16
    )
    
    
    0.0
    %
    
    
    11
    
    
    
    0.0
    %Total other income
    
    $
    92
    
    
    
    0.5
    %
    
    $
    63
    
    
    
    0.3
    %
  Page 27




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
MARCH 31, 2007  (Amounts in thousands, except share and per share amounts)
 Income Taxes
  Net Earnings from Continuing Operations
  Discontinued Operations
 Discontinued Operations
 Net Earnings
  Results of Operations  Segments
  Page 28




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
MARCH 31, 2007  (Amounts in thousands, except share and per share amounts)
 Environmental Systems
   Three months ended March 31,2007
    
    2006Revenue
    
    $
    8,847
    
    
    $
    6,490Operating income
    
    $
    1,457
    
    
    $
    1,384Operating income as % of revenue
    
    
    16.5
    %
    
    
    21.3
    %
    Separation / Filtration Systems
  Page 29




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
MARCH 31, 2007  (Amounts in thousands, except share and per share amounts)
  Three months ended March 31,2007
    
    2006Revenue
    
    $
    11,344
    
    
    $
    11,631Operating income
    
    $
    1,778
    
    
    $
    1,383Operating income as % of revenue
    
    
    15.7
    %
    
    
    11.9
    %
    Corporate Level Expenses
  Page 30




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
MARCH 31, 2007  (Amounts in thousands, except share and per share amounts)
 Nine Months Ended March 31, 2007 Compared to Nine Months Ended March 31, 2006
 Results of Operations  Consolidated
 Revenues
  Nine months ended March 31,2007
    
    
    % of Total
    
    
    2006
    
    
    % of TotalDomestic
    
    $
    29,362
    
    
    
    60.0
    %
    
    $
    22,898
    
    
    
    55.4
    %International
    
    
    19,558
    
    
    
    40.0
    %
    
    
    18,399
    
    
    
    44.6
    %Total revenues
    
    $
    48,920
    
    
    
    100.0
    %
    
    $
    41,297
    
    
    
    100.0
    %
  Gross Profit
  Nine months ended March 31,2007
    
    
    % of Revenue
    
    
    2006
    
    
    % of RevenueRevenues
    
    $
    48,920
    
    
    
    100.0
    %
    
    $
    41,297
    
    
    
    100.0
    %Cost of goods sold
    
    
    33,427
    
    
    
    68.3
    %
    
    
    30,455
    
    
    
    73.7
    %Gross profit
    
    $
    15,493
    
    
    
    31.7
    %
    
    $
    10,842
    
    
    
    26.3
    %
  Page 31




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
MARCH 31, 2007  (Amounts in thousands, except share and per share amounts)
 Operating Expenses
  Nine months ended March 31,2007
    
    
    % of Revenue
    
    
    2006
    
    
    % of RevenueSales and marketing
    
    $
    5,613
    
    
    
    11.5
    %
    
    $
    4,769
    
    
    
    11.5
    %Engineering & project management
    
    
    2,900
    
    
    
    5.9
    %
    
    
    2,560
    
    
    
    6.2
    %General and administrative
    
    
    4,377
    
    
    
    8.9
    %
    
    
    4,539
    
    
    
    11.0
    %Total operating expenses
    
    $
    12,890
    
    
    
    26.3
    %
    
    $
    11,868
    
    
    
    28.7
    %
  Other Income
  Nine months ended March 31,2007
    
    
    % of Revenue
    
    
    2006
    
    
    % of RevenueInterest income
    
    $
    244
    
    
    
    0.5
    %
    
    $
    179
    
    
    
    0.4
    %Foreign exchange gain
    
    
    81
    
    
    
    0.1
    %
    
    
    33
    
    
    
    0.1
    %Other income (expense), net
    
    
    (16
    )
    
    
    0.0
    %
    
    
    90
    
    
    
    0.2
    %Total other income
    
    $
    309
    
    
    
    0.6
    %
    
    $
    302
    
    
    
    0.7
    %
  Page 32




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PEERLESS MFG. CO. AND SUBSIDIARIES
MARCH 31, 2007  (Amounts in thousands, except share and per share amounts)
  Income Taxes
  Net Earnings (Loss) from Continuing Operations
  Discontinued Operations
 Discontinued Operations
 Net Earnings (Loss)
  Results of Operations  Segments
  Environmental Systems
  Page 33




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PEERLESS MFG. CO. AND SUBSIDIARIES
MARCH 31, 2007  (Amounts in thousands, except share and per share amounts)
   Nine months ended March 31,2007
    
    2006Revenue
    
    $
    16,011
    
    
    $
    13,385Operating income
    
    $
    2,251
    
    
    $
    1,375Operating income as % of revenue
    
    
    14.1
    %
    
    
    10.3
    %
    Separation / Filtration Systems
  Page 34




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PEERLESS MFG. CO. AND SUBSIDIARIES
MARCH 31, 2007  (Amounts in thousands, except share and per share amounts)
  Nine months ended March 31,2007
    
    2006Revenue
    
    $
    32,909
    
    
    $
    27,912Operating income
    
    $
    4,729
    
    
    $
    2,138Operating income as % of revenue
    
    
    14.4
    %
    
    
    7.7
    %
    Corporate Level Expenses
  Contingencies
   Page 35




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PEERLESS MFG. CO. AND SUBSIDIARIES
MARCH 31, 2007  (Amounts in thousands, except share and per share amounts)
 Backlog
  Financial Position
 Assets.
 Liabilities and Shareholders Equity.
 Liquidity and Capital Resources
     Page 36




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
MARCH 31, 2007  (Amounts in thousands, except share and per share amounts)
      New Accounting Standards
    Page 37




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
MARCH 31, 2007  (Amounts in thousands, except share and per share amounts)
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
   
 Item 4. Controls and Procedures
  Page 38




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
MARCH 31, 2007  (Amounts in thousands, except share and per share amounts)
     
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  Page 39




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PEERLESS MFG. CO. AND SUBSIDIARIES
MARCH 31, 2007  (Amounts in thousands, except share and per share amounts)
 
 Item 1A. Risk Factors
  
 Items 2, 3, 4 and 5 are not applicable and have been omitted.
 
 Item 6. Exhibits
   ExhibitNumber
    
    Exhibit10 (a)
    
    Employment Agreement between Peerless Mfg. Co. and David Taylor.31(a)
    
    Rule 13a  14(a)/15d  14(a) Certification of Chief Executive Officer.31(b)
    
    Rule 13a  14(a)/15d  14(a) Certification of Chief Financial Officer.32(a)
    
    Section 1350 Certification of Chief Executive Officer.32(b)
    
    Section 1350 Certification of Chief Financial Officer.
 Page 40




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
MARCH 31, 2007  (Amounts in thousands, except share and per share amounts)
 
 Signatures
  PEERLESS MFG. CO.Date: May 7, 2007
    
    /s/ Peter J. Burlage

Peter J. BurlagePresident and Chief Executive Officer
(Principal Executive Officer)Date: May 7, 2007
    
    /s/ Henry G. Schopfer, III

Henry G. Schopfer, IIIChief Financial Officer

(Principal Financial and Accounting Officer)
 Page 41