Document:

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                                                                   EXHIBIT 10(i)

                              EMPLOYMENT AGREEMENT

   THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into to be effective
as of the 20th day of July 2001 (the "Effective Date"), between PEERLESS MFG.
CO. ("Employer"), and SHERRILL STONE ("Employee"), and amends in part and
restates and supersedes in its entirety that certain Employment Agreement
between Employer and Employee dated April 29, 1994.

SECTION 1.        EMPLOYMENT.

   1.1 Employment and Term. Subject to the terms and conditions of this
Agreement, Employer agrees to employ Employee, and Employee agrees to be
employed exclusively by Employer, as Chairman of the Board, President and Chief
Executive Officer pursuant to this Agreement. Employee will be employed under
this Agreement for a term beginning on the Effective Date and ending on the
first anniversary date of the Effective Date, unless Employee's employment is
terminated earlier as provided in Section 4 below; provided however, this
Agreement shall continue for successive 12 month periods after the first
anniversary of the Effective Date unless (a) Employer or Employee gives the
other party to this Agreement written notice of termination of this Agreement no
less than sixty (60) days prior to the renewal term, or (b) Employee's
employment is terminated earlier pursuant to Section 4. Sections 2, 3 and 5 of
this Agreement shall survive any termination of Employee's employment with
Employer.

   1.2 Duties. At all times during the course of Employee's employment with
Employer, Employee agrees to perform the duties associated with such position
diligently and to devote all of his business time, attention and efforts to the
business of Employer. Employee agrees to comply with the policies, procedures
and guidelines established by Employer from time to time. Employee agrees to
perform his duties faithfully and loyally and to the best of his abilities, and
shall use his best efforts to promote the business of Employer.

   1.3 Supervision. Employee shall perform the duties of employment under the
direction and supervision of Employer's Board of Directors.

SECTION 2.        NON-COMPETITION.

   2.1   Non Competition.
         ---------------

                  (a) Employee agrees that during the term of his employment
         with Employer and for a period of one (1) year following termination of
         his employment (regardless of whether Employee is terminated without
         Cause (as defined in Section 4.1(c) below), for Cause, voluntarily
         resigns or otherwise), neither Employee nor any person or entity
         directly or indirectly controlling, controlled by or under common
         control with Employee, shall directly or indirectly, on his own behalf
         or as an employee or other agent of or an investor in another person:

                    (i) engage in any business conducted by Employer during
               Employee's term of employment with Employer (collectively, the
               "Business");

                    (ii) influence or attempt to influence any customer or
               supplier of Employer or any affiliate of Employer to purchase
               goods or services related to the Business from any person other
               than Employer or such affiliate; or

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                    (iii) employ or attempt to employ any individuals who are
               then or have been employees of Employer or any affiliate of
               Employer during the preceding 12 months, or influence or seek to
               influence any such employees to leave Employer's or such
               affiliate's employment.

                  (b) Employee specifically acknowledges that Employer's
         products are sold in a world market and that Employee has been engaged
         with regard to Employer's products and Employer's customers throughout
         the world without geographic limitation, and accordingly that the
         restrictive covenant regarding competition contained in this Section
         2.1 shall apply without geographic limitation.

                  (c) Employee acknowledges that his obligations under this
         Section 2.1 are a material inducement and condition to Employer's
         entering into this Agreement and the Other Agreements (as defined in
         Section 5.10 below). Employee acknowledges and agrees that the
         restrictions set forth in this Section 2.1 are reasonable as to time,
         geographic area and scope of activity and do not impose a greater
         restraint than is necessary to protect the goodwill and other business
         interests of Employer, and Employee agrees that Employer is justified
         in believing the foregoing.

                  (d) If any provision of this Section 2.1 should be found by
         any court of competent jurisdiction to be unenforceable by reason of
         its being too broad as to the period of time, territory, and/or scope,
         then, and in that event, such provision shall nevertheless remain valid
         and fully effective, but shall be considered to be amended so that the
         period of time, territory, and/or scope set forth shall be changed to
         be the maximum period of time, the largest territory, and/or the
         broadest scope, as the case may be, which would be found enforceable by
         such court.

                  (e) Employee acknowledges that Employee's violation or
         attempted violation of this Section 2.1 will cause irreparable damage
         to Employer or its affiliates, and Employee therefore agrees that
         Employer shall be entitled as a matter of right to an injunction, out
         of any court of competent jurisdiction, restraining any violation or
         further violation of such agreements by Employee or others acting on
         his behalf. Employer's right to injunctive relief will be cumulative
         and in addition to any other remedies provided by law or equity.

SECTION 3.        CONFIDENTIALITY; NONDISPARAGEMENT; CONFLICT OF INTEREST.

   3.1   Confidentiality.
         ---------------

                  (a) In the course of his employment with Employer, Employee
         has received and may receive or have access in the future to
         commercially valuable, confidential or proprietary information
         ("Confidential Information"). Confidential Information means all
         information, whether oral or written, previously or hereafter
         developed, acquired or used by Employer and relating to the business of
         Employer that is not generally known to others in Employer's area of
         business, including without limitation (i) any trade secrets, work
         product, processes, analyses or know-how of Employer; (ii) Employer's
         advertising, product development, strategic and business plans and
         information, including customer and prospect lists; (iii) the prices at
         which Employer has sold or offered to sell its products or services;
         and (iv) Employer's financial statements and other financial
         information.

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                  (b) Employee acknowledges and agrees that the Confidential
         Information is and shall be the sole and exclusive property of
         Employer. Employee shall not use any Confidential Information for his
         own benefit or disclose any Confidential Information to any third party
         (except in the course of performing his authorized duties for Employer
         under this Agreement), either during or subsequent to his employment
         with Employer.

                  (c) Specifically, Employee agrees that, except as expressly
         authorized in writing by Employer, or as may be required by law or
         court order, Employee (i) shall not disclose Confidential Information
         to any third party, (ii) shall not copy Confidential Information for
         any reason, and (iii) shall not remove Confidential Information from
         Employer's premises. Upon termination of his employment with Employer,
         Employee shall promptly deliver to the Employer all Confidential
         Information, including documents, computer disks and other computer
         storage devices and other papers and materials (including all copies
         thereof in whatever form) containing or incorporating any Confidential
         Information or otherwise relating in any way to the Employer's business
         that are in his possession or under his control.

                  (d) Employee acknowledges that Employee's violation or
         attempted violation of this Section 3.1 will cause irreparable damage
         to Employer or its affiliates, and Employee therefore agrees that
         Employer shall be entitled as a matter of right to an injunction, out
         of any court of competent jurisdiction, restraining any violation or
         further violation of such agreements by Employee or others acting on
         his behalf. Employer's right to injunctive relief will be cumulative
         and in addition to any other remedies provided by law or equity.

   3.2. Covenant of Nondisparagement. In consideration of this Agreement and the
Other Agreements, Employee agrees and promises that, during the term of and at
all times after the termination of this Agreement (regardless of whether
Employee is terminated without Cause, for Cause, voluntarily resigns or
otherwise), not to make any libelous, disparaging or otherwise injurious
statements about or concerning Employer or any of its affiliates, their
officers, employees or representatives. Such prohibited statements include any
statement that is injurious to the business or business reputation of any of the
Employer, its affiliates or their employees or representatives, but does not
include reasonable statements of disagreement that Employee makes for the
purpose of protecting or enforcing any of his rights or interests hereunder or
defending against any claim or claims of Employer, so long as such statements
are not slanderous or libelous and are delivered in terms as would ordinarily be
considered customary and appropriate.

   3.3. Conflict of Interest. Employee agrees that during the term of this
Agreement without the prior approval of the Board of Directors of Employer,
Employee shall not engage, either directly or indirectly, in any activity which
may involve a conflict of interest with Employer or its affiliates (a "Conflict
of Interest"), including ownership in any supplier, contractor, subcontractor,
customer or other entity with which Employer does business (other than as a
shareholder of less than one percent of a publicly traded class of securities)
or accept any material payment, service, loan, gift, trip, entertainment or
other favor from a supplier, contractor, subcontractor, customer or other entity
with which Employer does business and that Employee shall promptly inform the
Board of Directors of Employer as to each offer received by Employee to engage
in any such activity. Employee further agrees to disclose to Employer any other
facts of which Employee becomes aware which might involve or give rise to a
Conflict of Interest or potential Conflict of Interest.

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SECTION 4.        TERMINATION.

   4.1   Termination by Employer; Non-renewal of Agreement.
         -------------------------------------------------

                  (a) Employer may terminate Employee's employment without Cause
         upon no less than sixty (60) days prior written notice of termination
         to Employee. In the event that during the term hereof either (i)
         Employee is terminated by Employer without Cause or (ii) Employer does
         not renew this Agreement after the first anniversary date of the
         Effective Date as provided in Section 1.1 above, Employer shall pay
         Employee, a lump sum payment in an amount equal to one hundred fifty
         percent (150%) of Employee's then current base salary annualized, plus
         for a period of 12 successive months after such termination of
         employment or non-renewal of this Agreement, as applicable, Employer
         shall provide Employee and his spouse medical and health insurance
         substantially on the same terms and comparable as a whole to such
         insurance in effect on the date of Employee's termination of employment
         or non-renewal, as applicable. In the event of any such termination
         without Cause, except as aforesaid, Employer shall have no other
         obligations to pay any base salary or bonus or provide for any benefits
         to Employee after the effective date of such termination.

                  (b) Employer may discharge Employee for Cause at any time
         without prior notice. In the event of any such termination, Employer's
         obligations to pay any base salary or bonus or provide for any benefits
         to Employee shall terminate immediately upon the effective date of such
         termination.

                  (c)      As used herein, "Cause" shall mean any of the
         following:

                    (i) the conviction of Employee by a court of competent
               jurisdiction of any felony or crime involving moral turpitude;

                    (ii) commission by Employee of an intentional material act
               of fraud to his pecuniary benefit in connection with his duties
               or in the course of his employment with Employer, as reasonably
               determined by Employer's Board of Directors; or

                    (iii) the intentional and continued failure by Employee to
               substantially perform his duties hereunder, or the intentional
               wrongdoing by Employee resulting in material injury to Employer.
               No act, or failure to act, on the part of Employee shall be
               deemed "intentional" unless done, or omitted to be done, by
               Employee not in good faith and without reasonable belief that his
               action or omission was in the best interests of Employer.

   4.2 Termination by Employee. Employee may resign from Employee's employment
hereunder (whether for voluntary retirement or otherwise) upon no less than
sixty (60) days prior written notice of resignation to Employer. If Employee
voluntarily resigns from his employment with Employer during the term hereof for
retirement from active working life, Employer shall pay Employee a lump sum
payment in an amount equal to one hundred fifty percent (150%) of Employee's
then current base salary annualized, plus upon retirement Employee shall be
entitled to all benefits (if any) provided by Employer in the ordinary course to
other executive officers of Employer at comparable retirement age. In the event
of any such voluntary resignation, except as aforesaid in the case of voluntary
retirement from active working life, Employer shall have

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no other obligations to pay any base salary or bonus or provide for any benefits
to Employee after the effective date of such resignation.

   4.3 Termination on Death of Employee. This Agreement shall terminate
automatically upon the death of Employee and all rights of Employee, his heirs,
executors and administrators to salary, bonus or benefits shall terminate
immediately, except as otherwise provided in Employer's benefits plans in effect
at such time.

   4.4 Termination by Disability. Employer may terminate Employee's employment
hereunder upon Employee becoming Disabled (as defined below). Upon such
termination, Employer shall pay Employee a lump sum payment in an amount equal
to fifty percent (50%) of Employee's then current base salary annualized, and
Employee shall be entitled to all other disability benefits then in effect (if
any) provided by Employer to all other executive officers of Employer. For
purposes of this Agreement, "Disabled" means any mental or physical impairment
lasting more than 180 consecutive or non-consecutive calendar days that prevents
Employee from performing the essential functions of his position with or without
reasonable accommodation as determined by a physician mutually agreeable to
Employee and Employer. Employee agrees to submit to appropriate medical
examinations and authorize his physicians to release medical information
necessary to determine whether Employee is Disabled for purposes of this
Agreement.

SECTION 5.        MISCELLANEOUS.

   5.1 Notice. Any notice required or permitted under this Agreement must be in
writing and shall be deemed to have been given when delivered personally or by
overnight courier service or three days after being sent by mail, postage
prepaid, at the address indicated below or to such changed address as such
person may subsequently give such notice of:

                  if to Employer:
                                       Peerless Mfg. Co.
                                       2819 Walnut Hill Lane
                                       Dallas, Texas  75229
                                       Attn:  Chairman, Compensation Committee
                                       of the Board of Directors

                  if to Employee:
                                       Sherrill Stone
                                       4625 Royal Lane
                                       Dallas, Texas  75229

   5.2 Assignment. This Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective heirs, personal representatives,
successors, and assigns. Except as otherwise provided herein, this Agreement may
not be assigned by any party hereto without the prior written consent of the
other party hereto, except that Employer shall require any successor, and any
corporation or other person which is in control of such successor, to all or
substantially all of the business and/or assets of Employer (by purchase,
merger, consolidation or otherwise), by agreement in form and substance
satisfactory to Employee, to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that Employer would be
required to perform it if no such succession had taken place. Failure of
Employer to obtain such agreement prior to the effectiveness of any such
succession shall be a material breach of this Agreement by Employer. As used in
this Agreement, "Employer" shall mean Employer as herein before defined and any
successor to its business and/or all or part of its assets as aforesaid which
executes and delivers the assumption agreement provided for in this Section 5.2
or which otherwise becomes bound by all the terms and provisions of this
Agreement by operation of law.

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   5.3 Tax Treatment. In the event that the total compensation paid to Employee,
taking into account all cash payments under the Other Agreements or otherwise,
shares of stock, accelerated vesting of stock options, and bonuses, if any, is
found to constitute "an excess parachute payment" within the meaning of Section
280G of the Internal Revenue Code of 1986, as amended, then Employer shall pay
to Employee, in addition to the total compensation paid to Employee, but without
duplication, an additional amount which, after reduction for income taxes and
excise taxes on such additional amount, is sufficient to provide for the payment
of any excise tax that may be due by Employee on the total compensation paid by
Employer to Employee.

   5.4   Headings.  The section headings used herein are for reference and
convenience only and shall not enter into the interpretation hereof.

   5.5   Counterparts.  This Agreement may be executed in one or more
counterparts for the convenience of the parties hereto, all of which together
shall constitute one and the same instrument.

   5.6 Amendment and Waiver. The provisions of this Agreement may be amended or
waived only by written agreement of Employer and Employee, and no course of
conduct, failure or delay in enforcing the provisions of this Agreement shall
effect the validity, binding effect or enforceability of this Agreement.

   5.7 Severability. Any provision or portion of a provision of this Agreement
that is held to be invalid or unenforceable will be severable, and this
Agreement will be construed and enforced as if such provision, or portion
thereof, did not comprise a part hereof, and the remaining provisions or
portions of provisions will remain in full force and effect. In lieu of each
invalid or unenforceable provision there will be added automatically as part of
this Agreement a provision as similar in terms to such invalid or unenforceable
provision as may be possible and be legal, valid, and enforceable.

   5.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas, without giving effect to any
conflicts of law rule or principle that might require the application of the
laws of another jurisdiction.

   5.9 Disputes. The parties to this Agreement agree that in the event there is
a dispute or controversy between them that cannot be settled through direct
discussions, it is in the best interests of all for such dispute or controversy
to be resolved in the shortest time and with the lowest cost of resolution as
practicable. Consequently, any such dispute, controversy or claim between the
parties to this Agreement will not be litigated, but instead will be resolved by
arbitration in accordance with Title 9 of the U.S. Code (United States
Arbitration Act) and the Commercial Arbitration Rules of the American
Arbitration Association (the "Rules"), and judgment upon the award rendered by
the arbitrator may be entered in any court having jurisdiction thereof. The
arbitration will be before one neutral arbitrator and will proceed under the
Expedited Procedures of said Rules. The arbitration will be held in Dallas,
Texas, or such other place as may be selected by mutual agreement. The
arbitrator will have the discretion to order a prehearing exchange of
information by the parties, and to set limits for both the scope and time period
of such exchange. All issues regarding exchange requests will be decided by the
arbitrator. Neither party nor the arbitrators may disclose the existence,
content or results of any arbitration hereunder, unless required to do so by
court or regulatory order, without the prior written consent of both parties.
Fees and expenses of the arbitration itself will be borne by the parties
equally. The arbitrator will also be authorized to award to the prevailing party
all or that fraction of its reasonable costs and fees as is deemed equitable.
This provision will not apply to any injunctive relief sought by the Company or
any of its affiliate under Section 2 or 3 of this Agreement.

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   5.10 Entire Agreement. This Agreement and that certain Agreement, of even
date herewith, between Employer and Employee regarding certain agreements
effective upon a "Change-in-Control" (as defined therein) and that certain
Agreement, of even date herewith, between Employer and Employee regarding
certain bonus payments effective upon a "Sale of the Company" (as defined
therein) (such two agreements being the "Other Agreements") embody the complete
agreement in force between Employer and Employee regarding the subject matter
hereof and the same supersede all prior agreements or understandings, whether
oral, written or otherwise, between the parties that may have related in any way
to the subject matter hereof.

                             EMPLOYER:

                             PEERLESS MFG. CO.

                             By: /s/
                                 ----------------------------------------------
                                 Joseph V. Mariner,
                                 Chairman of the Compensation
                                 Committee of the Board of Directors
                                 of Peerless Mfg. Co.

                              EMPLOYEE:

                                   /s/
                                   --------------------------------------------
                                   Sherrill Stone

                                       7<PAGE>

                                                                   EXHIBIT 10(j)

                              EMPLOYMENT AGREEMENT

   THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into to be effective
as of the 20th day of July 2001 (the "Effective Date"), between PEERLESS MFG.
CO. ("Employer"), and ROY C. CUNY ("Employee"), and amends in part and restates
and supersedes in its entirety that certain Employment Agreement between
Employer and Employee dated May 26, 2000.

SECTION 1.    EMPLOYMENT.

   1.1 Employment and Term. Subject to the terms and conditions of this
Agreement, Employer agrees to employ Employee as Executive Vice President and
Chief Operating Officer pursuant to this Agreement. Employee will be employed
under this Agreement for a term beginning on the Effective Date and ending on
the third anniversary date of the Effective Date, unless Employee's employment
is terminated earlier as provided in Section 4 below. Sections 2, 3, and 5 of
this Agreement shall survive any termination of Employee's employment with
Employer.

   1.2 Duties. At all times during the course of Employee's employment with
Employer, Employee agrees to perform the duties associated with such position
diligently and to devote all of his business time, attention and efforts to the
business of Employer. Employee agrees to comply with the policies, procedures
and guidelines established by Employer from time to time. Employee agrees to
perform his duties faithfully and loyally and to the best of his abilities, and
shall use his best efforts to promote the business of Employer.

   1.3 Supervision.  Employee shall perform the duties of employment under the
direction and supervision of Employer's Chief Executive Officer.

SECTION 2.    NON-COMPETITION.

         2.1  During Term. During the period of his employment under this
Agreement, Employee shall be employed only by Employer and shall not engage in
any activity in competition with Employer.

         2.2  After Termination; Non-Competition. Employee agrees that for a
period of one (1) year following termination of employment, without regard to
the reason for termination, Employee shall not, directly or indirectly, compete
with Employer or perform any services for a competitor of Employer, including as
an employee, consultant, advisor, owner, partner, participant in a joint venture
or corporation, or otherwise. Employee specifically acknowledges that Employer's
products are sold in a world market, and that Employee has been engaged with
regard to Employer's products and Employer's customers throughout the world
without geographic limitation, and accordingly that the non-competition
agreement contained in this Section shall apply without geographic limitation.

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SECTION 3.________CONFIDENTIALITY; NONDISPARAGEMENT; CONFLICT OF INTEREST.

   3.1   Confidentiality.

                  (a) In the course of his employment with Employer, Employee
         has received and may receive or have access in the future to
         commercially valuable, confidential or proprietary information
         ("Confidential Information"). Confidential Information means all
         information, whether oral or written, previously or hereafter
         developed, acquired or used by Employer and relating to the business of
         Employer that is not generally known to others in Employer's area of
         business, including without limitation (i) any trade secrets, work
         product, processes, analyses or know-how of Employer; (ii) Employer's
         advertising, product development, strategic and business plans and
         information, including customer and prospect lists; (iii) the prices at
         which Employer has sold or offered to sell its products or services;
         and (iv) Employer's financial statements and other financial
         information.

                  (b) Employee acknowledges and agrees that the Confidential
         Information is and shall be the sole and exclusive property of
         Employer. Employee shall not use any Confidential Information for his
         own benefit or disclose any Confidential Information to any third party
         (except in the course of performing his authorized duties for Employer
         under this Agreement), either during or subsequent to his employment
         with Employer.

                  (c) Specifically, Employee agrees that, except as expressly
         authorized in writing by Employer, or as may be required by law or
         court order, Employee shall (i) not disclose Confidential Information
         to any third party, (ii) not copy Confidential Information for any
         reason, and (iii) not remove Confidential Information from Employer's
         premises. Upon termination of his employment with Employer, Employee
         shall promptly deliver to the Employer all Confidential Information,
         including documents, computer disks and other computer storage devices
         and other papers and materials (including all copies thereof in
         whatever form) containing or incorporating any Confidential Information
         or otherwise relating in any way to the Employer's business that are in
         his possession or under his control.

                  (d) Employee acknowledges that Employee's violation or
         attempted violation of this Section 3.1 will cause irreparable damage
         to Employer or its affiliates, and Employee therefore agrees that
         Employer shall be entitled as a matter of right to an injunction, out
         of any court of competent jurisdiction, restraining any violation or
         further violation of such agreements by Employee or others acting on
         his behalf. Employer's right to injunctive relief will be cumulative
         and in addition to any other remedies provided by law or equity.

   3.2. Covenant of Nondisparagement. In consideration of this Agreement and the
Other Agreements, Employee agrees and promises that, during the term of and at
all times after the termination of this Agreement (regardless of whether
Employee is terminated without Cause, for Cause, voluntarily resigns or
otherwise), not to make any libelous, disparaging or otherwise injurious
statements about or concerning Employer or any of its affiliates, their
officers, employees or representatives. Such prohibited statements include any
statement that is injurious to the business or business reputation of any of the
Employer, its affiliates or their employees or representatives, but does not
include reasonable statements of disagreement that Employee makes for the
purpose of protecting or enforcing any of his rights or interests hereunder or
defending against any claim or claims of Employer, so long as such statements
are not slanderous or libelous and are delivered in terms as would ordinarily be
considered customary and appropriate.

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   3.3. Conflict of Interest. Employee agrees that during the term of this
Agreement without the prior approval of the Board of Directors of Employer,
Employee shall not engage, either directly or indirectly, in any activity which
may involve a conflict of interest with Employer or its affiliates (a "Conflict
of Interest"), including ownership in any supplier, contractor, subcontractor,
customer or other entity with which Employer does business (other than as a
shareholder of less than one percent of a publicly traded class of securities)
or accept any material payment, service, loan, gift, trip, entertainment or
other favor from a supplier, contractor, subcontractor, customer or other entity
with which Employer does business and that Employee shall promptly inform the
Chief Executive Officer or the Board of Directors of Employer as to each offer
received by Employee to engage in any such activity. Employee further agrees to
disclose to Employer any other facts of which Employee becomes aware which might
involve or give rise to a Conflict of Interest or potential Conflict of
Interest.

SECTION 4.    TERMINATION.

   4.1   Termination by Employer.
         -----------------------

                  (a) Employer may terminate Employee's employment without Cause
         upon no less than sixty (60) days prior written notice of termination
         to Employee. In the event of any such termination without Cause,
         Employer shall pay Employee as severance compensation, a lump sum
         payment in an amount equal to one hundred fifty percent (150%) of
         Employee's then current base salary annualized. In the event of any
         such termination without Cause, except as aforesaid, Employer shall
         have no other obligations to pay any base salary or bonus or provide
         for any benefits to Employee after the effective date of such
         termination.

                  (b) Employer may discharge Employee for Cause at any time
         without prior notice. In the event of any such termination for Cause,
         Employer's obligations to pay any base salary or bonus or provide for
         any benefits to Employee shall terminate immediately upon the effective
         date of such termination.

                  (c)      As used herein, "Cause" shall mean any of the
          following:

                           (i)      the conviction of Employee by a court of
                  competent jurisdiction of any felony or crime involving moral
                  turpitude;

                           (ii) commission by Employee of an intentional
                  material act of fraud to his pecuniary benefit in connection
                  with his duties or in the course of his employment with
                  Employer, as reasonably determined by Employer's Board of
                  Directors; or

                           (iii) the intentional and continued failure by
                  Employee to substantially perform his duties hereunder, or the
                  intentional wrongdoing by Employee resulting in material
                  injury to Employer. No act, or failure to act, on the part of
                  Employee shall be deemed "intentional" unless done, or omitted
                  to be done, by Employee not in good faith and without
                  reasonable belief that his action or omission was in the best
                  interests of Employer.

   4.2 Termination by Employee. Employee may resign from Employee's employment
hereunder (whether for voluntary retirement or otherwise) upon no less than
sixty (60) days prior written notice of resignation to Employer. If Employee
voluntarily resigns from his employment with Employer during the term hereof
(whether for voluntary retirement or otherwise),

                                       3
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Employer's obligations to pay any base salary or bonus or provide for any
benefits shall terminate immediately upon the effective date of such
resignation. Upon retirement, Employee shall be entitled to all benefits (if
any) provided by Employer in the ordinary course to other executive officers of
Employer at comparable retirement age.

   4.3 Termination on Death of Employee. This Agreement shall terminate
automatically upon the death of Employee and all rights of Employee, his heirs,
executors and administrators to salary, bonus or benefits shall terminate
immediately, except as otherwise provided in Employer's benefits plans in effect
at such time.

   4.4 Termination by Disability. Employer may terminate Employee's employment
hereunder upon Employee becoming Disabled (as defined below). Upon such
termination, Employer shall pay Employee a lump sum payment in an amount equal
to fifty percent (50%) of Employee's then current base salary annualized, and
Employee shall be entitled to all other disability benefits then in effect (if
any) provided by Employer to all other executive officers of Employer. For
purposes of this Agreement, "Disabled" means any mental or physical impairment
lasting more than 180 consecutive or non-consecutive calendar days that prevents
Employee from performing the essential functions of his position with or without
reasonable accommodation as determined by a physician mutually agreeable to
Employee and Employer. Employee agrees to submit to appropriate medical
examinations and authorize his physicians to release medical information
necessary to determine whether Employee is Disabled for purposes of this
Agreement.

SECTION 5.    MISCELLANEOUS.

   5.1 Notice. Any notice required or permitted under this Agreement must be in
writing and shall be deemed to have been given when delivered personally or by
overnight courier service or three days after being sent by mail, postage
prepaid, at the address indicated below or to such changed address as such
person may subsequently give such notice of:

                  if to Employer:
                                           Peerless Mfg. Co.
                                           2819 Walnut Hill Lane
                                           Dallas, Texas  75229
                                           Attn:  Chairman, Board of Directors

                  if to Employee:
                                           Roy C. Cuny
                                           4716 Lakeside
                                           Colleyville, Texas  76034

   5.2 Assignment. This Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective heirs, personal representatives,
successors, and assigns. Except as otherwise provided herein, this Agreement may
not be assigned by any party hereto without the prior written consent of the
other party hereto, except that Employer shall require any successor, and any
corporation or other person which is in control of such successor, to all or
substantially all of the business and/or assets of Employer (by purchase,
merger, consolidation or otherwise), by agreement in form and substance
satisfactory to Employee, to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that Employer would be
required to perform it if no such succession had taken place. Failure of
Employer to obtain such agreement prior to the effectiveness of any such
succession shall be a material breach of this Agreement by Employer. As used in
this Agreement, "Employer" shall mean Employer as herein before defined and any
successor to its business and/or all or part of its assets as aforesaid which

                                       4
<PAGE>

executes and delivers the assumption agreement provided for in this Section 5.2
or which otherwise becomes bound by all the terms and provisions of this
Agreement by operation of law.

   5.3 Tax Treatment. In the event that the total compensation paid to Employee,
taking into account all cash payments under the Other Agreements or otherwise,
shares of stock, accelerated vesting of stock options, and bonuses, if any, is
found to constitute "an excess parachute payment" within the meaning of Section
280G of the Internal Revenue Code of 1986, as amended, then Employer shall pay
to Employee, in addition to the total compensation paid to Employee, but without
duplication, an additional amount which, after reduction for income taxes and
excise taxes on such additional amount, is sufficient to provide for the payment
of any excise tax that may be due by Employee on the total compensation paid by
Employer to Employee.

   5.4   Headings.  The section headings used herein are for reference and
convenience only and shall not enter into the interpretation hereof.

   5.5   Counterparts.  This Agreement may be executed in one or more
counterparts for the convenience of the parties hereto, all of which together
shall constitute one and the same instrument.

   5.6 Amendment and Waiver. The provisions of this Agreement may be amended or
waived only by written agreement of Employer and Employee, and no course of
conduct, failure or delay in enforcing the provisions of this Agreement shall
affect the validity, binding effect or enforceability of this Agreement.

   5.7 Severability. Employee acknowledges that his obligations under Section
2.1 are a material inducement and condition to Employer's entering into this
Agreement and the Other Agreements (as defined in Section 5.10 below). Employee
acknowledges and agrees that the restrictions set forth in Section 2.1 are
reasonable as to time, geographic area and scope of activity and do not impose a
greater restraint than is necessary to protect the goodwill and other business
interests of Employer, and Employee agrees that Employer is justified in
believing the foregoing. Any provision or portion of a provision of this
Agreement that is held to be invalid or unenforceable will be severable, and
this Agreement will be construed and enforced as if such provision, or portion
thereof, did not comprise a part hereof, and the remaining provisions or
portions of provisions will remain in full force and effect. In lieu of each
invalid or unenforceable provision there will be added automatically as part of
this Agreement a provision as similar in terms to such invalid or unenforceable
provision as may be possible and be legal, valid, and enforceable.

   5.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas, without giving effect to any
conflicts of law rule or principle that might require the application of the
laws of another jurisdiction.

   5.9 Disputes. The parties to this Agreement agree that in the event there is
a dispute or controversy between them that cannot be settled through direct
discussions, it is in the best interests of all for such dispute or controversy
to be resolved in the shortest time and with the lowest cost of resolution as
practicable. Consequently, any such dispute, controversy or claim between the
parties to this Agreement will not be litigated, but instead will be resolved by
arbitration in accordance with Title 9 of the U.S. Code (United States
Arbitration Act) and the Commercial Arbitration Rules of the American
Arbitration Association (the "Rules"), and judgment upon the award rendered by
the arbitrator may be entered in any court having jurisdiction thereof. The
arbitration will be before one neutral arbitrator and will proceed under the
Expedited Procedures of said Rules. The arbitration will be held in Dallas,
Texas, or such other place as may be selected by mutual agreement. The
arbitrator will have the discretion to order a prehearing exchange of
information by the parties, and to set limits for both the scope and time period
of such exchange. All issues regarding exchange requests will be decided by the

                                       5
<PAGE>

arbitrator. Neither party nor the arbitrators may disclose the existence,
content or results of any arbitration hereunder, unless required to do so by
court or regulatory order, without the prior written consent of both parties.
Fees and expenses of the arbitration itself will be borne by the parties
equally. The arbitrator will also be authorized to award to the prevailing party
all or that fraction of its reasonable costs and fees as are deemed equitable.
Notwithstanding the foregoing, Employee acknowledges that Employee's violation
or attempted violation of Section 2 or 3 above will cause irreparable damage to
Employer or its affiliates, and Employee therefore agrees that Employer shall be
entitled as a matter of right to an injunction, out of any court of competent
jurisdiction, restraining any violation or further violation of such agreements
by Employee or others acting on his behalf. Employer's right to injunctive
relief will be cumulative and in addition to the arbitration provisions of this
Section 5.9.

   5.10 Entire Agreement. This Agreement and that certain Agreement, of even
date herewith, between Employer and Employee regarding certain agreements
effective upon a "Change-in-Control" (as defined therein) and that certain
Agreement, of even date herewith, between Employer and Employee regarding
certain bonus payments effective upon a "Sale of the Company" (as defined
therein) (such two agreements being the "Other Agreements") embody the complete
agreement between Employer and Employee regarding the subject matter hereof and
the same supersede all prior agreements or understandings, whether oral, written
or otherwise, between the parties hereto that may have related in any way to the
subject matter hereof.

                                     EMPLOYER:

                                     PEERLESS MFG. CO.

                                     /s/
                                     ------------------------------------------
                                     Sherrill Stone,
                                     Chairman of the Board,
                                     Chief Executive Officer and President

                                     EMPLOYEE:

                                     /s/
                                     ------------------------------------------
                                     Roy C. Cuny

                                       6

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