8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

February 9, 2005 (February 3, 2005)

Date of Report (date of earliest event reported):

PEERLESS MFG. CO.

(Exact name of registrant as specified in its charter)

Texas	0-5214	75-0724417
(State or other Jurisdiction of Incorporation)	(Commission File Number)	(IRS Employer Identification No.)

2819 Walnut Hill Lane, Dallas, Texas 75229

(Address of principal executive offices) (Zip code)

Registrant’s telephone number, including area code:
(214) 357-6181

Not Applicable

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

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TABLE OF CONTENTS

Form of Non-Employee Director Stock Option Agreement

Form of Chief Executive Officer Stock Option Agreement

Form of Executive Stock Option Agreement

Key Employee Bonus Plan

ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT

I. Non-Employee Director Compensation

On February 3, 2005, the Board of Directors (the “Board”) of Peerless Mfg. Co. (the “Company”) approved compensation arrangements for non-employee directors for 2005. Each non-employee director will receive a $1,875 retainer per quarter, and $1,000 for each scheduled and special Board or Board committee meeting they attend. Chairpersons of Board committees will receive an additional $500 for each Board committee meeting they attend and chair. In addition, the Audit Committee chairperson was awarded an additional $2,500 for his service in that capacity. Each non-employee director will continue to be awarded immediately exercisable stock options for 1,000 shares of the Company’s common stock pursuant to the Company’s 2001 Stock Option and Restricted Stock Plan (“Stock Incentive Plan”) on the date of the annual shareholders’ meeting for the director’s prior year’s service. Additional terms of the stock options are set forth in the form of stock option agreement attached hereto as Exhibit 10.1 and incorporated herein by reference. These director fees were developed with the assistance of an independent consulting firm and were recommended to the Board by the Compensation Committee of the Board (the “Committee”). Employee directors do not receive compensation for service on the Board.

II. Stock Option Grants

On February 3, 2005, the Board, acting upon the recommendation of the Committee, granted stock options to purchase shares of the Company’s common stock to certain executive officers of the Company, pursuant to the Stock Incentive Plan, with an exercise price of $14.52 per share, as follows: (1) 5,000 fully vested stock options to Sherrill Stone, President and Chief Executive Officer, (2) 5,000 stock options vesting ratably in four equal annual increments commencing on the first anniversary of the date of grant or upon a change of control of the Company to each of Richard L. Travis, Jr., Chief Financial Officer and Vice President of Administration; and William T. Strohecker, Executive Vice President and Chief Operating Officer, and (3) 3,000 stock options vesting ratably in four equal annual increments commencing on the first anniversary of the date of grant or upon a change of control of the Company to each of David Taylor, Vice President of Separation Filtration Systems; Peter Burlage, Vice President of Environmental Systems; and G. Darwyn Cornwell, Vice President of Operations. Additional terms of the stock options granted to Mr. Stone are set forth in the form of stock option agreement attached hereto as Exhibit 10.2 and incorporated herein by reference, and additional terms of the stock options granted to the other executive officers are set forth in the form of stock option agreement attached hereto as Exhibit 10.3 and incorporated herein by reference.

III. Bonus Plan

On February 3, 2005, the Board, acting upon the recommendation of the Committee, determined criteria for the payment of bonuses under the Company’s Key Employee Bonus Plan, attached hereto as Exhibit 10.4 and incorporated herein by reference, pursuant to which certain employees, including senior executive officers, earn a cash bonus. Upon the recommendation of the Committee, the Board determined that, for the fiscal year ending June 30, 2005, bonuses payable under the Key Employee Bonus Plan will be paid to the following executive officers in accordance with the percentages set forth below:

		Percentage of
		Fiscal Year 2005
		Key Employee Bonus
Executive Officer	Title	Pool
Sherrill Stone	President and Chief Operating Officer		16	%
Richard L. Travis, Jr.	Chief Financial Officer and Vice President of Administration		16	%
William T. Strohecker	Executive Vice President and Chief Operating Officer		16	%

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		Percentage of
		Fiscal Year 2005
		Key Employee Bonus
Executive Officer	Title	Pool
Peter J. Burlage	Vice President of Environmental Systems		13	%
David Taylor	Vice President of Separation Filtration Systems		13	%
G. Darwyn Cornwell	Vice President of Operations		13	%
Barry Nesbit	Managing Director - Peerless Europe Limited		11	%
Katherine Frazier	Controller, Treasurer/Secretary		2	%

The maximum amount payable under the Key Employee Bonus Plan will not comprise more than 60% of the total of the bonuses payable under the Key Employee Bonus Plan plus the bonuses payable under the Company’s Salaried Employee Incentive Bonus Plan.

ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS

(c)   Exhibits

10.1	Form of Non-Employee Director Stock Option Agreement
10.2	Form of Chief Executive Officer Stock Option Agreement
10.3	Form of Executive Stock Option Agreement
10.4	Key Employee Bonus Plan

SIGNATURES

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

PEERLESS MFG. CO.
By:	/s/ Richard L. Travis
	Richard L. Travis
	Chief Financial Officer

Date: February 9, 2005

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Index to Exhibits

Exhibit No.	Description
10.1	Form of Non-Employee Director Stock Option Agreement
10.2	Form of Chief Executive Officer Stock Option Agreement
10.3	Form of Executive Stock Option Agreement
10.4	Key Employee Bonus Plan

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EX-10.1

Exhibit 10.1

PEERLESS MFG. CO.
STOCK OPTION AGREEMENT

     THIS AGREEMENT (this “Agreement”), effective as of ___, is made and entered into by and between Peerless Mfg. Co., a Texas corporation (the “Corporation”), and ___ (the “Participant”).

W I T N E S S E T H:

     WHEREAS, the Corporation has implemented the Peerless Mfg. Co. 2001 Stock Option and Restricted Stock Plan (the “Plan”), which was adopted by the Corporation’s Board of Directors (the “Board”) and approved by the Corporation’s shareholders, and which provides for the grant of stock to certain selected officers, directors and key employees of the Corporation or its subsidiaries with respect to shares of Common Stock, $1.00 par value, of the Corporation (the “Common Stock”);

     WHEREAS, the stock options provided for under the Plan are intended to comply with the requirements of Rule 16b-3 under the Securities Exchange Act of 1934, as amended;

     WHEREAS, the committee appointed by the Board to administer the Plan (the “Committee”) has selected the Participant to participate in the Plan and has awarded the non-qualified stock option described in this Agreement (the “Option”) to the Participant;

     WHEREAS, the parties hereto desire to evidence in writing the terms and conditions of the Option.

     NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements herein contained, and as an inducement to the Participant to continue as an employee of the Corporation or its subsidiaries and to promote the success of the business of the Corporation and its subsidiaries, the parties hereby agree as follows:

     1. Grant of Option. Pursuant to Section 21(c) of the Plan, effective as of November 21, 2002, which was the date of the Corporation’s 2001 Annual Shareholders’ Meeting (the “Award Date”), the Corporation hereby grants to the Participant, upon the terms and subject to the conditions, limitations and restrictions set forth in the Plan and in this Agreement, the Option to acquire ___ shares of Common Stock, at an exercise price per share of $       , which is the Fair Market Value as of the trading day immediately preceding the Award Date. The Participant hereby accepts the Option from the Corporation.

     2. Vesting. As of the Award Date (as defined above), the Option is vested in full as to all shares of Common Stock subject hereto.

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     3. Exercise. In order to exercise the Option with respect to any vested portion, the Participant shall provide written notice to the Corporation at its principal executive office. At the time of exercise, the Participant shall pay to the Corporation the exercise price per share set forth in Section 1 times the number of vested shares as to which the Option is being exercised. The Participant shall make such payment in cash, check or at the Corporation’s option, by the delivery of shares of Common Stock having a Fair Market Value on the date immediately preceding the exercise date equal to the aggregate exercise price. If the Option is exercised in full, the Participant shall surrender this Agreement to the Corporation for cancellation. If the Option is exercised in part, the Participant shall surrender this Agreement to the Corporation so that the Corporation may make appropriate notation hereon or cancel this Agreement and issue a new agreement representing the unexercised portion of the Option.

     If the shares to be purchased are covered by an effective registration statement under the Securities Act of 1933, as amended (the “Act”), the Option may be exercised by a broker-dealer acting on behalf of the Participant if (a) the broker-dealer has received from the Participant or the Corporation a fully- and duly-endorsed agreement evidencing such option, together with instructions signed by the Participant requesting the Corporation to deliver the shares of Common Stock subject to such option to the broker-dealer on behalf of the Participant and specifying the account into which such shares should be deposited, (b) adequate provision has been made with respect to the payment of any withholding taxes due upon such exercise, and (c) the broker-dealer and the Participant have otherwise complied with Section 220.3(e) (4) of Regulation T, 12 CFR Part 220, or any successor provision.

     4. Who May Exercise. The Option shall be exercisable during the lifetime of the Participant only by the Participant. To the extent exercisable after the Participant’s death, the Option shall be exercised only by the Participant’s representatives, executors, successors or beneficiaries.

     5. Expiration of Option. The Option shall expire, and shall not be exercisable with respect to any vested portion as to which the Option has not been exercised, on the first to occur of: (a) the tenth anniversary of the Award Date; or (b) the first anniversary of the date the Participant is no longer a director of the Corporation or an officer or employee of the Corporation or a Related Corporation.

     6. Tax Withholding. Any provision of this Agreement to the contrary notwithstanding, the Corporation may take such steps as it deems necessary or desirable for the withholding of any taxes that it is required by law or regulation of any governmental authority, federal, state or local, domestic or foreign, to withhold in connection with any of the shares of Common Stock subject hereto.

     7. Dilution. The number of shares of Common Stock subject to the Option and the exercise price therefor set forth in Section 1 shall be subject to adjustment for any Dilutive Event. A “Dilutive Event” shall include any of the following events that results in dilution to the shares of Common Stock acquired or acquirable upon exercise of the Option: any increase or decrease in the shares of Common Stock or any other capital stock of the Corporation or any change or exchange of any such

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securities for a different number or kind of securities, any of which results from one or more stock splits, reverse stock splits, stock dividends, recapitalizations, reorganizations or other corporate actions with a similar effect. A “Dilutive Event” shall not include, however, among other things: (i) the issuance or exercise of options granted pursuant to the Plan or pursuant to any other stock-based compensation plan adopted by the Corporation’s Board of Directors; or (ii) any issuance of capital stock by the Corporation for Fair Market Value or any issuance or grant to any person or entity of any right to subscribe for or to purchase any capital stock or securities convertible into any capital stock of the Corporation for Fair Market Value.

     8. Transfer of Option. The Participant shall not, directly or indirectly, sell, transfer, pledge, encumber or hypothecate (“Transfer”) any unvested portion of the Option or the rights and privileges pertaining thereto. In addition, the Participant shall not, directly or indirectly, Transfer any vested portion of the Option other than by will or the laws of descent and distribution. Any permitted transferee to whom the Participant shall Transfer the Option shall agree to be bound by this Agreement. Neither the Option nor the underlying shares of Common Stock is liable for or subject to, in whole or in part, the debts, contracts, liabilities or torts of the Participant, nor shall they be subject to garnishment, attachment, execution, levy or other legal or equitable process.

     9. Certain Legal Restrictions. The Corporation shall not be obligated to sell or issue any shares of Common Stock upon the exercise of the Option or otherwise unless the issuance and delivery of such shares shall comply with all relevant provisions of law and other legal requirements including, without limitation, any applicable federal or state securities laws and the requirements of any stock exchange upon which shares of the Common Stock may then be listed. As a condition to the exercise of the Option or the sale by the Corporation of any additional shares of Common Stock to the Participant, the Corporation may require the Participant to make such representations and warranties as may be necessary to assure the availability of an exemption from the registration requirements of applicable federal or state securities laws. The Corporation shall not be liable for refusing to sell or issue any shares if the Corporation cannot obtain authority from the appropriate regulatory bodies deemed by the Corporation to be necessary to lawfully sell or issue such shares. In addition, the Corporation shall have no obligation to the Participant, express or implied, to list, register or otherwise qualify any of the Participant’s shares of Common Stock. The shares of Common Stock issued upon the exercise of the Option may not be transferred except in accordance with applicable federal or state securities laws. At the Corporation’s option, the certificate evidencing shares of Common Stock issued to the Participant may be legended as follows:

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE APPLICABLE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION AND MAY NOT BE SOLD, ASSIGNED, TRANSFERRED OR PLEDGED EXCEPT IN COMPLIANCE WITH THE REQUIREMENTS OF SUCH ACT AND THE APPLICABLE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION.

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     Any Common Stock issued pursuant to the exercise of Options granted pursuant to this Agreement to a person who would be deemed an officer or director of the Corporation under Rule 16b-3 shall not be transferred until at least six months have elapsed from the date of grant of such Option to the date of disposition of the Common Stock underlying such Option.

     10. Plan Incorporated. The Participant accepts the Option subject to all the provisions of the Plan, which are incorporated into this Agreement, including the provisions that authorize the Committee to administer and interpret the Plan and which provide that the Committee’s decisions, determinations and interpretations with respect to the Plan are final and conclusive on all persons affected thereby. Except as otherwise set forth in this Agreement, terms defined in the Plan have the same meanings herein.

     11. Miscellaneous.

     (a) The Option is intended to be a non-qualified stock option under applicable tax laws, and it is not to be characterized or treated as an incentive stock option under such laws.

     (b) The granting of the Option shall impose no obligation upon the Participant to exercise the Option or any part thereof. Nothing contained in this Agreement shall affect the right of the Corporation to terminate the Participant at any time, with or without cause, or shall be deemed to create any rights to employment on the part of the Participant.

     (c) The rights and obligations arising under this Agreement are not intended to and do not affect the employment relationship that otherwise exists between the Corporation and the Participant, whether such employment relationship is at will or defined by an employment contract. Moreover, this Agreement is not intended to and does not amend any existing employment contract between the Corporation and the Participant; to the extent there is a conflict between this Agreement and such an employment contract, the employment contract shall govern and take priority.

     (d) Neither the Participant nor any person claiming under or through the Participant shall be or shall have any of the rights or privileges of a stockholder of the Corporation in respect of any of the shares issuable upon the exercise of the Option herein unless and until certificates representing such shares shall have been issued and delivered to the Participant or such Participant’s agent.

     (e) Any notice to be given to the Corporation under the terms of this Agreement or any delivery of the Option to the Corporation shall be addressed to the Corporation at its principal executive offices, and any notice to be given to the Participant shall be addressed to the Participant at the address set forth beneath his or her signature hereto, or at such other address for a party as such party may hereafter designate in writing to the other. Any such notice shall be deemed to have been duly given if mailed, postage prepaid, addressed as aforesaid.

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     (f) Subject to the limitations in this Agreement on the transferability by the Participant of the Option and any shares of Common Stock, this Agreement shall be binding upon and inure to the benefit of the representatives, executors, successors or beneficiaries of the parties hereto.

     (g) The interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of Texas and the United States, as applicable, without reference to the conflict of laws provisions thereof.

     (h) If any provision of this Agreement is declared or found to be illegal, unenforceable or void, in whole or in part, then the parties shall be relieved of all obligations arising under such provision, but only to the extent that it is illegal, unenforceable or void, it being the intent and agreement of the parties that this Agreement shall be deemed amended by modifying such provision to the extent necessary to make it legal and enforceable while preserving its intent or, if that is not possible, by substituting therefor another provision that is legal enforceable and achieves the same objectives.

     (i) All section titles and captions in this Agreement are for convenience only, shall not be deemed part of this Agreement, and in no way shall define, limit, extend or describe the scope or intent of any provisions of this Agreement.

     (j) The parties shall execute all documents, provide all information, and take or refrain from taking all actions as may be necessary or appropriate to achieve the purposes of this Agreement.

     (k) This Agreement constitutes the entire agreement among the parties hereto pertaining to the subject matter hereof and supersedes all prior agreements and understandings pertaining hereto.

     (l) No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition.

     (m) This Agreement may be executed in counterparts, all of which together shall constitute one agreement binding on all the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart.

     (n) At any time and from time to time the Committee may execute an instrument providing for modification, extension, or renewal of any outstanding option, provided that no such modification, extension or renewal shall (i) impair the Option in any respect without the consent of the holder of the Option or (ii) conflict with the provisions of Rule 16b-3. Except as provided in the preceding sentence, no supplement, modification or amendment of this Agreement or waiver of any provision of this Agreement shall be binding unless executed in

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writing by all parties to this Agreement. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision of this Agreement (regardless of whether similar), nor shall any such waiver constitute a continuing waiver unless otherwise expressly provided.

     (o) In addition to all other rights or remedies available at law or in equity, the Corporation shall be entitled to injunctive and other equitable relief to prevent or enjoin any violation of the provisions of this Agreement.

     (p) The Participant’s spouse joins this Agreement for the purpose of agreeing to and accepting the terms of this Agreement and to bind any community property interest he or she has or may have in the Option, any vested portion or any unvested portion of the Option, any shares of Common Stock acquired upon exercise of the Option and any other shares of Common Stock held by the Participant.

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     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

CORPORATION:

Peerless Mfg. Co.

By:

Name:

Title:

PARTICIPANT:

Name:

Address:

PARTICIPANT’S SPOUSE:

Name:

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EX-10.2

Exhibit 10.2

PEERLESS MFG. CO.
STOCK OPTION AGREEMENT

     THIS AGREEMENT (this “Agreement”), effective as of ___, is made and entered into by and between Peerless Mfg. Co., a Texas corporation (the “Corporation”), and ___ (the “Participant”).

W I T N E S S E T H:

     WHEREAS, the Corporation has implemented the Peerless Mfg. Co. 2001 Stock Option and Restricted Stock Plan (the “Plan”), which was adopted by the Corporation’s Board of Directors (the “Board”) and approved by the Corporation’s shareholders, and which provides for the grant of stock to certain selected officers, directors and key employees of the Corporation or its subsidiaries with respect to shares of Common Stock, $1.00 par value, of the Corporation (the “Common Stock”);

     WHEREAS, the stock options provided for under the Plan are intended to comply with the requirements of Rule 16b-3 under the Securities Exchange Act of 1934, as amended;

     WHEREAS, the committee appointed by the Board to administer the Plan (the “Committee”) has selected the Participant to participate in the Plan and has awarded the non-qualified stock option described in this Agreement (the “Option”) to the Participant;

     WHEREAS, the parties hereto desire to evidence in writing the terms and conditions of the Option.

     NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements herein contained, and as an inducement to the Participant to continue as an employee of the Corporation or its subsidiaries and to promote the success of the business of the Corporation and its subsidiaries, the parties hereby agree as follows:

     1. Grant of Option. Effective as of the date of this Agreement (the “Award Date”), the Corporation hereby grants to the Participant, upon the terms and subject to the conditions, limitations and restrictions set forth in the Plan and in this Agreement, the Option to acquire ___ shares of Common Stock, at an exercise price per share of $       , which is the Fair Market Value on the Award Date. The Participant hereby accepts the Option from the Corporation.

     2. Vesting. As of the Award Date (as defined above), the Option is vested in full as to all shares of Common Stock subject hereto.

     3. Exercise. In order to exercise the Option with respect to any vested portion, the Participant

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shall provide written notice to the Corporation at its principal executive office. At the time of exercise, the Participant shall pay to the Corporation the exercise price per share set forth in Section 1 times the number of vested shares as to which the Option is being exercised. The Participant shall make such payment in cash, check or at the Corporation’s option, by the delivery of shares of Common Stock having a Fair Market Value on the date immediately preceding the exercise date equal to the aggregate exercise price. If the Option is exercised in full, the Participant shall surrender this Agreement to the Corporation for cancellation. If the Option is exercised in part, the Participant shall surrender this Agreement to the Corporation so that the Corporation may make appropriate notation hereon or cancel this Agreement and issue a new agreement representing the unexercised portion of the Option.

     If the shares to be purchased are covered by an effective registration statement under the Securities Act of 1933, as amended (the “Act”), the Option may be exercised by a broker-dealer acting on behalf of the Participant if (a) the broker-dealer has received from the Participant or the Corporation a fully- and duly-endorsed agreement evidencing such option, together with instructions signed by the Participant requesting the Corporation to deliver the shares of Common Stock subject to such option to the broker-dealer on behalf of the Participant and specifying the account into which such shares should be deposited, (b) adequate provision has been made with respect to the payment of any withholding taxes due upon such exercise, and (c) the broker-dealer and the Participant have otherwise complied with Section 220.3(e) (4) of Regulation T, 12 CFR Part 220, or any successor provision.

     4. Who May Exercise. The Option shall be exercisable during the lifetime of the Participant only by the Participant. To the extent exercisable after the Participant’s death, the Option shall be exercised only by the Participant’s representatives, executors, successors or beneficiaries.

     5. Expiration of Option. The Option shall expire, and shall not be exercisable with respect to any vested portion as to which the Option has not been exercised, on the first to occur of: (a) the tenth anniversary of the Award Date; or (b) 90 days after any termination of the Participant’s employment with the Corporation for any reason other than death or 360 days after any such death. The Option shall expire, and shall not be exercisable, with respect to any unvested portion, immediately upon the termination of the Participant’s employment with the Corporation for any reason, including death.

     6. Tax Withholding. Any provision of this Agreement to the contrary notwithstanding, the Corporation may take such steps as it deems necessary or desirable for the withholding of any taxes that it is required by law or regulation of any governmental authority, federal, state or local, domestic or foreign, to withhold in connection with any of the shares of Common Stock subject hereto.

     7. Dilution. The number of shares of Common Stock subject to the Option and the exercise price therefor set forth in Section 1 shall be subject to adjustment for any Dilutive Event. A “Dilutive Event” shall include any of the following events that results in dilution to the shares of Common Stock acquired or acquirable upon exercise of the Option: any increase or decrease in the shares of Common Stock or any other capital stock of the Corporation or any change or exchange of any such securities

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for a different number or kind of securities, any of which results from one or more stock splits, reverse stock splits, stock dividends, recapitalizations, reorganizations or other corporate actions with a similar effect. A “Dilutive Event” shall not include, however, among other things: (i) the issuance or exercise of options granted pursuant to the Plan or pursuant to any other stock-based compensation plan adopted by the Corporation’s Board of Directors; or (ii) any issuance of capital stock by the Corporation for Fair Market Value or any issuance or grant to any person or entity of any right to subscribe for or to purchase any capital stock or securities convertible into any capital stock of the Corporation for Fair Market Value.

     8. Transfer of Option. The Participant shall not, directly or indirectly, sell, transfer, pledge, encumber or hypothecate (“Transfer”) any unvested portion of the Option or the rights and privileges pertaining thereto. In addition, the Participant shall not, directly or indirectly, Transfer any vested portion of the Option other than by will or the laws of descent and distribution. Any permitted transferee to whom the Participant shall Transfer the Option shall agree to be bound by this Agreement. Neither the Option nor the underlying shares of Common Stock is liable for or subject to, in whole or in part, the debts, contracts, liabilities or torts of the Participant, nor shall they be subject to garnishment, attachment, execution, levy or other legal or equitable process.

     9. Certain Legal Restrictions. The Corporation shall not be obligated to sell or issue any shares of Common Stock upon the exercise of the Option or otherwise unless the issuance and delivery of such shares shall comply with all relevant provisions of law and other legal requirements including, without limitation, any applicable federal or state securities laws and the requirements of any stock exchange upon which shares of the Common Stock may then be listed. As a condition to the exercise of the Option or the sale by the Corporation of any additional shares of Common Stock to the Participant, the Corporation may require the Participant to make such representations and warranties as may be necessary to assure the availability of an exemption from the registration requirements of applicable federal or state securities laws. The Corporation shall not be liable for refusing to sell or issue any shares if the Corporation cannot obtain authority from the appropriate regulatory bodies deemed by the Corporation to be necessary to lawfully sell or issue such shares. In addition, the Corporation shall have no obligation to the Participant, express or implied, to list, register or otherwise qualify any of the Participant’s shares of Common Stock. The shares of Common Stock issued upon the exercise of the Option may not be transferred except in accordance with applicable federal or state securities laws. At the Corporation’s option, the certificate evidencing shares of Common Stock issued to the Participant may be legended as follows:

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE APPLICABLE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION AND MAY NOT BE SOLD, ASSIGNED, TRANSFERRED OR PLEDGED EXCEPT IN COMPLIANCE WITH THE REQUIREMENTS OF SUCH ACT AND THE APPLICABLE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION.

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     Any Common Stock issued pursuant to the exercise of Options granted pursuant to this Agreement to a person who would be deemed an officer or director of the Corporation under Rule 16b-3 shall not be transferred until at least six months have elapsed from the date of grant of such Option to the date of disposition of the Common Stock underlying such Option.

     10. Plan Incorporated. The Participant accepts the Option subject to all the provisions of the Plan, which are incorporated into this Agreement, including the provisions that authorize the Committee to administer and interpret the Plan and which provide that the Committee’s decisions, determinations and interpretations with respect to the Plan are final and conclusive on all persons affected thereby. Except as otherwise set forth in this Agreement, terms defined in the Plan have the same meanings herein.

     11. Miscellaneous.

     (a) The Option is intended to be a non-qualified stock option under applicable tax laws, and it is not to be characterized or treated as an incentive stock option under such laws.

     (b) The granting of the Option shall impose no obligation upon the Participant to exercise the Option or any part thereof. Nothing contained in this Agreement shall affect the right of the Corporation to terminate the Participant at any time, with or without cause, or shall be deemed to create any rights to employment on the part of the Participant.

     (c) The rights and obligations arising under this Agreement are not intended to and do not affect the employment relationship that otherwise exists between the Corporation and the Participant, whether such employment relationship is at will or defined by an employment contract. Moreover, this Agreement is not intended to and does not amend any existing employment contract between the Corporation and the Participant; to the extent there is a conflict between this Agreement and such an employment contract, the employment contract shall govern and take priority.

     (d) Neither the Participant nor any person claiming under or through the Participant shall be or shall have any of the rights or privileges of a stockholder of the Corporation in respect of any of the shares issuable upon the exercise of the Option herein unless and until certificates representing such shares shall have been issued and delivered to the Participant or such Participant’s agent.

     (e) Any notice to be given to the Corporation under the terms of this Agreement or any delivery of the Option to the Corporation shall be addressed to the Corporation at its principal executive offices, and any notice to be given to the Participant shall be addressed to the Participant at the address set forth beneath his or her signature hereto, or at such other address for a party as such party may hereafter designate in writing to the other. Any such notice shall be deemed to have been duly given if mailed, postage prepaid, addressed as aforesaid.

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     (f) Subject to the limitations in this Agreement on the transferability by the Participant of the Option and any shares of Common Stock, this Agreement shall be binding upon and inure to the benefit of the representatives, executors, successors or beneficiaries of the parties hereto.

     (g) The interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of Texas and the United States, as applicable, without reference to the conflict of laws provisions thereof.

     (h) If any provision of this Agreement is declared or found to be illegal, unenforceable or void, in whole or in part, then the parties shall be relieved of all obligations arising under such provision, but only to the extent that it is illegal, unenforceable or void, it being the intent and agreement of the parties that this Agreement shall be deemed amended by modifying such provision to the extent necessary to make it legal and enforceable while preserving its intent or, if that is not possible, by substituting therefor another provision that is legal enforceable and achieves the same objectives.

     (i) All section titles and captions in this Agreement are for convenience only, shall not be deemed part of this Agreement, and in no way shall define, limit, extend or describe the scope or intent of any provisions of this Agreement.

     (j) The parties shall execute all documents, provide all information, and take or refrain from taking all actions as may be necessary or appropriate to achieve the purposes of this Agreement.

     (k) This Agreement constitutes the entire agreement among the parties hereto pertaining to the subject matter hereof and supersedes all prior agreements and understandings pertaining hereto.

     (l) No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition.

     (m) This Agreement may be executed in counterparts, all of which together shall constitute one agreement binding on all the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart.

     (n) At any time and from time to time the Committee may execute an instrument providing for modification, extension, or renewal of any outstanding option, provided that no such modification, extension or renewal shall (i) impair the Option in any respect without the consent of the holder of the Option or (ii) conflict with the provisions of Rule 16b-3. Except as provided in the preceding sentence, no supplement, modification or amendment of this

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Agreement or waiver of any provision of this Agreement shall be binding unless executed in writing by all parties to this Agreement. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision of this Agreement (regardless of whether similar), nor shall any such waiver constitute a continuing waiver unless otherwise expressly provided.

     (o) In addition to all other rights or remedies available at law or in equity, the Corporation shall be entitled to injunctive and other equitable relief to prevent or enjoin any violation of the provisions of this Agreement.

     (p) The Participant’s spouse joins this Agreement for the purpose of agreeing to and accepting the terms of this Agreement and to bind any community property interest he or she has or may have in the Option, any vested portion or any unvested portion of the Option, any shares of Common Stock acquired upon exercise of the Option and any other shares of Common Stock held by the Participant.

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     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

CORPORATION:

Peerless Mfg. Co.

By:

Name:

Title:

PARTICIPANT:

Name:

Address:

PARTICIPANT’S SPOUSE:

Name:

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EX-10.3

PEERLESS MFG. CO.

STOCK OPTION AGREEMENT

Exhibit 10.3

     THIS AGREEMENT (this “Agreement”), effective as of                     , is made and entered into by and between Peerless Mfg. Co., a Texas corporation (the “Corporation”), and                      (the “Participant”).

W I T N E S S E T H:

     WHEREAS, the Corporation has implemented the Peerless Mfg. Co. 2001 Stock Option and Restricted Stock Plan (the “Plan”), which was adopted by the Corporation’s Board of Directors (the “Board”) and approved by the Corporation’s shareholders, and which provides for the grant of stock to certain selected officers, directors and key employees of the Corporation or its subsidiaries with respect to shares of Common Stock, $1.00 par value, of the Corporation (the “Common Stock”);

     WHEREAS, the stock options provided for under the Plan are intended to comply with the requirements of Rule 16b-3 under the Securities Exchange Act of 1934, as amended;

     WHEREAS, the committee appointed by the Board to administer the Plan (the “Committee”) has selected the Participant to participate in the Plan and has awarded the non-qualified stock option described in this Agreement (the “Option”) to the Participant;

     WHEREAS, the parties hereto desire to evidence in writing the terms and conditions of the Option.

     NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements herein contained, and as an inducement to the Participant to continue as an employee of the Corporation or its subsidiaries and to promote the success of the business of the Corporation and its subsidiaries, the parties hereby agree as follows:

     1. Grant of Option. Effective as of the date of this Agreement (the “Award Date”), the Corporation hereby grants to the Participant, upon the terms and subject to the conditions, limitations and restrictions set forth in the Plan and in this Agreement, the Option to acquire              shares of Common Stock, at an exercise price per share of $       , which is the Fair Market Value on the Award Date. The Participant hereby accepts the Option from the Corporation.

     2. Vesting. The shares of Common Stock subject to the Option shall vest ratably in four equal annual increments commencing on the first anniversary of the Award Date. Notwithstanding the preceding sentence, the Option shall immediately vest in full as to all shares of Common Stock subject hereto upon any “Sale of the Corporation.” A “Sale of the Corporation” shall occur if the Corporation shall engage in a merger, consolidation, recapitalization, reorganization or sale, lease or transfer of all

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or substantially all of the Corporation’s assets and the Corporation or its stockholders or affiliates immediately before such transaction shall beneficially own, immediately after or as a result of such transaction, equity securities of the surviving or acquiring corporation or such corporation’s parent corporation possessing less than fifty-one percent (51%) of the voting power of the surviving or acquiring corporation or such corporation’s parent corporation, provided that a Sale of the Corporation shall not be deemed to occur upon any public offering or series of such offerings of securities of the Corporation or its affiliates that results in any such change in beneficial ownership.

     3. Exercise. In order to exercise the Option with respect to any vested portion, the Participant shall provide written notice to the Corporation at its principal executive office. At the time of exercise, the Participant shall pay to the Corporation the exercise price per share set forth in Section 1 times the number of vested shares as to which the Option is being exercised. The Participant shall make such payment in cash, check or at the Corporation’s option, by the delivery of shares of Common Stock having a Fair Market Value on the date immediately preceding the exercise date equal to the aggregate exercise price. If the Option is exercised in full, the Participant shall surrender this Agreement to the Corporation for cancellation. If the Option is exercised in part, the Participant shall surrender this Agreement to the Corporation so that the Corporation may make appropriate notation hereon or cancel this Agreement and issue a new agreement representing the unexercised portion of the Option.

     If the shares to be purchased are covered by an effective registration statement under the Securities Act of 1933, as amended (the “Act”), the Option may be exercised by a broker-dealer acting on behalf of the Participant if (a) the broker-dealer has received from the Participant or the Corporation a fully- and duly-endorsed agreement evidencing such option, together with instructions signed by the Participant requesting the Corporation to deliver the shares of Common Stock subject to such option to the broker-dealer on behalf of the Participant and specifying the account into which such shares should be deposited, (b) adequate provision has been made with respect to the payment of any withholding taxes due upon such exercise, and (c) the broker-dealer and the Participant have otherwise complied with Section 220.3(e) (4) of Regulation T, 12 CFR Part 220, or any successor provision.

     4. Who May Exercise. The Option shall be exercisable during the lifetime of the Participant only by the Participant. To the extent exercisable after the Participant’s death, the Option shall be exercised only by the Participant’s representatives, executors, successors or beneficiaries.

     5. Expiration of Option. The Option shall expire, and shall not be exercisable with respect to any vested portion as to which the Option has not been exercised, on the first to occur of: (a) the tenth anniversary of the Award Date; or (b) 90 days after any termination of the Participant’s employment with the Corporation for any reason other than death or 360 days after any such death. The Option shall expire, and shall not be exercisable, with respect to any unvested portion, immediately upon the termination of the Participant’s employment with the Corporation for any reason, including death.

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     6. Tax Withholding. Any provision of this Agreement to the contrary notwithstanding, the Corporation may take such steps as it deems necessary or desirable for the withholding of any taxes that it is required by law or regulation of any governmental authority, federal, state or local, domestic or foreign, to withhold in connection with any of the shares of Common Stock subject hereto.

     7. Dilution. The number of shares of Common Stock subject to the Option and the exercise price therefor set forth in Section 1 shall be subject to adjustment for any Dilutive Event. A “Dilutive Event” shall include any of the following events that results in dilution to the shares of Common Stock acquired or acquirable upon exercise of the Option: any increase or decrease in the shares of Common Stock or any other capital stock of the Corporation or any change or exchange of any such securities for a different number or kind of securities, any of which results from one or more stock splits, reverse stock splits, stock dividends, recapitalizations, reorganizations or other corporate actions with a similar effect. A “Dilutive Event” shall not include, however, among other things: (i) the issuance or exercise of options granted pursuant to the Plan or pursuant to any other stock-based compensation plan adopted by the Corporation’s Board of Directors; or (ii) any issuance of capital stock by the Corporation for Fair Market Value or any issuance or grant to any person or entity of any right to subscribe for or to purchase any capital stock or securities convertible into any capital stock of the Corporation for Fair Market Value.

     8. Transfer of Option. The Participant shall not, directly or indirectly, sell, transfer, pledge, encumber or hypothecate (“Transfer”) any unvested portion of the Option or the rights and privileges pertaining thereto. In addition, the Participant shall not, directly or indirectly, Transfer any vested portion of the Option other than by will or the laws of descent and distribution. Any permitted transferee to whom the Participant shall Transfer the Option shall agree to be bound by this Agreement. Neither the Option nor the underlying shares of Common Stock is liable for or subject to, in whole or in part, the debts, contracts, liabilities or torts of the Participant, nor shall they be subject to garnishment, attachment, execution, levy or other legal or equitable process.

     9. Certain Legal Restrictions. The Corporation shall not be obligated to sell or issue any shares of Common Stock upon the exercise of the Option or otherwise unless the issuance and delivery of such shares shall comply with all relevant provisions of law and other legal requirements including, without limitation, any applicable federal or state securities laws and the requirements of any stock exchange upon which shares of the Common Stock may then be listed. As a condition to the exercise of the Option or the sale by the Corporation of any additional shares of Common Stock to the Participant, the Corporation may require the Participant to make such representations and warranties as may be necessary to assure the availability of an exemption from the registration requirements of applicable federal or state securities laws. The Corporation shall not be liable for refusing to sell or issue any shares if the Corporation cannot obtain authority from the appropriate regulatory bodies deemed by the Corporation to be necessary to lawfully sell or issue such shares. In addition, the Corporation shall have no obligation to the Participant, express or implied, to list, register or otherwise qualify any of the Participant’s shares of Common Stock. The shares of Common Stock issued upon the exercise of the Option may not be transferred except in accordance with applicable federal or state

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securities laws. At the Corporation’s option, the certificate evidencing shares of Common Stock issued to the Participant may be legended as follows:

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE APPLICABLE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION AND MAY NOT BE SOLD, ASSIGNED, TRANSFERRED OR PLEDGED EXCEPT IN COMPLIANCE WITH THE REQUIREMENTS OF SUCH ACT AND THE APPLICABLE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION.

     Any Common Stock issued pursuant to the exercise of Options granted pursuant to this Agreement to a person who would be deemed an officer or director of the Corporation under Rule 16b-3 shall not be transferred until at least six months have elapsed from the date of grant of such Option to the date of disposition of the Common Stock underlying such Option.

     10. Plan Incorporated. The Participant accepts the Option subject to all the provisions of the Plan, which are incorporated into this Agreement, including the provisions that authorize the Committee to administer and interpret the Plan and which provide that the Committee’s decisions, determinations and interpretations with respect to the Plan are final and conclusive on all persons affected thereby. Except as otherwise set forth in this Agreement, terms defined in the Plan have the same meanings herein.

     11. Miscellaneous.

     (a) The Option is intended to be a non-qualified stock option under applicable tax laws, and it is not to be characterized or treated as an incentive stock option under such laws.

     (b) The granting of the Option shall impose no obligation upon the Participant to exercise the Option or any part thereof. Nothing contained in this Agreement shall affect the right of the Corporation to terminate the Participant at any time, with or without cause, or shall be deemed to create any rights to employment on the part of the Participant.

     (c) The rights and obligations arising under this Agreement are not intended to and do not affect the employment relationship that otherwise exists between the Corporation and the Participant, whether such employment relationship is at will or defined by an employment contract. Moreover, this Agreement is not intended to and does not amend any existing employment contract between the Corporation and the Participant; to the extent there is a conflict between this Agreement and such an employment contract, the employment contract shall govern and take priority.

     (d) Neither the Participant nor any person claiming under or through the Participant shall

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be or shall have any of the rights or privileges of a stockholder of the Corporation in respect of any of the shares issuable upon the exercise of the Option herein unless and until certificates representing such shares shall have been issued and delivered to the Participant or such Participant’s agent.

     (e) Any notice to be given to the Corporation under the terms of this Agreement or any delivery of the Option to the Corporation shall be addressed to the Corporation at its principal executive offices, and any notice to be given to the Participant shall be addressed to the Participant at the address set forth beneath his or her signature hereto, or at such other address for a party as such party may hereafter designate in writing to the other. Any such notice shall be deemed to have been duly given if mailed, postage prepaid, addressed as aforesaid.

     (f) Subject to the limitations in this Agreement on the transferability by the Participant of the Option and any shares of Common Stock, this Agreement shall be binding upon and inure to the benefit of the representatives, executors, successors or beneficiaries of the parties hereto.

     (g) The interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of Texas and the United States, as applicable, without reference to the conflict of laws provisions thereof.

     (h) If any provision of this Agreement is declared or found to be illegal, unenforceable or void, in whole or in part, then the parties shall be relieved of all obligations arising under such provision, but only to the extent that it is illegal, unenforceable or void, it being the intent and agreement of the parties that this Agreement shall be deemed amended by modifying such provision to the extent necessary to make it legal and enforceable while preserving its intent or, if that is not possible, by substituting therefor another provision that is legal enforceable and achieves the same objectives.

     (i) All section titles and captions in this Agreement are for convenience only, shall not be deemed part of this Agreement, and in no way shall define, limit, extend or describe the scope or intent of any provisions of this Agreement.

     (j) The parties shall execute all documents, provide all information, and take or refrain from taking all actions as may be necessary or appropriate to achieve the purposes of this Agreement.

     (k) This Agreement constitutes the entire agreement among the parties hereto pertaining to the subject matter hereof and supersedes all prior agreements and understandings pertaining hereto.

     (l) No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition.

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     (m) This Agreement may be executed in counterparts, all of which together shall constitute one agreement binding on all the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart.

     (n) At any time and from time to time the Committee may execute an instrument providing for modification, extension, or renewal of any outstanding option, provided that no such modification, extension or renewal shall (i) impair the Option in any respect without the consent of the holder of the Option or (ii) conflict with the provisions of Rule 16b-3. Except as provided in the preceding sentence, no supplement, modification or amendment of this Agreement or waiver of any provision of this Agreement shall be binding unless executed in writing by all parties to this Agreement. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provision of this Agreement (regardless of whether similar), nor shall any such waiver constitute a continuing waiver unless otherwise expressly provided.

     (o) In addition to all other rights or remedies available at law or in equity, the Corporation shall be entitled to injunctive and other equitable relief to prevent or enjoin any violation of the provisions of this Agreement.

     (p) The Participant’s spouse joins this Agreement for the purpose of agreeing to and accepting the terms of this Agreement and to bind any community property interest he or she has or may have in the Option, any vested portion or any unvested portion of the Option, any shares of Common Stock acquired upon exercise of the Option and any other shares of Common Stock held by the Participant.

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     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

CORPORATION:

Peerless Mfg. Co.

By:

Name:

Title:

PARTICIPANT:

Name:

Address:

PARTICIPANT’S SPOUSE

Name:

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EX-10.4

KEY EMPLOYEE BONUS PLAN

Exhibit 10.4

The Key Employee Bonus Plan establishes a total bonus pool based on a portion of the before tax profit that is in excess of the before tax profit required at the applicable U.S. corporate tax rate to produce an 8% after tax return on the beginning fiscal year consolidated net equity.

The excess profit is defined as bonusable profit. The portion of this profit to be shared by designated Key Employees is computed as follows:

10% of first $800,000 of bonusable profit

+ 15% of $800,000 — $1,500,000 of bonusable profit

+ 20% of over $1,500,000 of bonusable profit

= Total Bonus

The bonus pool as calculated above is distributed to designated participants at percentages as recommended by the Compensation Committee and approved by the Board of Directors. The total of participant percentages is not required to equal 100%.

A list of plan participants and their respective percent share will be determined annually by the Compensation Committee and the Chief Executive Officer will implement and administer.

The bonus is computed based on audited year-end results.

Profits realized from the sale of property or other assets are excluded from this bonus plan.

The maximum allowable bonus to a participant is 90% of the participant’s annual salary.

Unless provided for in separate employee agreements, bonuses will not be pro-rated should the employee leave the Company prior to June 30 of each bonus year.

It is expected that the Plan will be continued indefinitely. However, the Company reserves the right to alter, amend, modify, suspend, or terminate the Plan and contributions thereunder. Such rights may be exercised by action of the Board of Directors at any time. Payment of bonuses under this plan are at the discretion of the Board of Directors.

This Key Employee Incentive Bonus Plan is renewable by yearly affirmative action of the Board of Directors.

By: /s/ Sherrill Stone

Sherrill Stone

Chief Executive Officer

January 4, 2005