UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2007

OR

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period from                      to                     

Commission File Number 0-33453

PEERLESS MFG. CO.

(Exact Name of Registrant as Specified in Its Charter)

Texas	75-0724417
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
14651 North Dallas Parkway, Suite 500, Dallas, Texas	75254
(Address of Principal Executive Offices)	(Zip code)

(214) 357-6181

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o      Accelerated Filer þ      Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of November 6, 2007, there were 6,469,938 shares of the Registrant’s common stock outstanding.

TABLE OF CONTENTS

	Page
	Number
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2007 (unaudited) and June 30, 2007		4
Unaudited Condensed Consolidated Statements of Operations for the three months ended September 30, 2007 and 2006		5
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2007 and 2006		6
Unaudited Condensed Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the three months ended September 30, 2007 and 2006		7
Notes to the Condensed Consolidated Financial Statements		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3. Quantitative and Qualitative Disclosures About Market Risk		28
Item 4. Controls and Procedures		28
PART II: OTHER INFORMATION
Item 1. Legal Proceedings		29
Item 1A. Risk Factors		29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		29
Item 3. Defaults Upon Senior Securities		29
Item 4. Submission of Matters to a Vote of Security Holders		29
Item 5. Other Information		29
Item 6. Exhibits		29
SIGNATURES		30
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
Section 1350 Certification of Chief Executive Officer
Section 1350 Certification of Chief Financial Officer

Page 2

FORWARD-LOOKING STATEMENTS

     This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934. You should not place undue reliance on these statements. These forward-looking statements include statements that reflect the current views of our senior management with respect to our financial performance and future events with respect to our business and our industry in general. Statements that include the words “expect,” “intend,” “plan,” “believe,” “project,” “forecast,” “estimate,” “may,” “should,” “anticipate” and similar statements of a future or forward-looking nature identify forward-looking statements. Forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to, the following:

• changes in the power generation industry and/or the economy;

• changes in the price, supply or demand for natural gas;

• changes in current environmental legislation;

• increased competition;

• changes in our ability to conduct business outside the United States, including changes in foreign laws and regulations;

• decreased demand for our products;

• the effects of U.S. involvement in hostilities with other countries and large-scale acts of terrorism, or the threat of hostilities or terrorist acts;

• the effects of natural disasters; and

• loss of the services of any of our senior management or other key employees.

     The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this and other reports we file with the Securities and Exchange Commission, including the information in Item 1A. “Risk Factors” of Part I to our Annual Report on Form 10-K for the year ended June 30, 2007. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate.

Page 3

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PEERLESS MFG. CO. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	September 30		June 30,
	2007		2007
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	23,958	$	17,015
Restricted cash		2,865		2,811
Accounts receivable-principally trade — net of allowance for doubtful accounts of $465 at September 30, 2007 and $465 at June 30, 2007		19,952		21,329
Inventories		6,300		3,919
Costs and earnings in excess of billings on uncompleted contracts		16,871		15,976
Deferred income taxes		1,410		1,410
Other current assets		1,950		1,646
Total current assets		73,306		64,106
Property, plant and equipment — net		3,767		3,747
Other assets		624		818
Total assets	$	77,697	$	68,671
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	18,308	$	17,217
Billings in excess of costs and earnings on uncompleted contracts		12,246		6,970
Commissions payable		1,500		1,401
Income taxes payable		1,406		1,576
Product warranties		947		641
Accrued liabilities and other		4,518		5,679
Total current liabilities		38,925		33,484
Deferred income taxes		1,005		1,010
Other non current liabilities		930		640
Commitments and contingencies
Shareholders’ equity:
Common stock — authorized, 10,000,000 shares of $1 par value; issued and outstanding, 6,469,938 and 6,439,644 shares at September 30, 2007 and June 30, 2007, respectively		6,470		6,440
Additional paid-in capital		1,415		1,359
Accumulated other comprehensive income		468		431
Retained earnings		28,484		25,307
Total shareholders’ equity		36,837		33,537
Total liabilities and shareholders’ equity	$	77,697	$	68,671

See accompanying notes to condensed consolidated financial statements.

Page 4

PEERLESS MFG. CO. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three months ended September 30,
	2007			2006
Revenues	$	30,018		$	14,638
Cost of goods sold		19,633			10,243
Gross profit		10,385			4,395
Operating expenses
Sales and marketing		2,477			1,722
Engineering and project management		1,072			833
General and administrative		2,052			1,188
		5,601			3,743
Operating income		4,784			652
Other income (expense)
Interest income		367			62
Foreign exchange gain (loss)		69			(19	)
Other income (loss) — net		(9	)		—
		427			43
Earnings before income taxes		5,211			695
Income tax expense		(1,825	)		(244	)
Net earnings	$	3,386		$	451
Earnings per share — basic	$	0.53		$	0.07
Earnings per share — diluted	$	0.52		$	0.07

Note: September 30, 2006 earnings per share amounts adjusted for
June 2007 two-for-one stock split in the form of a dividend.

See accompanying notes to condensed consolidated financial statements.

Page 5

PEERLESS MFG. CO. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three months ended September 30,
	2007			2006
Cash flows from operating activities:
Net earnings	$	3,386		$	451
Adjustments to reconcile net earnings from operations to net cash provided by (used in) operating activities:
Depreciation and amortization		199			168
Deferred income taxes		(5	)		(9	)
Deferred rent expense		81			—
Bad debt expense		—			56
Provision for warranty expenses		316			69
Inventory valuation reserve		159			56
Foreign exchange (gain) loss		(69	)		19
Excess tax benefits from stock-based payment arrangements		—			(109	)
Stock based compensation		86			36
Changes in operating assets and liabilities of operations:
Accounts receivable		1,425			2,906
Inventories		(2,535	)		(842	)
Costs and earnings in excess of billings on uncompleted contracts		(848	)		904
Other current assets		(301	)		307
Other assets		194			(4	)
Accounts payable		1,143			(3,176	)
Billings in excess of costs and earnings on uncompleted contracts		5,276			548
Commissions payable		99			10
Income taxes payable		(170	)		237
Product warranties		(10	)		(56	)
Accrued liabilities and other		(1,145	)		(531	)
Net cash provided by operating activities of operations		7,281			1,040
Cash flow from investing activities of operations:
Increase in restricted cash		—			(2,621	)
Purchases of property and equipment		(219	)		(106	)
Net cash used in investing activities of operations		(219	)		(2,727	)
Cash flows from financing activities of operations:
Proceeds from exercise of stock options		—			446
Excess tax benefits from stock-based payment arrangements		—			109
Net cash provided by financing activities of operations		—			555
Effect of exchange rate changes on cash and cash equivalents		(119	)		18
Net increase (decrease) in cash and cash equivalents		6,943			(1,114	)
Cash and cash equivalents at beginning of period		17,015			6,411
Cash and cash equivalents at end of period	$	23,958		$	5,297

See accompanying notes to condensed consolidated financial statements.

Page 6

PEERLESS MFG. CO. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

	Three months ended September 30,
	2007			2006
Common stock
Balance at beginning of period	$	6,440		$	6,268
Common stock issued		30			64
Balance at end of period		6,470			6,332
Additional paid-in capital
Balance at beginning of period		1,359			9
Common stock issued with restrictions		(30	)		—
Stock option exercised		—			382
Income tax benefit related to stock options exercised		—			109
Stock-based compensation expense		86			36
Balance at end of period		1,415			536
Accumulated other comprehensive income
Balance at beginning of period		431			245
Foreign currency translation adjustment		37			30
Balance at end of period		468			275
Retained earnings
Balance at beginning of period		25,307			19,395
Cumulative effect of a change in accounting principle (adoption of FIN 48)		(209	)		—
Net earnings		3,386			451
Balance at end of period		28,484			19,846
Total shareholders’ equity	$	36,837		$	26,989

Note: September 30, 2006 common stock and additional paid-in capital amounts adjusted for
June 2007 two-for-one stock split in the form of a dividend.

See accompanying notes to condensed consolidated financial statements.

Page 7

PEERLESS MFG. CO. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

(Amounts in thousands, except share and per share amounts)

1. Basis of Presentation

The accompanying condensed consolidated financial statements of Peerless Mfg. Co. and subsidiaries (hereafter referred to as the “Company,” “we,” “us” and “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. The condensed consolidated financial statements of the Company as of September 30, 2007, and for the three months ended September 30, 2007 and September 30, 2006 are unaudited and, in the opinion of management, contain all adjustments necessary for the fair presentation of the financial position and results of operations of the Company for the interim periods. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2007. The results of operations for the three months ended September 30, 2007 are not necessarily indicative of the results to be expected for the entire fiscal year. The Company’s fiscal year ends on June 30. References herein to fiscal 2007 and fiscal 2008 refer to our fiscal years ended June 30, 2007 and 2008, respectively.

Certain prior year amounts have been adjusted to conform to the current year presentation, specifically the share and per share information reflected in this report have been adjusted to reflect the Registrant’s two-for-one stock split in the form of a stock dividend in June 2007.

2. New Accounting Standards

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN No. 48”). FIN No. 48 clarifies the accounting for uncertainty in tax positions. The interpretation prescribes a recognition threshold and measurement attribute to the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 was effective for the Company beginning July 1, 2007. Upon adoption, the Company recognized a $209 charge to beginning retained earnings as a cumulative effect of a change in accounting principle. See Note 8 – Income Taxes.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 would allow the Company an irrevocable election to measure certain financial assets and liabilities at fair value, with unrealized gains and losses on the elected items recognized in earnings at each reporting period. The fair value option may only be elected at the time of initial recognition of a financial asset or financial liability or upon the occurrence of certain specified events. The election is applied on an instrument by instrument basis, with a few exceptions, and is applied only to entire instruments and not to portions of instruments. SFAS No. 159 also provides expanded disclosure requirements regarding the effects of electing the fair value option on the financial statements. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating SFAS No. 159 and has not yet determined the financial assets and liabilities, if any, for which the fair value option may be elected or the potential impact on the consolidated financial statements, if such election were made.

Page 8

PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(Amounts in thousands, except share and per share amounts)

3. Accounts Receivable

The Company’s accounts receivable are due from companies in various industries. Credit is extended based on an evaluation of the customer’s financial condition. Generally, collateral is not required except on credit extended to international customers. Accounts receivable are generally due within 30 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than contractual payment terms are considered past due. The Company records an allowance on a specific basis by considering a number of factors, including the length of time the accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the industry and the economy as a whole. The Company writes off accounts receivable when they become uncollectible. Payments subsequently received on such receivables are credited back to bad debt expense in the period the payment is received.

Changes in the Company’s allowance for doubtful accounts are as follows:

	Three months ended September 30,
	2007		2006
Balance at beginning of period	$	465	$	462
Bad debt expense		—		56
Accounts written off, net		—		—
Balance at end of period	$	465	$	518

4. Inventories

Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method, including material, labor and factory overhead. The Company regularly reviews the value of inventory on hand, using specific aging categories, and records a provision for obsolete and slow-moving inventory based on historical usage and estimated future usage. In assessing the ultimate realization of its inventory, the Company is required to make judgments as to future demand requirements. As actual future demand or market conditions may vary from those projected by the Company, adjustments to inventory valuations may be required.

Principal components of inventories are as follows:

	September 30,			June 30,
	2007			2007
Material and component parts	$	5,819		$	3,652
Work in progress		920			613
Finished goods		252			186
		6,991			4,451
Reserve for obsolete and slow-moving inventory		(691	)		(532	)
	$	6,300		$	3,919

Page 9

PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(Amounts in thousands, except share and per share amounts)

4. Inventories — Continued

Changes in the Company’s reserve for obsolete and slow-moving inventory are as follows:

	Three months ended September 30,
	2007		2006
Balance at beginning of period	$	532	$	434
Additions		159		56
Amounts written off		—		—
Balance at end of period	$	691	$	490

5. Revenue Recognition and Cost and Earnings on Uncompleted Contracts

The Company provides products under long-term, generally fixed-priced, contracts that may extend up to 18 months or longer in duration. In connection with these contracts, the Company follows the guidance contained in AICPA Statement of Position (“SOP”) 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (“SOP 81-1”). SOP 81-1 requires the use of percentage-of-completion accounting for long-term contracts that contain enforceable rights regarding services to be provided and received by the contracting parties, consideration to be exchanged, and the manner and terms of settlement, assuming reasonably dependable estimates of revenues and expenses can be made. The percentage-of-completion methodology generally results in the recognition of reasonably consistent profit margins over the life of a contract. Amounts recognized in revenue are calculated using the percentage of construction cost completed, generally on a cumulative cost to total cost basis. Cumulative revenues recognized may be less or greater than cumulative costs and profits billed at any point in time during a contract’s term. The resulting difference is recognized as “costs and earnings in excess of billings on uncompleted contracts” or “billings in excess of costs and earnings on uncompleted contracts.”

The completed contract method is applied to relatively short-term contracts where the financial statement presentation does not vary materially from the presentation under the percentage-of-completion method. Revenues under the completed contract method are recognized upon shipment of the product.

The components of uncompleted contracts are as follows:

	September 30,			June 30,
	2007			2007
Costs incurred on uncompleted contracts and estimated earnings	$	87,467		$	70,527
Less billings to date		(82,842	)		(61,521	)
	$	4,625		$	9,006

Page 10

PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(Amounts in thousands, except share and per share amounts)

5. Revenue Recognition and Cost and Earnings on Uncompleted Contracts — Continued

The components of uncompleted contracts are reflected in the balance sheets as follows:

	September 30,			June 30,
	2007			2007
Costs and earnings in excess of billings on uncompleted contracts	$	16,871		$	15,976
Billings in excess of costs and earnings on uncompleted contracts		(12,246	)		(6,970	)
	$	4,625		$	9,006

6. Product Warranties

The Company warrants that its products will be free from defects in materials and workmanship and will conform to agreed upon specifications at the time of delivery and typically for a period of 12 to 18 months from the date of shipment, depending upon the specific product and terms of the customer agreement. Typical warranties require the Company to repair or replace defective products during the warranty period at no cost to the customer. The Company attempts to obtain concurrent warranties for major component parts produced by third-party suppliers.

The Company provides for the estimated cost of product warranties, based on historical experience by product type, expectation of future conditions and the extent of concurrent supplier warranties in place, at the time the product revenue is recognized. Revisions to the estimated product warranties are made when necessary based on changes in these factors. Product warranty activity is as follows:

	Three months ended September 30,
	2007			2006
Balance at beginning of period	$	641		$	626
Provision for warranty expenses		316			69
Warranty charges		(10	)		(56	)
Balance at end of period	$	947		$	639

Page 11

PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(Amounts in thousands, except share and per share amounts)

7. Accrued Liabilities and Other

The components of accrued liabilities and other are as follows:

	September 30,		June 30,
	2007		2007
Accrued start-up expense	$	2,519	$	2,095
Accrued compensation		881		1,755
Accrued professional, legal and other expenses		427		1,555
Sales and use taxes payable		28		24
Other		663		250
	$	4,518	$	5,679

8. Income Taxes

The Company adopted the provisions of FIN No. 48 on July 1, 2007. As a result of the implementation of FIN No. 48, the Company recognized an adjustment in the liability for unrecognized tax benefits of $209, which is reported as a cumulative effect of a change in accounting principle and is reported as an adjustment to the beginning balance of retained earnings. The Company records interest and penalties related to income taxes as income tax expense in the Consolidated Statements of Operations. As of July 1, 2007 and September 30, 2007, we had approximately $52 of accrued interest and penalties related to uncertain tax positions. The Company’s income tax years 2004 through 2007 remain open to examination by state and federal tax jurisdictions.

9. Stock Based Compensation

The Company has two stock option and restricted stock plans. In December 1995, the Company adopted a stock option and restricted stock plan (the “1995 Plan”), which provided for a maximum of 480,000 shares of common stock to be issued. In January 2002, the Company adopted a stock option and restricted stock plan (the “2001 Plan”), which provided for a maximum of 500,000 shares of common stock to be issued.

Under both plans, stock options generally vest ratably over four years, and expire ten years from date of grant. Under both plans, stock options are granted to employees at exercise prices equal to the fair market value of the Company’s stock at the date of grant. Stock options granted to non-employee directors are generally exercisable on the date of grant, which is the date of the annual shareholders’ meeting. The Company recognizes stock option compensation expense over the requisite service period of the individual grants, which generally equals the vesting period.

Under both plans, restricted stock awards entitle the holder to shares of common stock when the award vests. Awards generally vest ratably over four years. The fair value of the restricted stock awards is based upon the market price of the underlying common stock as of the date of the grant and is

Page 12

PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(Amounts in thousands, except share and per share amounts)

9. Stock Based Compensation — Continued

amortized over their applicable vesting period using the straight-line method. The Company uses newly issued shares of common stock to satisfy option exercises and restricted stock awards.

As a result of the adoption of SFAS 123R, the financial results were lower than under the previous accounting method for compensation by less than $0.01 per share as shown below:

	Three months ended September 30,
	2007		2006
Earnings before income taxes	$	14	$	26
Net earnings		9		17
Basic and diluted net earnings per common share	$	0.00	$	0.00

For the Company’s stock-based compensation plans, the fair value of each stock option grant is estimated at the date of grant using the Black-Scholes option pricing model. Black-Scholes utilizes assumptions related to volatility, the risk-free interest rate, the dividend yield (which is assumed to be zero, as the Company has not paid, nor anticipates paying any cash dividends) and employee exercise behavior. Expected volatilities utilized in the model are based mainly on the historical volatility of the Company’s stock price and other factors.

The Company did not grant any stock options during the three months ended September 30, 2007 or during the three months ended September 30, 2006.

A summary of the option activity under the plans for the three months ended September 30, 2007 and 2006 is as follows:

	Summary of Stock Option Activity
	2007					2006
				Weighted					Weighted
				Average					Average
				Exercise					Exercise
	No. of Options			Price		No. of Options			Price
Balance at June 30		147,874		$	7.68		143,650		$	7.01
Granted		—			—		—			—
Exercised		—			—		(32,400	)		6.89
Forfeited before vesting		(8,000	)		7.75		—			—
Forfeited after vesting		—			—		—			—
Balance at September 30		139,874			7.67		111,250			7.05
Exercisable at September 30		88,574			7.49		65,964			6.54

The total options outstanding at September 30, 2007 had a weighted average remaining term of 6.11 years and an aggregate intrinsic value of $2,318 based upon the closing price of the Company’s common stock on September 30, 2007. The options exercisable at September 30, 2007 had a weighted average remaining term of 5.83 years and an aggregate intrinsic value of $1,483 based upon the closing price of the Company’s common stock on September 30, 2007.

Page 13

PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(Amounts in thousands, except share and per share amounts)

9. Stock Based Compensation — Continued

A summary of the status of the Company’s unvested stock options at September 30, 2007 and 2006, and changes during the three months ended September 30, 2007 and 2006 is presented below:

	Summary of Unvested Stock Options
	2007					2006
				Weighted				Weighted
				Average				Average
				Grant Date				Grant Date
	No. of Options			Fair Value		No. of Options		Fair Value
Unvested at June 30		59,300		$	3.41		45,286	$	3.38
New Grants		—			—		—		—
Vested		—			—		—		—
Forfeited		(8,000	)		—		—		—
Unvested at September 30		51,300			3.43		45,286		3.38

The Company had no stock options that became vested during the three months ended September 30, 2007 and 2006.

As of September 30, 2007, the total remaining unrecognized compensation expense related to unvested stock options was $109. The weighted average remaining requisite service period of the unvested stock options was 0.91 years.

A summary of the restricted stock award activity under the plans for the three months ended September 30, 2007 and 2006 is as follows:

	Summary of Restricted Stock Awards
	2007					2006
				Weighted				Weighted
				Average				Average
				Grant Date				Grant Date
	No. of Shares			Fair Value		No. of Shares		Fair Value
Balance at June 30		37,600		$	12.17		10,000	$	17.06
Granted		31,094			21.71		—		—
Vested		—			—		—		—
Forfeited		(800	)		12.49		—		—
Balance at September 30		67,894			16.53		10,000		17.06

As of September 30, 2007, the total remaining unrecognized compensation expense related to unvested restricted stock awards was $992. The weighted average remaining requisite service period of the unvested restricted stock awards was 1.88 years.

Page 14

PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(Amounts in thousands, except share and per share amounts)

10. Earnings Per Share

Basic earnings per share have been computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if options were exercised into common stock. The following table sets forth the computation for basic and diluted earnings per share for the periods indicated (the number of shares and earnings per share have been adjusted for our two-for-one stock split in June 2007):

	Three months ended September 30,
	2007		2006
Net earnings	$	3,386	$	451
Basic weighted average common shares outstanding		6,402,044		6,256,531
Effect of dilutive options and restricted stock awards		63,800		124,521
Diluted weighted average common shares outstanding		6,465,844		6,381,052
Earnings per share — basic	$	0.53	$	0.07
Earnings per share — diluted	$	0.52	$	0.07

No stock options were excluded in the calculation of diluted weighted average common shares for the three months ended September 30, 2007 or September 30, 2006.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(Amounts in thousands, except share and per share amounts)

11. Segment Information

The Company has two reportable segments: Environmental Systems and Separation Filtration Systems. The main product of the Environmental Systems segment is the Selective Catalytic Reduction Systems, referred to as “SCR Systems.” These environmental control systems are used for air pollution abatement and converting nitrogen oxide (NOx) emissions from exhaust gases caused by burning hydrocarbon fuels, such as coal, gasoline, natural gas and oil, into nitrogen and water vapor. Along with the SCR Systems, this segment also offers systems to reduce other pollutants such as carbon monoxide (CO) and particulate matter. The Company combines these systems with other components, such as instruments, controls and related valves and piping to offer its customers a totally integrated system. The Separation Filtration Systems segment produces various types of separators and filters used primarily to remove solid and liquid contaminants from natural gas, as well as saltwater aerosols from combustion intake air of shipboard gas turbine and diesel engines. Separators are also used in nuclear power plants to remove water from saturated steam.

Segment profit and loss is based on revenue less direct expenses of the segment before allocation of general, administrative, research and development costs. All inter-company transfers between segments have been eliminated. The Company allocates all costs associated with the manufacture, sale and design of its products to the appropriate segment. Segment information and reconciliation to operating profit for the three months ended September 30, 2007 and 2006 are presented below. The Company does not allocate general and administrative expenses (“reconciling items”), assets, expenditures for assets or depreciation expense on a segment basis for internal management reporting, and therefore this information is not presented.

	Three months ended September 30,
	2007			2006
Revenues
Environmental	$	16,295		$	4,614
Separation / Filtration		13,723			10,024
Consolidated	$	30,018		$	14,638
Operating income (loss)
Environmental	$	4,649		$	932
Separation / Filtration		2,187			908
Reconciling items		(2,052	)		(1,188	)
Consolidated	$	4,784		$	652

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(Amounts in thousands, except share and per share amounts)

12. Supplemental Cash Flow Information

Net cash flows from operating activities reflect cash payments for income taxes as follows:

	Three months ended September 30,
	2007		2006
Income taxes paid	$	2,000	$	310
Income taxes refunded	$	—	$	(297	)

13. Lines of Credit

The Company renewed and amended its credit facility in September 2006. This credit facility is a $9,000 revolving line of credit for working capital requirements that expires on September 30, 2008. Under this facility the Company has a maximum borrowing availability equal to the lesser of (i) $9,000 or (ii) 70% of eligible accounts and 40% of eligible inventory. This revolving line of credit carries a floating interest rate based on the prime or Eurodollar rate plus or minus an applicable margin, and is secured by substantially all of the Company’s assets. As of September 30, 2007, the applicable rate was Eurodollar plus 2.00% (7.53%). This credit facility contains financial covenants, restrictions on capital expenditures, acquisitions, asset dispositions, and additional debt, as well as other customary covenants.

At September 30, 2007, the Company had no outstanding borrowings under the credit line, and $5,913 of outstanding stand-by letters of credit, leaving $3,087 of maximum availability under the facility and actual availability based on borrowing base calculations. As of September 30, 2007, the Company was in compliance with all financial and other covenants under this facility.

In addition, the Company’s U.K. subsidiary had a £2,600 ($5,320) debenture agreement used to facilitate the issuances of letters of credit and bank guarantees. At September 30, 2007, this facility was secured by substantially all of our U.K. subsidiary’s assets, and by a cash deposit of £1,400 ($2,865), which is recorded as restricted cash on the consolidated balance sheet. At September 30, 2007, there was £1,931 ($3,951) outstanding under stand-by letters of credit and bank guarantees under this debenture agreement. As of September 30, 2007, the Company was in compliance with all financial and other covenants under this debenture agreement.

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SEPTEMBER 30, 2007
(Amounts in thousands, except share and per share amounts)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

     We are a global company providing environmental, separation and filtration products for the abatement of air pollution and the removal of contaminants from gases and liquids through our two principal business segments – Environmental Systems and Separation Filtration Systems.

     Environmental Systems. This reporting segment represented 54.3% and 31.5% of our revenues in the first three months of fiscal 2008 and 2007, respectively. In this segment, we design, engineer, manufacture and sell environmental control systems used for air pollution abatement. Our main product, Selective Catalytic Reduction Systems, referred to as “SCR Systems,” is used to convert nitrogen oxide (NOx) emissions from exhaust gases, caused by burning hydrocarbon fuels, such as coal, gasoline, natural gas and oil, as well as organic bio-fuels such as wood products, grasses and grains, into nitrogen and water vapor. These systems are totally integrated, complete with instruments, controls and related valves and piping. In this segment, we also offer systems to reduce other pollutants, such as carbon monoxide (CO) and particulate matter (PM).

     Separation Filtration Systems. This reporting segment represented 45.7% and 68.5% of our revenues in the first three months of fiscal 2008 and 2007, respectively. In this segment, we design, engineer, manufacture and sell specialized products known as “separators” or “filters” which are used for a variety of purposes in cleaning gases and liquids as they move through piping systems. These products are used primarily to remove solid and liquid contaminants from natural gas, as well as saltwater aerosols from combustion intake air of shipboard gas turbine and diesel engines. Separators are also used in nuclear power plants to remove water from saturated steam.

Critical Accounting Policies

     The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.

     Certain of our accounting policies require a higher degree of judgment than others in their application. These include revenue recognition on long-term contracts, accrual for estimated warranty costs, allowance for doubtful accounts, and reserve for obsolete and slow moving inventory. Our policies and related procedures for these items are summarized below.

     Revenue Recognition. We provide products under long-term, generally fixed-priced, contracts that may extend up to 18 months or longer in duration. In connection with these contracts, we follow the guidance contained in AICPA Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (“SOP 81-1”). SOP 81-1 requires the use of percentage-of-completion accounting for long-term contracts that contain enforceable rights regarding services to be provided and received by the contracting parties, consideration to be exchanged, and the manner and terms of settlement, assuming reasonably dependable estimates of

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(Amounts in thousands, except share and per share amounts)

revenues and expenses can be made. The percentage-of-completion methodology generally results in the recognition of reasonably consistent profit margins over the life of a contract. Amounts recognized in revenue are calculated using the percentage of construction cost completed, generally on a cumulative cost to total cost basis. Cumulative revenues recognized may be less or greater than cumulative costs and profits billed at any point in time during a contract’s term. The resulting difference is recognized as “costs and earnings in excess of billings on uncompleted contracts” or “billings in excess of costs and earnings on uncompleted contracts.”

     When using the percentage-of-completion method, we must be able to accurately estimate the total costs we expect to incur on a project in order to record the proper amount of revenues for that period. We update our estimates of costs and the status of each project with our subcontractors and our manufacturing plant personnel. If it is determined that a loss will result from the performance of a contract, the entire amount of the loss is recognized when it is determined. The impact of revisions in contract estimates are recognized on a cumulative basis in the period in which the revisions are made. In addition, significant portions of our costs are subcontracted under fixed-priced arrangements, thereby reducing the risk of significant cost overruns on any given project. However, a number of internal and external factors, including labor rates, plant utilization factors, future material prices, changes in customer specifications, and other factors can affect our cost estimates. While we attempt to reduce the risk related to revenue and cost estimates in percentage-of-completion models through corporate policy and approval and monitoring processes, any estimation process, including that used in preparing contract accounting models, involves substantial judgment.

     Product Warranties. We offer warranty periods of various lengths to our customers depending upon the specific product and terms of the customer agreement. We typically negotiate varying terms regarding warranty coverage and length of warranty depending upon the product involved and customary practices. In general, our warranties require us to repair or replace defective products during the warranty period at no cost to the customer. We attempt to obtain back-up concurrent warranties for major component parts from our suppliers. As of each balance sheet date, we record an estimate for warranty related costs for products sold based on historical experience, expectation of future conditions and the extent of back-up concurrent supplier warranties in place. While we believe that our estimated warranty reserve is adequate and the judgment applied is appropriate, due to a number of factors, our estimated liability for product warranties could differ from actual warranty costs incurred in the future.

     Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts to reflect estimated losses resulting from the inability of customers to make required payments. On an on-going basis, we evaluate the collectability of accounts receivable based upon historical collection trends, current economic factors, and the assessment of the collectability of specific accounts. We evaluate the collectability of specific accounts using a combination of factors, including the age of the outstanding balances, evaluation of customers’ current and past financial condition and credit scores, recent payment history, current economic environment, discussions with our project managers, and discussions with the customers directly, and record a provision for doubtful accounts based on historical collections and estimated future collections. As actual collections or market conditions may vary from those projected, adjustments to our allowance for doubtful accounts may be required.

     Reserve for Obsolete and Slow-Moving Inventory. Inventories are valued at the lower of cost or market and are reduced by a reserve for excess and potentially obsolete inventories. We regularly review inventory values on hand, using specific aging categories, and record a provision for obsolete and slow-moving inventory based on historical usage and estimated future usage. As actual future demand or market conditions may vary from those projected, adjustments to our inventory reserve may be required.

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SEPTEMBER 30, 2007
(Amounts in thousands, except share and per share amounts)

     Results of Operations

     The following table summarizes our results of operations as a percentage of revenues:

	Three months ended September 30,
	2007			2006
Revenues		100.0	%		100.0	%
Cost of goods sold		65.4			70.0
Gross profit		34.6			30.0
Operating expenses		18.7			25.6
Operating Income		15.9			4.4
Other income		1.40			0.3
Earnings before income tax		17.3			4.7
Income tax expense		(6.0	)		(1.6	)
Net earnings		11.3	%		3.1	%

     Cost of goods sold includes manufacturing and distribution costs for products sold. Manufacturing and distribution costs include material, direct and indirect labor, manufacturing overhead, sub-contract work, inbound and outbound freight, purchasing, receiving, inspection, warehousing, internal transfer costs, and other costs of our manufacturing and distribution processes. Additionally, cost of goods sold includes the costs of commissioning the equipment and warranty related costs.

     Operating expenses include sales and marketing expenses, engineering and project management expenses, and general and administrative expenses.

     Sales and marketing expenses include payroll, employee benefits, stock-based compensation and other employee-related costs associated with sales and marketing personnel. Sales and marketing expenses also include travel and entertainment, advertising, promotions, trade shows, seminars, and other programs and sales commissions paid to independent sales representatives.

     Engineering and project management expenses include payroll, employee benefits, stock-based compensation and other employee-related costs associated with engineering, project management and field service personnel. Additionally, engineering and project management expenses include the cost of sub-contracted engineering services.

     General and administrative costs include payroll, employee benefits, stock-based compensation and other employee-related costs and costs associated with executive management, finance, accounting, human resources, information systems, and other administrative employees. General and administrative costs also include facility costs, insurance, audit fees, legal fees, reporting expense, professional services, and other administrative fees.

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(Amounts in thousands, except share and per share amounts)

Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006

Results of Operations — Consolidated

     Revenues

     The following table summarizes consolidated revenues:

	Three months ended September 30
	2007		% of Total			2006		% of Total
Domestic	$	21,052		70.1	%	$	7,605		52.0	%
International		8,966		29.9	%		7,033		48.0	%
Total revenues	$	30,018		100.0	%	$	14,638		100.0	%

     We classify revenue as domestic or international based upon the origination of the order. Revenue generated by orders originating from within the United States is classified as domestic revenue. Revenue generated by orders originating from a country other than the United States is classified as international revenue.

     For the first quarter of fiscal 2008, total revenues increased $15,380, or 105.1%, when compared to the first quarter of fiscal 2007. Domestic revenues increased $13,447 or 176.8%, in the first quarter of fiscal 2008 when compared to the first quarter of fiscal 2007. International revenues increased $1,933 or 27.5%, in the first quarter of fiscal 2008 when compared to the first quarter of fiscal 2007. The increase in our domestic revenues is primarily a result of the increase in our Environmental System sales related to power plant expansions. The increase in our international revenues is primarily related to an increase of gas separation and filtration equipment sales related to a gas transmission project.

     Gross Profit

     The following table summarizes revenues, cost of goods sold, and gross profit:

	Three months ended September 30,
	2007		% of Revenues			2006		% of Revenues
Revenues	$	30,018		100.0	%	$	14,638		100.0	%
Cost of goods sold		19,633		65.4	%		10,243		70.0	%
Gross profit	$	10,385		34.6	%	$	4,395		30.0	%

     For the first quarter of fiscal 2008, our gross profit increased $5,990 or 136.3% when compared to the first quarter of fiscal 2007. Our gross profit, as a percentage of revenues, increased to 34.6% for the first quarter of fiscal 2008 compared to 30.0% for the first quarter of fiscal 2007. The increase in gross margin was due mainly to a $15,380 increase in revenues. The gross profit margin was favorably impacted by increased sales of higher margin environmental products.

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(Amounts in thousands, except share and per share amounts)

     Operating Expenses

               The following table summarizes operating expenses:

	Three months ended September 30,
			% of					% of
	2007		Revenues			2006		Revenues
Sales and marketing	$	2,477		8.3	%	$	1,722		11.8	%
Engineering and project management		1,072		3.6	%		833		5.7	%
General and administrative		2,052		6.8	%		1,188		8.1	%
Total operating expenses	$	5,601		18.7	%	$	3,743		25.6	%

     For the first quarter of fiscal 2008, our operating expenses increased by $1,858, or 49.6%, when compared to the first quarter of fiscal 2007. As a percentage of revenue, these expenses decreased to 18.7% in the first quarter of fiscal 2008 from 25.6% in the first quarter of fiscal 2007, primarily as a result of the greater revenue in the current quarter. Our sales and marketing expenses were $2,477 in the first quarter of fiscal 2008 compared to $1,722 in the first quarter of fiscal 2007. Our engineering and project management expense increased to $1,072 in the first quarter of fiscal 2008 from $833 in the first quarter of fiscal 2007. Selling, marketing, engineering and project management expenses in the first quarter of fiscal 2008 increased over the first quarter of fiscal 2007 primarily due to the increased revenues and revenue related activities. Our general and administrative expenses were $2,052 in the first quarter of fiscal 2008 compared to $1,188 in the first quarter of fiscal 2007. The increase in general and administrative expenses was primarily due to increased compensation expense related to improved earnings, expense associated with a computer system upgrade, increased director compensation, and increased occupancy expenses associated with our new corporate office facility.

     Other Income and Expense

     The following table summarizes other income and expenses:

	Three months ended September 30,
	2007			% of Revenues			2006			% of Revenues
Interest income	$	367			1.2	%	$	62			0.4	%
Foreign exchange gain (loss)		69			0.2	%		(19	)		-0.1	%
Other expense, net		(9	)		0.0	%		—			0.0	%
Total other income	$	427			1.4	%	$	43			0.3	%

     For the first quarter of fiscal 2008, other income and expense items increased by $384, from income of $43 for the first quarter of fiscal 2007 to income of $427 for the first quarter of fiscal 2008. This change was primarily due to an increase in interest income related to increased cash generated by operating activities.

     Income Taxes

     Our effective income tax rate was 35%, for the first quarter of fiscal years 2008 and 2007.

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(Amounts in thousands, except share and per share amounts)

     Net Earnings

     Our net earnings increased by $2,935 from a net income of $451, or 3.1% of revenues, for the first quarter of fiscal 2007, to net earnings of $3,386, or 11.3% of revenues, for the first quarter of fiscal 2008. The increase in net earnings was primarily attributable to the increased revenues in the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007. Basic earnings per share increased from $0.07 per share for the first quarter of fiscal 2007, to $0.53 per share for the first quarter of fiscal 2008. Diluted earnings per share increased from $0.07 per share for the first quarter of fiscal 2007, to $0.52 per share for the first quarter of fiscal 2008.

Results of Operations — Segments

     We have two lines of business: Environmental Systems and Separation Filtration Systems. Revenue and operating income in this section are presented on a basis consistent with generally accepted accounting principles in the United States (“GAAP”). Certain corporate level expenses have been excluded from our segment operating results and are analyzed separately.

     Environmental Systems

     The primary product of the Environmental Systems segment is Selective Catalytic Reduction Systems, referred to as “SCR Systems.” These are integrated systems, with instruments, controls and related valves and piping. This reporting segment represented 54.3% and 31.5% of our revenues for the first quarter of fiscal 2008 and fiscal 2007, respectively.

     The following table summarizes Environmental Systems revenues and operating income:

	Three months ended September 30,
	2007			2006
Revenues	$	16,295		$	4,614
Operating income		4,649			932
Operating income as % of revenue		28.5	%		20.2	%

     Revenues from Environmental Systems increased in the first quarter of fiscal 2008 when compared to the first quarter of fiscal 2007. The increase was primarily due to increased demand for power and expanded refining capacity resulting in the construction of power generation plants and refinery equipment that require environmental control systems. We are currently experiencing an increase in proposal levels, particularly for our products in power and refinery related projects and environmental compliance projects.

     Environmental Systems operating income in the first quarter of fiscal 2008 increased $3,717 compared to the first quarter of fiscal 2007. As a percentage of Environmental Systems revenues, operating income was 28.5% in the first quarter of fiscal 2008 compared to 20.2% in the first quarter of fiscal 2007.

     We anticipate an increase in the demand for refining capacity and power generation due to increasing energy consumption. We also expect that as additional air regulations come into effect

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(Amounts in thousands, except share and per share amounts)

combined with this anticipated increase in demand, existing facilities will implement compliance plans, resulting in increased spending for environmental systems. In addition, the anticipated increase in demand for refining capacity and power generation increases the likelihood that new power plants will be constructed, which will require environmental systems to reduce NOx emissions. For example, in the United States, new gas-fired plants are anticipated to be constructed to meet peak power demands and new coal-fired power plants have been announced for construction over the next several years. Internationally, more power generation units are installing environmental systems in order to comply with more stringent emission standards. Worldwide expansion of refineries and gas to liquids plants combined with the global need to reduce pollution creates additional demand for environmental systems.

     Separation Filtration Systems

     The Separation Filtration Systems segment produces specialized products known as “separators” or “filters” which are used for a variety of purposes in cleaning gases and liquids as they move through piping systems. This reporting segment represented 45.7% and 68.5% of our revenues for the first quarter of fiscal 2008 and fiscal 2007, respectively.

     The following table summarizes Separation Filtration Systems revenues and operating income:

	Three months ended September 30,
	2007			2006
Revenues	$	13,723		$	10,024
Operating income		2,187			908
Operating income as % of revenue		15.9	%		9.1	%

     Separation Filtration Systems revenues increased by $3,699, or 36.9%, in the first quarter of fiscal 2008 when compared to the first quarter of fiscal 2007. Our revenues increased during the first quarter of fiscal 2008 when compared to the same period in the prior year both domestically and internationally. The increase in our revenues is attributed to increased gas transmission separation and filtration related projects.

     Separation Filtration Systems operating income in the first quarter of fiscal 2008 increased $1,279 compared to the first quarter of fiscal 2007. As a percentage of Separation Filtration Systems revenues, operating income was 15.9% in the first quarter of fiscal 2008 and 9.1% in the first quarter of fiscal 2007. The improved operating income in fiscal 2008 is primarily related to the increased revenues and gross profit.

     Strong global demand for energy is creating opportunities for our separation and filtration products. We believe the domestic and international markets for our separation products will continue to remain strong as new pipelines and gas processing facilities are developed and as nuclear power plants continue to invest in projects for life extension and additional capacity. The construction of new nuclear power plants outside the United States is also expected to provide revenue opportunities.

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(Amounts in thousands, except share and per share amounts)

     Corporate Level Expenses

     The following table summarizes corporate level expenses excluded from our segment operating results:

	Three months ended September 30,
	2007		2006
Corporate level expenses	$	2,052	$	1,188

     The corporate level expenses excluded from our segment operating results are corporate level general and administrative expenses. See “Operating Expenses” above for additional discussion on these expenses.

Contingencies

     On June 19, 2007, Martin-Manatee Power Partners, LLC (“MMPP”) filed a complaint against the Company in the Circuit Court of the 15th Judicial Circuit in and for Palm Beach County, Florida. In the complaint, MMPP asserts claims for breach of contract and express warranty, breach of implied warranty and indemnification against the Company, arising out of an incident in September 2005 when an electric fuel gas start-up heater, which was a component of a fuel gas heater skid supplied by the Company to MMPP, allegedly ruptured resulting in a fire. In the complaint, MMPP does not make a specific demand for damages, but alleges that it has incurred approximately $5.7 million in costs to repair the damage as a result of the incident. We believe MMPP’s claims are without merit and, with our insurance company, intend to vigorously defend this suit.

     From time to time we are involved in various litigation matters arising in the ordinary course of our business. We do not believe the disposition of any current matter will have a material adverse effect on our consolidated financial position or results of operations.

Backlog

     The Company’s backlog of orders was $83,000 at September 30, 2007 and $97,000 at June 30, 2007. Backlog has been calculated under our customary practice of including uncompleted orders for products that are deliverable in future periods but potentially could be changed or cancelled. The timing of our larger contracts can have a notable impact upon our backlog from period to period. Demand for separation and filtration products and environmental systems continues to improve throughout the world. See “Results of Operations – Segments” above for additional discussion.

Financial Position

     Assets. Total assets increased by $9,026, or 13.1%, from $68,671 at June 30, 2007, to $77,697 at September 30, 2007. We held cash and cash equivalents of $23,958, had working capital of $34,381 and a current liquidity ratio of 1.9-to-1.0 at September 30, 2007. This compares with cash and cash equivalents of $17,015, $30,622 in working capital, and a current liquidity ratio of 1.9-to-1.0 at June 30, 2007.

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(Amounts in thousands, except share and per share amounts)

     Liabilities and Shareholders’ Equity. Total liabilities increased by $5,726, or 16.3%, from $35,134 at June 30, 2007 to $40,860 at September 30, 2007. This increase in liabilities related primarily to the increase in our billings in excess of costs and earnings on uncompleted contracts of $5,276. The increase in our equity of $3,300 or 9.8%, from $33,537 at June 30, 2007 to $36,837 at September 30, 2007 is primarily attributable to an increase in our net earnings. Our ratio of total liabilities-to-equity increased from 1.05-to-1.0 at June 30, 2007 to 1.11-to-1.0 at September 30, 2007, reflecting a 16.3% increase in our liabilities and a 9.8% increase in our equity during the period.

Liquidity and Capital Resources

     Our cash and cash equivalents were $23,958 as of September 30, 2007, compared to $17,015 at June 30, 2007. Cash provided by operating activities during the first three months of fiscal year 2008 was $7,281 compared to cash provided by operating activities of $1,040 during the first three months of fiscal 2007.

     Because we are engaged in the business of manufacturing systems, our progress billing practices are event-oriented rather than date-oriented, and vary from contract to contract. We typically bill our customers upon the occurrence of project milestones. Billings to customers affect the balance of billings in excess of costs and earnings or the balance of cost and earnings in excess of billings, as well as the balance of accounts receivable. Consequently, we focus on the net amount of these accounts along with accounts payable, to determine our management of working capital. At September 30, 2007, the balance of these working capital accounts was $6,269 compared to $13,118 at June 30, 2007, reflecting a decrease of our investment in these working capital items of $6,849. Generally, a contract will either allow for amounts to be billed upon shipment or on a progress basis based on the attainment of certain milestones. During the first three months of fiscal 2008, cash used in operating activities increased as a result of an increase in material purchases for work in process, while funds were provided by an overall decrease in our accounts receivable. Additionally, during the first three months of fiscal 2008, several large projects reached milestones that allowed us to invoice our customers, generating an increase to the billings in excess of costs and earnings.

     Cash used in investing activities was $219 for the first three months of fiscal year 2008, compared to cash used in investing activities of $2,727 for the first three months of fiscal 2007. Cash used during the first three months of fiscal 2008 related primarily to purchase of property and equipment. Cash used during the first three months of fiscal 2007 related primarily to an increase in restricted cash to support a debenture agreement used by our UK subsidiary to facilitate the issuances of bank guarantees.

     No cash was provided by financing activities during the first three months of fiscal 2008. During the same period in the previous year $555 was provided from the issuance of common stock resulting from the exercise of employee stock options and the corresponding excess tax benefits associated with these stock option exercises.

     As a result of the events described above, our cash and cash equivalents during the first three months of fiscal year 2008 increased by $6,943, compared to a decrease of $1,114 in the first three months of fiscal 2007.

     On September 30, 2006, we entered into a revolving credit facility for working capital requirements. This facility expires on September 30, 2008. Under this facility, we have a maximum borrowing availability equal to the lesser of (i) $9,000 or (ii) 70% of eligible accounts and 40% of eligible inventory. The facility carries a floating interest rate based on the prime or Euro rate plus or

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(Amounts in thousands, except share and per share amounts)

minus an applicable margin, and is secured by substantially all of our assets in the United States. At September 30, 2007, the applicable rate was Euro plus 2.0% (7.53%). At September 30, 2007, the Company had no outstanding borrowings under the credit line, and $5,913 of outstanding stand-by letters of credit, leaving $3,087 of maximum availability under the facility and actual availability based on borrowing base calculations. The facility contains financial covenants, certain restrictions on capital expenditures, acquisitions, asset dispositions, dividends and additional debt, as well as other customary covenants. As of September 30, 2007, we were in compliance with all financial and other covenants under this credit facility.

     In addition, our UK subsidiary had a £2,600 ($5,320) debenture agreement used to facilitate the issuances of bank guarantees. At September 30, 2007, this facility was secured by substantially all assets of the UK subsidiary, and was secured by a cash deposit of £1,400 ($2,865). At September 30, 2007, there was £1,931 ($3,951) outstanding under this facility. As of September 30, 2007, we were in compliance with all financial and other covenants under this credit facility.

     We believe we maintain adequate liquidity to support existing operations and planned growth.

New Accounting Standards

     In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN No. 48”). FIN No. 48 clarifies the accounting for uncertainty in tax positions. The interpretation prescribes a recognition threshold and measurement attribute to the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Upon adoption, the Company recognized a $209 charge to beginning retained earnings as a cumulative effect of a change in accounting principle. See Note 8 – Income Taxes.

     In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.

     In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 would allow the Company an irrevocable election to measure certain financial assets and liabilities at fair value, with unrealized gains and losses on the elected items recognized in earnings at each reporting period. The fair value option may only be elected at the time of initial recognition of a financial asset or financial liability or upon the occurrence of certain specified events. The election is applied on an instrument by instrument basis, with a few exceptions, and is applied only to entire instruments and not to portions of instruments. SFAS No. 159 also provides expanded disclosure requirements regarding the effects of electing the fair value option on the financial statements. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating SFAS No. 159 and has not yet determined the financial assets and liabilities, if any, for which the fair value option may be elected or the potential impact on the consolidated financial statements, if such election were made.

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PEERLESS MFG. CO. AND SUBSIDIARIES
SEPTEMBER 30, 2007
(Amounts in thousands, except share and per share amounts)

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     Our primary market risk exposures are interest rate risk and currency exchange rate risk. We currently believe our risk to interest rate fluctuations is nominal, as our investments are short-term in nature and we are currently not borrowing under our bank credit facility. Our exposure to currency exchange rate fluctuations has been, and is expected to continue to be, modest as foreign contracts payable in currencies other than United States dollars are performed, for the most part, in the same currency and therefore provide a “natural hedge” against currency fluctuations. On occasion, we engage in derivative transactions with respect to foreign contracts that do not contain a “natural hedge,” but the impact of any fluctuation in the exchange rates in these hedged currencies would be expected to have an immaterial impact on our consolidated results of operations. The impact of currency exchange rate movements on inter-company transactions has been, and is expected to continue to be, immaterial. We did not have any derivatives outstanding as of September 30, 2007.

     Since June 30, 2007, there have been no material changes in the quantitative or qualitative aspects of our market risk profile. For information regarding our exposure to certain market risks, see Item 7A “ Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended June 30, 2007 as filed with the Securities and Exchange Commission.

Item 4. Controls and Procedures

     The Company maintains disclosure controls and procedures that are designed to ensure that information related to the Company (including its consolidated subsidiaries) that is required to be disclosed in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

     The Company’s management has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of these disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934) as of the end of the period covered by this Report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective in ensuring that all information required to be disclosed in this Report has been recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. Additionally, based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Report, the Company’s disclosure controls and procedures were effective in ensuring that all material information required to be filed in this Report has been accumulated and communicated to the Company’s management, including its principle executive and principal financial officers, in a timely fashion to allow decisions regarding required disclosures.

     Due to the inherent limitations of control systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls could be circumvented by the individual acts of some persons or by collusion of two or more people. The Company’s controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met.

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PEERLESS MFG. CO. AND SUBSIDIARIES
SEPTEMBER 30, 2007
(Amounts in thousands, except share and per share amounts)

     During the quarter ended September 30, 2007, there have been no changes in the Company’s internal control over financial reporting, or in other factors, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

     From time to time we are involved in various litigation matters arising in the ordinary course of our business. We do not believe the disposition of any current matter will have a material adverse effect on our consolidated financial position or results of operations.

Item 1A. Risk Factors

     There have been no material changes in the risk factors set forth under Part I, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2007 filed with the Securities and Exchange Commission.

Items 2, 3, 4 and 5 are not applicable and have been omitted.

Item 6. Exhibits

(a) Exhibits

The following exhibits are filed as part of this report.

Exhibit
Number	Exhibit
31(a)	Rule 13a – 14(a)/15d – 14(a) Certification of Chief Executive Officer.
31(b)	Rule 13a – 14(a)/15d – 14(a) Certification of Chief Financial Officer.
32(a)	Section 1350 Certification of Chief Executive Officer.
32(b)	Section 1350 Certification of Chief Financial Officer.

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PEERLESS MFG. CO. AND SUBSIDIARIES
SEPTEMBER 30, 2007
(Amounts in thousands, except share and per share amounts)

Signatures

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

	PEERLESS MFG. CO.
Date: November 6, 2007	/s/ Peter J. Burlage
	Peter J. Burlage
	President and Chief Executive Officer (Principal Executive Officer)
Date: November 6, 2007	/s/ Henry G. Schopfer, III
	Henry G. Schopfer, III
	Chief Financial Officer (Principal Financial and Accounting Officer)

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