SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934

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PEERLESS MFG. CO.
(Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------

(Names of Person(s) Filing Proxy Statement, if other than the Registrant)

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* set forth the amount on which the filing fee is calculated and state how it
was determined

[PEERLESS MFG. CO. LOGO]

PEERLESS MFG. CO.
2819 Walnut Hill Lane
Dallas, Texas 75229

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD THURSDAY NOVEMBER 20, 2003

We will hold the Annual Meeting of Shareholders of Peerless Mfg. Co.
(the "Company" or "we" "us" or "our") on Thursday, November 20, 2003 at 10:00
a.m. at our corporate offices, located at 2819 Walnut Hill Lane, Dallas, Texas
75229 (the "Annual Meeting"). At the Annual Meeting we will ask you to vote on
the following proposals:

- The election of two Directors to serve as Class III Directors
for a three-year term or until their successors are elected
and qualified;

- The ratification of the selection of Grant Thornton LLP as our
independent accountants for fiscal year 2004; and

- To transact such other business as may properly come before
the Annual Meeting and any adjournment or postponement
thereof.

The foregoing items of business, including the nominees for directors
are more fully described in the Proxy Statement, which is attached to and made
part of this Notice. If you were a shareholder at the close of business on
October 17, 2003, you are entitled to notice of and to vote on the proposals to
be considered at this year's Annual Meeting. It is important that your Common
Stock be represented at the Annual Meeting regardless of the number of shares
you hold.

You are cordially invited to attend the Annual Meeting in person.
However, if you are unable to attend in person, please know that we desire to
have maximum representation of our shareholders at the meeting and respectfully
request that you complete, date, sign and return the enclosed proxy as promptly
as possible in the enclosed postage-paid self-addressed envelope. No additional
postage is required if mailed in the United States. You may revoke your proxy at
any time prior to the use as specified in the enclosed Proxy Statement. We look
forward to hearing from you.

By Order of the Board of Directors,

/s/ Katherine S. Frazier
Corporate Controller
Secretary / Treasurer

Dallas, Texas
October 28, 2003

YOUR VOTE IS IMPORTANT.
Please vote early, even if you plan to attend the Annual Meeting.

PEERLESS MFG. CO.
2819 Walnut Hill Lane
Dallas, Texas 75229

PROXY STATEMENT

ANNUAL MEETING OF SHAREHOLDERS
NOVEMBER 20, 2003

TABLE OF CONTENTS

QUESTIONS AND ANSWERS:

Why did I receive this proxy statement?.................................................. 1
I may have received more than one proxy statement. Why? ................................ 1
What will occur at the Annual Meeting? .................................................. 1
How many votes are necessary to elect the nominees for director? ........................ 2
What if a nominee is unwilling or unable to stand for election? ......................... 2
How do I vote if I am not planning to attend the Annual Meeting? ........................ 2
What if I want to change my vote?........................................................ 2
How do I raise an issue for discussion or vote at the Annual Meeting?.................... 2
What if my shares are in a brokerage account and I do not vote? ......................... 3
How are abstentions treated? ............................................................ 3
Who will pay for the cost of this solicitation? ......................................... 3
Where can I find the voting results of the Annual Meeting? .............................. 3

MORE ABOUT THE PROPOSALS:

Proposal 1: Election of Class III Directors ............................................ 4
Proposal 2: Ratification of Independent Accountants..................................... 5

OTHER INFORMATION YOU NEED TO MAKE AN INFORMED DECISION:

Directors, Nominees, Executive Officers and Significant Employees of the Company......... 6
Security Ownership of Management and Certain Beneficial Owners........................... 7
Section 16(a) Beneficial Ownership Reporting Compliance.................................. 9
Certain Relationships and Related Transactions........................................... 9
Meeting Attendance and Committees of the Board of Directors ............................. 9
Compensation of Directors and Senior Officers............................................ 11
Compensation Committee Interlocks and Insider Participation.............................. 15
Report of the Compensation Committee of the Board of Directors........................... 15
Report of the Audit Committee of the Board of Directors.................................. 18
Stock Price Performance Graph ........................................................... 20
Other Matters............................................................................ 21

QUESTIONS AND ANSWERS

WHY DID I RECEIVE THIS PROXY STATEMENT?

Peerless Mfg. Co. is furnishing you with this proxy statement on behalf
of its Board of Directors to solicit proxies for its 2003 Annual Meeting of
Shareholders and any adjournment or postponement of the Annual Meeting. On or
about October 28, 2003, we will begin mailing this proxy statement and
accompanying proxy card to everyone who was a shareholder of our company at the
close of business on October 17, 2003. We prepare a proxy statement each year to
let our shareholders know when and where we will hold our annual shareholders'
meeting. This proxy statement:

- includes information about the matters that will be discussed
and voted on at the meeting, and

- provides you with updated information about our company.

I MAY HAVE RECEIVED MORE THAN ONE PROXY STATEMENT. WHY?

If you received more than one proxy statement, your shares are probably
registered differently or are in more than one account. Please vote each proxy
card that you received.

WHAT WILL OCCUR AT THE ANNUAL MEETING?

We will determine whether enough shareholders are present at the
meeting to conduct business. A shareholder will be deemed to be "present" at the
meeting if the shareholder:

- is present in person, or

- is not present in person but has voted by proxy card prior to
the meeting.

All shareholders of record at the close of business on October 17, 2003
will be entitled to vote on matters presented at the meeting or any adjournment
thereof. On October 17, 2003, there were 3,000,534 shares of our Common Stock
issued and outstanding. The holders of a majority, or 1,500,268 of the shares of
our Common Stock entitled to vote at the meeting, must be represented at the
meeting in person or by proxy to have a quorum for the transaction of business
at the meeting and to act on the matters specified in the Notice. If holders of
fewer than 1,500,268 shares are present at the meeting, we will adjourn and
reschedule the meeting until a quorum is present. Under our Articles of
Incorporation, for each share of Common Stock that you owned at the close of
business on October 17, 2003, you are entitled to one vote on all matters
brought before the meeting or any adjournment thereof.

After each proposal has been voted on at the meeting, we will discuss
and take action on any other matter that is properly brought before the meeting.
Our transfer agent, Mellon Investor Services, will count the votes and act as
inspector of election.

We know of no other matters that will be presented for consideration at
the Annual Meeting. If, however, other matters or proposals are presented and
properly come before the meeting, the proxy holders intend to vote all proxies
in accordance with their best judgment in the interest of Peerless Mfg. Co. and
our shareholders.

A representative of Grant Thornton LLP (we refer to it as "Grant
Thornton"), our independent accountants, is expected to be present at the Annual
Meeting and will be afforded an opportunity to make a statement, if such
representative so desires, and to respond to appropriate questions.

HOW MANY VOTES ARE NECESSARY TO ELECT THE NOMINEES FOR DIRECTOR?

The two nominees receiving the highest number of "yes" votes will be
elected as directors. A majority of the votes cast is not required. This number
is called a "plurality."

Votes that are withheld from any director nominee will be counted in
determining whether a quorum has been reached, but will not affect the outcome
of the vote. Assuming a quorum is present, the election of directors will be
determined by a plurality of votes cast. Votes may be cast in favor of, or
withheld from, a director nominee.

In the election of directors, shareholders are not entitled to cumulate
their votes or to vote for a greater number of persons than the number of
nominees named in this proxy statement.

WHAT IF A NOMINEE IS UNWILLING OR UNABLE TO STAND FOR ELECTION?

Each of the persons nominated for re-election to our Board of Directors
has agreed to stand for election. However, should any nominee become unable or
unwilling to accept nomination or election, the directors' proxies will vote for
the election of such other person as the Board may recommend. Our Board of
Directors has no reason to believe that any of the nominees will be unable or
unwilling to serve if elected, and to the knowledge of the Board, each of the
nominees intends to serve the entire term for which election is sought.

HOW DO I VOTE IF I AM NOT PLANNING TO ATTEND THE ANNUAL MEETING?

In addition to voting in person at the meeting, you may mark your
selections on the enclosed proxy card, date and sign the card and return the
card in the enclosed postage-paid envelope.

We encourage you to vote now even if you plan to attend the Annual
Meeting in person. If your shares are in a brokerage account, you may receive
different voting instructions from your broker.

Where a shareholder has appropriately specified how a proxy is to be
voted, it will be voted accordingly, and where no specific direction is given on
a properly executed proxy card, it will be voted FOR adoption of the proposals
set forth in this proxy statement.

WHAT IF I WANT TO CHANGE MY VOTE?

You may revoke your vote on a proposal at any time before the Annual
Meeting for any reason. To revoke your proxy before the meeting, write to our
Secretary, Katherine S. Frazier, at 2819 Walnut Hill Lane, Dallas, Texas 75229.
You may also come to the meeting and change your vote in writing.

HOW DO I RAISE AN ISSUE FOR DISCUSSION OR VOTE AT THE ANNUAL MEETING?

There are two different deadlines for the submission of shareholder
proposals. If you would like to include a proposal in our next annual proxy
statement you must submit the proposal in writing no later than June 30, 2004.
The proposal will be included in our next annual proxy statement if it is a
proposal that we are required to include in our proxy statement pursuant to the
rules of the Securities and Exchange Commission. Under Rule 14a-8 of the
Securities Exchange Act of 1934, as amended, proposals of shareholders must
conform to certain requirements as to form and may be omitted from the proxy
materials under certain circumstances. To avoid unnecessary expenditures of time
and money, you are urged to review this rule and, if questions arise, consult
legal counsel prior to submitting a proposal to us.

If you would like to present a proposal at our next Annual Meeting,
other than for inclusion in our proxy statement, you must submit the proposal in
writing no earlier than May 31, 2004 and no later than June 30, 2004. Any such
proposal when submitted must be in compliance with applicable law and our
bylaws.

Proposals should be directed to our Secretary, Katherine S. Frazier, at
2819 Walnut Hill Lane, Dallas, Texas 75229.

WHAT IF MY SHARES ARE IN A BROKERAGE ACCOUNT AND I DO NOT VOTE?

If your shares are in a brokerage account and you do not vote, your
brokerage firm could:

- vote your shares, if it is permitted by the NASDAQ rules, or

- not vote your shares.

Brokers who hold shares in street name have the authority to vote in
favor of all proposals specified in this proxy statement, if they do not receive
contrary voting instructions from beneficial owners. If a broker has not
received voting instructions with respect to certain shares and gives a proxy
for those shares, but does not vote the shares on a particular matter, those
shares will not affect the outcome of the vote with respect to that matter. Such
broker non-votes will be counted for purposes of determining the presence or
absence of a quorum for the transaction of business, but will not be counted for
purposes of determining the number of votes cast with respect to a proposal. A
broker non-vote will not affect the outcome of the voting on any proposals in
this proxy statement.

HOW ARE ABSTENTIONS TREATED?

Any shareholder that is present at the meeting, either in person or by
proxy, but who abstains from voting, will still be counted for purposes of
determining whether a quorum exists. An abstention will not be counted as an
affirmative or negative vote in the election of the directors or the
ratification of our independent accountants. Our shareholders have no appraisal
rights under Texas law with respect to the proposals specified in this proxy
statement.

WHO WILL PAY FOR THE COST OF THIS SOLICITATION?

We will bear the cost of solicitation of proxies, including the cost of
preparing, printing and mailing proxy materials, and the cost of reimbursing
brokers for forwarding proxies and proxy statements to their principals. Proxies
may also be solicited without extra compensation by our officers and employees
by telephone or otherwise. Arrangements may also be made with brokerage houses
and other custodians, nominees and fiduciaries for forwarding the proxy
materials to the beneficial owners of our Common Stock, and we may reimburse
them for reasonable out-of-pocket expenses incurred by them.

WHERE CAN I FIND THE VOTING RESULTS OF THE ANNUAL MEETING?

We will announce the voting results at the meeting and will publish the
results in our quarterly report on Form 10-Q for the second quarter of fiscal
2004 ending on December 31, 2003. We will file that report with the Securities
and Exchange Commission by mid-February 2004, and you can get a copy by
contacting either our Investor Relations office at (214) 353-5589 or the
Securities and Exchange Commission at (800) SEC-0330 or by visiting the
Securities and Exchange Commission website at http://www.sec.gov or our website
at http://www.peerlessmfg.com.

MORE ABOUT THE PROPOSALS

PROPOSAL NO. 1

ELECTION OF CLASS III DIRECTORS

The Company's Bylaws provide that the number of directors will be five.
The Company's Board of Directors consists of three classes, with one director
serving in Class I, and two directors serving in each of Classes II and III.
Each class of director serves three-year terms or until successors have been
elected and qualified. The term of the Class III directors, Donald A. Sillers,
Jr. and Sherrill Stone, expire at the Annual Meeting.

Our Board of Directors proposes the re-election of each of Donald A.
Sillers, Jr. and Sherrill Stone as Class III directors, to hold office for a
term of three years, expiring at the close of our Annual Meeting of Shareholders
to be held in 2006 or until his successor is elected and qualified. It is the
Board's opinion that because of Messrs. Sillers and Stone tenure as directors,
they are sufficiently familiar with the Company and its business to be able to
competently direct and manage the Company's business affairs. Biographical
information on Donald A. Sillers, Jr. and Sherrill Stone is set forth below in
"Other Information You Need To Make An Informed Decision - Directors, Nominees,
Executive Officers and Significant Employees of the Company."

If Messrs. Sillers or Stone becomes unavailable for election, which is
not anticipated, the directors' proxies will vote for the election of such other
person as the Board may recommend.

THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE
NOMINEES FOR DIRECTORS SET FORTH ABOVE.

PROPOSAL NO. 2

RATIFICATION OF INDEPENDENT ACCOUNTANTS

Grant Thornton LLP, independent certified public accountants, served as
independent accountants for the Company for the fiscal year ended June 30, 2003
and has reported on the Company's financial statements. The Audit Committee of
the Board of Directors has selected Grant Thornton LLP as the Company's
independent accountants for fiscal year 2004 and the Board recommends that the
shareholders ratify this selection.

A representative of Grant Thornton is expected to be present at the
Annual Meeting and will have an opportunity to make a statement if he/she
desires to do so, and is expected to be available to respond to appropriate
questions. See "Report of the Audit Committee of the Board of Directors" for a
discussion of auditor independence.

Shareholder ratification is not required for the selection of Grant
Thornton LLP as the Company's independent accountants for fiscal year 2004,
because the Audit Committee has the responsibility of selecting the Company's
independent accountants. The selection is being submitted for ratification with
a view toward soliciting the opinion of the shareholders, which opinion will be
taken into consideration in future deliberations.

THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR
THE RATIFICATION OF THE APPOINTMENT OF GRANT THORNTON LLP
AS THE COMPANY'S INDEPENDENT ACCOUNTANTS FOR THE 2004 FISCAL YEAR.

OTHER INFORMATION YOU NEED TO MAKE AN INFORMED DECISION

DIRECTORS, NOMINEES, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES OF THE COMPANY

The Company's Bylaws divide the Board into three classes, with the
terms of each class expiring in consecutive years so that only one class is
elected in any given year. The shareholders of the Company elect successors to
directors whose terms have expired. The Board fills vacancies in unexpired
terms.

There is no family relationship among any of our directors and senior
officers. The following table sets forth, as of October 1, 2003, the names of
our directors and senior officers and their respective ages and positions:

NAME AGE POSITION
- ---------------------------- --- ------------------------------------------------------------

Peter J. Burlage 39 Vice President of Environmental Systems
G. Darwyn Cornwell 59 Vice President of Manufacturing
Frank J. Fuller 74 Vice President of International Operations
Bernard S. Lee (1)(2) 68 Class II Director
Joseph V. Mariner, Jr. (1)(2) 83 Class II Director
R. Clayton Mulford (2) 47 Class I Director
Donald A. Sillers, Jr. (1)(2) 77 Class III Director
Sherrill Stone 66 Class III Director, Chairman, President, and
Chief Executive Officer
William T. Strohecker 45 Executive Vice President and Chief Operating Officer
David Taylor 38 Vice President of Separation & Filtration Systems
Richard L. Travis, Jr. 47 Chief Financial Officer and Vice President of Administration

- ----------------------
(1) member of the Audit Committee

(2) member of the Compensation Committee

Set forth below is a description of the backgrounds of the executive
officers and directors, including the nominees for director.

- PETER J. BURLAGE joined the Company in 1992. He has served as Vice
President of Environmental Systems business unit since January 2001.
Prior to this, Mr. Burlage was the Company's SCR division manager from
1997 to 2000 and its Vice President of Engineering from 2000 to 2001.

- G. DARWYN CORNWELL rejoined the Company in 2003 as Vice President of
Manufacturing. He had previously served as Vice President of Operations
for the Company from 1997 through 2000. Prior to rejoining the Company,
Mr. Cornwell served from 2002 to 2003, as the Director of Manufacturing
for Manufacturing Group of America, a manufacturer of cabinet products,
and from 2000 to 2002, as President of Ace World Companies, a
manufacturer of highly specialized machinery and equipment. Mr.
Cornwell served in various capacities with the Company from 1982 to
2000.

- FRANK J. FULLER joined the Company in 1995. He has served as Vice
President of the Company's international operations since 1999. Prior
to his current appointment, Mr. Fuller was the Managing Director of our
Asia-Pacific operations.

- BERNARD S. LEE, retired, was the former President of Institute of Gas
Technology. Mr. Lee is also a director of NUI Corporation and National
Fuel Gas Company. Mr. Lee has been a director of our Company since
1982.

- JOSEPH V. MARINER, JR., retired, has been a director of the Company
since 1980.

- R. CLAYTON MULFORD has been a director of the Company since January
2002. Mr. Mulford is a partner and member of the Executive Committee of
the Texas based law firm of Hughes & Luce, LLP. Mr. Mulford served as
lead corporate legal counsel to the Company for a number of years.

- DONALD A. SILLERS, JR. is the Company's former Chairman of the Board
and Chief Executive Officer, and has served as a director of the
Company since 1970.

- SHERRILL STONE has served as Chairman of the Board and Chief Executive
Officer since 1993, and President of the Company from 1986 through 2002
and from 2003 to present. Mr. Stone has also served as a director of
the Company since 1986.

- WILLIAM T. STROHECKER joined the Company in July 2003 as Executive Vice
President and Chief Operating Officer. Prior to joining the Company, he
served from 2000 through 2003 as President of Doosan HF Controls
Corporation, a manufacturer of control systems, and served from 1994
through 2000 as Vice President at Forney Corporation, a manufacturer of
mechanical products and integrated systems.

- DAVID TAYLOR joined the Company in 1988. He has served as Vice
President since 1999 and was appointed the head of our Separation &
Filtration Systems business unit in July 2002. Prior to his current
position, Mr. Taylor served as the Vice President of our nuclear/marine
product line and Director of Sales and Engineering for our Asia-Pacific
operations.

- RICHARD L. TRAVIS, JR. joined the Company in February 2002 as the
Company's Chief Financial Officer and Vice President of Administration.
Prior to joining the Company, Mr. Travis served from 2000 to 2002, as
the Senior Vice President and Chief Financial Officer of Trintel
Communications, Inc., a telecommunications company, from 1996 through
1999, as President, Chief Operating Officer and Chief Financial Officer
of CT Holdings, Inc., a software development and incubation company,
and from 1986 to 1996, as Executive Vice President and Chief Financial
Officer of Texwood Industries, Inc., an international manufacturer and
distributor.

SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS

The following table sets forth information regarding the beneficial
ownership of our Common Stock as of October 17, 2003 (unless otherwise noted)
for:

- each person who is known by us to own beneficially more than
5% of the outstanding shares of our Common Stock;

- each of our directors and director nominees;

- each of our senior officers named in the Summary Compensation
Table; and

- all of our directors and senior officers as a group.

The percentages of shares outstanding provided in the table is based on
3,000,534 voting shares outstanding as of October 17, 2003. Beneficial ownership
is determined in accordance with the rules of

the Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Unless otherwise indicated, each
person or entity named in the table has sole voting and investment power, or
shares voting and investment power with his or her spouse, with respect to all
shares of stock listed as owned by that person. The number of shares shown does
not include the interest of certain persons in shares held by family members in
their own right. Shares issuable upon the exercise of options that are
exercisable within 60 days of October 17, 2003 are considered outstanding for
the purpose of calculating the percentage of outstanding shares of our Common
Stock held by the individual, but not for the purpose of calculating the
percentage of outstanding shares held by any other individual. The address of
our directors, director nominees and senior officers listed below is c/o
Peerless Mfg. Co., 2819 Walnut Hill Lane, Dallas, Texas 75229.

NAME NUMBER OF SHARES PERCENT
- ----------------------------------------------------------- ---------------- -------

Peter J. Burlage (1) 7,000 *
Frank J. Fuller (2) 28,400 *
Bernard S. Lee (3) 13,000 *
Joseph V. Mariner, Jr. (4) 12,100 *
R. Clayton Mulford (5) 1,000 *
W. S. Respess (6) 5,400 *
Donald A. Sillers, Jr. (7) 125,821 4.2%
Sherrill Stone (8) 114,716 3.7%
David Taylor (9) 5,500 *
Richard L. Travis, Jr. (10) 3,000 *
Royce & Associates, Inc. (11) 420,400 14.0%
1414 Avenue of the Americas
New York, NY 10019
William F. Nicklin (12) 220,434 7.4%
3 Rivers Edge
Newburgh, NY 12550
All directors and senior officers as a group (9 persons)(13) 310,537 10.0%

- ----------------------
* Denotes ownership of less than 1%.

(1) Includes 7,000 shares issuable pursuant to options to purchase Common
Stock.

(2) Includes 13,000 shares issuable pursuant to options to purchase Common
Stock.

(3) Includes 2,000 shares issuable pursuant to options to purchase Common
Stock.

(4) Includes 9,400 shares issuable pursuant to options to purchase Common
Stock.

(5) Includes 1,000 shares issuable pursuant to options to purchase Common
Stock.

(6) Includes 3,000 shares issuable pursuant to options to purchase Common
Stock. Mr. Respess, the Company's former Vice President of Manufacturing,
resigned his position with the Company on September 15, 2003. These shares
have been excluded in determining the amount of shares held by our
directors and senior officers.

(7) Includes 9,400 shares presently issuable pursuant to options to purchase
Common Stock. Does not include 1,778 shares owned of record by Virginia
Sillers, Mr. Sillers' wife, as to which shares Mr. Sillers disclaims any
beneficial interest.

(8) Includes 68,000 shares issuable pursuant to options to purchase Common
Stock. Does not include 300 shares owned of record by Jo Ann Stone, Mr.
Stone's wife, as to which shares Mr. Stone disclaims any beneficial
interest.

(9) Includes 5,500 shares issuable pursuant to options to purchase Common
Stock.

(10) Includes 2,000 shares issuable pursuant to options to purchase Common
Stock.

(11) The information is based on a Schedule 13G filed with the Securities and
Exchange Commission on February 4, 2003.

(12) The information is based on a Schedule 13G filed with the Securities and
Exchange Commission on February 14, 2003.

(13) Includes 117,300 shares issuable pursuant to options to purchase Common
Stock. The shares indicated do not include the shares held by Mr. Respess,
the Company's former Vice President of Manufacturing, who resigned his
position with the Company in September 2003.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Under the securities laws of the United States, our directors, officers
and any beneficial owner of more than 10% of our outstanding Common Stock
(collectively, "insiders") are required to report their initial ownership of our
Common Stock and any subsequent changes in their ownership to the Securities and
Exchange Commission. Specific due dates have been established by the Securities
and Exchange Commission, and we are required to disclose any failure to file by
those dates. We believe, that our insiders have complied with all Section 16(a)
filing requirements applicable to them during fiscal year 2003.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

R. Clayton Mulford, a director of the Company, is a partner at the law
firm of Hughes & Luce, LLP, Dallas, Texas. Hughes & Luce, LLP provided legal
services to the Company during the 2003 fiscal year. The dollar amount of fees
that the Company paid to Hughes & Luce, LLP during the 2003 fiscal year did not
exceed five percent of Hughes & Luce, LLP's gross revenue for its latest full
fiscal year.

MEETING ATTENDANCE AND COMMITTEES OF THE BOARD OF DIRECTORS

Our business is managed under the direction of our Board of Directors.
Our Board meets during the year to review significant developments and to act on
matters requiring Board approval. Our Board met on six occasions during the year
ended June 30, 2003. Each of the directors attended at least 75% of these
meetings of our Board. In addition, each of the directors attended at least 75%
of all meetings of each committee of our Board on which he served.

Our Board has established an Audit Committee and a
Compensation Committee to devote attention to specific subjects and to assist
our Board in discharging its responsibilities. The Board appoints the Audit and
Compensation committee members annually, and the committee members serve until
their successors are appointed or their earlier resignation or removal. The
functions of these committees are described below.

AUDIT COMMITTEE

Our Audit Committee is currently comprised of Bernard S. Lee, Joseph V.
Mariner, and Donald A. Sillers, Jr. The members meet the independence and
qualification standards required by the NASDAQ Stock market, Inc. ("NASDAQ").
The Audit Committee operates under a written charter adopted by our Board of
Directors and oversees our financial reporting process on behalf of our Board,
pursuant to the charter. This includes reviewing the scope and results of audits
made by the independent accountants. The Audit Committee met in person on six
occasions during the year ended June 30, 2003 and held an additional four
telephonic meetings that included members of both the Company's management team
and Grant Thornton.

Our Board has ratified the selection by the Audit Committee of the
firm of Grant Thornton as our independent accountants for 2004. Following is a
summary of Grant Thornton's fees for the year ended June 30, 2003:

Audit Fees. Grant Thornton's fees for our annual audit and review of
our quarterly financial statements were $97,350.

Financial Information Systems Design and Implementation Fees. Grant
Thornton did not render any professional services to us in 2003 with respect to
financial information systems design and implementation.

All Other Fees. In addition to the fees described above, Grant Thornton
billed us an aggregate of $25,140 for all other services rendered during fiscal
year 2003. These services included fees for tax consultations and return
preparation.

The Audit Committee has determined that the services provided under
"All Other Fees" are compatible with maintaining Grant Thornton's independence.
For additional information concerning the Audit Committee, see "Report of the
Audit Committee of the Board of Directors."

COMPENSATION COMMITTEE

Our Compensation Committee is currently comprised of Bernard S. Lee,
Joseph V. Mariner, Jr., R. Clayton Mulford, and Donald A. Sillers, Jr.

The Compensation Committee is responsible for recommending to the full
Board salaries and bonuses for our senior management and also administers the
stock incentive and benefit plans of the Company. The Compensation Committee met
six times in the 2003 fiscal year. For additional information concerning the
Compensation Committee, see "Report of Compensation Committee of the Board of
Directors."

NOMINATING COMMITTEE

The Company's Board does not have a nominating committee. The
independent members of the Board, as a whole, performed the functions
customarily attributable to a nominating committee.

COMPENSATION OF DIRECTORS AND SENIOR OFFICERS

SUMMARY COMPENSATION TABLE

The following table sets forth information regarding compensation we
paid to our Chief Executive Officer and our most highly compensated senior
officers during fiscal years ended June 30, 2003, 2002 and 2001.

LONG TERM COMPENSATION
-------------------------------------
AWARDS PAYOUTS
----------------------- --------
SECURITIES
ANNUAL COMPENSATION RESTRICTED UNDERLYIN
--------------------------------------- STOCK OPTIONS/ LTIP ALL OTHER
NAME AND FISCAL SALARY BONUS OTHER AWARDS(S) SAR's PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) (1) ($) ($) (#) ($) ($) (2)
- ------------------ ------ --------- -------- ----- ---------- ---------- -------- ------------

PETER J. BURLAGE 2003 $ 112,500 $ - $ - $ - $ - $ - $ 2,378
Vice President 2002 109,750 83,257 - - 4,000 - 2,264
2001 101,750 96,300 - - 6,000 - 2,104

FRANK J. FULLER 2003 115,000 - - - - - 4,855
Vice President 2002 112,927 62,443 - - 3,000 - 5,200
2001 112,364 54,749 - - 2,000 - 4,501

W. S. RESPESS (3) 2003 126,000 - - - - - 5,275
Vice President 2002 123,000 93,664 - - 4,000 - 7,330
2001 56,397 43,017 - - 4,000 - 1,071

SHERRILL STONE 2003 250,000 - - - - - 14,280
Chairman, CEO 2002 226,500 197,735 - - 10,000 - 14,231
2001 199,000 164,247 - - 8,000 - 12,428

DAVID TAYLOR 2003 112,500 - - - - - 2,378
Vice President 2002 109,750 83,257 - - 4,000 - 2,296
2001 102,500 96,300 - - 6,000 - 2,150

RICHARD L. TRAVIS 2003 179,231 - - - - - 5,783
CFO 2002 65,385 49,968 - - 8,000 - 1,450
2001 - - - - - - -

(1) Bonuses are paid in the fiscal year following the year in which they
are earned.

(2) Amounts reported for 2003 consist of: (1) personal use of Company
vehicles of $2,050, $5,470 and $1,935 for Messrs. Respess, Stone, and
Travis, respectively; (2) employer matching contributions under the
Company's 401(k) plan of $2,250 for Mr. Burlage, $1,814 for Mr. Fuller,
$2,375 for Mr. Respess, $5,000 for Mr. Stone, $2,250 for Mr. Taylor,
and $3,454 for Mr. Travis; and (3) cost of premiums for group life
insurance in excess of $50,000 of $128, $3,041, $850, $3,810, $128 and
$394 for Messrs. Burlage, Fuller, Respess, Stone, Taylor and Travis.

(3) Resigned his employment with the Company in September 2003.

OPTION GRANTS IN 2003 TO BOARD AND SENIOR OFFICERS

In fiscal 2003, no stock options were granted to our senior officers.
We granted stock options for 1,000 shares of our Common Stock to each of our
four non-employee directors, all of which were immediately exercisable.

Aggregated Option Exercises in 2003 and Fiscal Year-end Option Values Table

The following table sets forth information concerning Common Stock
acquired on exercise of stock options during fiscal 2003, any value realized
therein, the number of options at the end of fiscal 2003 (exercisable and
unexercisable) and the value of stock options held at the end of 2003 by the
senior officers. The "Value Realized" column reflects the difference between the
market price on the date of exercise and the option exercise price for all
options exercised, even though the officer may have actually received fewer
shares as a result of the surrender of shares to pay the exercise price, or the
withholding of shares to cover the tax liability associated with the option
exercise.

VALUE OF UNEXERCISED
NUMBER OF OPTIONS IN-THE-MONEY-OPTIONS
SHARES AT FY-END AT FY-END
ACQUIRED JUNE 30, 2003 JUNE 30, 2003
ON VALUE (#) ($) (1)
EXERCISE REALIZED ----------------------------- ------------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------- --------- -------- ----------- ------------- ----------- -------------

Peter J. Burlage -- -- 6,000 6,000 $ 24,438 $ 14,213
Frank J. Fuller -- -- 13,000 -- 61,500 --
W. S. Respess (2) -- -- 3,000 5,000 9,475 9,475
Sherrill Stone -- -- 68,000 -- 324,775 --
David Taylor -- -- 4,500 6,000 17,081 14,213
Richard L. Travis -- -- 2,000 6,000 -- --

(1) The closing price for the Company's Common Stock as reported on NASDAQ
on June 30, 2003 was $11.05. Value is calculated on the basis of the
difference between $11.05 and the option exercise price of "in the
money" options, multiplied by the number of shares of our Common Stock
underlying the option.

(2) Resigned his employment with the Company is September 2003.

EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth aggregate information regarding the
Company's compensation plans in effect as of June 30, 2003.

NUMBER OF
SECURITIES
AVAILABLE FOR
FUTURE ISSUANCES
NUMBER OF WEIGHTED- UNDER EQUITY
SECURITIES TO BE AVERAGE COMPENSATION
ISSUED UPON EXERCISE PRICE PLANS (EXCLUDING
EXERCISE OF OF SECURITIES
OUTSTANDING OUTSTANDING REFLECTED IN
OPTIONS OPTIONS COLUMN (a))
PLAN CATEGORY (a) (b) (c)
- ----------------------------------------- ---------------- ---------------- ----------------

Equity compensation plans approved by
security holders (1) 186,750 $ 9.59 210,200

Equity compensation plans not approved by
security holders -- -- --

---------------- --------------- ----------------
Total 186,7500 $ 9.59 210,200
================ =============== ================

- ------------------------

(1) Includes the 1995 Stock Option and Restricted Stock Plan and the 2001 Stock
Option and Restricted Stock Plan.

Employment, Severance and Change in Control Agreements with Certain Executive
Officers

The Company has entered into an employment agreement and a change of
control agreement with Mr. Stone, the Company's Chief Executive Officer, Mr.
Travis, the Company's Chief Financial Officer and Mr. Strohecker, the Company's
Chief Operating Officer.

Stone Agreements. Mr. Stone's employment agreement with the Company as
Chairman of the Board, Chief Executive Officer and President was initially for a
one year term, commencing July 20, 2001 and renews for successive 12 month
periods thereafter unless the agreement is terminated by either party prior to
the anniversary date of the agreement. Pursuant to the terms of the employment
agreement, Mr. Stone has agreed not to compete with the Company during his
employment and for one year following the termination of his employment. Mr.
Stone is also bound by confidentiality, nondisparagement and conflict of
interest provisions. The Company may terminate Mr. Stone for "cause" or without
"cause" at any time. If Mr. Stone is terminated without "cause," the Company
must pay Mr. Stone a severance payment equal to 150% of his current base salary
plus provide insurance benefits to Mr. Stone and his spouse for 12 months after
the date of termination. Mr. Stone may terminate his employment at any time and
the Company will have no severance obligations in the event of his voluntary
resignation, unless Mr. Stone resigns to retire from active working life. In the
event Mr. Stone retires from active working life, the Company will pay Mr. Stone
a payment equal to 150% of his current base salary. In Mr. Stone's and Mr.
Travis' employment and change of control agreements, "cause" is defined as (1)
the conviction of a crime involving moral turpitude, (2) the employee's
intentional material act of fraud to his pecuniary benefit, or (3) the
employee's intentional and continued failure to substantially perform his duties
to the Company or intentional wrong doing resulting in material injury to the
Company.

Mr. Stone's change of control agreement provides that if after a
"change of control" occurs, Mr. Stone is terminated by the Company (or its
successor) without "cause" or Mr. Stone resigns and (1) an adverse change in his
position, duties or authority has occurred, (2) he has been hindered in his
ability to perform his job, (3) his principal location of work is relocated
outside of the Dallas metropolitan area, or (4) the Company (or its successor)
breaches the change of control agreement (each, a "good reason"), Mr. Stone will
receive severance compensation equal to 299% of his average annual compensation
for the prior five years plus customary employee benefits for three years
thereafter. The change of control agreement has a term of three years following
a change of control, which renews for successive one-year periods unless either
party gives notice prior to the annual renewal date. As used in each executive's
change of control agreement, "change of control" means (1) the Company is
merged, consolidated or reorganized with another company and as a result, the
Company's shareholders own less than 50.1% of the voting power of the combined
company, (2) the Company sells all or substantially all its assets, (3) more
than 50% of the Company's issued and outstanding Common Stock is sold, (4) the
current Board of Directors, or successor directors approved by the Board, cease
to constitute a majority of the Company's Board of Directors, or (5) such other
events that cause a change of control of the Company as determined by the Board.

Travis Agreements. Mr. Travis' employment agreement with the Company as
Chief Financial Officer and Vice President of Administration is for a three year
term, commencing February 4, 2002. Pursuant to the terms of the employment
agreement, Mr. Travis has agreed not to compete with the Company during his
employment and for one year following the termination of his employment. Mr.
Travis is also bound by confidentiality, nondisparagement and conflict of
interest provisions. The Company may terminate Mr. Travis for "cause" or without
"cause" at any time. If Mr. Travis is terminated without "cause", the Company
must give Mr. Travis no less than 60 days written notice and pay Mr. Travis a
severance payment equal to 150% of his then current base salary. Mr. Travis may
terminate his employment at any time, after 60 days notice, and the Company will
have no severance obligations in the event of his voluntary termination.

Mr. Travis' change of control agreement provides that if after a
"change of control" occurs, Mr. Travis is terminated by the Company (or its
successor) without "cause" or Mr. Travis resigns and a "good reason" has
occurred, Mr. Travis will receive severance compensation equal to 299% of his
average annual compensation for the prior five years plus customary employee
benefits for three years thereafter. The change of control agreement has a term
of three years following a change of control, which renews for successive
one-year periods unless either party gives notice prior to the annual renewal
date.

Strohecker Agreements. Mr. Strohecker's employment agreement with the
Company as Executive Vice President and Chief Operating Officer is for a three
year term, commencing July 16, 2003. Pursuant to the terms of the employment
agreement, Mr. Strohecker has agreed not to compete with the Company during his
employment and for one year following the termination of his employment. Mr.
Strohecker is also bound by confidentiality, nondisparagement and conflict of
interest provisions. The Company may terminate Mr. Strohecker for "cause" or
without "cause" at any time. If Mr. Strohecker is terminated without "cause",
the Company, after 30 days notice, must pay Mr. Strohecker a severance payment
equal the sum of (i) his current monthly salary times the number of complete
months of employment, up to a total of 12 months, less (ii) the amount of notice
payment made. Mr. Strohecker may terminate his employment at any time, after 30
days notice, and the Company will have no severance obligations in the event of
his voluntary termination.

In Mr. Strohecker's employment and change in control agreement, "cause"
is defined as (1) the conviction of a crime involving moral turpitude, (2) the
employee's intentional material act of fraud to his pecuniary benefit, or (3)
the employee's intentional and continued failure to substantially perform his

duties to the Company or intentional wrong doing resulting in material injury to
the Company, (4) the failure by the employee to follow a reasonable directive of
the Board of Directors or the Chief Executive Officer, or (5) violation of any
policies or procedures of the Company, including without limitation, any human
relations policy, resulting in material injury to the Company, in each case as
reasonably determined by the Company's Board of Directors.

Mr. Strohecker's change of control agreement provides that if a "change
of control" occurs after Mr. Strohecker's sixth month of employment and Mr.
Strohecker is terminated by the Company (or its successor) without "cause" or
Mr. Strohecker resigns and a "good reason" has occurred, Mr. Strohecker will
receive severance compensation equal to 150% of his average annual compensation
for the prior five years plus customary employee benefits for 12 months
thereafter. The change of control agreement has a term of three years following
a change of control, which renews for successive one-year periods unless either
party gives notice prior to the annual renewal date.

Director Compensation

Non-employee directors are paid $1,575 per quarter, plus $950 for each
scheduled and special Board meeting and each separately called committee meeting
they attend. The Company also grants stock options for 1,000 shares of our
Common Stock to each of the non-employee directors on the date of the annual
shareholder's meeting for such director's prior year's service. Mr. Stone, the
only officer serving on the Board, does not receive compensation for serving on
our Board.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During the 2003 fiscal year, none of the Company's executive officers
served on the board of directors of any entities whose directors or officers
serve on the Company's Compensation Committee. Except for Mr. Sillers prior
service as Chairman of the Board and Chief Executive Officer of the Company from
which he retired in 1993, no other member of the Compensation Committee is
currently or has been an officer or employee of the Company.

REPORT OF COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS

The Compensation Committee is responsible for setting the annual base
compensation and bonus levels and administering the restricted stock programs
for our employees, including our executive officers. Its recommendations are
subject to final approval by the Board of Directors. The Compensation Committee
believes that the key to a successful executive compensation program is in
setting aggressive business goals by integrating the program with annual and
strategic planning and evaluation processes and by comparing results against
industry performance levels. The Compensation Committee takes into account
achievements of the Company during the past fiscal year, as well as the
individual achievements of various business units and divisions, in making
executive compensation determinations. In addition, the Compensation Committee
recognizes that the Company competes in a competitive environment, and executive
compensation therefore must also take into account the Company's performance as
compared to that of other companies in its industry or in similar industries.
The Compensation Committee also evaluates on an annual basis the Company's
corporate performance, revenues and stock performance compared to a broader
group of companies, such as the Standard & Poor's 500.

Annual Base Compensation. Annual base compensation awarded in any
particular fiscal year to each senior officer is based upon the following
factors: corporate performance during the prior year, performance of the
division for which the officer is responsible, and a more subjective evaluation
of each of the officer's individual performance. The evaluation of corporate
performance is directly linked to profitability during the period, and therefore
is based upon the value of the Company's Common Stock.

In making this evaluation, the Compensation Committee reviews the Company's
percentage growth in earnings per share over the prior year, and its overall
return on equity for that period. The Compensation Committee believes that these
two factors are the primary determinants of stock price over time. The
Compensation Committee also reviews the profit performance of the individual
divisions for which the officer is responsible. In addition, the Compensation
Committee determines the individual rating for each officer, which is based upon
such qualitative factors as the achievement of certain financial objectives and
specific organizational and management goals for that officer. Annual base
compensation for the Company's Chief Executive Officer, Chief Operating Officer
and Chief Financial Officer is determined in the same manner as for other
officers, except that the Compensation Committee does not review or evaluate any
particular division's performance, but rather, looks to the Company as a whole
in determining corporate performance relevant to these officers' compensation.

The Compensation Committee also recognizes that, in order to attract
and retain the highest quality officers, their base compensation must be
competitive in relation to that paid by companies in similar industries and in
comparable geographic areas. Accordingly, the Compensation Committee
periodically reviews the executive compensation paid by such companies.

Annual Bonus Plans. The Company has an incentive bonus plan pursuant to
which certain key employees, including the named senior officers, are selected
annually by the Compensation Committee to earn a cash bonus based upon our
after-tax profitability. This plan requires that a specific after-tax return on
beginning-of-year equity be achieved, after which bonuses may be paid out. The
available bonus pool is calculated on earnings in excess of the base level.

Once the total bonus pool is calculated, bonuses are distributed to
participants in the plan in accordance with pre-determined percentages as set by
the Compensation Committee annually. The determination of the bonus level
awarded to our Chief Executive Officer is made in the same manner as that of
other officers.

The Compensation Committee also recommended that an additional
discretionary bonus pool of $50,000 be established, to be used by the Chief
Executive Officer for the purpose of recognizing certain outstanding
contributions made by any employee, including the named senior officers, but
excluding the Chief Executive Officer. Awards under this plan may be made in
order to recognize new product inventions or improvements, ideas for major
manufacturing cost reductions, originations of large and profitable orders or
for other purposes.

Compensation of Chief Executive Officer. During fiscal 2003, Sherrill
Stone, the Company's Chief Executive Officer, received a base salary of
$250,000, an increase of 10.4% over the previous year. As Mr. Stone's did not
receive a bonus during fiscal year 2003 his total compensation (base salary and
bonus) decreased by 41% over the previous year. Mr. Stone was not granted any
options to purchase shares of the Company's Common Stock during fiscal 2003.

Mr. Stone's base salary is not solely related to specific measures of
corporate performance. His tenure of service and his current job
responsibilities, as well as the relative salaries of his peers in the
industries in which the Company competes are also used to determine his base
salary. Any stock options awarded to Mr. Stone are not necessarily directly tied
to specific measures of corporate performance. Such awards are generally based
on his current compensation and the Company's overall relative performance.

1995 Stock Option and Restricted Stock Plan. Our Board of Directors
adopted the 1995 Stock Option and Restricted Stock Plan (the "1995 Plan") to
attract, motivate and retain qualified employees. The 1995 Plan was approved by
our shareholders on November 21, 1996 and became effective

immediately thereafter. Our Board of Directors, which administers the 1995 Plan,
delegated to the Compensation Committee its power to determine which employees
should be awarded stock options or restricted stock pursuant to the plan. From
time to time, our Chief Executive Officer will recommend to the Compensation
Committee individuals he believes should receive an option or grant, and, with
respect to any recommended option, whether the option should be a qualified or
nonqualified. The Compensation Committee will consider, but need not accept, the
Chief Executive Officer's recommendations.

Under the terms of the 1995 Plan, options or grants up to an aggregate
of 240,000 shares of Common Stock may be granted to employees and non-employee
directors. The Compensation Committee will determine the number and the exercise
price of the options, and the time or times that the options become exercisable,
provided that an option exercise price may not be less than the fair market
value of our Common Stock on the date of grant. The Compensation Committee will
also determine the term of an option, provided that the term of a qualified
option may not exceed 10 years. The Compensation Committee may grant shares of
restricted stock without requiring the payment of cash consideration for the
shares. As of June 30, 2003, there were 17,400 shares of Common Stock still
available for grant under the 1995 Plan.

2001 Stock Option and Restricted Stock Plan. Our Board of Directors
adopted the 2001 Stock Option and Restricted Stock Plan (the "2001 Plan") to
attract, motivate and retain qualified employees. The 2001 Plan was approved by
our shareholders on November 20, 2001 and became effective immediately
thereafter. Our Board of Directors, which administers our 2001 Plan, delegated
to the Compensation Committee its power to determine employees should be awarded
stock options or restricted stock pursuant to the 2001 Plan. From time to time,
our Chief Executive Officer will recommend to the Compensation Committee
individuals he believes should receive an option or grant, and, with respect to
any recommended option, whether the option should be a qualified or
nonqualified. The Compensation Committee will consider, but need not accept, the
Chief Executive Officer's recommendations.

Under the terms of the 2001 Plan, options or grants up to an aggregate
of 250,000 shares of Common Stock may be granted to employees and non-employee
directors. Under the 2001 Plan, each of our non-employee directors receive
additional options on the date of our annual shareholders meeting for the prior
year's service on the Board of Directors. The Compensation Committee will
determine the number and the exercise price of the options, and the time or
times that the options become exercisable, provided that an option exercise
price may not be less than the fair market value of our Common Stock on the date
of grant. The Compensation Committee will also determine the term of an option,
provided that the term of a qualified option may not exceed 10 years. The
Compensation Committee may grant shares of restricted stock without requiring
the payment of cash consideration for the shares. As of June 30, 2003, there
were 192,800 shares of Common Stock still available for grant under the 2001
Plan.

The members of the Compensation Committee for the fiscal year ending
June 20, 2003 submit this report:

Joseph V. Mariner, Jr., Chairman,
Bernard S. Lee,
R. Clayton Mulford
Donald A. Sillers, Jr.

The foregoing report of the compensation committee does not constitute
soliciting material and shall not be deemed to be incorporated by reference in
any filing by the Company under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended.

REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS

On May 8, 2000, the Board adopted the Audit Committee Charter setting
out the audit related functions the committee is to perform. A copy of the Audit
Committee Charter was included in the Company's Proxy Statement for its 2001
Annual Meeting of Shareholders. The functions of the Audit Committee of the
Board of Directors (the "Audit Committee") are focused on three areas:

- The adequacy of the Company's internal controls and financial
reporting process and the reliability of the Company's financial
statements.

- The independence and performance of the Company's independent
accountants.

- The Company's compliance with legal and regulatory requirements.

The directors who serve on the Audit Committee are all "independent"
for purposes of the NASDAQ stock market listing standards. That is, the Board
has determined that no members on the Audit Committee have a relationship to the
Company that may interfere with the Committee's independence from the Company
and its management.

Management is responsible for the Company's financial statements,
internal controls and financial reporting process. The Company's independent
accountants are responsible for performing an independent audit of the Company's
financial statements, expressing an opinion as to whether those financial
statements fairly present the financial position, results of operations and cash
flows of the Company in accordance with auditing standards generally accepted in
the United States of America and for issuing a report thereon. The Audit
Committee is responsible for monitoring and overseeing these processes.

In connection with those responsibilities, the Audit Committee meets
with management periodically to consider the adequacy of the Company's internal
controls and the objectivity of its financial reporting and discusses these
matters with the Company's independent accountants and appropriate Company
financial personnel. The Audit Committee regularly meets privately and
independently with both the independent accountants and Company financial
personnel, each of which has unrestricted access to the Audit Committee. During
these private sessions, candid discussions of financial management, accounting
and internal control issues take place. The Audit Committee has the authority
and responsibility to retain and terminate the engagement of the Company's
independent accountants and also periodically reviews their performance and
independence from management. In addition, the Audit Committee reviews the
Company's financial plans and reports recommendations to the full Board for
approval and to authorize action.

In this context, the Audit Committee has reviewed with management and
the independent accountants the audited consolidated financial statements in the
Annual Report on Form 10-K for the fiscal year ended June 30, 2003 (the "Annual
Report"), including a discussion of the quality, not just the acceptability, of
the accounting principles, the reasonableness of significant judgments and the
clarity of disclosures in the consolidated financial statements. Management
represented to the Audit Committee that the Company's consolidated financial
statements were prepared in accordance with accounting principles generally
accepted in the United States of America. The Audit Committee discussed with the
independent accountants matters required to be discussed by Statement on
Auditing Standards No. 61, "Communication with Audit Committees," which
includes, among other items, matters related to the conduct of the audit of the
Company's financial statements.

The independent accountants also provided the Audit Committee with
written disclosures and the letter required by Independence Standards Board
Standard No. 1, "Independence Discussion with Audit Committees." The Committee
discussed with the independent accountants that firm's independence and
considered whether non-audit services provided by the independent accountants
are compatible with maintaining its independence.

Based on the Audit Committee's discussions with management and the
independent accountants, as well as a review of the representations of
management and the report of the independent accountants to the Audit Committee,
the Audit Committee recommended to the Board that the Company's audited
consolidated financial statements be included in the Annual Report, as filed
with the Securities and Exchange Commission.

The Audit Committee has selected Grant Thornton LLP to be employed as
the Company's independent certified public accountants to perform the annual
audit and to report on, as may be required, the consolidated financial
statements which may be filed by the Company with the Securities and Exchange
Commission during the ensuing year.

The members of the Audit Committee for the fiscal year ending June 20,
2003 submit this report:

Bernard S. Lee, Chairman
Joseph V. Mariner
Donald A. Sillers, Jr.

The foregoing report of the audit committee does not constitute
soliciting material and shall not be deemed to be incorporated by reference in
any filing by the Company under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended.

STOCK PRICE PERFORMANCE GRAPH

The following graph compares the cumulative total shareholder return
over a five-year period, assuming $100 invested at June 30, 1998 in each of (1)
our Common Stock, (2) the Dow Jones Industrial Average and (3) a peer group
consisting of manufacturers in the industrial sector providing industrial and
commercial services to other commercial enterprises. Total shareholder return is
based on the increase in the price of the Common Stock with dividends
reinvested. The stock price performance depicted in the Corporate Performance
Graph is not necessarily indicative of future price performance.

The Corporate Performance Graph does not constitute soliciting material
and shall not be deemed incorporated by reference in any filing by the Company
under the Securities Act of 1933, as amended, or the Exchange Act of 1934, as
amended.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
AMONG PEERLESS MFG. CO., THE DOW JONES US INDUSTRIAL AVERAGE INDEX
AND THE DOW JONES US INDUSTRIAL DIVERSIFIED INDEX

[PERFORMANCE GRAPH]

TOTAL RETURN ANALYSIS 6/30/98 6/30/99 6/30/00 6/30/01 6/30/02 6/30/03
- -----------------------------------------------------------------------------------------------------------

Peerless Mfg. Co. $100.00 $ 87.49 $142.95 $306.62 $292.82 $190.35
- -----------------------------------------------------------------------------------------------------------
Dow Jones Industrial Average 100.00 124.67 120.49 122.95 110.27 109.75
- -----------------------------------------------------------------------------------------------------------
Dow Jones US Industrial - Diversified 100.00 123.68 144.97 145.98 96.20 97.74
- -----------------------------------------------------------------------------------------------------------

Source: Research Data Group, Inc. www.researchdatagroup.com (415-241-6506)

OTHER MATTERS

OTHER BUSINESS PRESENTED AT ANNUAL MEETING

As of the date of this Proxy Statement, the Board is not aware of any
matter to be presented for action at the annual meeting other than the matters
set forth herein. If any other matters should arise at the Annual Meeting,
shares represented by proxies will be voted at the discretion of the proxy
holders.

WHERE YOU CAN FIND MORE INFORMATION

The Company files reports, proxy statements and other information with
the Securities and Exchange Commission. You can read and copy these reports,
proxy statements and other information concerning the Company at the Securities
and Exchange Commission public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the public reference room. The
Securities and Exchange Commission maintains an Internet site at
http://www.sec.gov/ that contains reports, proxy and information statements and
other information regarding issuers that file electronically with the Securities
and Exchange Commission, including the Company. The Company's Common Stock is
quoted on the NASDAQ Stock Market National Market under the symbol "PMFG."

A copy of the Company's 2003 annual report containing audited financial
statements accompanies this proxy statement. The annual report does not
constitute a part of the proxy solicitation materials.

If you send your request in writing to Katherine S. Frazier, c/o
Peerless Mfg. Co., 2819 Walnut Hill Lane, Dallas, Texas 75229, we will provide
you, without charge, a copy of our Annual Report on Form 10-K filed with the
Securities and Exchange Commission, or you can download a copy of our Annual
Report on Form 10-K from our website, http://www.peerlessmfg.com.

You should rely only on the information contained or incorporated by
reference in this Proxy Statement to vote on the proposals contained herein. The
Company has not authorized anyone else to provide you with different
information. You should not assume that the information in this Proxy Statement
is accurate as of any date other than October 28, 2003.

By Order of the Board of Directors,

/s/ Katherine S. Frazier

Katherine S. Frazier
Corporate Controller
Secretary / Treasurer

Dallas, Texas
October 28, 2003

APPENDIX 1
PEERLESS MFG. CO.
PROXY
ANNUAL MEETING OF SHAREHOLDERS
NOVEMBER 20, 2003

The undersigned shareholder of Peerless Mfg. Co. (the "Company") does hereby
constitute and appoint Sherrill Stone, Chairman of the Board, and Katherine S.
Frazier, Secretary, Treasury and Controller, as his or her proxy, with full
power of substitution, to attend the Annual Meeting of Shareholders of the
Company to be held at 10:00 a.m. on Thursday, November 20, 2003, at 2819 Walnut
Hill Lane, Dallas, Texas 75229, or any continuation or adjournment thereof, with
full power to vote and act for the undersigned, in his or her name, and to vote
all Common Stock of the Company held by him or her, to the same extent and with
the same effect as the undersigned, in the manner specified below. The
undersigned here revokes any other proxy previously given by him or her.

IF YOU PLAN TO ATTEND THE MEETING AND YOUR SHARES ARE HELD IN THE NAME OF A
BROKER OR OTHER NOMINEE, PLEASE BRING A STATEMENT OR LETTER FROM THE BROKER OR
NOMINEE CONFIRMING YOUR OWNERSHIP OF SHARES.

PLEASE MARK YOUR VOTE LIKE THIS. [X]

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 1.

1. ELECTION OF DIRECTORS:
DONALD A. SILLERS, JR. AND SHERRILL STONE

[ ] FOR All Nominees.

[ ] WITHHOLD All Nominees.

[ ] WITHOLD Authority To Vote For Any Individual Nominee Listed Below.

To withhold authority to vote for any individual nominee, write the nominee's
name below:

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 2.

2. RATIFICATION OF APPOINTMENT OF GRANT THORNTON LLP

[ ] FOR [ ] AGAINST [ ] ABSTAIN

THIS PROXY IS SOLICITED ON BEHALF ON THE BOARD OF DIRECTORS AND WILL BE VOTED AS
DIRECTED THEREIN. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED FOR
PROPOSALS 1 AND 2.

Signature: ________________________________ Dated: _________________, 2003
Signature: ________________________________ Dated: _________________, 2003

This proxy should be signed EXACTLY as your name(s) appear on this proxy card.
Joint owners must EACH sign personally. When signing as attorney, trustee,
executor, administrator, guardian or corporate officer, please give your FULL
title as such. If a corporation, please sign in full corporate name by president
or other authorized officer. If partnership, please sign in partnership name by
authorized person.