SCHEDULE 14A
(RULE 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )

Filed by the Registrant [x]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12

PEERLESS MFG. CO.
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(Name of Registrant as Specified in its Charter)

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

Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.

(1) Title of each class of securities to which transaction applies:

- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:

- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):

- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:

- --------------------------------------------------------------------------------
(5) Total fee paid:

[ ] Fee paid previously with preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

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(2) Form, Schedule or Registration Statement No.:

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(3) Filing Party:

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(4) Date Filed:

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2

PEERLESS MFG. CO.
2819 WALNUT HILL LANE
DALLAS, TEXAS 75229

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER 20, 1997

To the Shareholders of
PEERLESS MFG. CO.:

NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Peerless
Mfg. Co. (the "Company") will be held at the Peerless Mfg. Co. Corporate
Offices, 2819 Walnut Hill Lane, Dallas, Texas, on Thursday, the 20th day of
November, 1997 at 10:00 o'clock a.m., local time, for the following purposes:

1. To elect a Board of Directors to serve during their remaining terms and
until their successors are elected and qualified;

2. To approve an amendment to the Company's Articles of Incorporation, as
amended to date, to authorize 1,000,000 shares of "blank check"
preferred stock, par value $.01 per share;

3. To approve an amendment to the Company's Articles of Incorporation, as
amended to date, to increase to 10,000,000 the number of shares of the
Company's Common Stock, par value $1.00, authorized for issuance; and

4. To transact such other business as may properly come before the meeting
and any adjournment(s) thereof.

The Board of Directors fixed the close of business on September 29, 1997 as
the record date ("Record Date") for the determination of shareholders entitled
to notice of and to vote at the Annual Meeting and any adjournment(s) thereof.
Only shareholders of record at the close of business on the Record Date are
entitled to notice of and to vote at such meeting. The transfer books will not
be closed.

It is important that your stock be represented at the meeting regardless of
the number of shares you hold. You are invited to attend the meeting in person,
but whether or not you plan to attend, please complete, date, sign and return
the accompanying Proxy in the enclosed postage-paid self-addressed envelope. If
you do attend the meeting, you may, if you wish, revoke your Proxy and vote your
shares in person.

By Order of the Board of Directors,

KENT J. VAN HOUTEN
Secretary

Dated: October 20, 1997
3

PEERLESS MFG. CO.
2819 WALNUT HILL LANE
DALLAS, TEXAS 75229

PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER 20, 1997
---------------------

PROXY SOLICITATION

This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Peerless Mfg. Co. (the "Company"), a Texas
corporation, to be used at the Annual Meeting of the Shareholders of the Company
(the "Annual Meeting"), to be held at the Company's corporate offices, 2819
Walnut Hill Lane, Dallas, Texas on Thursday, November 20, 1997, and at any
adjournment(s) thereof. The approximate date on which this Proxy Statement and
accompanying form of Proxy were first sent or given to shareholders is October
20, 1997.

The Company will bear the expense of preparing, printing and mailing this
Proxy Statement and accompanying material to shareholders. Solicitation may be
made by mail, personal contact, telephone and facsimile by officers and other
employees of the Company, who will not receive additional compensation for such
services. The Company may also request brokerage houses, nominees, custodians,
fiduciaries and other similar parties to forward soliciting material to the
Company's record shareholders and will reimburse such persons for their
reasonable associated charges and expenses. The Company has engaged Corporate
Investor Communications, Inc. to represent the Company in the solicitation of
proxies at a cost of $4,000 plus expenses.

VOTING AT THE ANNUAL MEETING

The record date for the determination of shareholders entitled to vote at
the Annual Meeting and to notice thereof was the close of business on September
29, 1997 (the "Record Date"). On the Record Date, there were issued and
outstanding 1,451,992 shares of Common Stock of the Company, par value $1.00 per
share (the "Common Stock"). Each holder of Common Stock is entitled to one vote
for each share owned as of the Record Date on all matters presented at the
meeting. The presence at the Annual Meeting in person or by proxy of the holders
of a majority of the outstanding shares of Common Stock shall constitute a
quorum. The affirmative vote of a majority of the shares eligible to vote and
actually voted at the Annual Meeting, if a quorum is present, is required for
the election of directors and for action on such other matters as may properly
come before the Annual Meeting or any adjournment(s) thereof. The affirmative
vote of two-thirds of the outstanding Common Stock is required for the
amendments to the Company's Articles of Incorporation. The shareholders of the
Company have no appraisal rights under the corporation law statute of the
Company's place of incorporation, the Texas Business Corporation Act (the
"TBCA"), or any other statute or regulation with respect to the proposals
specified in the notice.

Shares represented by valid proxies will be voted in accordance with
instructions contained therein, or, in the absence of such instructions, in
accordance with the Board of Directors' recommendations. Any shareholder who is
present at the meeting but who abstains from voting shall be counted for
purposes of determining whether a quorum exists, but an abstention shall not be
counted as an affirmative vote with respect to any matter. With respect to all
matters other than the election of directors, an abstention would have the same
effect as a vote against the proposal. Any shareholder of the Company has the
unconditional right to revoke such shareholder's proxy at any time prior to the
voting thereof by written notice of revocation to Kent J. Van Houten, Secretary,
Peerless Mfg. Co., 2819 Walnut Hill Lane, Dallas, Texas 75229, by executing a
new proxy, or by attending the Annual Meeting and casting a contrary vote;
however, no

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revocation shall be effective until such notice of revocation has been received
by the Company at or prior to the Annual Meeting.

ELECTION OF DIRECTORS

PROPOSAL ONE -- THE ELECTION OF DIRECTORS

One of the purposes of the Annual Meeting is the election of directors. The
number of directors expected to constitute the whole Board following the Annual
Meeting is five. Unless a shareholder indicates to the contrary, the proxies
named in the enclosed Proxy card will vote such shareholder's shares for the
election as directors of the nominees named below, all of whom are currently
directors of the Company. Each of the director nominees has held the position
listed below his name or a similar position with the same organization for at
least the past five years. The election of directors requires the affirmative
vote of the holders of a majority of the outstanding shares of Common Stock
represented in person or by proxy at the Annual Meeting, if a quorum is present
at the Annual Meeting. Although it is not contemplated that any nominee will
decline or be unable to serve, the proxies will be voted by the proxy holders,
in their discretion, for another person, or for a lesser number of persons, if
such a contingency should arise.

On May 21, 1997, in accordance with the TBCA, the Board of Directors
amended the Company's bylaws to provide for a classified board. The Board of
Directors will consist of three classes, with one director serving in Class I,
and two directors serving in each of Classes II and III. Each nominee will be
elected for the term indicated or until his successor has been duly elected and
qualified. If elected, the Class I Director's term will expire at the 1998
Annual Meeting of Shareholders; the Class II Directors' terms will expire at the
1999 Annual Meeting of Shareholders; and the Class III Directors' terms will
expire at the 2000 Annual Meeting of the Shareholders. Upon expiration of their
respective terms, each class of directors will thereafter be elected for
three-year terms. The Board of Directors' nominees and their respective classes
are:

Class I:

David D. Battershell, 71 -- Consulting Engineer, and a director of the
Company since Fiscal 1980.

Class II:

Bernard S. Lee, 62 -- President, 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 the Company since Fiscal 1982.

Joseph V. Mariner, Jr., 77 -- Investments. Mr. Mariner is also a director
of El Chico Restaurants, Inc., Renters Choice, Inc. and Temtex Industries, Inc.
Mr. Mariner has been a director of the Company since Fiscal 1980.

Class III:

Sherrill Stone, 61 -- Chairman of the Board, Chief Executive Officer and
President of the Company. Mr. Stone has served as a director of the Company
since Fiscal 1985.

Donald A. Sillers, Jr., 71 -- Investments. Mr. Sillers is the former
Chairman of the Board and Chief Executive Officer of the Company and has served
as a director of the Company since Fiscal 1970.

The Board of Directors has an Audit Committee and a Compensation Committee.
The Audit Committee is responsible for reviewing the scope of the audit by the
independent auditors, reviewing the management letter received from the auditors
and recommending changes in the Company's internal accounting controls. The
Compensation Committee is responsible for recommending to the full Board of
Directors salaries and bonuses for the Company's key employees. Both the Audit
Committee and the Compensation Committee in Fiscal 1997 were comprised of
Messrs. Battershell, Lee, Sillers and Mariner. The Board of Directors does not
have a nominating committee.

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During Fiscal 1997, the Board of Directors held eight meetings, the Audit
Committee held one meeting and the Compensation Committee held one meeting. Each
of the directors attended at least 75% of the aggregate number of meetings of
the Board of Directors and any meetings held by any committee on which that
director served. Directors who are not also employees of the Company are paid
$1,250 per quarter, plus $500 for each board or board committee meeting
attended.

THE BOARD OF DIRECTORS URGES SHAREHOLDERS TO VOTE "FOR" EACH OF THE
NOMINEES FOR THE BOARD OF DIRECTORS SET FORTH ABOVE.

AUTHORIZE "BLANK CHECK" PREFERRED STOCK

PROPOSAL TWO -- AUTHORIZE "BLANK CHECK" PREFERRED STOCK

The Board of Directors deems it advisable that the Articles of
Incorporation be amended, subject to approval by the shareholders, to authorize
1,000,000 shares of "blank check" preferred stock, par value $.01 ("Preferred
Stock"). Approval of the amendment to the Articles of Incorporation requires the
affirmative vote of two-thirds of the outstanding shares of Common Stock
entitled to vote at the annual meeting of shareholders. Abstention from voting
on the proposal will have the same effect as voting against the proposal.

The Board of Directors unanimously recommends a vote FOR approval of the
amendment of Article 6 of the Company's Articles of Incorporation.

In the event that both Proposal No. 2 and Proposal No. 3 are approved,
Article 6 of the Company's Articles of Incorporation will read as follows:

"The aggregate number of shares of all classes of stock which the
Corporation shall have the authority to issue is eleven million
(11,000,000) consisting of ten million shares of Common Stock of the par
value of One Dollar ($1.00) and one million shares of Preferred Stock of
the par value of One Cent ($.01) per share. The Board of Directors shall
have authority to establish series of unissued shares of any class by
fixing and determining the designations, preferences, limitations and
relative rights, including voting rights, of the shares of any series so
established to the same extent that such designations, preferences,
limitations and relative rights could be stated if fully set forth in the
articles of incorporation."

In the event Proposal No. 2 is approved and Proposal No. 3 is not approved,
Article 6 of the Company's Articles of Incorporation will read as follows:

"The aggregate number of shares of all classes of stock which the
Corporation shall have the authority to issue is five million (5,000,000)
consisting of four million shares of Common Stock of the par value of One
Dollar ($1.00) and one million shares of Preferred Stock of the par value
of One Cent ($.01) per share. The Board of Directors shall have authority
to establish series of unissued shares of any class by fixing and
determining the designations, preferences, limitations and relative rights,
including voting rights, of the shares of any series so established to the
same extent that such designations, preferences, limitations and relative
rights could be stated if fully set forth in the articles of
incorporation."

The proposed amendment would vest in the Board of Directors the authority
to designate one or more series of Preferred Stock. Such provisions are often
referred to as "blank check" provisions, as they give the Board of Directors the
flexibility, at any time or from time to time, without further shareholder
approval, to create one or more series of Preferred Stock and to determine the
designations, preferences and limitations of each such series, including, but
not limited to, (i) the number of shares, (ii) dividend rights, (iii) voting
rights, (iv) conversion privileges, (v) redemption provisions, (vi) sinking fund
provisions, (vii) rights upon liquidation, dissolution or winding up of the
Company and (viii) other relative rights, preferences and limitations of such
series. If the proposed amendment is approved by the shareholders, it will
become effective upon filing and recording a certificate of amendment to the
Articles of Incorporation or Restated Articles of Incorporation as required by
the TBCA.

The Board of Directors believes that amending the Articles of Incorporation
to permit the Board to authorize the issuance of up to 1,000,000 shares of
"blank check" preferred stock provides the Company with

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the flexibility to address potential future financing needs by creating a series
of Preferred Stock customized to meet the needs of any particular transaction
and to market conditions. The Company also could issue Preferred Stock for other
corporate purposes, such as to implement joint ventures or to make acquisitions.
In addition, while the proposed amendment to authorize "blank check" preferred
stock is not designed to deter or to prevent a change in control, under certain
circumstances, the Company could use the Preferred Stock to create voting
impediments or to frustrate persons seeking to effect a takeover or otherwise
gain control of the Company and thereby to protect the continuity of the
Company's management. In addition, the issuance of additional Preferred Stock at
below market rates would dilute the value of the outstanding securities of the
Company. The Company could also privately place such shares with purchasers who
might favor the Board of Directors in opposing a hostile takeover bid, although
the Company has no present intention to do so. The Company does not currently
have any plans, agreements, commitments or understandings with respect to the
issuance of Preferred Stock. Although the Company is not currently considering
the issuance of Preferred Stock or any such financing or transaction and has no
present intention to issue any series of Preferred Stock, the Board believes
that the Company should have the flexibility to issue Preferred Stock.

If any series of Preferred Stock authorized by the Board provides for
dividends, such dividends, when and as declared by the Board of Directors out of
any funds legally available therefor, may be cumulative and may have a
preference over the Common Stock as to the payment of such dividends. In
addition, if any series of Preferred Stock authorized by the Board so provides,
in the event of any dissolution, liquidation or winding up of the Company,
whether voluntary or involuntary, the holders of each such series of the then
outstanding Preferred Stock may be entitled to receive, prior to the
distribution of any assets or funds to the holders of Common Stock, a
liquidation preference established by the Board of Directors, together with all
accumulated and unpaid dividends. Depending upon the consideration paid for
Preferred Stock, the liquidation preference of Preferred Stock and other
matters, the issuance of Preferred Stock could therefore result in a reduction
in the assets available for distribution to the holders of Common Stock in the
event of liquidation of the Company. Holders of Common Stock do not have any
preemptive rights to acquire Preferred Stock or any other securities of the
Company.

THE BOARD OF DIRECTORS URGES SHAREHOLDERS TO VOTE "FOR" ADOPTION OF THE
AMENDMENT TO THE ARTICLES OF INCORPORATION AUTHORIZING 1,000,000 SHARES OF
"BLANK CHECK" PREFERRED STOCK.

INCREASE IN THE AUTHORIZED NUMBER OF SHARES OF COMMON STOCK

PROPOSAL THREE -- INCREASE IN THE AUTHORIZED NUMBER OF SHARES OF COMMON STOCK

The Company's Articles of Incorporation as amended to date (the "Articles
of Incorporation") presently authorize the issuance of 4,000,000 shares of
Common Stock. As of June 30, 1997, 1,451,992 shares of Common Stock were issued
and outstanding and no shares of Common Stock were held in treasury. There are
98,750 shares reserved for issuance under the Company's 1995 Stock Option and
Restricted Stock Plan (the "Plan"), leaving a balance of 2,449,258 authorized,
unissued, and unreserved shares of Common Stock.

The Board of Directors deems it advisable that the Articles of
Incorporation be further amended, subject to approval by the shareholders, to
increase the number of shares of authorized Common Stock to 10,000,000. Approval
of the amendment to the Articles of Incorporation requires the affirmative vote
of two-thirds of the outstanding shares of Common Stock entitled to vote at the
annual meeting of shareholders. Abstention from voting on the proposal will have
the same effect as voting against the proposal.

The Board of Directors unanimously recommends a vote FOR approval of the
amendment of Article 6 of the Company's Articles of Incorporation.

In the event that both Proposal No. 2 and Proposal No. 3 are approved,
Article 6 of the Company's Articles of Incorporation will read as follows:

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One Dollar ($1.00) and one million shares of Preferred Stock of the par
value of One Cent ($.01) per share." The Board of Directors shall have
authority to establish series of unissued shares of any class by fixing and
determining the designations, preferences, limitations and relative rights,
including voting rights, of the shares of any series so established to the
same extent that such designations, preferences, limitations and relative
rights could be stated if fully set forth in the articles of
incorporation."

In the event Proposal No. 2 is not approved and Proposal No. 3 is approved,
Article 6 of the Company's Articles of Incorporation will read as follows:

"The aggregate number of shares of all classes of stock which the
Corporation shall have the authority to issue is ten million (10,000,000)
consisting of ten million shares of Common Stock of the par value of One
Dollar ($1.00) per share."

The additional shares of Common Stock would become part of the existing
class of Common Stock, and the additional shares, when issued, would have the
same rights and privileges as the Common Stock now issued. There are no
preemptive rights relating to the Common Stock. If the proposed amendment is
approved by the shareholders, it will become effective upon filing and recording
a certificate of amendment to the Articles of Incorporation or Restated Articles
of Incorporation as required by the TBCA.

Although the Company has no present plans, agreements or understandings
regarding the issuance of the proposed additional authorized shares of Common
Stock, the Board of Directors believes that adoption of the amendment is
advisable because it will provide the Company with greater flexibility in
connection with possible future financing transactions, acquisitions of other
products or businesses, stock dividends or splits, employee benefit plans and
other proper corporate purposes. Moreover, having such additional authorized
shares available will, subject to applicable law and rules of any exchange or
market on which the Common Stock is traded, give the Company the ability to
issue shares without the expense and delay of shareholder action to approve an
amendment to the Articles of Incorporation. Such a delay could deprive the
Company of the flexibility the Board views as important in facilitating the
effective use of the Company's shares. Except as otherwise required by
applicable law or the rules of any exchange or market on which the Common Stock
is traded, authorized but unissued shares of Common Stock may be issued at such
time, for such purposes and for such consideration as the Board of Directors may
determine to be appropriate, without further authorization by shareholders.

Since the issuance of additional shares of Common Stock, other than on a
pro rata basis to all current stockholders, would dilute the ownership interest
of a person seeking to obtain control of the Company, such issuance could be
used as an anti-takeover device to discourage a change in control of the Company
by making it more difficult or costly. The Company could also privately place
such shares with purchasers who might favor the Board of Directors in opposing a
hostile takeover bid, although the Company has no present intention to do so.
The Company is not aware of anyone seeking to accumulate Common Stock or obtain
control of the Company, and has no present intention to use the additional
authorized shares to deter a change in control or otherwise as an anti-takeover
device.

THE BOARD OF DIRECTORS URGES SHAREHOLDERS TO VOTE "FOR" ADOPTION OF THE
AMENDMENT TO THE ARTICLES OF INCORPORATION AUTHORIZING THE INCREASED NUMBER OF
SHARES OF COMMON STOCK.

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COMMON STOCK OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS

The following table sets forth certain information, as of the Record Date,
concerning each nominee for director, the named executive officers, and certain
beneficial owners regarding beneficial ownership of the Company's Common Stock.
Mr. Sillers, Quest Advisory Corp. and Cannell Capital Management are the only
persons or entities known by the Company to beneficially own more than 5% of the
Common Stock as of such date.

SHARES OF PERCENT OF
COMMON STOCK COMMON
NAME BENEFICIALLY OWNED STOCK
---- ------------------ ----------

Sherrill Stone(1)......................................... 25,858 1.8%
Donald A. Sillers, Jr.(2)................................. 110,188 7.6%
David D. Battershell(3)................................... 7,100 *
Bernard S. Lee(4)......................................... 4,100 *
Joseph V. Mariner, Jr.(5)................................. 1,850 *
G. D. Cornwell(6)......................................... 9,750 *
Edward Perry(7)........................................... 3,250 *
Quest Advisory Corp.(8)................................... 110,900 7.6%
Cannell Capital Management(9)............................. 85,600 5.9%
All Directors and Officers as a Group (eight persons
including those named above)............................ 162,846 11.2%

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* Less than 1%.

(1) Includes 2,500 stock options that are exercisable within 60 days of this
Proxy Statement. Does not include 150 shares owned of record by Mrs. Jo Ann
Stone, Mr. Stone's wife, as to which shares Mr. Stone disclaims any
beneficial interest.

(2) Includes 26,000 shares owned of record by Mr. Sillers as sole trustee of a
trust, the income from which is payable for life to Mr. Sillers and his
wife, remainder to their children and 500 stock options that are exercisable
within 60 days of this Proxy Statement. Does not include 939 shares owned of
record by Mrs. Virginia Sillers, Mr. Sillers' wife, as to which shares Mr.
Sillers disclaims any beneficial interest.

(3) Includes 500 stock options that are exercisable within 60 days of this Proxy
Statement.

(4) Includes 500 stock options that are exercisable within 60 days of this Proxy
Statement. Does not include 3,000 shares owned of record by Mrs. Pauline
Lee, Mr. Lee's wife, as to which shares Mr. Lee disclaims any beneficial
interest.

(5) Includes 500 stock options that are exercisable within 60 days of this Proxy
Statement.

(6) Includes 1,250 stock options that are exercisable within 60 days of this
Proxy Statement.

(7) Includes 1,250 stock options that are exercisable within 60 days of this
Proxy Statement.

(8) Based on a 13(g) filing dated February 4, 1997, Quest Advisory Corp., Quest
Management Company and Charles M. Royce, controlling person of Quest
Advisory Corp. and Quest Management Company, are deemed the beneficial
owners of 110,900 shares of Common Stock.

(9) Based on a 13(d) filing dated June 11, 1997, Cannell Capital Management is
deemed the beneficial owner of 85,600 shares of Common Stock.

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EXECUTIVE COMPENSATION

The following table sets forth certain information regarding compensation
paid during its fiscal year ended June 30, 1997 to the Company's Chief Executive
Officer and its most highly compensated executive officers whose total annual
salaries and bonuses during fiscal 1997 exceeded $100,000.

SUMMARY COMPENSATION TABLE

LONG TERM COMPENSATION
------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------------- ------------------------ --------------------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING ALL OTHER
COMPEN- STOCK OPTIONS/ LTIP COMPEN-
PRINCIPAL FISCAL SALARY BONUS SATION AWARD(S) SAR'S PAYOUTS SATION
POSITION YEAR ($) ($)(1) ($)(2) ($)(3) (#)(4) ($) ($)(5)
--------- ------ ------- ------ ------- ---------- ---------- ------- ---------

Sherrill Stone 1997 171,693 None None None N/A N/A 3,434
Chairman, CEO & 1996 168,000 8,716 None None 10,000 N/A 3,360
President 1995 164,480 10,878 None 33,750 N/A N/A 3,290
Dayle B. Ellis 1997 140,990 None None None N/A N/A 2,161
Executive Vice 1996 92,500 5,684 None None 5,000 N/A 1,850
President & COO(6) 1995 92,541 7,095 None 33,750 N/A N/A 1,743
Edward Perry 1997 117,942 None None None N/A N/A 2,315
Vice President 1996 115,750 6,063 None None 5,000 N/A 2,315
1995 113,946 7,568 None 33,750 N/A N/A 2,268
G.D. Cornwell 1997 103,723 None None None N/A N/A 2,074
Vice President 1996 101,600 6,063 None None 5,000 N/A 2,032
1995 104,692 7,568 None 33,750 N/A N/A 1,982

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

(2) The aggregate value of Other Annual Compensation paid does not exceed the
lesser of $50,000 or 10% of the salary and bonuses paid to the executive
officers named above.

(3) Restricted stock awards are valued at the closing market price of the Common
Stock as of the date of grant. Dividends are paid on restricted shares at
the same rate paid to all shareholders. The Company's Restricted Stock Plan
is discussed in the "Board Compensation Committee Report on Executive
Compensation -- 1995 Stock Option and Restricted Stock Plan" section.

(4) Amounts shown give effect to grants under the 1995 Stock Option and
Restricted Stock Plan.

(5) Amounts shown represent contributions made by the Company on behalf of the
named executive officers to the Peerless Mfg. Co. Retirement Savings Plan
Trust, a defined contribution plan defined under Section 401(k) of the
Internal Revenue Code of 1986, as amended.

(6) Mr. Ellis' employment with the Company was voluntarily terminated on April
17, 1997.

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OPTION GRANTS DURING 1997 FISCAL YEAR

There were no options granted during Fiscal 1997 to the Named Executive
Officers. In Fiscal 1997, 2,000 Common Stock options (500 Common Stock options
for each non-employee director) were granted, all of which were immediately
exercisable, and 500 common stock options were given to an employee which vests
25% ratably over the first four years of its 10-year exercise period.

OPTION EXERCISES IN 1997 FISCAL YEAR AND

FISCAL YEAR ENDED JUNE 30, 1997 OPTION VALUE TABLE

VALUE OF UNEXERCISED
NUMBER OF OPTIONS IN-THE-MONEY OPTIONS
AT FY-END AT FY-END
SHARES JUNE 30, 1997 JUNE 30, 1997
ACQUIRED VALUE (#) ($)
ON EXERCISE REALIZED --------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------

Sherrill Stone........... 0 0 2,500 7,500 3,750 11,250
Dayle B. Ellis........... 1,250 $14,844 0 0 0 0
Edward Perry............. 0 0 1,250 3,750 1,875 5,625
G. D. Cornwell........... 0 0 1,250 3,750 1,875 5,625

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Board of Directors is composed of Messrs.
Battershell, Lee, Sillers and Mariner, the four independent outside directors of
the Company. No Compensation Committee interlocks existed and no insiders
participated in Compensation Committee decisions in Fiscal 1997.

BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The Compensation Committee is responsible for setting the annual base
compensation and bonus levels and administering the restricted stock program for
the Company's employees, including its executive officers. Its recommendations
are subject to final approval by the Board of Directors. The Company believes
that the key to a successful executive compensation program is in setting
aggressive business goals by integrating the program with the Company's annual
and strategic planning and evaluation processes and by comparing the Company's
results against industry performance levels. The Company's achievements during
the past fiscal year, as well as the individual achievements of its various
business units and divisions, are taken into account in making executive
compensation determinations. In addition, the Company recognizes that it
competes in an increasingly competitive environment, and executive compensation
therefore must also take into account the Company's performance as compared to
that of other companies in the industry or in similar industries. The
Compensation Committee also evaluates on an annual basis the Company's corporate
performance, revenues and share performance with respect 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 of
the Company's executive officers is based upon the following factors: corporate
performance of the Company during the prior year, performance of the divisions
within the Company for which the executive officer is responsible, and a more
subjective evaluation of the executive officer's personal performance. The
evaluation of the Company's corporate performance is directly linked to the
Company's profitability during the period, and therefore is based upon the value
of the stock of the Company. In making this determination, the Compensation
Committee reviews the Company's percentage growth in earnings per share over the
prior year, and the Company's 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 next reviews
the profit performance of the individual divisions for which the executive
officer is responsible. Finally, the Compensation Committee determines the
personal rating for each executive 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 is

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determined in the same manner as for the Company's other executive officers,
except that the Compensation Committee does not review or evaluate any
particular division's performance, but looks to the Company as a whole in
determining corporate performance relevant to the Chief Executive Officer's
compensation. Additionally, the Company and the Chief Executive Officer entered
into an Employment Agreement in 1994 which provides that, under certain
circumstances, the Company will pay the Chief Executive Officer ninety percent
of his annual base compensation for three years as severance pay.

The Committee also recognizes that in order to attract and retain the
highest quality executive officers, its base compensation must be competitive
when compared 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 executive officers, are selected annually by the
Compensation Committee to earn a cash bonus based upon the after-tax
profitability of the Company. This plan requires that the Company achieve a
specific after-tax return on beginning-of-year equity, after which bonuses may
be paid out. The available bonus pool for the Company is calculated on earnings
in excess of the base level.

Once the total bonus pool is calculated, it is 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
the Company's Chief Executive Officer is made in the same manner as that of the
Company's other executive officers. The bonuses paid in Fiscal 1997 to the
executive officers are set forth in the Summary Compensation Table.

The Compensation Committee also recommended that an additional
discretionary bonus pool of $20,000 be established, to be used by the President
for the purpose of recognizing certain outstanding contributions made by any
employee, including the named executive officers, but excluding the President.
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. No awards were made from this
bonus pool to the executive officers named in the Summary Compensation Table in
Fiscal 1997.

1985 Restricted Stock Plan

The Board of Directors adopted the 1985 Restricted Stock Plan (the "1985
Plan") to attract, motivate and retain qualified employees. The 1985 Plan was
approved by the Company's shareholders on November 13, 1985 and became effective
as of December 13, 1985. The 1985 Plan is administered by the Board of
Directors, which delegates to the Compensation Committee its power to determine
which employees should be awarded restricted stock pursuant to the plan. Under
the terms of the 1985 Plan, the Company may grant up to an aggregate of 75,000
shares of restricted Common Stock to any employee or employees. Employees
receiving restricted stock do not pay for such stock; however, certain ownership
restrictions are placed upon the stock on the date of its issuance which lapse
within five years after such issuance. Dividends are paid to the employee on
restricted shares during the restriction period.

During Fiscal 1997, the Company made distributions of 8,000 shares of
restricted stock pursuant to the 1985 Plan. Subsequent to the distribution and
before the fiscal year end, 3,000 shares were returned upon an employee's
voluntary termination from the Company and forfeiture of this grant. As of June
30, 1997,

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following grants were outstanding to the executive officers named in the Summary
Compensation Table, with the restrictions thereon lapsing on the dates
indicated:

LAPSE NUMBER OF VALUE OF SHARES AT
NAMED OFFICER DATE SHARES GRANT ISSUE DATE
------------- ------- --------- ------------------

Sherrill Stone................................ 1/17/98 1,000 $11,250
Edward Perry.................................. 1/17/98 1,000 $11,250
G. D. Cornwell................................ 1/17/98 1,000 $11,250

1995 STOCK OPTION AND RESTRICTED STOCK PLAN

The 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 the Company's shareholders on November 21, 1996 and
became effective immediately thereafter. The 1995 Plan is administered by the
Board of Directors, which delegated to certain members of the Compensation
Committee, Messrs. Battershell, Lee and Mariner, acting as the Stock Option
Committee (the "Stock Option Committee"), its power to determine which employees
should be awarded restricted stock pursuant to the plan. From time to time, the
Chief Executive Officer of the Company will recommend to the Stock Option
Committee individuals he believes should be subject to such Option or grant,
and, with respect to any recommended Option, whether the Option should be a
qualified or nonqualified option. The Stock Option Committee will consider, but
need not accept, the Chief Executive Officer's grant recommendations. Each
non-employee director of the Company or its subsidiaries will receive
nonqualified options to purchase 500 shares of Common Stock on the date that the
shareholders approve the Plan and on the date of the Company's annual
shareholder's meeting for each following year that such director serves on the
Board.

Under the terms of the 1995 Plan, the Company may provide options or grant
up to an aggregate of 100,000 shares of restricted common stock to any employees
or non-employee directors.

The Stock Option 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 the Common Stock on the date of grant. The term of an Option will also
be determined by the Stock Option Committee, provided that the term of a
qualified Option may not exceed 10 years.

The Stock Option Committee may grant shares of Restricted Stock without
requiring the payment of cash consideration for such shares. Currently, there
are no grants awarded under this plan.

In Fiscal 1997, 500 common stock options were given to each non-employee
director which were immediately exercisable, and 500 common stock options were
given to an employee which vests 25% ratably over the first four years of its 10
year exercise period.

This Report is submitted by the members of the Compensation Committee.

DAVID D. BATTERSHELL
BERNARD S. LEE
JOSEPH V. MARINER, JR.
DONALD A. SILLERS, JR.

This Report will not be deemed to be incorporated by reference in any
filing by the Company under the Securities Act of 1933, as amended (the
"Securities Act"), or the Exchange Act, except to the extent that the Company
specifically incorporates this Report by reference.

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CORPORATE PERFORMANCE GRAPH

The following graph compares the cumulative total shareholder return over a
five-year period, assuming $100 invested at June 28, 1992 in each of (i)
Peerless Mfg. Co. common stock, (ii) the Dow Jones Industrial Average and (iii)
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 will not be deemed to be incorporated by reference in any
filing by the Company under the Securities Act or the Exchange Act, except to
the extent that the Company specifically incorporates the graph by reference.

TOTAL RETURN TO STOCKHOLDERS
(ASSUMES $100 INVESTMENT ON 6/30/92)

[GRAPH]

- ----------------------------------------------------------------------------------
6/30/92 6/30/93 6/30/94 6/30/95 6/30/96 6/30/97
- ----------------------------------------------------------------------------------

Peerless Mfg. Co. $100.00 $ 75.34 $ 96.09 $109.29 $113.31 $118.43
- ----------------------------------------------------------------------------------
DJ Industrial Average $100.00 $105.95 $109.23 $137.29 $170.40 $231.21
- ----------------------------------------------------------------------------------
DJ Diversified Industrial $100.00 $120.12 $124.52 $148.04 $185.65 $252.67
- ----------------------------------------------------------------------------------

Source: Carl Thompson Associates www.ctaonline.com (303) 494-5472. Data from
Bloomberg Financial Markets

SECTION 16(A) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's executive officers and directors, and
persons who own more than 10% of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission ("SEC") (and, if such security is registered
on a national securities exchange, also with the exchange). Executive officers,
directors and greater than 10% shareholders are required by SEC regulation to
furnish the Company with copies of all Section 16(a) forms they file.

Based solely on the Company's review of the copies of Forms 3, 4 and 5
furnished to the Company or written representations from certain reporting
persons that no Forms 5 were required for those persons, the Company believes
that, during the fiscal year ended June 30, 1997, its officers, directors and
greater than 10%

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shareholders complied with all Section 16(a) filing requirements applicable to
them; except for one late filing on Form 4 by Donald A. Sillers. This late
filing resulted in two transactions not being reported on a timely basis.

AUDITORS

Grant Thornton has audited the Company's financial statements since Fiscal
1970 and has been selected to act in that capacity for the ensuing fiscal year.
Representatives of Grant Thornton are expected to be present at the Annual
Meeting, will have the opportunity to make a statement if they desire to do so,
and will respond to shareholder questions raised during the meeting.

SHAREHOLDER PROPOSALS

A proper proposal submitted by a shareholder of the Company for
presentation at the Company's 1998 Annual Meeting of Shareholders and received
at the Company's executive office not earlier than May 23, 1998 and not later
than June 22, 1998 will be included in the Company's Proxy Statement and form of
Proxy relating to such Annual Meeting.

OTHER MATTERS

Neither management nor the Board of Directors knows of any matter to be
acted upon at the Annual Meeting other than the matters described above. If any
other matter properly comes before the Annual Meeting or any adjournments
thereof, however, the proxies in the enclosed form confer upon the persons
entitled to vote the shares represented by such proxies discretionary authority
to vote thereon in accordance with their best judgment in the interest of the
Company.

UPON WRITTEN REQUEST TO THE UNDERSIGNED, C/O PEERLESS MFG. CO., 2819 WALNUT
HILL LANE, DALLAS, TEXAS 75229, THE COMPANY WILL PROVIDE, WITHOUT CHARGE, A COPY
OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.

By Order of the Board of Directors,

KENT J. VAN HOUTEN
Secretary

Dallas, Texas
October 20, 1997

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FRONT OF PROXY CARD

PEERLESS MFG. CO.
BOARD OF DIRECTORS PROXY FOR THE ANNUAL MEETING
OF SHAREHOLDERS AT 10:00 A.M. THURSDAY, NOVEMBER 20, 1997
2819 WALNUT HILL LANE, DALLAS, TEXAS 75229

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

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

The undersigned shareholder of Peerless Mfg. Co. (the "Company")
hereby appoints Sherrill Stone and Kent J. Van Houten or either of them,
as proxies, each with full powers of substitution, to vote the shares of the
undersigned at the above-stated Annual Meeting and at any adjournment(s)
thereof:

Proposal Number 1: The election of each of the nominees to the class
indicated:

Election of David D. Battershell as Class I Director.

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

FOR nominee WITHHOLD AUTHORITY
[ ] to vote for nominee [ ]

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

Election of Bernard S. Lee and Joseph V. Mariner, Jr. as Class II
Directors.

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

FOR all nominees (except as WITHHOLD AUTHORITY
provided to the contrary below) [ ] to vote for all nominees [ ]

(INSTRUCTION: To withhold authority to vote for any
individual nominee, write that nominee's name here):

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

Election of Sherrill Stone and Donald A. Sillers, Jr. as Class III
Directors.

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

FOR all nominees (except as WITHHOLD AUTHORITY
provided to the contrary below) [ ] to vote for all nominees [ ]

(INSTRUCTION: To withhold authority to vote for any
individual nominee, write that nominee's name here):

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

Proposal 2: Approval of an amendment to the Company's Articles of
Incorporation to authorize 1,000,000 shares of "blank check"
preferred stock, par value $.01 per share.

[ ] FOR [ ] AGAINST [ ] ABSTAIN
--------------------------------------------------------------------

Proposal 3: Approval of an amendment to the Company's Articles of
Incorporation to increase the number of shares of authorized
Common Stock of the Company to 10,000,000.

[ ] FOR [ ] AGAINST [ ] ABSTAIN
--------------------------------------------------------------------

In their discretion, the proxies are authorized to vote upon
such other business or matters as may properly come before the
meeting or any adjournment thereof.

(Continued and to be signed on the reverse side)

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BACK OF PROXY CARD

(Continued from reverse side)

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND WILL
BE VOTED IN ACCORDANCE WITH THE SPECIFICATIONS MADE ON THE REVERSE SIDE. IF A
CHOICE IS NOT INDICATED WITH RESPECT TO PROPOSALS 1, 2 AND 3 THIS PROXY WILL
BE VOTED "FOR" SUCH PROPOSAL. THE PROXIES WILL USE THEIR DISCRETION WITH
RESPECT TO ANY MATTER REFERRED TO IN ITEM (6). THIS PROXY IS REVOCABLE AT ANY
TIME BEFORE IT IS EXERCISED.

Receipt herewith of the Company's Annual Report and Notice of Meeting
and Proxy Statement, dated October 20, 1997, is hereby acknowledged.

Dated:____________________________, 1997

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

--------------------------------------
(Signature(s) of Shareholder(s))

(Joint owners must EACH sign. Please
sign EXACTLY as your name(s) appear(s)
on this card. When signing as attorney,
trustee, executor, administrator,
guardian or corporate officer, please
give your FULL title.)

PLEASE SIGN, DATE AND MAIL TODAY.