Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Large accelerated filer o

Accelerated filer þ

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o

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

The aggregate value of the voting stock held by non-affiliates of the registrant as of December 31, 2007 was approximately $262.8 million.

The number of shares outstanding of the registrant’s common stock, $0.01 par value, as of August 29, 2008 was 13,080,134.

No documents are incorporated by reference into this Form 10-K.

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

          The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this and other reports we file with the Securities and Exchange Commission (“SEC”) including the information in “Item 1A. Risk Factors” of this Report. There may be other factors that may cause our actual results to differ materially from the forward-looking statements. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. We undertake no obligation to publicly update or revise any forward-looking statement.

          On August 15, 2008, we completed a holding company reorganization. In the reorganization, Peerless Mfg. Co., a Texas corporation, became a wholly owned subsidiary of PMFG, Inc., a newly formed Delaware corporation. Shareholders of Peerless received two shares of common stock of PMFG for each outstanding share of common stock of Peerless held prior to the reorganization. As a result, the reorganization also had the effect of a two-for-one stock split. All share and per share amounts in this Report, including in the consolidated financial statements for the fiscal year ended June 30, 2008, 2007, and 2006 have been retroactively adjusted to give effect to the reorganization, including the two-for-one exchange of PMFG common stock for Peerless common stock. Under SEC rules, PMFG, Inc. is a successor registrant to Peerless Mfg. Co.

          As used in this Report, references to “Company,” “we,” “us” and “our” refer to (a) PMFG, Inc. and its subsidiaries after the holding company reorganization, and (b) Peerless Mfg. Co. and its subsidiaries prior to the holding company reorganization, in each case unless the context requires otherwise. Additionally, references to “PMFG” refer to PMFG, Inc. and references to “Peerless” refer to Peerless Mfg. Co., in each case unless the context requires otherwise.

          Our fiscal year ends on June 30. References in this Report to fiscal 2008, fiscal 2007 and fiscal 2006 refer to our fiscal years ended June 30, 2008, 2007 and 2006, respectively.

Overview

          We are a leading provider of custom-engineered systems and products designed to help ensure that the delivery of energy is safe, efficient and clean. We primarily serve the markets for power generation, natural gas infrastructure, and refining and petrochemical processing.

          We offer a broad range of separation and filtration products, selective catalytic reduction, or SCR, systems, and other complementary products including specialty heat exchangers, pulsation dampeners and silencers. We offer complete systems to our customers as well as individual products that our customers use as components in other systems. Our separation and filtration products remove contaminants from gases and liquids, improving efficiency, reducing maintenance and extending the life of energy infrastructure. Our SCR systems convert nitrogen oxide, or NOx, into nitrogen and water, reducing air pollution and helping our customers comply with environmental regulations. We have provided more than 700 SCR systems, primarily for electric power generation facilities that have more than 90,000 megawatts of electric power generation capability. We believe we have provided more SCR systems than any other supplier of these systems.

          The increasing demand for energy in both developed and emerging countries, coupled with the global trend toward stricter environmental regulations, is driving demand for our systems and products. These trends stimulate investment, both in new power generation facilities, refineries and related infrastructure, and in retrofitting older facilities to extend their useful lives. Further, in response to demand for cleaner, more environmentally responsible power generation, power providers and industrial power consumers are building new facilities that use cleaner fuels, such as natural gas. Power providers in international and domestic markets are also building new facilities that use nuclear technology. We believe we are positioned to benefit from the increase in use of both natural gas and nuclear technology — markets where our competitive strengths are an advantage.

          We have been in business for over 75 years and believe we succeed in winning customer orders because of the relationships we have developed over our years of service; the long history of performance and reliability of our systems and products; and our advanced technical engineering capabilities on complex projects. We work closely with our customers to design and custom-engineer our systems and products to meet their specific needs. Our customers include some of the largest natural gas producers, transmission and distribution companies, refiners, power generators, boiler manufacturers, and engineering and construction companies around the world. Reliable product performance, timely delivery and customer satisfaction are critical in maintaining our competitive position.

          Our business strategy is to continue to pursue opportunities in high-growth international markets, capitalize on opportunities to deliver complete systems, use our technological capabilities to address a broader range of pollutants, further expand our technical expertise by investing in engineering talent, improve our manufacturing processes, and pursue strategic acquisitions. We believe these efforts will improve our financial performance and better position our company to compete globally.

          In April 2008 we acquired Nitram Energy, Inc. for approximately $63.1 million, including transaction costs. Nitram is the parent company of Burgess-Manning, Inc., Bos-Hatten, Inc. and Alco Products, producers of equipment similar and complementary to our existing systems and products. This acquisition broadens our product offerings, expands our position in selected markets, increases our engineering and skilled labor resources, broadens our research and development capabilities, and furthers our strategy of providing more complete systems to our customers. In addition, the acquisition of Nitram should improve our financial results by improving manufacturing and supply chain efficiencies and leveraging the cost of our corporate overhead.

          On August 15, 2008, we completed a holding company reorganization. In the reorganization, Peerless Mfg. Co., a Texas corporation, became a wholly owned subsidiary of PMFG, Inc., a newly formed Delaware corporation. Shareholders of Peerless received two shares of common stock of PMFG for each outstanding share of common stock of Peerless held prior to the reorganization. As a result, the reorganization also had the effect of a two-for-one stock split. Our business, operations and management did not change as a result of the holding company reorganization.

          We filed a shelf registration statement with the SEC that will allow us to sell, from time to time, up to 3,000,000 shares of our common stock in one or more offerings. The shelf registration statement gives us greater flexibility to raise funds from the offering of our common stock, subject to market conditions and our capital needs. The shelf registration statement was declared effective by the SEC in August 2008. Proceeds from sales of our securities under the registration statement will be used for the purposes described in a prospectus supplement filed at the time of any offering. Under the terms of our debt agreements, part of the proceeds from any common stock offering would be required to be used to repay a portion of the indebtedness we incurred in connection with our acquisition of Nitram.

          PMFG, Inc. is a holding company and was incorporated in Delaware in 2008 in connection with our reorganization. Peerless Mfg. Co. is now our principal operating subsidiary and was organized in 1933 as a proprietorship and was incorporated as a Texas corporation in 1946. The Company’s business, operations and management did not change as a result of the holding company reorganization. We are headquartered in Dallas, Texas, and maintain engineering, manufacturing and sales offices in the United States, Canada, the United Kingdom and Singapore.

          We primarily serve the power generation, natural gas infrastructure, and refining and petrochemical processing markets. According to the Energy Information Administration, or EIA,

worldwide marketed energy consumption is expected to increase 50% between 2005 and 2030, with the most rapid growth expected in emerging markets. In North America, marketed energy consumption is projected to increase 34.0% between 2004 and 2030. Over the long term, increases in worldwide energy consumption drive demand for infrastructure in our target markets. In the short term, a variety of factors affect demand for energy infrastructure, including general economic conditions, current and anticipated environmental regulations and the level of capital spending by companies engaged in energy production, processing, transportation, storage and distribution.

          Power generation encompasses a broad range of activities related to the production of electricity. The primary types of fuel used to generate electricity are coal, natural gas and nuclear. In 2006, coal accounted for 49% of United States power generation, followed by natural gas (20%), nuclear (19%) and other forms (12%). Coal plants generally have higher emission rates than natural gas-powered plants. In the U.S., concerns about potential environmental regulations have prevented the construction of many proposed coal-fired plants. In contrast, more natural gas-fired plants are being built in the United States, and natural gas has become the fastest growing fuel worldwide for electrical power generation. Natural gas-fired power plants are considered cleaner than coal, and they are more flexible in terms of start-up times. Additionally, the number of nuclear power facilities worldwide continues to increase.

          The natural gas industry consists of the production, processing, transportation, storage and distribution of natural gas. Natural gas is primarily used for electricity generation, residential heating fuel and the production of petrochemicals. The Energy and Information Administration estimates that worldwide natural gas consumption will increase 52.0% between 2005 and 2030, while North American consumption will grow 29.0% between 2004 and 2030. While overall use of natural gas is expected to increase, the EIA estimates that its use for power generation will begin to decline in the United States after 2017.

          Natural gas delivery is a complex process that refines raw natural gas for industrial, commercial or residential uses. Initially, raw natural gas is extracted from the earth and cleansed of contaminants such as dirt and water at the well site. The natural gas is then transported to a processing facility, where it is processed to meet quality standards set by pipeline and distribution companies, such as specified levels of solids, liquids and other gases. After processing, the natural gas is transmitted for storage or through an extensive network of pipelines to end users.

          The natural gas pipeline network in the United States can transport to nearly any location in the lower 48 states. This network, which consists of more than 300,000 miles of interstate and intrastate pipelines and over 1,400 compressor stations, continually undergoes maintenance and expansion upgrades to meet demand. The Federal Energy Regulatory Commission estimates that from January 2007 to February 2008, approximately $6 billion was invested in the United States to fund major pipeline expansions, adding over 14 billion cubic feet per day of new delivery capacity.

          Refining and petrochemical processing involves the refining and processing of fuels and chemicals for use in a variety of applications, such as gasoline, fertilizers and plastics. In response to increasing international demand for petrochemicals and refined products, companies are constructing new refineries and petrochemical processing facilities as well as expanding existing facilities. In many cases,

these new and expanded facilities must comply with stricter environmental regulations, which influence both choice of fuel and demand for systems to control exhaust emissions.

          We believe that a number of trends in the markets in which we operate create significant opportunities for us including:

          The demand for energy in both developed and emerging countries is growing. The EIA estimates that total electricity consumption in the United States will increase 30% between 2006 and 2030. Internationally, rapid industrialization in countries such as China and India is increasing worldwide energy consumption. Consequently, the global demand for energy is placing a strain on existing power generation capacity. This demand for energy is driving the construction of new power generation and related facilities and the retrofitting of existing facilities, many of which are near the end of their useful lives. In 2000, there were over 2,775 power plants operating in the United States, with coal-fired plants providing the most electrical power. Generally, coal-fired power plants are designed with an expected useful life of 25 to 40 years. The average age of coal-fired plants in the United States is approximately 35 years. As these plants age, they must be refurbished or replaced to maintain power generation capacity. Additionally, according to the World Nuclear Association, there are currently 439 nuclear power reactors worldwide, with an additional 36 reactors under construction, 93 reactors planned, and 218 reactors proposed.

          As energy demand increases, the need for energy infrastructure is also expected to rise. The PipeLine and Gas Technology construction report estimates that operators are building, planning and studying the feasibility of approximately 55,654 additional miles of natural gas pipeline throughout the world. According to the INGAA Foundation, Inc., an industry group that sponsors research regarding natural gas use and pipeline construction and operation, approximately $61 billion of new investment in infrastructure will be required to satisfy energy demand between 2003 and 2020 in the United States and Canada, including $19 billion for the replacement of current pipelines and an additional $42 billion to fund new pipeline projects. Internationally, the EIA estimates that approximately 78% of the world’s natural gas reserves are located in the Middle East, Eurasia, Central America and South America, where pipeline systems are generally less developed than the systems in North America. Consequently, new pipeline systems in these regions will need to be constructed to transport natural gas. Additionally, as known reserves of natural gas are depleted, development of other resources, such as deep offshore reserves, will increase, which will require more complex infrastructure.

          Governmental agencies, consumers and others concerned with the environment continue to drive the adoption of stricter environmental regulations. In the United States as well as a number of other countries, legislative and regulatory programs have targeted NOx emissions, which are a byproduct of burning fuels in power generation facilities. These emissions gather at low atmospheric levels causing ground level ozone or the dark haze commonly referred to as smog. NOx is the third most prevalent greenhouse gas behind CO₂ and methane. NOx emissions also have the potential to cause serious respiratory conditions, threaten vegetation and contribute to global warming. State and federal programs in the United States require the reduction of NOx emissions, and in many cases have caused existing power plants to upgrade their emission control equipment to reduce NOx emissions. Internationally,

governmental agencies are also enacting new laws to reduce emissions from power generation facilities. For example, Saudi Arabia has issued regulations to reduce NOx emissions and most economically developed nations (such as those that are members of the Organization for Economic Cooperation and Development) have adopted regulations to reduce or control NOx emissions. The increased regulations require new facilities to incorporate improved NOx emission control capabilities into their designs and some existing facilities to be retrofitted to comply with these regulations.

          In response to demand for cleaner, more environmentally responsible power generation, power providers are building new facilities that use cleaner fuels, such as natural gas, and nuclear technology. In the United States, concerns about potential environmental regulations have prevented the construction of many proposed coal-fired plants. However, more natural gas-fired plants are being built in the United States. In addition, emerging countries are increasing their power generation capacity, including the construction of additional nuclear facilities, to meet their growing power demands. For example, the EIA estimates that the nuclear generation capacity of Asia will increase 116% between 2004 and 2030. Increased concerns about the environment, government tax incentives and government sponsored programs have also stimulated growth in power generation using alternative fuels.

          Environmental, economic, safety, logistical and efficiency concerns are affecting traditional approaches for energy delivery. For example, base load power plants, which are large-scale, capital-intensive facilities that operate continuously and are the foundation of a region’s power generation network, are typically built away from heavily populated areas to reduce concerns regarding pollution and safety. Recently, electric utilities have increased their focus on distributed power generation. Distributed power generation provides power from smaller capacity facilities that are located closer to the final destination of use. Because these facilities are located closer to where the power is needed, they are generally cleaner, lower-emission facilities, often using natural gas. This proximity lowers the cost of bringing power to commercial, industrial and residential end-users and reduces the amount of power lost in transmission. In addition, power generation companies are increasingly relying on peaker plants, which typically operate only in periods of high demand. Most peaker plants use natural gas.

          We believe there is a significant opportunity for companies serving the energy infrastructure market to differentiate themselves by delivering proven solutions to customers in a timely manner. We believe our competitive strengths position us well to capitalize on global energy trends.

          We believe we have established a strong, competitive position in our markets by consistently and reliably providing custom-engineered, quality systems and products to our customers. We consider many of our systems and products to be innovative and technologically advanced, and we continually seek to improve our existing systems and products and develop new systems and products. We believe that our long history of performance has allowed us to gain substantial market share. For example, we have provided more than 700 SCR systems, primarily for electric power generation facilities that have more than 90,000 megawatts of electric power generation capability. We believe we have provided more SCR systems than any other supplier of these systems.

          We have developed strong customer relationships by using our engineering and manufacturing resources to deliver quality systems and products and by providing a high level of customer service. We focus our efforts on consistently and reliably meeting our customers’ needs with respect to system and product performance and timely delivery. We believe that we have established long-term preferred supplier relationships with many of our customers.

          We believe that we compete most effectively in providing solutions that require a high level of complex design and engineering expertise. We currently employ more than 60 engineers with backgrounds in chemical, mechanical, industrial, structural, process and civil engineering. We believe that our customers depend on our engineering and technical expertise and experience in designing complex systems to meet their needs. We regularly employ sophisticated computer and physical modeling, including advanced computerized fluid dynamic modeling, to verify the performance criteria of designs prior to manufacturing our systems and products. We continue to invest in research and development to further broaden our capabilities. We also believe that our proprietary know-how developed over years of industry experience provides us with a competitive advantage.

          We offer our customers an extensive line of systems and products. We believe we can use our proprietary technologies and know-how to further broaden our portfolio of systems and products and expand our market potential. For example, we have utilized the experience and expertise gained from our SCR systems to broaden the application of our environmental control technology to address renewable and alternative fuels. We are also applying our separation technologies to a wider range of fluids such as molten sulfur and petroleum products. By broadening our line of high quality systems and products, we believe we are better able to meet our customers’ needs, enter new markets and add new customers.

          We employ subcontractors at various locations around the world to meet our customers’ needs in a timely manner, meet local content requirements and reduce costs. Subcontractors generally perform the majority of our manufacturing for international customers. We also utilize subcontractors in North America, primarily to add additional non-proprietary manufacturing capacity. We believe that our network of subcontractors improves the timeliness of our delivery, and permits us to achieve more competitive pricing, which improves our market position.

          Our management team is highly experienced in the industries in which we operate, with an average 15 years of industry experience. Our chief executive officer, Peter J. Burlage, joined our company 16 years ago as an engineer. Our chief financial officer, Henry G. Schopfer, joined our management team in 2005 and has 17 years of experience in related industries. Our Vice President of Manufacturing and Supply Chain Management, Charles G. Mogged, has global manufacturing expertise and 20 years of experience managing a global supply chain. We recently added to the depth of our management team through our acquisition of Nitram, led by Robert M. Sherman, a 37-year industry veteran. We believe our management team has the ability to identify, pursue and succeed in taking advantage of opportunities in our target markets.

          Our objective is to enhance our position as a leading global provider of custom-engineered systems and products designed to help ensure that the delivery of energy is safe, efficient and clean. The key elements of our strategy to achieve this goal are:

          We believe we have established a strong international presence, with international sales representing from about 30% to almost 50% of our total sales in each of the last five fiscal years. We estimate that international markets for our systems and products are substantial and are growing more rapidly than our North American markets due to the significant growth in the use of natural gas and the demand for additional power generation in China, the Middle East and Europe, as well as oil recovery and processing in Western Canada. We believe that we are well-positioned to capitalize on this growth. To exploit these opportunities, we are dedicating additional sales and marketing resources to our international operations. Additionally, we intend to continue to develop our established network of subcontractors to grow our international market share and increase profitability.

          We believe that we have a considerable opportunity to utilize our engineering know-how to offer our customers more complete systems and subsystems, rather than individual products that our customers use as components in other systems. Complete systems generally have higher profit margins and should allow us to develop longer-term, preferred supplier relationships with customers. For example, we are marketing fuel gas conditioning systems for the power industry, which combine a series of components, instruments and controls and is custom-engineered to the customers’ specifications. We believe these systems highlight our engineering expertise.

          We believe we have opportunities to further expand our technology and product offerings in related markets both through internal technology development and strategic acquisitions. For example, we have taken the expertise gained from our SCR systems and have applied it to systems for alternative fuel sources. We believe we can employ our technology to reduce emissions in addition to NOx, such as sulfur dioxide and other greenhouse gases. We have also expanded the applications of our separation and filtration technology to liquids such as molten sulfur and petroleum products. By expanding our product and technology offerings, we believe that we can broaden our customer base and capture additional market share.

          We believe our success depends on our ability to attract, retain and develop engineering talent and technical expertise, including skilled labor. As a result, we have actively taken steps to recruit additional engineers and technical workers, including certified welders. For example, we collaborate with local universities on research and development projects, offer engineering scholarships and recruit directly from these universities. We also foster relationships with technical schools to gain exposure to technical talent and opportunities to recruit skilled workers. We believe that these investments will allow us to maintain and expand our engineering expertise, improve our manufacturing capabilities and capacity and pursue additional business opportunities.

          Our customers place a high priority on timely delivery. To best meet these customer demands, we are actively seeking to improve our manufacturing processes and reduce costs. In addition, we are streamlining our production processes. We believe these manufacturing initiatives will improve the timeliness of our delivery, providing us with an opportunity to increase our market share and profitability, while maintaining competitive pricing.

          We believe that strategic acquisitions will help us to broaden our product offerings, expand our markets, advance our research and development capabilities, further our strategy of providing more systems to our customers and provide opportunities to lower raw material costs and leverage the cost of our corporate overhead. We continually review potential acquisitions and believe we have established a diligent process for identifying complementary acquisition opportunities.

          We classify our systems and products into two broad groups consistent with our reportable segments: separation/filtration systems and environmental systems. Below is a brief description of our primary offerings for each of our segments.

          Our separation/filtration systems segment accounted for 56.6% of total revenues in fiscal 2008, compared to 62.9% of total revenues in fiscal 2007 and 68.8% of total revenues in fiscal 2006. Our separation and filtration systems and products improve efficiency, reduce maintenance and extend the life of energy infrastructure by removing liquid contaminants from vaporous gas, removing solid contaminants from vaporous gas or liquids and separating different liquids. In addition, products in our separation/filtration systems segment include pulsation dampeners, heat exchangers and industrial silencers. Our separation and filtration systems and products are applied in the power generation, natural gas infrastructure, refining and petrochemical processing and other specialized industries. Our separation and filtration systems and products include:

          Our environmental systems segment accounted for 43.4% of total revenues in fiscal 2008, compared to 37.1% of total revenues in fiscal 2007 and 31.2% of total revenues in fiscal 2006. We design, engineer, fabricate and sell environmental control systems and products for air pollution abatement. Our environmental control systems and products are applied in the power generation, natural gas infrastructure, refining and petrochemical processing and other specialized industries. Examples of these systems and products include:

          Our customers are geographically diversified, with $88.8 million of sales for fiscal 2008 derived from customers in the United States and $51.7 million from customers in other countries. Our systems and products are not dependent upon any single customer or group of customers. However, the custom-designed and project-specific nature of our business can cause year-to-year variances in sales to our major customers. During fiscal 2008, one customer accounted for 21% of our consolidated revenues. No other customer accounted for more than 10% of revenues in fiscal 2008.

          We sell the majority of our separation and filtration systems and products, including gas separators, filters and conditioning systems, to gas producers, gas gathering, transmission and distribution companies, chemical manufacturers and refiners, either directly or through contractors engaged to build plants and pipelines. We also sell these products to manufacturers of compressors, turbines, and nuclear and conventional steam generating equipment. We sell our marine separation and filtration systems primarily to shipbuilders. We also sell our heat exchangers, pulsation dampeners and industrial silencers to power generation owners and operators, refiners, petrochemical processors and specialty industrial users.

          We sell our environmental control systems and products to power generators, engineering and construction companies, heat recovery steam generator manufacturers, boiler manufacturers, refiners, petrochemical plants and others who desire or may be required by environmental regulations to reduce NOx emissions and ground level ozone, of which NOx is a precursor.

          We believe our sales and marketing efforts have helped establish our reputation for providing innovative engineering solutions and meeting our customers’ needs in a timely, cost-efficient manner.

The sales and marketing of our systems and products largely depends upon the type of offering, type of market and extent of engineering involvement in the sales cycle.

          We market our products worldwide through approximately 60 independent sales representatives who sell on a commission basis. These independent representatives, substantially all of whom have technical backgrounds, work in conjunction with our application engineers. We also sell our products directly to customers through our internal sales force.

          Our promotional and marketing activities include direct sales contacts, participation in trade shows, an internet website, advertising in trade magazines and distribution of product brochures.

          The markets we serve are highly competitive and fragmented, with no company competing with us across the full range of our systems and products. Competition in the markets we serve is based on a number of considerations, including price, timeliness of delivery, technology, applications experience, know-how, reputation, product warranties and service. We believe our reputation, service and technical engineering capabilities differentiate us from many of our competitors, including those competitors who often offer products at a lower price.

          We believe our primary competitors for our separation and filtration systems and products include Anderson Separators Company, King Tool Company, NATCO Group Inc. and PECO-Facet, a subsidiary of CLARCOR, Inc. We believe our primary competitors for our environmental control systems and products include EnviroKinetics, Inc., Hitachi Zosen Corporation and Applied Utility Systems, Inc.

          Our backlog of uncompleted orders was $107.0 million at June 30, 2008, compared to $97.0 million at June 30, 2007. Backlog has been calculated under our customary practice of including incomplete orders for products that are deliverable in future periods but that could be changed or cancelled. Of our backlog at June 30, 2008, we estimate approximately 97% will be completed during fiscal 2009, compared to 92% at June 30, 2007 that we anticipated would be completed in fiscal 2008.

          We purchase raw materials and component parts essential to our business from a number of reliable suppliers. During fiscal 2007 and 2008, we experienced increased costs and order lead-times for raw materials, including steel, and other component parts that we purchase from third-party suppliers. We mitigated the increase in costs and potential delays through forward purchase contracts and escalation clauses in our supply contracts. We believe that raw materials and component parts will be available in sufficient quantities to meet our anticipated demand for at least the next 12 months.

          Our operations are subject to a number of federal, state and local laws and regulations relating to the protection of the environment. In connection with our acquisition of Nitram and the related financing transactions, environmental site assessments were performed on both our existing manufacturing properties and Nitram’s properties in Cisco, Texas and Wichita Falls, Texas. These assessments involved visual inspection, testing of soil and groundwater, interviews with site personnel and a review of publicly available records. The results of these assessments indicated soil and groundwater contamination at the

Cisco plant and at the Vermont Street plant in Wichita Falls and groundwater contamination at the Jacksboro Highway plant in Wichita Falls. Further investigation is required, and remediation of the affected areas will likely be required. We believe that we will be reimbursed for the cost of any remediation under our purchase agreement with Nitram’s former stockholders. In addition, funds have been deposited into an escrow account that may be used to reimburse us for these costs.

          As of June 30, 2008, we employed 402 full-time employees and five part-time employees. None of our employees are represented by a labor union or are subject to a collective bargaining agreement. We did not experience any material labor difficulties during fiscal 2008. We believe our employee relations are good.

          Our corporate website is located at www.peerlessmfg.com. We make our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) available free of charge through our website as soon as reasonably practicable after we electronically file the reports with, or furnish them to, the SEC. Our website also provides access to reports filed by our directors, executive officers and certain significant stockholders pursuant to Section 16 of the Exchange Act. In addition, our corporate governance policies, corporate code of conduct and charters for the standing committees of our board of directors are available on our website. The information on our website is not incorporated by reference into this Report. In addition, the SEC maintains a website, www.sec.gov, that contains reports, proxy and information statements and other information that we file electronically with the SEC.

          Our executive officers as of August 29, 2008, were as follows:

          Peter J. Burlage joined the Company in 1992. Mr. Burlage has served as our President and Chief Executive Officer and a member of our Board of Directors since June 2006. He served as Executive Vice President and Chief Operating Officer from October 2005 to June 2006 and Vice President, Environmental Systems from January 2001 to October 2005. Mr. Burlage also served as Vice President of Engineering from 2000 to 2001 and SCR Division Manager from 1997 to 2000. He earned a B.S. in Mechanical Engineering from the University of Texas, Arlington and an M.B.A. from Baylor University.

          Charles G. Mogged, Jr. joined the Company in July 2007 as our Vice President, Manufacturing & Supply Chain Management. Prior to joining the Company, he served as Senior Vice President,

Operations—North America for Manitowoc Crane Group, a tower crane manufacturing company, from 2005 through 2006, and as Vice President of Engineering for Overhead Door Corporation, a manufacturer of custom garage doors, from 2002 to 2005. Mr. Mogged began his career with Deere & Company, serving over 20 years in a variety of manufacturing and engineering capacities both domestically and overseas from 1977 to 2001. He earned a B.S. in Mechanical Engineering from Massachusetts Institute of Technology, and an M.B.A. from the University of Chicago.

          Sean P. McMenamin joined the Company in 2001. Mr. McMenamin has served as our Vice President, Environmental Systems since January 2006. He served as product manager for refinery and retrofit applications in our environmental systems business from 2001 to January 2006. Prior to joining the Company, Mr. McMenamin was a project manager for Telcordia Technologies from 1999 to 2001, and served in various positions in the environmental and power business at Foster Wheeler from 1994 to 1999. He earned a B.S. in Mechanical Engineering from the New Jersey Institute of Technology and an M.B.A. in Finance from Lehigh University.

          Henry G. Schopfer, III joined the Company in October 2005 as our Chief Financial Officer. Prior to joining the Company, he served as Chief Financial Officer of T-Netix, Inc., a telecommunications company, from 2001 to 2005, as Chief Financial Officer of Wireless One, Inc., a communications company, from 1996 to 2000 and as Chief Financial Officer and Corporate Controller of Daniel Industries, Inc., a manufacturer of fluid measurement products and systems for the energy industry, from 1988 to 1996. Mr. Schopfer earned a B.S. in Accounting from Louisiana State University and is a Certified Public Accountant (inactive).

          Jon P. Segelhorst joined the Company in August 2006. He has served as our Vice President, Pressure Products since January 2007. He served as General Manager of our Pressure Products business from August 2006 to January 2007. Prior to joining the Company, Mr. Segelhorst managed surge protection and DSL product lines for Corning Cable Systems, a telecommunications equipment company, from 1996 to 2006. Mr. Segelhorst holds several U.S. patents related to fiber optic hardware. He earned a B.S. in Mechanical Engineering from the University of Texas at Austin and an M.B.A. from Baylor University.

          Robert M. Sherman joined the Company as a Vice President in May 2008 in connection with our acquisition of Nitram Energy, Inc. Prior to joining the Company, he served as President of Nitram from 1988 until May 2008. Mr. Sherman earned a B.S in Mechanical Engineering and an M.B.A. from Southern Methodist University and is a licensed Professional Engineer.

          David Taylor joined the Company in 1988. Mr. Taylor has served as our Vice President, Separation Systems since 2000. He has served in a variety of engineering, sales and management positions since joining the Company. From 1997 through 1999, Mr. Taylor served as Director of Sales and Engineering in our Singapore office in support of our Asia Pacific operations and resumed responsibility for our Asia Pacific operations in July 2004. He earned a B.S. in Mechanical Engineering from Southern Methodist University.

          In evaluating the Company, the factors described below should be considered carefully. The occurrence of one or more of these events could significantly and adversely affect our business, prospects, financial condition, results of operations and cash flows.

Changes in the price, supply or demand for natural gas could have an adverse impact on sales of our separation and filtration systems and products and our operating results.

          A large portion of our separation/filtration systems business is driven by the construction of natural gas infrastructure. Increased demand for natural gas may result in the construction of additional infrastructure. Higher prices of natural gas, while beneficial to exploration activities and the financing of new projects, can adversely impact the demand for natural gas. Excess supply could also negatively impact the price of natural gas, which could discourage spending on related capital projects.

Changes in the power generation industry could have an adverse impact on sales of our environmental control systems and products and our operating results.

          The demand for our environmental control systems and products depends in part on the continued construction of new power generation and related facilities and the retrofitting of existing facilities. The power generation industry is cyclical and has experienced periods of slow or no growth in the past. Any change in the power generation industry that results in a decrease in new construction or refurbishing of power plants, in particular natural gas facilities, could have a material adverse impact on our environmental systems segment’s revenues and our results of operations.

Changes in current environmental legislation could have an adverse impact on the sale of our environmental control systems and products and on our operating results.

          Our environmental systems business is primarily driven by capital spending by our customers to comply with laws and regulations governing the discharge of pollutants into the environment or otherwise relating to the protection of the environment or human health. These laws include U.S. federal statutes such as the Resource Conservation and Recovery Act of 1976, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), the Clean Water Act, the Clean Air Act, the Clean Air Interstate Rule (CAIR), and the regulations implementing these statutes, as well as similar laws and regulations at state and local levels and in other countries. These U.S. laws and regulations may change and other countries may not adopt similar laws and regulations. In July 2008, the U.S. Court of Appeals for the District of Columbia vacated the CAIR in its entirety and instructed the Environmental Protection Agency to issue a new rule. Our business may be adversely impacted by this court ruling and may also be adversely impacted to the extent that other regulations requiring the reduction of NOx emissions are repealed, amended or implementation dates delayed or to the extent that regulatory authorities reduce enforcement.

The acquisition of Nitram was significantly larger than any other acquisition we have made. This acquisition could disrupt our business and harm our financial condition if we are not able to successfully integrate the acquired business or if we are not able to achieve the expected benefits of this transaction.

          We completed the acquisition of Nitram in April 2008. This acquisition is the largest and most significant in our history. As a result of the acquisition, we are integrating Nitram’s operations with our existing operations. To realize the anticipated benefits of this acquisition, we are also implementing and integrating new management and financial reporting systems and controls. We may experience difficulties and higher than expected costs in integrating Nitram’s operations and implementing these

systems. This integration may require significant time and attention from our management and other personnel, which may distract their attention from our day-to-day operations. Further, because we historically have not engaged in significant acquisition transactions, our senior management has very limited experience in integrating acquired businesses.

          The success of the Nitram acquisition will also depend, in part, on our ability to realize the anticipated revenues and cost savings opportunities from combining the Nitram business with our business. We cannot assure you that our financial results will meet or exceed the financial results that would have been achieved without this acquisition. If our integration of Nitram is not successful or if Nitram’s operations are less profitable than we currently anticipate, our business, financial condition and results of operations could be materially adversely affected.

We incurred substantial debt in connection with our acquisition of Nitram. Our substantial indebtedness and related debt service obligations could have a negative impact on our business.

          We incurred substantial debt in connection with our acquisition of Nitram. As of June 30, 2008, we had $60 million of outstanding indebtedness, comprised of a $40 million senior secured term loan and $20 million of secured subordinated debt. We also have a revolving credit facility available for working capital needs. We have not utilized the revolving credit facility and, as of June 30, 2008, we had approximately $8.9 million available (subject to borrowing base restrictions) for borrowing. Among other things, our substantial indebtedness and debt service obligations:

          Our ability to pay principal and interest on our long-term debt and to satisfy our other liabilities will depend upon our future performance and our ability to refinance our debt as it becomes due. Our future operating performance and ability to refinance will be affected by economic and capital markets conditions, our financial condition, results of operations and prospects and other factors, many of which are beyond our control.

          If we are unable to service our indebtedness and fund our operating costs, we will be forced to adopt alternative strategies that may include:

There can be no assurance that any of these strategies could be implemented on satisfactory terms, if at all.

Restrictions in our debt agreements limit our operating and strategic flexibility.

          Prior to entering into the debt agreements to finance the Nitram acquisition, we had no long-term debt and substantial cash balances. Our debt agreements contain covenants and events of default that, among other things, require us to satisfy financial tests and maintain financial ratios, including a minimum fixed charge coverage ratio, a maximum leverage ratio and a minimum net worth requirement. Among other things, these covenants and events of default limit our ability to, or do not permit us to:

          Events beyond our control could affect our ability to comply with these covenants, including the required financial ratios. Failure to comply with any of these debt covenants would result in a default under these debt agreements. A default would permit lenders to accelerate the maturity of the debt under these agreements, foreclose upon our assets securing the debt and terminate any commitments to lend. Moreover, any of our debt agreements that contain a cross-default or cross-acceleration provision that would be triggered by such default or acceleration would also be subject to acceleration upon the occurrence of such default or acceleration. Under these circumstances, we may not have sufficient funds or other resources to satisfy our debt and other obligations. In addition, the limitations imposed by these debt agreements on our ability to incur additional debt and to take other actions may significantly impair our ability to obtain other financing and may prevent us from taking advantage of attractive business opportunities.

A portion of our debt is subject to variable interest rates. If interest rates increase, our interest expense will also increase.

          We incurred $40 million of variable rate debt in connection with the Nitram acquisition. In addition, we pay interest based on variable interest rates under our new revolving credit facility. If market interest rates increase, our interest payments will increase, adversely affecting our cash flow and results of operations.

          Our ability to operate our businesses and implement our strategies depends, in part, on the efforts of our executive officers and other key employees, including engineers. We do not have employment contracts with each of our executive officers. The loss of the services of one or more executive officers or other key employees could have an adverse effect on our business or business prospects. In addition, we do not maintain key-person insurance on the lives of any of our executive officers or other employees and the loss of any one of them could disrupt our business.

Our industry has recently experienced shortages in the availability of skilled workers. Any difficulty we experience replacing or adding qualified personnel could adversely affect our business.

          Our operations require the services of employees having technical training and related experience, including certified welders. As a result, our operations depend on the continuing availability of qualified employees. Our industry is experiencing shortages of workers with the necessary skills. If we should suffer any material loss of these employees to competitors, or be unable to employ additional or replacement personnel with the requisite level of training and experience, our operations could be adversely affected. A significant increase in the wages paid to these workers by other employers could result in a reduction in our workforce, increases in wage rates, or both.

Competition could result in lower sales, decreased margins and loss of market share.

          We operate in highly competitive markets worldwide, and contracts for our systems and products are generally awarded on a competitive basis. We face competition from potential new competitors that in some cases face low barriers to entry, specialized competitors that focus on competing with only one of our systems or products and low cost competitors that are able to produce similar systems and products for less. Competition could result in not only a reduction in our sales, but also may lower the prices we can charge for our systems and products and reduce our market share. To remain competitive we must be able to anticipate and respond quickly to our customers’ needs and enhance and upgrade our existing systems and products to meet those needs. We must also be able to price our systems and products competitively and make timely delivery of our systems and products. Our competitors may develop less expensive or more efficient systems and products, may be willing to charge lower prices in order to increase market share and may be better equipped to make deliveries to customers on a more timely basis. Some of our competitors have more capital and resources than we do and may be better able to take advantage of market opportunities or adapt more quickly to changes in customer requirements. In addition, despite increased market demand, we may not be able to realize higher prices for our systems and products because we have competitors that use cost-plus pricing and do not set prices in accordance with market demand.

If actual costs for our projects with fixed-price contracts exceed our original estimates, or if we are required to pay liquidated damages due to late delivery, our profits will be reduced or we may suffer losses.

          The majority of our contracts are fixed-price contracts from which we have limited ability to recover cost overruns. Because of the large scale and long-term nature of our contracts, unanticipated cost increases may occur as a result of several factors, including:

          In addition to increasing costs, these factors could also delay delivery of our products. Our contracts often provide for liquidated damages in the case of late delivery. Unanticipated costs that we cannot pass on to our customers under fixed contracts, such as increases in steel prices, or liquidated damages that we are required to pay in the case of late delivery, could negatively impact our profits.

Increasing costs for manufactured components and raw materials, such as steel, may adversely affect our profitability.

          We use a broad range of manufactured components and raw materials in our products, primarily raw steel and steel-related components. The costs for many of these components and materials have increased. Further increases in the price of these items could further materially increase our operating costs and materially adversely affect our profit margins.

The inability of our engineering or manufacturing operations to meet customer demand for new orders with short delivery times may require us to outsource additional aspects of our business, resulting in increased variable costs incurred by us that are not included in our manufacturing overhead.

          Our engineering and manufacturing operations require a highly skilled workforce for which there is increasing demand and short supply in a very competitive environment. Consequently, increased demand to produce product orders that require tight delivery and short order cycle times may require us to outsource the engineering or manufacturing of these orders. The additional expense incurred to outsource these functions is a variable cost that is not part of our manufacturing overhead, and the incurrence of this variable cost could negatively affect our profit margins.

Our use of subcontractors could harm our profitability and business reputation.

          We employ subcontractors at various locations around the world to meet our customers’ needs in a timely manner, meet local content requirements and reduce costs. Subcontractors generally perform the majority of our manufacturing for international customers. We also utilize subcontractors in North America, primarily to add additional non-proprietary manufacturing capacity. The use of subcontractors decreases our control over the performance of these functions and could result in project delays, escalated costs and substandard quality. These risks could adversely affect our profitability and business reputation. In addition, many of our competitors, who have greater financial resources and greater bargaining power than we have, use the same subcontractors that we use and could potentially influence our ability to hire these subcontractors. If we were to lose relationships with key subcontractors, our business could be adversely impacted.

Customers may cancel or delay projects. As a result, our backlog may not be indicative of our future revenues.

          Customers may cancel or delay projects for reasons beyond our control. Our orders generally contain cancellation provisions which permit us to recover our costs, and for most contracts, a portion of our anticipated profit in the event a customer cancels an order. If a customer cancels an order, we may not realize the full amount of revenues included in our backlog. If projects are delayed, the timing of our revenues could be affected and projects may remain in our backlog for extended periods of time.

Revenue recognition occurs over long periods of time and is subject to unanticipated delays. If we receive relatively large orders in any given quarter, fluctuations in the levels of our quarterly backlog can result because the backlog in that quarter may reach levels that may not be sustained in subsequent quarters. As a result, our backlog may not be indicative of our future revenues.

Our ability to conduct business outside the United States may be adversely affected by factors outside of our control and our revenues and profits from international sales could be adversely impacted.

          Revenues generated outside the United States represented 36.8%, 37.3% and 48.7% of our consolidated revenues during fiscal 2008, 2007 and 2006, respectively. Our operations and earnings throughout the world have been, and may in the future be, affected from time to time in varying degrees by a number of factors, including changes in foreign laws and regulations, regional economic uncertainty, political instability, customs and tariffs, government sanctions, fluctuations in foreign currency exchange rates and tax rates. The likelihood of the occurrence and the overall effect on our business vary from country to country and are not predictable. These factors may result in a decline in revenues or profitability, could adversely affect our ability to expand our business outside of the United States and may impact our ability to deliver our products and collect our receivables.

Our financial performance may vary significantly from period to period, making it difficult to estimate future revenues.

          Our revenues and earnings have varied in the past and are likely to vary in the future. Our contracts generally stipulate customer specific delivery terms and may have contract cycles of a year or more, which subjects these contracts to many factors beyond our control. In addition, contracts that are significantly larger in size than our typical contracts tend to have a greater impact on our operating results. Furthermore, as a significant portion of our operating costs are fixed, an unanticipated decrease in our revenues, a delay or cancellation of orders in backlog, or a decrease in the demand for our products, may have a significant impact on our operating results. Therefore, our operating results may be subject to significant variations and our operating performance in any period may not be indicative of our future performance.

Our use of the percentage-of-completion method of accounting for contract revenues may result in material adjustments that would adversely affect our operating results.

          Substantially all of our revenues are recognized using the percentage-of-completion method. Under this method, estimated contract revenues are accrued based generally on the percentage of costs to date compared to total estimated costs. Estimates are based on management’s reasonable assumptions and our historical experience. Estimated contract losses are recognized in full when determined. Accordingly, we periodically review and revise these estimates, with adjustments to revenues reflected in the period when the revisions are made. Adjustments to revenues resulting from revisions to estimates and variations of actual results from estimates could materially affect our operating results.

Changes in our product mix can have a significant impact on our profit margins.

          Some of our products have higher profit margins than others. Consequently, changes in the product mix of our sales from quarter-to-quarter or from year-to-year can have a significant impact on our reported profit margins. Some of our products also have a much higher internally manufactured cost component. Therefore, changes from quarter-to-quarter or from year-to-year can have a significant impact on our reported margins through a change in our manufacturing costs, and specifically in our manufacturing costs as a percentage of sales.

          We offer warranty periods of various lengths to our customers depending upon the specific system or product and terms of the customer agreement. Among other things, warranties require us to repair or replace faulty systems or products. While we continually monitor our warranty claims and provide a reserve for estimated warranty issues on an on-going basis, an unanticipated claim could have a material adverse impact on our results of operations. In some cases, we may be able to recover a portion of our warranty cost from a subcontractor if the subcontractor supplied the defective product or performed the service. However, this recovery may not always be possible. The need to repair or replace systems and products with design or manufacturing defects could temporarily delay the sale of new systems and products, reduce our profits, cause us to suffer a loss and could adversely affect our reputation. Furthermore, average warranty costs for complete systems are higher than warranty costs for individual products that our customers use as components in other systems due to complete systems being more complex. As a result, our transition to offering more complete systems may increase our warranty costs.

Our systems and products could be subject to product liability claims and litigation, which could adversely affect our financial condition and results of operations and harm our business reputation.

          We manufacture systems and products that create exposure to product liability claims and litigation. If our systems and products are not properly manufactured or designed, personal injuries or property damage could result, which could subject us to claims for damages. The costs associated with defending product liability claims and payment of damages could be substantial. Our reputation could also be adversely affected by such claims, whether or not successful, and such claims could lead to decreased demand for our systems and products.

Our insurance policies may not cover all claims against us or may be insufficient to cover such claims.

          We may be subject to product liability claims for personal injury and property damage. We maintain insurance coverage against these and other risks associated with our business. However, this insurance may not protect us against liability from some kinds of events, including events involving losses resulting from business interruption. We cannot assure that our insurance will be adequate in risk coverage or policy limits to cover all losses or liabilities that we may incur. Moreover, we cannot assure you that we will be able in the future to maintain insurance at levels of risk coverage or policy limits that we deem adequate. Any future damages caused by our systems and products that are not covered by insurance or are in excess of policy limits could have a material adverse effect on our financial condition and results of operations.

A significant portion of our accounts receivable are related to large contracts from customers in the same markets, which increases our exposure to credit risk.

          We monitor the credit worthiness of our customers. Significant portions of our sales are to customers who place large orders for custom systems and products and whose activities are related to the power generation, natural gas infrastructure and refining and petrochemical processing markets. As a result, our exposure to credit risk is affected to some degree by conditions within these markets and governmental and political conditions. We attempt to reduce our exposure to credit risk by requiring progress payments and letters of credit. However, unanticipated events that affect our customers could have a materially adverse impact on our operating results.

          We generally sell our systems and products under contracts that allow us to either bill upon the completion of certain agreed upon milestones, or upon actual shipment of the system or product. We attempt to negotiate progress-billing milestones on large contracts to help us manage the working capital and to reduce the credit risk associated with these large contracts. Consequently, shifts in the billing terms of the contracts in our backlog from period to period can increase our requirement for working capital and can increase our exposure to credit risk.

Our customers may require us to perform portions of our projects in their local countries.

          Some foreign countries have regulations requiring that, and some customers in foreign countries prefer that, a certain degree of local content be included in projects destined for installation in their country. These requirements and preferences may require us to outsource significant functions to manufacturers in foreign countries or otherwise to establish manufacturing capabilities in foreign countries. These requirements may negatively impact our profit margins and present project management issues.

We are subject to export control and economic sanctions laws and regulations. Failure to comply with these laws and regulations could adversely affect our business.

          We are subject to export control and economic sanctions laws and regulations of the United States, including the trade sanctions laws and regulations administered by the Office of Foreign Assets Control (“OFAC”) of the U.S. Department of the Treasury. In April 2008, Burgess-Manning, Inc., a subsidiary of Nitram, made a voluntary disclosure to OFAC regarding sales of industrial separators to Iran. In connection with the Nitram acquisition, $10.9 million of the purchase price was placed in escrow to reimburse us for breach of representation and certain other claims, including potential costs, fines or penalties related to the OFAC voluntary disclosure. We cannot predict the response of OFAC, the outcome of any related proceeding, the likelihood that future proceedings will be instituted against us or whether the amount held in escrow will be adequate to cover these costs. In the event that there is an adverse ruling in any proceeding, we may be required to pay fines and penalties that could harm our business and financial results.

The implementation of enterprise resource planning software requires substantial resources and could have a negative impact on our business.

          We commenced implementation of an enterprise resource planning software in fiscal 2008. This implementation will be extended to Nitram’s operations in fiscal 2009. This implementation requires significant resources and could detract from our operations during the implementation phase. The implementation requires significant efforts from our existing personnel. The complexities of the implementation and additional demands on our staff could have a material adverse effect on our business.

We intend to continue to pursue acquisition opportunities, which may subject us to considerable business and financial risk.

          We evaluate potential acquisitions on an ongoing basis. Aside from our recent acquisition of Nitram, we have limited experience with acquisitions. We may not be successful in identifying acquisition opportunities, assessing the value, strengths and weaknesses of these opportunities and consummating acquisitions on acceptable terms. Furthermore, suitable acquisition opportunities may not even be made available or known to us. In addition, we may compete for acquisition targets with companies having greater financial resources than we do. Borrowings necessary to finance acquisitions may not be available on terms acceptable to us, or at all. Future acquisitions may also result in potentially

dilutive issuances of equity securities. Acquisitions may expose us to particular business and financial risks that include, but are not limited to:

          If we are unable to successfully implement our acquisition strategy or address the risks associated with acquisitions, or if we encounter unforeseen expenses, difficulties, complications or delays frequently encountered in connection with the integration of acquired entities and the expansion of operations, our growth and ability to compete may be impaired, we may fail to achieve acquisition synergies and we may be required to focus resources on integration of operations rather than on our primary business.

Our ability to obtain financing for future growth opportunities may be limited.

          Our ability to execute our growth strategies may be limited by our ability to secure and retain reasonably priced financing. Some of our competitors are larger companies that may have better access to capital and therefore may have a competitive advantage over us should our access to capital be limited.

Our management certification and auditor attestation regarding the effectiveness of our internal control over financial reporting as of June 30, 2008 excluded the operations of Nitram. If we are not able to integrate Nitram’s operations into our internal control over financial reporting, our internal control over financial reporting will not be effective.

          Section 404 of the Sarbanes-Oxley Act requires us to furnish a management certification and auditor attestation regarding the effectiveness of our internal control over financial reporting. As a public company, we are required to report, among other things, control deficiencies that constitute a “material weakness” or changes in internal control that materially affect, or are reasonably likely to materially affect, internal control over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a

material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis.

          Complying with Section 404 is time consuming and costly. Prior to its acquisition by us, Nitram was a private company and was not required to comply with Section 404. The integration of Nitram’s operations into our internal control over financial reporting will require additional time and resources from our management and other personnel and may increase our compliance costs. Our management certification and auditor attestation regarding the effectiveness of our internal control over financial reporting as of June 30, 2008 excluded the operations of Nitram.

          Failure to comply with Section 404, including a delay in or failure to successfully integrate Nitram’s operations into our internal control over financial reporting, or the report by us of a material weakness may cause investors to lose confidence in our consolidated financial statements and the trading price of our common stock may decline. If we fail to remedy any material weakness, our financial statements may be inaccurate, our access to the capital markets may be restricted and the trading price of our common stock may decline.

Provisions of our charter documents, Delaware law and our stockholder rights plan could discourage a takeover that individual stockholders may consider favorable or the removal of our current management.

          Some provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition that individual stockholders may consider favorable or the removal of our current management. These provisions:

Delaware law may also discourage, delay or prevent someone from acquiring or merging with us. In addition, purchase rights distributed under our stockholder rights plan will cause substantial dilution to any person or group attempting to acquire us without conditioning the offer on our redemption of the rights. As a result, our stock price may decrease and you might not receive a change of control premium over the then-current market price of the common stock.

We are a holding company with no operations of our own. As a result, our cash flow and ability to service debt is dependent upon distributions from our subsidiaries.

          Our ability to service our debt is dependent upon the operating earnings of our subsidiaries. The distribution of those earnings, or advances or other distributions of funds by those subsidiaries to us, all of which could be subject to statutory or contractual restrictions, are contingent upon the subsidiaries’ earnings and are subject to various business considerations.

          A significant portion of our consolidated revenues are generated outside the United States. Consequently, we are subject to fluctuations in foreign currency exchange rates. Translation losses resulting from currency fluctuations may adversely affect the profits from our operations and have a negative impact on our financial results. Foreign currency fluctuations may also make our systems and products more expensive for our customers, which could have a negative impact on our sales. In addition, we purchase some foreign-made products directly and through our subcontractors. Due to the multiple currencies involved in our business, foreign currency positions partially offset and are netted against one another to reduce exposure. We cannot assure you that fluctuations in foreign currency exchange rates will not make these products more expensive to purchase. Increases in our direct or indirect cost of purchasing these products could negatively impact our financial results if we are not able to pass those increased costs on to our customers.

Litigation against us could be costly and time consuming to defend.

          We are from time to time subject to legal proceedings and claims that arise in the ordinary course of business, such as claims brought by our customers in connection with commercial disputes and employment claims made by our current or former employees. Litigation may result in substantial costs and may divert management’s attention and resources, which may seriously harm our business, financial condition and results of operations. In addition, legal claims that have not yet been asserted against us may be asserted in the future.

Our business is subject to risks of terrorist acts, acts of war and natural disasters.

          Terrorist acts, acts of war, or national disasters may disrupt our operations, as well as those of our customers. These types of acts have created, and continue to create, economic and political uncertainties and have contributed to global economic instability. Future terrorist activities, military or security operations, or natural disasters could weaken the domestic and global economies and create additional uncertainties, thus forcing our customers to reduce their capital spending, or cancel or delay already planned construction projects, which could have a material adverse impact on our business, operating results and financial condition.

The limited liquidity for our common stock could affect your ability to sell your shares at a satisfactory price.

          Our common stock is relatively illiquid. As of August 29, 2008, we had 13,080,134 shares of common stock outstanding. The average daily trading volume in our common stock, as reported by the NASDAQ Global Market, for the 50 trading days ended August 29, 2008 was less than 110,000 shares. A more active public market for our common stock may not develop, which could adversely affect the trading price and liquidity of our common stock. Moreover, a thin trading market for our stock could cause the market price for our common stock to fluctuate significantly more than the stock market as a whole. Without a larger float, our common stock is less liquid than the stock of companies with broader public ownership and, as a result, the trading prices of our common stock may be more volatile. In addition, in the absence of an active public trading market, you may be unable to liquidate your shares of our common stock at a price satisfactory to you.

          The market price of our common stock has experienced, and may continue to experience, substantial volatility, and the price of our common stock has increased significantly since June 30, 2006. During the period beginning July 1, 2006 through August 29, 2008, the sale prices of our common stock on the NASDAQ Global Market have ranged from a low of $5.06 to a high of $30.75 per share. We expect our common stock to continue to be subject to fluctuations. Broad market and industry factors may adversely affect the market price of our common stock, regardless of our actual operating performance. Factors that could cause fluctuation in our stock price may include, among other things:

          If any of these risks and other factors beyond our control were to occur, the market price of our common stock could decline significantly.

          None.

          We own and lease office, manufacturing and warehousing facilities in various locations. Our principal facilities are described in the following table. All facilities are currently fully utilized.

          On June 19, 2007, Martin-Manatee Power Partners, LLC (“MMPP”) filed a complaint against the Company in the Circuit Court of the 15th Judicial Circuit in and for Palm Beach County, Florida. In the complaint, MMPP asserted claims for breach of contract and express warranty, breach of implied warranty and indemnification against the Company. MMPP’s claims arise out of an incident in September 2005 when an electric fuel gas start-up heater, which was a component of a fuel gas heater skid supplied by the Company to MMPP, allegedly ruptured resulting in a fire. In the complaint, MMPP did not make a specific demand for damages, but alleged that it has incurred approximately $5.7 million in costs to repair the damage as a result of the incident.

          The Company’s insurance carriers have agreed to defend the claims asserted by MMPP, pursuant to reservation of rights letters issued on September 5, 2007, and have retained counsel to defend the Company. The Company’s motion to dismiss the complaint for improper venue was granted on December 11, 2007. On February 20, 2008, MMPP filed a new action in the District Court of Johnson County, Kansas, the venue referenced in the purchase order pursuant to which the skid was purchased by MMPP from the Company. In this complaint, MMPP asserted the same claims and damages as described above. We believe MMPP’s claims are without merit and we intend to vigorously defend this suit.

          None.

          Our common stock is traded on the NASDAQ Global Market under the symbol “PMFG.” The table below sets forth the reported high and low sales prices for our common stock, as reported on the NASDAQ Global Market for the periods indicated. The prices have been adjusted for our two-for-one stock split in June 2007 and our holding company reorganization in August 2008, in which each share of Peerless common stock was converted into two shares of PMFG common stock.

          As of August 29, 2008, there were approximately 96 holders of record of our common stock.

          We did not pay cash dividends in fiscal 2008 or fiscal 2007. Cash dividends may be paid, from time to time, on our common stock as our Board of Directors deems appropriate after consideration of our continued growth rate, operating results, financial condition, cash requirements and other related factors. Additionally, our debt agreements contain restrictions on our ability to pay dividends based on satisfaction of certain performance measures and compliance with other conditions. Our ability to comply with these performance measures and conditions may be affected by events beyond our control. A breach of any of the covenants (including financial covenant ratios) contained in our debt agreements could result in a default under the debt agreements. Any defaults under our debt agreements could also prohibit us from paying any dividends.

          We did not repurchase any of our common stock in fiscal 2008 or fiscal 2007. Additionally, we do not have a stock repurchase program.

          The following table summarizes certain selected financial data that should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included in “Item 8. Financial Statements and Supplementary Data” of this Report. Share and per share data has been adjusted for our two-for-one stock split in June 2007 and our holding company reorganization in August 2008, in which each share of Peerless common stock was converted into two shares of PMFG common stock.

          The following discussion of our results of operations and financial condition should be read together with our consolidated financial statements and the notes thereto included in Item 8 of this Report. This discussion includes forward-looking statements that are subject to risks, uncertainties and other factors described in Item 1.A of this Report. These factors could cause our actual results for future periods, including fiscal 2009, to differ materially from those experienced in, or implied by, these forward-looking statements.

          We begin this discussion with an overview of our Company to give you an understanding of our business and the markets we serve. The overview also includes a brief summary of recent developments regarding our holding company reorganization and our acquisition of Nitram. This overview is followed by a discussion of our results of operations for the fiscal years ended June 30, 2008, 2007 and 2006, including a discussion of significant year-to-year variances. We also include information regarding our two reportable business segments: separation/filtration systems and environmental systems. We then discuss our financial condition at June 30, 2008 with a comparison to June 30, 2007. This discussion includes information regarding our liquidity and capital resources, including cash flows from operating, investing and financing activities. We complete this discussion with an overview of our business outlook for fiscal 2009 and future periods.

          All share and per share amounts in this Report, including in this discussion and in our consolidated financial statements, have been retroactively adjusted to give effect to the reorganization, including the two-for-one exchange of PMFG common stock for Peerless common stock. All dollar amounts included in this discussion are expressed in thousands, other than per share amounts.

          We are a leading provider of custom-engineered systems and products designed to help ensure that the delivery of energy is safe, efficient and clean. We primarily serve the markets for power generation, natural gas infrastructure, and refining and petrochemical processing. We offer a broad range of separation and filtration products, selective catalytic reduction, or SCR, systems, and other complementary products including specialty heat exchangers, pulsation dampeners and silencers. Our primary customers include equipment manufacturers, engineering contractors and operators of power plants.

          Our products and systems are marketed worldwide. In each of the last three fiscal years, more than 35% of our revenues have been generated from outside the United States. We expect our international sales to continue to be an increasingly important part of our business.

          On August 15, 2008, we completed a holding company reorganization. In the reorganization, Peerless Mfg. Co. became a wholly owned subsidiary of PMFG, Inc. Shareholders of Peerless received two shares of common stock of PMFG for each outstanding share of common stock of Peerless held prior to the reorganization. As a result, the reorganization also had the effect of a two-for-one stock split. Our business, operations and management did not change as a result of the holding company reorganization.

          On April 30, 2008, we completed our acquisition of Nitram for approximately $63,110, including transaction costs. This acquisition broadens our product offerings, expands our position in selected markets, increases our engineering and skilled labor resources, broadens our research and development capabilities, and furthers our strategy of providing more complete systems to our customers. In addition,

the acquisition of Nitram should improve our financial results by improving manufacturing and supply chain efficiencies and leveraging the cost of our corporate overhead.

          As a result of the acquisition, Nitram’s results of operations have been included in our consolidated financial statements from the date of acquisition. Purchase accounting for this acquisition resulted in the allocation of a portion of the purchase price to Nitram’s net assets, including tangible and intangible assets. This allocation resulted in increases to the fair value of Nitram’s inventory and backlog by $4,606 and $6,489, respectively. Of these amounts, $2,258 of this inventory cost was expensed and $2,734 of this backlog was amortized in the last two months of fiscal 2008, increasing our reported cost of goods sold. The balance of these amounts is expected to be expensed in the first two quarters of fiscal 2009, which will significantly impact our results of operations in those periods. For a further discussion of our allocation of the purchase price to the fair value of the assets acquired and liabilities assumed in the Nitram acquisition, see Note D to our consolidated financial statements included in this Report.

          The following summarizes our consolidated statements of operations as a percentage of net revenues:

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

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

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

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

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

     Revenues. We classify revenues as domestic or international based upon the origination of the order. Revenues generated by orders originating from within the United States are classified as domestic revenues. Revenues generated by orders originating from a country other than the United States are classified as international revenues. The following summarizes consolidated revenues:

          For fiscal 2008, total revenues increased $65,355, or 87.0%, compared to fiscal 2007. Domestic revenues increased $41,677, or 88.5%, in fiscal 2008 when compared to fiscal 2007. International revenues increased $23,678, or 84.4%, in fiscal 2008 when compared to fiscal 2007. Our fiscal 2008 and 2007 domestic revenues include $29,958 and $10,326, respectively, related to a large environmental systems order that has been completed. The increase in international revenues in fiscal 2008 includes a $13,850 order and other revenues from gas transmission projects. The results of Nitram’s operations have been included in our fiscal 2008 consolidated financial results since the date of acquisition, which was April 30, 2008, and accounted for $13,235 of domestic revenues and $1,473 of international revenues.

          For fiscal 2007, total revenues increased $11,730, or 18.5%, compared to fiscal 2006. Domestic revenues increased $14,567, or 44.8%, in fiscal 2007 when compared to fiscal 2006. International revenues decreased $2,837, or 9.2%, in fiscal 2007 when compared to fiscal 2006. The increase in our domestic revenues was primarily a result of the increase in our environmental systems sales related to power plant expansions. The decrease in our international revenues in fiscal 2007 was primarily related to the completion of a large environmental system in fiscal 2006.

          Gross Profit. Our gross profit during any particular period may be impacted by several factors, primarily sales volume, shifts in our product mix, material cost changes, and warranty and start-up (commissioning) costs. Shifts in the geographic composition of our sales can also have a significant impact on our reported margins. The following summarizes revenues, cost of goods sold, and gross profit:

          For fiscal 2008, our gross profit increased $17,482, or 73.5%, compared to fiscal 2007. The increase in fiscal 2008 was due mainly to increased revenues of $65,355, partially offset by $2,734 of amortization expense related to Nitram’s backlog at April 30, 2008 and $2,258 of expense related to fair value adjustment of Nitram’s inventory at April 30, 2008. Our gross profit, as a percentage of revenues, decreased from 31.7% in fiscal 2007 to 29.4% in fiscal 2008 primarily due to the expenses related to Nitram’s backlog and inventory.

          For fiscal 2007, our gross profit increased $6,365, or 36.5%, compared to fiscal 2006. Our gross profit, as a percentage of revenues, increased from 27.5% in fiscal 2006 to 31.7% in fiscal 2007. The increase in gross profit was due mainly to the increased revenues of $11,730. The gross profit margin was favorably impacted by the shift to increased revenues from our higher margin environmental products and reduced warranty and start-up costs.

          Operating Expenses. The following summarizes operating expenses:

          For fiscal 2008, our operating expenses increased $13,576, or 87.3%, over fiscal 2007. As a percentage of revenues, these expenses were at 20.7% in fiscal 2008 and fiscal 2007. Our sales and marketing expenses increased $3,533 in fiscal 2008 compared to fiscal 2007 primarily due to commissions and other selling related expenses associated with higher revenues in fiscal 2008. Our engineering and project management expenses increased $1,558 in fiscal 2008 compared to fiscal 2007 primarily due to support activities associated with increased revenues. Our general and administrative expenses increased $4,984 in fiscal 2008 compared to fiscal 2007 primarily due to $1,100 of general and administrative costs associated with Nitram, higher compensation related expenses of $1,200, higher professional services of $900, additional facilities cost of $300 and $218 in amortization of intangible assets, other than amortization of the backlog related to the acquisition of Nitram.

          For fiscal 2007, our operating expenses decreased by $1,140, or 6.8%, compared to fiscal 2006. As a percentage of revenues, these expenses decreased from 26.3% in fiscal 2006 to 20.7% in fiscal 2007. Operating expenses in fiscal 2007 were offset by a gain on sale of property of $3,501, or 4.7% of revenues. Sales and marketing expenses increased from $6,645 in fiscal 2006 to $8,127 in fiscal 2007 due primarily to increased sales commissions attributable to increased orders and revenues. In addition, sales and marketing expenses increased due to increased staffing to support the growth in business activities. Our engineering and project management expenses increased from $3,480 in fiscal 2006 to $4,094 in fiscal 2007 due to the need for additional staffing and outside engineering services to support increased sales. Our general and administrative expenses increased from $6,562 in fiscal 2006 to $6,827 in fiscal 2007 primarily due to professional expenses related to compliance with Section 404 of the Sarbanes-Oxley Act and the cost of the Erie Power bankruptcy settlement, partially offset by lower compensation expenses from charges that occurred in fiscal 2006.

          Other Income and Expense. For fiscal 2008, other income and expense items decreased by $223 to $366, primarily due to an increase in foreign exchange gains of $309 and a $583 increase in interest income attributable to higher cash balances offset by $1,084 in interest expense related to the debt incurred in connection with the Nitram acquisition, and other net changes of $31.

          For fiscal 2007, other income increased by $134 compared to fiscal 2006, primarily due to an increase in interest income.

          Income Taxes: The Company’s effective income tax rate for continuing operations was 33.3%, 33.1% and 55.0% in fiscal 2008, 2007 and 2006, respectively. The rate in fiscal 2006 was impacted by increased state income tax expense during the year and reduced foreign tax related benefits. For further information related to income taxes, see Note Q to our consolidated financial statements included in Item 8 of this Report.

          Net Earnings: Our net earnings for fiscal 2008 increased by $2,443 to net earnings of $8,355, or 6.0% of revenues, from net earnings of $5,912, or 7.9% of revenues for fiscal 2007, as a result of increased sales partially offset by increased cost of goods sold, higher operating expense and the impact of the Nitram acquisition. Basic earnings per share increased from net earnings of $0.47 per share for fiscal 2007, to net earnings of $0.65 per share for fiscal 2008. Diluted earnings per share increased from net earnings of $0.46 per share for fiscal 2007, to net earnings of $0.64 per share for fiscal 2008.

          Our net earnings from continuing operations for fiscal 2007 increased by $5,371 to net earnings of $5,912, or 7.9% of revenues, from net earnings from continuing operations of $541, or 0.9% of revenues for fiscal 2006, as a result of a $3,501 gain on the sale of property, increased sales, and improved gross profit margin. These gains were partially offset by an increase in total operating expenses. Basic earnings per share from continuing operations increased from net earnings of $0.04 per share for fiscal 2006, to net earnings of $0.47 per share for fiscal 2007. Diluted earnings per share increased from net earnings of $0.04 per share for fiscal 2006, to net earnings of $0.46 per share for fiscal 2007.

          Discontinued Operations: There was no operating income or loss from discontinued operations for fiscal 2008 or 2007. Our net loss from discontinued operations for fiscal 2006 was $115 and related primarily to legal expenses. Basic and diluted loss per share from discontinued operations was ($0.01) per share for fiscal 2006.

          We have two lines of business: separation/filtration systems and environmental systems. Revenues and operating income in this section are presented on a basis consistent with accounting principles generally accepted in the United States of America (“GAAP”). Certain corporate level expenses and the gain on sale of property in 2007 have been excluded from our segment operating results and are analyzed separately.

          The separation/filtration systems segment produces specialized systems and products that remove contaminants from gases and liquids, improving efficiency, reducing maintenance and extending the life of energy infrastructure. Separation/filtration systems represented 56.6%, 62.9%, and 68.8% of our revenues in fiscal years 2008, 2007, and 2006, respectively.

          Separation/filtration systems revenues and operating income for the prior three fiscal years are presented below:

          Separation/filtration systems revenues increased by $32,284, or 68.3%, in fiscal 2008 compared to fiscal 2007 due to the Nitram acquisition, which accounted for $14,708 of the increase, and increased global expansion of gas transmission projects. Our domestic separation/filtration systems revenues increased by $15,601 in fiscal 2008 compared to fiscal 2007 primarily due to the Nitram acquisition. Our international separation/filtration systems revenues increased by $16,683 in fiscal 2008 compared to fiscal 2007 primarily due to a $13,850 contract awarded in May 2007.

          Revenues from separation/filtration systems increased by $3,612, or 8.3%, in fiscal 2007 as compared to fiscal 2006. Our domestic separation/filtration systems revenues increased by $5,195 in fiscal 2007 compared fiscal 2006. Our international revenues decreased by $1,583 in fiscal 2007 compared to fiscal 2006. The increase in revenues in fiscal 2007 related primarily to an increase in domestic sales of our gas separation and filtration products.

          Separation/filtration systems operating income in fiscal 2008 increased $3,607 compared to fiscal 2007. Separation/filtration systems operating income in fiscal 2007 increased $1,356 compared to fiscal 2006. As a percentage of separation/filtration systems revenues, operating income was 12.8%, 14.0%, and 12.0%, in fiscal 2008, 2007, and 2006, respectively. The increased operating income in fiscal 2008 is primarily related to increased revenues partially offset by the inclusion of Nitram’s operating results since April 30, 2008, the date of acquisition, which are reported in the separation/filtration systems segment and include expenses of $2,734 and $2,258 related to fair value adjustments of Nitram’s backlog and inventory, respectively.

          The primary product of our environmental systems business is selective catalytic reduction systems, which we refer to as SCR systems. SCR systems are integrated systems, with instruments, controls and related valves and piping. Our SCR systems convert nitrogen oxide, or NOx, into nitrogen and water, reducing air pollution and helping our customers comply with environmental regulations. Environmental systems represented 43.4%, 37.1%, and 31.2% of our revenues in fiscal years 2008, 2007, and 2006, respectively.

          Environmental systems revenues and operating income for the prior three fiscal years are presented below:

          Environmental systems revenues increased by $33,071, or 118.6%, in fiscal 2008 compared to fiscal 2007. Our fiscal 2008 and 2007 domestic revenues include $29,958 and $10,326, respectively, from a large environmental systems order. The additional increase in fiscal 2008 was primarily due to increased demand for power and expanded refining capacity resulting in the construction of power generation plants and refinery equipment that require environmental control systems.

          Revenues from environmental systems increased by $8,118, or 41.1%, in fiscal 2007 when compared to fiscal 2006. The increase in fiscal 2007 was due to increased demand for power and expanded refining capacity resulting in the construction of power generation plants and refinery equipment that require environmental control systems.

          Environmental systems operating income in fiscal 2008 increased $8,784 compared to fiscal 2007 due to increased sales and improved operating margins. Environmental systems operating income in fiscal 2007 increased $2,913 compared to fiscal 2006. As a percentage of environmental systems revenues, operating income was 22.6%, 17.8%, and 10.4% in fiscal 2008, 2007, and 2006, respectively.

          Corporate level expenses excluded from our segment operating results were $11,811, $6,827, and $6,562 for fiscal years 2008, 2007, and 2006, respectively, excluding the gain on sale of property of $3,501 in fiscal 2007.

          For fiscal 2008, our corporate level expenses increased $4,984, or 73.0%, compared to fiscal 2007. The increase related primarily to $1,100 of general and administrative costs associated with Nitram, higher compensation related expenses of $1,200, higher professional services of $900, additional facilities cost of $300 and $218 in amortization of intangible assets, other than amortization of the backlog related to the acquisition of Nitram. For fiscal 2007, our corporate level expenses increased $265, or 4.0%, compared to fiscal 2006. The increase was due primarily to professional expenses related to compliance with Section 404 of the Sarbanes-Oxley Act and the cost of the Erie Power bankruptcy settlement, partially offset by lower compensation expenses from charges that occurred in fiscal 2006.

          The demand for energy is growing worldwide, driving the need for additional energy infrastructure. At the same time, increased environmental awareness is resulting in the adoption of stricter environmental regulations not only in the United States, but in a number of other countries. In response to the demand for cleaner, more environmentally responsible power generation, power providers and industrial power consumers are building new facilities that use cleaner fuels, such as natural gas.

Internationally, power providers are constructing new nuclear power facilities. These market trends are driving the demand for both our separation/filtration products as well as our SCR systems, creating significant opportunities for us.

          Factors that are expected to impact our results in fiscal 2009 include the following:

          On June 19, 2007, Martin-Manatee Power Partners, LLC (“MMPP”) filed a complaint against the Company in the Circuit Court of the 15th Judicial Circuit in and for Palm Beach County, Florida. In the complaint, MMPP asserted claims for breach of contract and express warranty, breach of implied warranty and indemnification against the Company. MMPP’s claims arise out of an incident in September 2005 when an electric fuel gas start-up heater, which was a component of a fuel gas heater skid supplied by the Company to MMPP, allegedly ruptured resulting in a fire. In the complaint, MMPP did not make a specific demand for damages, but alleged that it has incurred approximately $5,700 in costs to repair the damage as a result of the incident.

          The Company’s insurance carriers have agreed to defend the claims asserted by MMPP, pursuant to reservation of rights letters issued on September 5, 2007, and have retained counsel to defend the Company. The Company’s motion to dismiss the complaint for improper venue was granted on December 11, 2007. On February 20, 2008, MMPP filed a new action in the District Court of Johnson County, Kansas, the venue referenced in the purchase order pursuant to which the skid was purchased by

MMPP from the Company. In this complaint, MMPP asserted the same claims and damages as described above. We believe MMPP’s claims are without merit and we intend to vigorously defend this suit.

          We completed the acquisition of Nitram in April 2008. We have liability with respect to the operations of Nitram and its subsidiaries because these entities are our wholly owned subsidiaries. In particular, in April 2008, a subsidiary of Nitram made a voluntary disclosure to the Office of Foreign Assets Control (“OFAC”) regarding sales of industrial separators to Iran. We cannot predict the response of the OFAC, the outcome of any related proceeding or the likelihood that future proceedings will be instituted against us. In the event that there is an adverse ruling in any proceeding, we may be required to pay fines and penalties. Additionally, we have potential liability related to environmental matters associated with certain properties that we acquired in the Nitram acquisition. The liability related to the environmental matters has not been quantified, but is currently not expected to be material. We believe that we will be reimbursed for the cost of any remediation under our purchase agreement with Nitram’s former stockholders. In connection with the Nitram acquisition, $10,920 of the purchase price was placed in escrow to reimburse us for breach of representation and certain other claims, including potential costs, fines or penalties related to the OFAC voluntary disclosure and environmental matters.

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

          Our backlog of uncompleted orders was $107,000 at June 30, 2008, compared to $97,000 at June 30, 2007. Backlog has been calculated under our customary practice of including incomplete orders for products that are deliverable in future periods but that could be changed or cancelled. Of our backlog at June 30, 2008, we estimate approximately 97% will be completed during fiscal 2009, compared to 92% at June 30, 2007 that we anticipated would be completed in fiscal 2008.

          Assets. Total assets increased by $98,065 or 142.8%, from $68,671 at June 30, 2007 to $166,736 at June 30, 2008. We held cash and cash equivalents of $11,444, had working capital of $42,334, and a current liquidity ratio of 1.77-to-1.0 at June 30, 2008. This compares with cash and cash equivalents of $17,015, working capital of $30,622, and a current liquidity ratio of 1.91-to-1.0 at June 30, 2007. The increase in our assets is primarily related to the Nitram acquisition, which, based on our preliminary allocation of the purchase price, includes net tangible assets of $5,186, intangible assets of $30,049 and goodwill of $27,875. For a discussion of our allocation of the purchase price to the fair value of the assets acquired and liabilities assumed in the Nitram acquisition, see Note D to our consolidated financial statements included in Item 8 of this Report.

          Liabilities and Stockholders’ Equity. Total liabilities increased by $88,671 or 252.4%, from $35,134 at June 30, 2007 to $124,090 at June 30, 2008. This increase in liabilities relates primarily to the $60,000 of debt incurred in connection with the Nitram acquisition and the assumption of Nitram’s liabilities. The increase in our stockholders’ equity of $9,394, or 28.0%, from $33,537 at June 30, 2007 resulted primarily from an increase in retained earnings due to net earnings in fiscal 2008. Our debt (total liabilities)-to-equity ratio increased from 1.05-to-1.0 at June 30, 2007, to 2.89-to-1.0 at June 30, 2008 reflecting the debt incurred in connection with the Nitram acquisition, a 63.1% increase in our current liabilities and a 28.0% increase in our stockholders’ equity during fiscal 2008.

          Our cash and cash equivalents were $11,444 as of June 30, 2008, compared to $17,015 at June 30, 2007. Net cash provided by operating activities during fiscal 2008 was $784 compared to net cash provided by operating activities during fiscal 2007 of $9,422 and net cash used in operating activities during fiscal 2006 of $2,488.

          Because we are engaged in the business of manufacturing custom systems, our progress billing practices are event-oriented rather than date-oriented, and vary from contract to contract. We ordinarily bill our customers upon the occurrence of project milestones. Billings to customers affect the balance of billings in excess of costs and earnings on uncompleted contracts or the balance of costs and earnings in excess of billings on uncompleted contracts, as well as the accounts receivable balance. Consequently, we focus on the net amount of these accounts, along with accounts payable, to determine our management of working capital. At June 30, 2008, the balance of these working capital accounts was $31,872 compared to $13,118 at June 30, 2007, reflecting an increase of our investment in these working capital items of $18,754 resulting primarily from the Nitram acquisition.

          Net cash used in investing activities was $63,141 for fiscal 2008, compared to net cash used in investing activities of $236 and $258 for fiscal 2007 and 2006, respectively. The use of cash during fiscal 2008 related primarily to the acquisition of Nitram and the purchase of property and equipment. The use of cash during fiscal 2007 related primarily to purchasing property and equipment and an increase in restricted cash, partially offset by cash provided from the sale of our former headquarters facility. The use of cash during fiscal 2006 related primarily to purchases of plant equipment.

          Net cash provided by financing activities was $56,764, $1,292, and $980 during fiscal 2008, 2007 and 2006, respectively. The cash provided in fiscal 2008 related primarily to proceeds from the long-term debt associated with the Nitram acquisition less the costs of incurring the debt. The cash provided in fiscal 2007 and 2006 related to the proceeds and tax benefits from the issuance of common stock pursuant to the exercise of employee stock options.

          As a result of the above factors, our cash and cash equivalents during fiscal 2008 decreased $5,571, net of $2,789 in restricted cash, compared to an increase of $10,604, net of $2,811 in restricted cash, in fiscal 2007, and compared to a decrease of $1,866 in fiscal 2006.

          The Company’s $9,000 revolving line of credit for working capital requirements was terminated on April 30, 2008 in connection with the financing of the Nitram acquisition. Concurrently with the closing of this acquisition, the Company entered into a new revolving credit and term loan agreement, dated April 30, 2008 (the “Senior Secured Credit Agreement”), with Comerica Bank, as administrative agent, and several other financial institutions. The Senior Secured Credit Agreement provides for a $40,000 term loan and a $20,000 revolving credit facility.

          At the acquisition closing, the Company borrowed $40,000 under the senior term loan and borrowed an additional $20,000 pursuant to a subordinated secured term loan. The proceeds from the senior and subordinated term loans, together with cash on hand, were used to fund our acquisition of Nitram and related transaction costs.

          The senior term loan matures on March 31, 2013. Interest on the senior term loan is payable quarterly at a floating rate per annum equal to either (a) for prime rate loans, a margin of between 50 and 125 basis points based on the Company’s consolidated total leverage (“CTL”) ratio plus the higher of (1) the administrative agent’s prime rate, or (2) the federal funds effective rate (as determined in accordance with the Senior Secured Credit Agreement) plus a margin of 100 basis points, or (b) for LIBOR rate

loans, the adjusted LIBOR rate (as determined in accordance with the Senior Secured Credit Agreement) plus a margin of between 275 and 350 basis points based on our CTL ratio. The Senior Secured Credit Agreement requires quarterly principal payments on the senior term loan of $1,000 through April 1, 2011 and $1,500 thereafter through April 1, 2013, with the balance of the senior term loan due at maturity. The Senior Secured Credit Agreement also requires additional principal payments of the senior term loan based upon the Company’s cash flow beginning in the 2009 fiscal year, the net proceeds of certain asset sales and dispositions and the issuance by the Company of additional equity securities or subordinated debt.

          The revolving credit facility matures on April 30, 2011. Interest under the revolving credit facility is payable quarterly at a floating rate per annum equal to either (a) for prime rate loans, a margin of between 25 and 100 basis points based on the Company’s CTL ratio plus the higher of (1) the administrative agent’s prime rate, or (2) the federal funds effective rate (as determined in accordance with the Senior Secured Credit Agreement) plus a margin of 100 basis points, or (b) for LIBOR rate loans, the adjusted LIBOR rate (as determined in accordance with the Senior Secured Credit Agreement) plus a margin of between 225 and 300 basis points based on our CTL ratio. Under this revolving credit facility, the Company has a maximum borrowing availability equal to the lesser of (a) $20,000 or (b) 75% of eligible accounts receivable plus 45% of eligible inventory (not to exceed 50% of the borrowing base).

          The subordinated term loan matures on April 29, 2013. Interest on the subordinated note is payable monthly at a rate of 15.0% per annum, with 11.5% required to be paid in cash and the remaining 3.5% payable, at the Company’s option (subject to certain limitations), in cash or by adding the amount of such additional interest to the principal balance of the subordinated term loan. To date, we have paid all interest obligations on the subordinated term loan in cash and currently expect to continue paying in cash rather than adding to the principal balance. The subordinated term loan permits the lenders to require mandatory principal prepayments of the subordinated term loan using the net proceeds of the issuance of additional equity securities by the Company. The Company may also prepay the subordinated term loan in whole or in part, at its option, subject to the terms of the Senior Secured Credit Agreement. Optional and mandatory prepayments require the Company to pay a fee equal to 3% of the prepayment amount if made on or before April 30, 2009, 2% of the prepayment amount if made on or after May 1, 2009 but on or before April 30, 2010 and 1% of the prepayment amount if made on or after May 1, 2010 but on or before April 30, 2011.

          The senior term loan and any borrowings under the revolving credit facility are secured by a first lien on substantially all assets of the Company and contain financial and other covenants, including restrictions on additional debt, dividends, capital expenditures and acquisitions and dispositions, as well as other customary covenants. The subordinated term loan is secured by a second lien on substantially all assets of the Company and contains financial and other covenants, including restrictions on additional debt, dividends, capital expenditures and acquisitions and dispositions, as well as other customary covenants of a type similar to those contained in the Senior Secured Credit Agreement.

          As required by the Senior Secured Credit Agreement, the Company entered into a LIBOR interest rate cap transaction with respect to the senior term loan, with a notional amount of $20,000 (the “Hedging Transaction”). The Hedging Transaction became effective on August 15, 2008 and that will terminate on April 2, 2012. Under the terms of the Hedging Transaction, the counterparty will pay to the Company, on the first business day of each quarter, commencing on October 1, 2008, an amount equal to the greater of $0 and the product of (i) the outstanding notional amount of the Hedging Transaction during the prior quarter, (ii) the difference between the three month LIBOR rate at the beginning of the prior quarter and 3.70% and (iii) the quotient of the number of days in the prior quarter over 360. The notional amount of the Hedging Transaction will amortize in the amount of (i) $5,000 on October 1, 2008, October 1, 2009 and October 1, 2010 and (ii) $4,500 on October 3, 2011. As long as the counterparty makes the payments

required under the Hedging Transaction, the Company will have a maximum annual LIBOR interest rate exposure equal to the sum of 3.70% and a margin of 275 to 350 basis points based on our CTL ratio, for the term of the Hedging Transaction.

          In addition, the Company’s U.K. subsidiary had a £2,600 ($5,179) debenture agreement used to facilitate the issuances of letters of credit and bank guarantees. At June 30, 2008, this facility was secured by substantially all of our U.K. subsidiary’s assets, and by a cash deposit of £1,400 ($2,789), which is recorded as restricted cash on the consolidated balance sheet. At June 30, 2008, there was £2,144 ($4,271) outstanding under stand-by letters of credit and bank guarantees under this debenture agreement. As of June 30, 2008, the Company was in compliance with all financial and other covenants under this debenture agreement.

          We filed a shelf registration statement with the SEC that will allow us to sell up to 3,000,000 shares of our common stock in one or more offerings. The shelf registration statement gives us greater flexibility to raise funds from the offering of our common stock, subject to market conditions and our capital needs. Under the terms of our debt agreements, part of the proceeds from any offering would be required to be used to repay a portion of the indebtedness we incurred in connection with our acquisition of Nitram.

          We believe we maintain adequate liquidity to support existing operations and planned growth over the next 12 months.

          We had no off-balance sheet arrangements as of June 30, 2008.

          The following table summarizes the indicated contractual obligations and other commitments of the Company as of June 30, 2008.

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

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

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

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

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

factors, our estimated liability for product warranties could differ from actual warranty costs incurred in the future.

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

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

          Intangible Assets and Goodwill. The amount of recorded goodwill relates primarily to the Nitram acquisition and represents the difference between the purchase price and the fair value of the net assets acquired. Goodwill is not amortized, however it is measured for impairment annually, or more frequently if conditions indicate an earlier review is necessary. If the estimated fair value of goodwill is less than the carrying value, goodwill is impaired and is written down to its estimated fair value.

          Intangible assets subject to amortization acquired as part of the Nitram acquisition include customer backlog, licensing agreements, and customer relationships. These intangible assets are amortized over their useful lives based on a pattern in which the economic benefit of the respective intangible asset is realized. Intangible assets acquired in the Nitram acquisition, which the Company considers indefinite are trade names and design guidelines. The Company evaluates the recoverability of intangible assets annually, or whenever events or changes in circumstances indicate that an intangible asset’s carrying amount may not be recoverable.

          We exercise judgment in evaluating our long-lived assets for impairment. We assess the impairment of long-lived assets that include other intangible assets, goodwill, and property, plant, and equipment annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In performing tests of impairment, we must make assumptions regarding the estimated future cash flows and other factors to determine the fair value of the respective assets in assessing the recoverability of our goodwill and other intangibles. If these estimates or the related assumptions change, we may be required to record impairment charges for these assets in the future. Actual results could differ from assumptions made by management. We believe our businesses will generate sufficient undiscounted cash flow to more than recover the investments we have made in property, plant and equipment, as well as the goodwill and other intangibles recorded as a result of our acquisitions. We cannot predict the occurrence of future impairment triggering events nor the impact such events might have on our reported asset values.

          Income Taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each jurisdiction in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from different treatment of items for tax and accounting purposes. These differences result in deferred tax

assets and liabilities, which are included in our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income. To the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance we must include an expense within the tax provision in the consolidated statements of operations. In the event that actual results differ from these estimates, our provision for income taxes could be materially impacted. In accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109,” we estimate and record any uncertainty in regards to a tax position taken or expected to be taken in a tax return.

          In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position FSP 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”). FSP 157-2 delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. FSP 157-2 delays the effective date for certain items to July 1, 2009. The Company is currently assessing the impact of SFAS No. 157 on its consolidated financial position, statements of operations and cash flows.

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

          In December 2007, the FASB issued SFAS No. 141R (revised 2007), “Business Combinations” (“SFAS No. 141R”) which requires most identifiable assets, liabilities, non-controlling interests, and goodwill acquired in a business combination to be recorded at “full fair value.” SFAS No. 141R applies to all business combinations, including combinations among mutual entities and combinations by contract alone. Under SFAS No. 141R, all business combinations will be accounted for by applying the acquisition method. SFAS No. 141R is prospectively effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company will adopt SFAS No. 141R on July 1, 2009, the beginning of its 2010 fiscal year. The adoption of SFAS No. 141R will have an impact on our financial results with respect to any future acquisitions. However, the impact can not be estimated at this time.

          In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161

requires additional disclosures about the objectives of the derivative instruments and hedging activities, the method of accounting for such instruments under SFAS No. 133 and its related interpretations, and a tabular disclosure of the effects of such instruments and related hedged items on our financial position, financial performance, and cash flows. SFAS No. 161 is effective for the Company beginning January 1, 2009. The Company is currently assessing the potential impact that adoption of SFAS No. 161 may have on its financial statements.

          In April 2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination of the Useful Life of Intangible Assets,” (“FSP FAS 142-3”) to revise the factors that an entity should consider to develop renewal or extension assumptions used in determining the useful life of a recognized intangible asset. The purpose of FSP FAS 142-3 is to improve consistency between the period of expected cash flows used to measure the fair value of a recognized intangible asset and the useful life of the intangible asset as determined under Statement 142. FSP FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and for interim periods within those fiscal years. Early adoption is not permitted. The Company is currently assessing the potential impact that adoption of FSP FAS 142-3 may have on its financial statements.

          From time to time, new accounting pronouncements applicable to the Company are issued by the FASB or other standards setting bodies, which we will adopt as of the specified effective date. Unless otherwise discussed, we believe the impact of recently issued standards that are not effective will not have a material impact on our consolidated financial statements upon adoption.

          Our primary market risk exposures are in the areas of interest rate risk and foreign currency exchange rate risk.

          We are subject to interest rate risk on outstanding borrowings under our Senior Secured Credit Agreement, which bears interest at a variable rate. At June 30, 2008, we had $40.0 million of outstanding borrowings under this Agreement. Subsequent to June 30, 2008, we entered into an interest rate cap transaction with a notional amount of $20.0 million, or 50% of our variable rate debt on that date. This cap transaction complies with our obligation under our Senior Secured Credit Agreement.

          To assess exposure to interest rate changes, we performed a sensitivity analysis assuming a hypothetical 100 basis point increase or decrease in interest rates on borrowings under our Senior Secured Credit Agreement. Our analysis indicates that the effect on fiscal 2008 income before taxes of such an increase and decrease in interest rates would be approximately $69,000.

          Our exposure to currency exchange rate fluctuations has been, and is expected to continue to be, modest as foreign contracts payable in currencies other than United States dollars are performed principally in the local currency and therefore provide a “natural hedge” against currency fluctuations. The impact of currency exchange rate movements on inter-company transactions has been, and is expected to continue to be, immaterial. We did not have any currency derivatives outstanding as of, or during, the fiscal year ended June 30, 2008.

We have audited the accompanying consolidated balance sheets of PMFG, Inc. (a Delaware corporation) and subsidiaries (the “Company”, formerly Peerless Mfg. Co.) as of June 30, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity and comprehensive income and cash flows for each of the three years in the period ended June 30, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PMFG, Inc. and subsidiaries as of June 30, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2008 in conformity with accounting principles generally accepted in the United States of America.

As described in Note A to the consolidated financial statements, the Company adopted FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB No. 109,” effective as of July 1, 2007.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), PMFG, Inc.’s internal control over financial reporting as of June 30, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated September 8, 2008 expressed and unqualified opinion.

Dallas, Texas
September 8, 2008

We have audited PMFG, Inc. (a Delaware Corporation) and subsidiaries’ (the “Company”, formerly Peerless Mfg. Co.) internal control over financial reporting as of June 30, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As described in Management’s Report on Internal Control over Financial Reporting, management has excluded Nitram Energy, Inc. (“Nitram”) from its assessment of internal control over financial reporting as of June 30, 2008 because it was acquired by the Company in a purchase business combination on April 30, 2008. We have also excluded Nitram from our audit of internal control over financial reporting. Nitram is a wholly-owned subsidiary whose total assets and total revenues represent 18% and 10%, respectively, of the related consolidated financial statement amounts as of and for the year ended June 30, 2008.

In our opinion, PMFG, Inc. maintained, in all material respects, effective internal control over financial reporting as of June 30, 2008, based on criteria established in Internal Control—Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of June 30, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended June 30, 2008 and our report dated September 8, 2008 expressed and unqualified opinion on those consolidated financial statements.

Dallas, Texas
September 8, 2008