UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


		For the quarterly period ended June 30, 2005


		OR


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


		For the transition period from to

Commission file number 000-00822

THE OILGEAR COMPANY

(Exact name of registrant as specified in its charter)


Wisconsin		39-0514580

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2300 South 51st Street,
Post Office Box 343924,
Milwaukee, Wisconsin		53234-3924

(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (414) 327-1700

Not Applicable

(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES þ NO o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

YES o NO þ

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding as of August 15, 2005

Common Stock, $1.00 Par Value		1,994,173

EXPLANATORY NOTE

Our independent registered public accounting firm has informed us that it was unable to complete their review of our interim financial statements for the quarterly period ended June 30, 2005 prior to the filing of this Form 10-Q. As a result, the interim financial statements contained in our quarterly report on Form 10-Q for the quarter and six month period ended June 30, 2005 have not been reviewed by our independent registered public accounting firm as required pursuant to Rule 10.01(d) of Regulation S-X, and therefore, the filing of this Form 10-Q is considered to be incomplete. As soon as our independent registered public accounting firm completes its review of our second quarter 2005 financial statements, we will file an amended Form 10-Q/A.

For a more complete description of the issues under ongoing review, see note 1 to the unaudited consolidated financial statements.

TABLE OF CONTENTS


Certification Pursuant to Section 302
Certification Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
ITEM 4. CONTROLS AND PROCEDURES
PART II — OTHER INFORMATION
ITEM 6. EXHIBITS.
SIGNATURES
THE OILGEAR COMPANY
COMMISSION FILE NUMBER 000-00822
EXHIBIT INDEX
Certification
Certification
Certification
Certification
Certification
Certification
Certification
Certification

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

THE OILGEAR COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)


	June 30, 2005			December 31, 2004

ASSETS
Current assets:
Cash and cash equivalents	$	4,862,146			4,109,409
Trade accounts receivable, less allowance for doubtful receivables of $324,000 and $340,000 in 2005 and 2004, respectively		18,939,562			17,029,550
Costs and estimated earnings in excess of billings on uncompleted contracts		2,334,935			3,532,711
Inventories		25,362,127			25,529,064
Prepaid expenses		1,112,757			1,033,301
Other current assets		1,461,693			1,294,555

Total current assets		54,073,220			52,528,590

Property, plant and equipment, at cost:
Land		1,436,435			1,535,231
Buildings		12,472,800			12,842,337
Machinery and equipment		51,071,657			51,880,198
Drawings, patterns and patents		6,309,930			6,131,266

		71,290,822			72,389,032
Less accumulated depreciation and amortization		54,650,612			54,226,261

Net property, plant and equipment		16,640,210			18,162,771
Other assets		2,888,998			2,123,868

	$	73,602,428			72,815,229

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short term borrowings	$	15,341,440			2,610,291
Current installments of long term debt		1,229,858			18,724,046
Accounts payable		9,390,129			10,830,336
Billings in excess of costs and estimated earnings on uncompleted contracts		414,662			581,927
Customer deposits		2,852,613			1,706,846
Accrued compensation and employee benefits		2,458,629			3,413,427
Other accrued expenses and income taxes		2,993,112			2,805,084

Total current liabilities		34,680,443			40,671,957

Long term debt, less current installments		8,364,292			1,302,124
Unfunded employee retirement plan costs		15,113,876			15,373,973
Unfunded post retirement health care costs		7,500,000			7,650,000
Other noncurrent liabilities		715,777			693,861

Total liabilities		66,374,388			65,691,915

Minority interest in consolidated subsidiaries		1,035,002			1,036,976
Shareholders’ equity:
Common stock, par value $1 per share, authorized 4,000,000 shares; issued 1,993,271 shares in 2005 and issued 1,990,783 shares in 2004		1,993,271			1,990,783
Capital in excess of par value		9,495,418			9,497,906
Retained earnings		15,314,601			14,509,592

		26,803,290			25,998,281
Deduct:
Treasury stock, 27,111 shares in 2004		—			(240,627	)
Notes receivable from employees for purchase of Company common stock		(32,204	)		(48,804	)
Accumulated other comprehensive income (loss):
Foreign currency translation adjustment		239,766			1,418,850
Minimum pension liability adjustment		(20,817,814	)		(21,041,362	)

		(20,610,252	)		(19,622,512	)

Total shareholders’ equity		6,193,038			6,086,338

	$	73,602,428			72,815,229

See accompanying notes to consolidated financial statements.

THE OILGEAR COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)


	FOR THREE MONTHS ENDED				FOR SIX MONTHS ENDED
	JUNE 30,				JUNE 30,
	2005		2004		2005		2004

Net sales	$	25,511,871		23,271,375		51,554,358		44,562,675
Cost of sales		18,460,283		17,794,848		37,695,405		33,896,315

Gross profit		7,051,588		5,476,527		13,858,953		10,666,360
Selling, general and administrative expenses		5,586,831		5,000,342		11,254,581		9,670,627

Operating income		1,464,757		476,185		2,604,372		995,733
Interest expense		602,866		326,614		1,212,880		657,045
Other non-operating income (loss), net		41,383		36,960		82,830		(8,680	)

Earnings before income taxes and minority interest		903,274		186,531		1,474,322		330,008
Income tax expense		213,746		149,116		342,715		262,003
Minority interest in net earnings		68,473		34,160		85,973		55,148

Net earnings	$	621,055		3,255		1,045,634		12,857

Basic weighted average outstanding shares		1,991,946		1,959,777		1,987,290		1,958,838

Diluted weighted average outstanding shares		2,021,601		1,978,677		2,018,102		1,980,456

Basic earnings per share of common stock	$	0.31		0.00		0.53		0.01

Diluted earnings per share of common stock	$	0.31		0.00		0.52		0.01

See accompanying notes to consolidated financial statements.

THE OILGEAR COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)


	FOR SIX MONTHS ENDED
	JUNE 30,
	2005			2004

Cash flows from operating activities:
Net earnings	$	1,045,634			12,857
Adjustments to reconcile net earnings to net cash used by operating activities:
Depreciation and amortization		1,663,487			1,533,953
Common and treasury stock issued in connection with compensation element of sales to employees and employee savings plan		7,836			12,831
Minority interest in consolidated subsidiaries		85,973			55,148
Change in assets and liabilities:
Trade accounts receivable		(2,828,442	)		(397,973	)
Inventories		(659,675	)		(217,335	)
Billings, costs and estimated earnings on uncompleted contracts		846,935			(64,223	)
Prepaid expenses		(140,078	)		(196,702	)
Accounts payable		(1,072,912	)		634,809
Customer deposits		1,273,848			20,034
Accrued compensation		(805,931	)		1,464,285
Other, net		52,327			(1,300,500	)


Net cash provided (used) by operating activities	$	(530,999	)		1,557,185

Cash flows from investing activities:
Additions to property, plant and equipment		(597,311	)		(431,671	)

Net cash used by investing activities	$	(597,311	)		(431,671	)

Cash flows from financing activities:
Net borrowings under line of credit agreements		1,446,691			167
Repayment of long term debt		(8,197,758	)		(926,504	)
Proceeds from issuance of long term debt		9,450,000			260,815
Payment of financing fees		(809,000	)		(208,000	)
Payments received on notes receivable from employees		8,766			14,922

Net cash provided (used) by financing activities	$	1,898,699			(858,601	)
Effect of exchange rate changes on cash and cash equivalents		(17,652	)		(373,679	)

Net increase (decrease) in cash and cash equivalents	$	752,737			(106,765	)

Cash and cash equivalents:
At beginning of period		4,109,409			6,235,975

At end of period	$	4,862,146			6,129,209

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	927,234			673,598
Income taxes		223,780			74,963

See accompanying notes to consolidated financial statements.

THE OILGEAR COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)


	FOR THREE MONTHS ENDED						FOR SIX MONTHS ENDED
	JUNE 30,						JUNE 30,
	2005			2004			2005			2004

Net income	$	621,055			3,255			1,045,634			12,857
Other comprehensive income (loss):
Foreign currency translation adjustment		(493,744	)		(450,608	)		(1,179,084	)		(467,113	)
Minimum pension liability adjustment		174,361			57,494			223,548			(79,261	)

Total comprehensive income (loss)	$	301,672			(389,859	)		90,098			(533,517	)

See accompanying notes to consolidated financial statements.

THE OILGEAR COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

These unaudited interim financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods in accordance with accounting principles generally accepted in the United States of America. Except as described in the next paragraph, such adjustments are of a normal recurring nature. Management assumes the reader will have access to the December 31, 2004 Annual Report on Form 10-K, a copy of which is available upon request, and these notes should be read in conjunction with the Consolidated Financial Statements and the related notes in the 2004 Form 10-K.

As previously described in a Form 12b-25 filed by the Company on August 15, 2005, the Company is currently reviewing the accounting treatment of shares of stock (the “Shares”) it received from a 2001 demutualization of an insurance company in which it was a member. Specifically, the Company is trying to determine whether the approximately $312,000 of income the Company recognized in the first quarter of 2004 from the decision to sell the Shares (which sale occurred early in the second quarter of 2004) should instead be allocated to 2001 and subsequent periods prior to or at the time of the sale. If an adjustment is made, the most significant revisions would reduce the Company’s 2001 net loss by approximately $188,000, reduce the Company’s net earnings for the first quarter of 2004 by approximately $312,000 (thus changing reported net earnings of approximately $10,000 into a net loss of approximately $302,000), and increase the Company’s net earnings for the second quarter of 2004 by approximately $118,000. For the six months ended June 30, 2004, the effect of these changes would be to reduce net earnings by approximately $194,000 (thus changing reported net earnings of approximately $13,000 into a net loss of approximately $181,000). The Company is working with its independent registered public accounting firm to determine whether any adjustments to the historical treatment of this transaction are required, which will depend primarily upon whether any such adjustments would be material to the Company’s financial statements for the relevant periods. The adjustments that are being considered would have no impact on the Company’s 2005 operating results or financial position.

2. BUSINESS DESCRIPTION AND OPERATIONS

The Company manages its operations in three reportable segments based upon geographic area. Domestic includes the United States and Canada, European includes Europe and International includes Asia, Latin America, Australia and Africa.

The individual subsidiaries of the Company operate predominantly in the fluid power industry. The Company provides advanced technology in the design and production of unique fluid power components. Products include piston pumps, motors, valves, controls, manifolds, electrohydraulic components, cylinders, reservoirs, skids and meters. Industries that use these products are primary metals, machine tool, automobile, aerospace, petroleum, construction equipment, chemical, plastic, glass, lumber, rubber and food. The products are sold as individual components or integrated into high performance applications. Standard components, such as our hydraulic pumps, are sold direct to users through our distribution network. These items can be inventoried as finished goods, have short delivery times and do not have progress billings. We recognize revenue on these products as they are shipped to our customers. The contracts for high performance applications typically require custom engineered solutions that meet customer specified requirements. These construction type contracts take months and sometimes years to engineer, manufacture, assemble and install at our customer’s specified location. These contracts require progress payments. The revenue for these contracts is recognized on a percentage-of-completion method of accounting which compares actual costs incurred on a contract to the estimated total contract cost developed at contract proposal and reviewed and updated monthly by our engineers and financial staff until the contract is closed.

Segment Information


	FOR THREE MONTHS ENDED						FOR SIX MONTHS ENDED
	JUNE 30, 2005			JUNE 30, 2004			JUNE 30, 2005			JUNE 30, 2004

SALES TO UNAFFILIATED CUSTOMERS
Domestic	$	14,662,379			11,688,452			28,579,225			22,478,058
European		7,060,489			8,327,410			15,754,813			15,955,174
International		3,789,003			3,255,513			7,220,320			6,129,443

	$	25,511,871			23,271,375			51,554,358			44,562,675

INTERSEGMENT SALES
Domestic	$	2,381,483			1,710,809			4,351,675			3,338,725
European		414,157			418,339			1,088,502			618,710
OPERATING INCOME
Domestic	$	1,997,452			314,073			3,266,519			705,624
European		(154,036	)		535,106			77,962			896,090
International		312,204			211,408			567,481			533,924
Corporate expenses, including R&D		(690,863	)		(584,402	)		(1,307,590	)		(1,139,905	)

Total	$	1,464,757			476,185			2,604,372			995,733

Identifiable assets at June 30, 2005 and December 31, 2004 consisted of the following:


	JUNE 30,		DECEMBER 31,
Identifiable Assets	2005		2004

Domestic	$	34,254,000		33,551,000
European		28,922,000		29,998,000
International		8,767,000		7,555,000
Corporate		1,660,000		1,711,000

Total		73,603,000		72,815,000

3. DEBT

The Company’s sources of capital historically have been cash generated from operations and bank borrowings. The fluctuations in working capital requirements are covered by bank lines of credit at the Company’s joint venture and subsidiary in India and an asset based bank revolving line of credit in the United States and England.

A new bank arrangement was entered into on February 7, 2005. The Company entered into a Loan and Security Agreement (the “Loan Agreement”) dated as of January 28, 2005 by and among the Company, LaSalle Business Credit, LLC (“LaSalle”), and two of the Company’s wholly-owned subsidiaries, Oilgear Towler, S.A. (“Oilgear Spain”) and Oilgear Towler GmbH (“Oilgear Germany”). On the same date, the Company and LaSalle also entered into a Foreign Accounts Loan and Security Agreement dated as of January 28, 2005 (the “EXIM Loan Agreement”).

The Loan Agreement provides the Company with a $12,000,000 revolving loan facility (subject to advance rates based on eligible accounts receivable and inventory, as well as reserves that may be established in LaSalle’s discretion), of which up to $10,000,000 may be used for the issuance of letters of credit. The Loan Agreement also provides term loans to the Company in the amounts of $2,050,000 (“Term Loan A”) and $4,700,000 (“Term Loan B”), respectively, as well as an $840,000 term loan to Oilgear Germany (“Term Loan C”) and a $1,860,000 term loan to Oilgear Spain (“Term Loan D”).

The outstanding principal amount of the revolving loan is scheduled to mature on January 28, 2008 (the “Maturity Date”). The Loan Agreement provides, however, that it will automatically renew for successive one year terms unless either the Company or LaSalle elects not to renew, or the liabilities thereunder have been accelerated.

Principal on Term Loan A amortizes in 60 equal monthly installments of $34,167; principal on Term Loan B amortizes in 120 equal monthly installments of $39,167; principal on Term Loan C amortizes in 120 equal monthly installments of $7,000; and principal on Term Loan D amortizes in 120 equal monthly installments of $15,500. Mandatory prepayments of the term loans are required upon the sales of certain assets and from excess cash flow, if available.

At the Company’s option: (i) the revolving loan bears interest (a) at one-half of one percent in excess of LaSalle’s announced prime rate (the “Prime Rate”) or (b) 350 basis points in excess of LIBOR and (ii) the term loans bear interest (x) at one percent in excess of the Prime Rate or (y) 400 basis points in excess of LIBOR. Upon the occurrence of an event of default, all loans bear interest at two percentage points in excess of the interest rate otherwise payable.

The EXIM Loan Agreement provides the Company with up to $3,000,000 in revolving loans (subject to advance rates based on eligible accounts receivable and inventory in respect of sales made to non-US customers, and reserves that may be established at LaSalle’s discretion). The outstanding principal amount of these loans is scheduled to mature on the Maturity Date, but the EXIM Loan Agreement is subject to the same renewal terms described above with respect to the Loan Agreement. At the Company’s option, these loans bear interest at either one-half of one percent over the Prime Rate or 350 basis points in excess of LIBOR. Upon the occurrence of an event of default, the loans bear interest at two percentage points in excess of the interest rate otherwise payable.

Both the Loan Agreement and the EXIM Loan Agreement are secured by a blanket lien against all of the Company’s assets (including intellectual property); a pledge by the Company of its shares or equity interests in its US, Spanish, German, French and Italian subsidiaries; guaranties from each of the foregoing subsidiaries (subject to dollar limitations for each of the non-US subsidiaries); and a real estate mortgage on the Company’s Wisconsin, Nebraska and Texas real property, as well as the real estate owned by its Spanish, German, French and Italian subsidiaries.

The Loan Agreement and the EXIM Loan Agreement contain customary terms and conditions for asset-based facilities, including standard representations and warranties, affirmative and negative covenants, and events of default, including non-payment, insolvency, breaches of the terms of the respective loan agreements, change of control, and material adverse changes in the Company’s business operations.

Also on February 7, 2005, the Company’s subsidiary in the United Kingdom, Oilgear Towler Limited (“Oilgear UK”), entered into

a series of financing arrangements with Venture Finance PLC (“Venture Finance”). The Venture Finance facilities provide for aggregate loans to Oilgear UK of Pounds Sterling 2,500,000. These loans are apportioned among: (i) a Pounds Sterling 2,000,000 invoice discounting facility pursuant to an Agreement for the Purchase of Debts, (ii) a Pounds Sterling 250,000 equipment loan pursuant to a Plant & Machinery Loan Agreement and (iii) a Pounds Sterling 250,000 stock loan pursuant to a Stock Loan Agreement. The Venture facilities are each dated as of January 28, 2005 and have a stated maturity of three years.

Loans under the Agreement for the Purchase of Debts bear a discount charge of either two percent over the base rate of Venture Finance’s bankers for prepayments in Pounds Sterling or two percent over Venture Finance’s cost of funds for prepayments in agreed currencies other than Pounds Sterling. Loans under the Plant & Machinery Loan Agreement and the Stock Purchase Agreement bear interest at 3 percent and 2.5 percent, respectively, above the base rate of Venture Finance’s bankers.

All of the Venture Finance facilities contain standard representations and warranties, general covenants and events of default, including non-payment, breaches of the terms of the respective documents, and insolvency.

Also on February 7, 2005, Oilgear UK entered into a demand loan facility with Barclays Bank PLC dated as of February 4, 2005 that provides loans of up to the lesser of Pounds Sterling 3,200,000 or 78% of the appraised value of certain assets. Although the Barclays facility is repayable on demand of the bank at any time, it is scheduled for review and renewal on August 15, 2005. The Barclays loan bears interest at 2.25 percent over LIBOR, and the outstanding principal amount thereof is to be repaid in a single payment on the renewal date. The Barclays facility is secured by a land charge over the land and buildings owned by Oilgear UK in Leeds, United Kingdom. Oilgear UK has contracted to sell this facility for 4,050,000 Pounds Sterling, conditioned upon Oilgear UK moving to a new location.

Based on EITF Issue No. 95-22, “Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that Include Both a Subjective Acceleration Clause and a Lock-Box Arrangement” (“EITF 95-22”), and certain provisions in the Loan Agreement, the Company will be required to classify its revolving loan facility as short-term debt for the term of the new Loan Agreement, even though the revolving loan facility does not mature until March 2008. As a result, upon recording the Loan Agreement in February 2005, the Company classified the outstanding portion of the $12 million revolving loan portion of the new Credit Facility as short-term debt, notwithstanding the fact that it does not mature until March 2008.

On February 7, 2005, the Company used a portion of the proceeds from the loan agreements described above to repay and terminate the Seventh Amended and Restated Credit Agreement dated as of March 22, 2004 (the “M&I Credit Agreement”) by and between the Company and M&I Marshall & Ilsley Bank (“M&I Bank”). Also on February 7, 2005 the Company gave notice pursuant to that certain Lease Agreement dated as of October 1, 1997 (the “Lease”) between the County of Dodge, Nebraska as lessor (the “Issuer”) and the Company as lessee, for a part of its facility in Fremont, Nebraska, that the Company would prepay all rental payments due under the Lease in whole in the principal amount of $1,200,000 plus accrued interest on March 21, 2005 (the “Redemption Date”). Concurrent with such prepayment, the Issuer and Wells Fargo Bank, National Association as Trustee (the “Trustee”) redeemed all County of Dodge, Nebraska Variable Rate Demand Industrial Development Revenue Bonds, Series 1997 (The Oilgear Company Project) (the “Bonds”), in whole at a redemption price of $1,200,000 plus accrued interest to the Redemption Date and without premium. The Bonds were secured by, and were paid by a draw on an irrevocable direct-pay letter of credit issued by M&I Bank. The Company’s obligation to reimburse M&I Bank for such draw is secured by funds deposited by the Company with M&I Bank as cash collateral. Upon payment of the Bonds in full, the Issuer terminated and released its interest in the Lease and sold the equipment purchased with the proceeds of the Bonds to the Company for a nominal purchase price. Each of these transactions was in connection with and as a result of the Company’s entry into the new credit agreements described above. The termination did not result in any early termination penalty.

4. INVENTORIES

Inventories at June 30, 2005 and December 31, 2004 consisted of the following:


	JUNE 30, 2005			DECEMBER 31, 2004

Raw materials	$	3,360,262			2,842,553
Work in process		19,196,150			20,175,049
Finished goods		3,921,715			3,627,462

		26,478,127			26,645,064

LIFO reserve		(1,116,000	)		(1,116,000	)

Total	$	25,362,127			25,529,064

Inventories stated on the last-in, first-out (LIFO) basis, including amounts allocated to contracts that have not been completed, are valued at $15,035,000 and $15,327,000 at June 30, 2005 and December 31, 2004, respectively. The remaining inventory is stated on the first-in, first-out (FIFO) or average cost basis.

5. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per common share:


	FOR THREE MONTHS ENDED				FOR SIX MONTHS ENDED
	JUNE 30, 2005		JUNE 30, 2004		JUNE 30, 2005		JUNE 30, 2004

Net income for basic and diluted earnings	$	621,055		3,255		1,045,634		12,857
Weighted average common shares outstanding		1,991,946		1,959,777		1,987,290		1,958,838
Dilutive stock options		29,655		19,840		30,902		20,678
Dilutive average common shares outstanding		2,021,601		1,978,677		2,018,102		1,980,456
Basic income per common share	$	0.31		0.00		0.53		0.01
Diluted income per common share	$	0.31		0.00		0.52		0.01

Options to purchase 54,983 shares of common stock with a weighted average exercise price of $4.07 per share were outstanding at June 30, 2005. Options to purchase 118,493 shares of common stock with a weighted average exercise price of $5.57 per share were outstanding at June 30, 2004.

Options to purchase 1,095 and 67,960 shares of common stock were not included in the computations of diluted earnings per share for the three month periods ended June 30, 2005 and 2004, respectively, because the options’ exercise prices were greater than the average market price of common stock during the periods then ended.

Options to purchase 1,095 and 64,993 shares of common stock were not included in the computations of diluted earnings per share for the six month periods ended June 30, 2005 and 2004, respectively, because the options’ exercise prices were greater than the average market price of common stock during the periods then ended

Had compensation cost for the Company’s stock options been recognized using the fair value method, the Company’s pro forma operating results would have been as follows:


	FOR THREE MONTHS ENDED					FOR SIX MONTHS ENDED
	JUNE 30, 2005		JUNE 30, 2004			JUNE 30, 2005		JUNE 30, 2004

Net earnings as reported	$	621,055		3,255			1,045,634		12,857
Add: Stock-based compensation expense included in reported net earnings, net of related tax effects		3,917		6,415			7,834		12,830
Deduct: Stock-based compensation expense determined under fair value-based method, net of related tax effects		10,552		11,693			21,105		23,386

Pro forma earnings (loss)	$	614,420		(2,023	)		1,032,363		2,301
Basic earnings per common share:
As reported		0.31		0.00			0.53		0.01
Pro forma earnings		0.31		0.00			0.52		0.00
Diluted earnings per common share:
As reported		0.31		0.00			0.52		0.01
Pro forma earnings		0.30		0.00			0.51		0.00

The fair value of the Company’s stock options used to compute pro forma net earnings and earnings per share disclosures is the estimated fair value at grant date using the Black-Scholes option pricing model with a risk-free interest rate equivalent to 3 year Treasury securities and an expected life of 3.5 years. The Black-Scholes option pricing model also used the following weighted- average assumptions: 2005- expected volatility of 49% and expected dividend yield of 0%; 2004- expected volatility of 44% and expected dividend yield of 0%. Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s options have characteristics significantly different from traded options, and because changes in the subjective input can materially affect the fair value estimates, in the opinion of management, the existing models do not necessarily provide a reliable single value of the Company’s options and may not be representative of the future effects on reported net earnings or the future stock price of the Company’s common stock. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the option’s vesting period.

6. EMPLOYEE BENEFIT PLANS

(A) PENSION PLANS

The Company has non-contributory defined benefit retirement plans covering substantially all domestic employees. The plan covering salaried and management employees provides pension benefits that are based on years of service and the employee’s compensation during the last ten years prior to retirement. This plan was frozen on December 31, 2002. Benefits payable under this plan may be reduced by benefits payable under The Oilgear Stock Retirement Plan (Stock Retirement Plan). The plan covering union members in Milwaukee, WI generally provides benefits of stated amounts for each year of service. This plan was frozen on December 31, 1997. The union member plan was merged into the salaried and management plan on January 1, 2005. The Company’s policy is to fund pension costs to conform to the requirements of the Employee Retirement Income Security Act of 1974. The Company was delinquent in its funding of estimated contributions for its United States plans at December 31, 2004 and made contributions of $1,714,267 in February 2005, $594,937 in April 2005 and $594,937 in July 2005, as a result of which it is current in its required minimum contributions as of the filing date of this 10-Q. The minimum required total contributions to be made in 2005 for the defined benefit retirement plan in the United States is approximately $2,181,000. Net pension expense under these plans for the three month and six month periods ended June 30 is comprised of the following:


	FOR THREE MONTHS ENDED						FOR SIX MONTHS ENDED
	JUNE 30, 2005			JUNE 30, 2004			JUNE 30, 2005			JUNE 30, 2004

Service cost	$	—			—			—			—
Interest cost on projected benefit obligation		460,000			460,000			920,000			920,000
Return on plan assets		(461,000	)		(406,000	)		(922,000	)		(812,000	)
Net amortization and deferral of net transition liability		321,000			302,000			642,000			604,000

Net pension expense	$	320,000			356,000			640,000			712,000

The Company has a pension plan (“UK Plan”) for substantially all United Kingdom employees that provides defined benefits based

upon years of service and salary. This plan was frozen on December 31, 2002 but continues to accrue service costs due to statutory
requirements. The minimum required contributions for 2005 are approximately $388,000, of which approximately $194,000 was paid in the first six months of 2005.

Net pension expense under this plan for the three month and six month periods ended June 30 is comprised of the following:


	FOR THREE MONTHS ENDED						FOR SIX MONTHS ENDED
	JUNE 30, 2005			JUNE 30, 2004			JUNE 30, 2005			JUNE 30, 2004

Service cost	$	6,000			15,000			13,000			30,000
Interest cost on projected benefit obligation		142,000			266,000			284,000			532,000
Return on plan assets		(125,000	)		(216,000	)		(249,000	)		(432,000	)
Net amortization and deferral of net transition liability		43,000			110,000			86,000			220,000

Net pension expense	$	66,000			175,000			134,000			350,000

(B) POST-RETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS

In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for retired domestic employees. All non-bargaining unit domestic employees who were eligible to receive retiree health care benefits as of December 31, 1991 are eligible to receive a health care credit based upon a defined formula or a percentage multiplied by the Medicare eligible premium. Non-bargaining unit domestic employees hired subsequent to, or ineligible at December 31, 1991, will receive no future retiree health care benefits. Beginning February 22, 1996, active bargaining unit employees in Milwaukee, WI are provided retiree health care benefits up to the amount of credits each employee accumulates during his or her employment with the Company. Employees terminating their employment prior to normal retirement age forfeit their rights, if any, to receive health care and life insurance benefits.

The post-retirement health care and life insurance benefits are funded by the Company on a pay as you go basis. There are no assets in these plans. Net periodic post-retirement benefit cost for the three month and six month periods ended June 30 includes the following components:


	FOR THREE MONTHS ENDED						FOR SIX MONTHS ENDED
	JUNE 30, 2005			JUNE 30, 2004			JUNE 30, 2005			JUNE 30, 2004

Service cost	$	7,000			13,000			14,000			26,000
Interest cost		81,000			112,000			162,000			224,000
Net amortization and deferral		(54,000	)		(33,000	)		(108,000	)		(66,000	)

Net periodic post retirement benefit cost	$	34,000			92,000			68,000			184,000

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXPLANATORY NOTE

For a more complete description of the issues under ongoing review, see note 1 to the unaudited consolidated financial statements.

As described in note 1 to the unaudited consolidated financial statements, if a change in accounting treatment were to be deemed appropriate for the receipt and later sale of the shares of stock that the Company received as a result of the demutualization of an insurance company in which it was a member, this change would have an impact on our results of operation for the 2004 fiscal year, including the quarter and six month period ended June 30, 2004 that are included in this Form 10-Q. The results of operation for fiscal year 2004 (and related interim periods) presented herein do not reflect any such adjustments.

FINANCIAL CONDITION AND LIQUIDITY

The Company’s sources of capital historically have been cash generated from operations and bank borrowings. The fluctuations in working capital requirements are covered by bank lines of credit and an asset based bank revolving line of credit in the United States and England. A new bank arrangement was entered into on February 7, 2005. The Company entered into a Loan and Security Agreement (the “Loan Agreement”) dated as of January 28, 2005 by and among the Company, LaSalle Business Credit, LLC (“LaSalle”), and two of the Company’s wholly-owned subsidiaries, Oilgear Towler, S.A. (“Oilgear Spain”) and Oilgear Towler GmbH (“Oilgear Germany”). On the same date, the Company and LaSalle also entered into a Foreign Accounts Loan and Security Agreement dated as of January 28, 2005 (the “EXIM Loan Agreement”).

Also on February 7, 2005, the Company’s subsidiary in the United Kingdom, Oilgear Towler Limited (“Oilgear UK”), entered into a series of financing arrangements with Venture Finance PLC (“Venture Finance”). The Venture Finance facilities provide for aggregate loans to Oilgear UK of Pounds Sterling 2,500,000. These loans are apportioned among: (i) a Pounds Sterling 2,000,000

invoice discounting facility pursuant to an Agreement for the Purchase of Debts, (ii) a Pounds Sterling 250,000 equipment loan pursuant to a Plant & Machinery Loan Agreement and (iii) a Pounds Sterling 250,000 stock (inventory) loan pursuant to a Stock Loan Agreement. The Venture facilities are each dated as of January 28, 2005 and have a stated maturity of three years.

Also on February 7, 2005, Oilgear UK entered into a demand loan facility with Barclays Bank PLC dated as of February 4, 2005 that provides loans of up to the lesser of Pounds Sterling 3,200,000 or 78% of the appraised value of certain assets. Although the Barclays facility is repayable on demand of the bank at any time, Barclays is currently proposing that the August 15, 2005 renewal date be extended to June 2006. The Barclays loan bears interest at 2.25 percent over LIBOR, and the outstanding principal amount thereof is to be repaid in a single payment on the renewal date. The Barclays facility is secured by a land charge over the land and buildings owned by Oilgear UK in Leeds, United Kingdom. As indicated in our 2004 Form 10-K, we have contracted to sell this facility for 4,050,000 Pounds Sterling, conditioned upon Oilgear UK moving to a new location. We expect the move to be completed before the June 2006 Barclays proposed loan extended date.

On February 7, 2005, the Company used a portion of the proceeds from the loan agreements described above to repay and terminate the Seventh Amended and Restated Credit Agreement dated as of March 22, 2004 (the “M&I Credit Agreement”) by and between the Company and M&I Marshall & Ilsley Bank (“M&I Bank”). Also on February 7, 2005 the Company gave notice pursuant to that certain Lease Agreement dated as of October 1, 1997 (the “Lease”) between the County of Dodge, Nebraska as lessor (the “Issuer”) and the Company as lessee, for a part of its facility in Fremont, Nebraska, that the Company would prepay all rental payments due under the Lease in whole in the principal amount of $1,200,000 plus accrued interest on March 21, 2005 (the “Redemption Date”). Concurrent with such prepayment, the Issuer and Wells Fargo Bank, National Association as Trustee (the “Trustee”) redeemed all County of Dodge, Nebraska Variable Rate Demand Industrial Development Revenue Bonds, Series 1997 (The Oilgear Company Project) (the “Bonds”), in whole at a redemption price of $1,200,000 plus accrued interest to the Redemption Date and without premium. The Bonds were secured by, and were paid by a draw on an irrevocable direct-pay letter of credit issued by M&I Bank. The Company’s obligation to reimburse M&I Bank for such draw was secured by funds deposited by the Company with M&I Bank as cash collateral. Upon payment of the Bonds in full, the Issuer terminated and released its interest in the Lease and sold the equipment purchased with the proceeds of the Bonds to the Company for a nominal purchase price. Each of these transactions was in connection with and as a result of the Company’s entry into the new credit agreements described above. The termination did not result in any early termination penalty.

For the six months ended June 30, 2005, approximately $531,000 of cash was used by operations compared to approximately $1,557,000 of cash provided by operations during the same period in 2004. The largest use of cash was the approximately $2,828,000 increase in trade accounts receivable resulting from the increase in net sales. The increase in the backlog of orders in process has increased inventory, which used approximately $660,000 of cash. The new credit facility made it possible to make significant payments to vendor accounts payable, which used approximately $1,073,000 of cash. The catch-up of the delinquent defined benefit pension contributions was the primary reason for the approximately $806,000 use of cash in accrued compensation. Approximately $1,780,000 of defined benefit pension contributions are planned to be paid in the last six months of 2005. An approximately $2,000,000 progress payment received on the large French ADH contract in the second quarter of 2005 caused billings, costs and estimated earnings on uncompleted contracts to provide approximately $847,000 of cash. The balance due on the ADH contract, approximately $2,250,000, is expected to be received in 2006. The Company expects to receive cash payments on the remaining contracts

under percentage of completion accounting of approximately $5,630,000 and $4,500,000 in the last six months of 2005 and in 2006, respectively. An increase in customer deposits provided approximately $1,274,000 of cash. Inventory turns were 3.02 at June 30, 2005 compared to 2.86 at June 30, 2004.

Property, plant and equipment additions consisting primarily of purchases of machinery and equipment were approximately $597,000 in the first six months of 2005 compared to approximately $432,000 in the first six months of 2004. Property, plant and equipment additions are expected to total less than $1,200,000 for 2005 as a whole.

WORKING CAPITAL


	June 30, 2005		December 31, 2004

Current assets	$	54,073,000		52,529,000
Current liabilities		34,680,000		40,672,000
Working capital		19,393,000		11,857,000
Current ratio		1.56		1.29

Working capital increased by approximately $7,536,000 at June 30, 2005 compared to December 31, 2004. The new finance arrangement is the primary cause for the improvement.

CAPITALIZATION


	June 30, 2005			December 31, 2004

Interest bearing debt	$	24,936,000			22,636,000
Shareholders’ equity		6,193,000			6,086,000
Debt and equity		31,129,000			28,722,000
Ratio		80.1	%		78.8	%

The capitalization of the Company increased during the first six months of 2005, primarily as a result of increased borrowing from the new bank agreement. The financing fees of the new banking arrangement were approximately $1,581,000 of which approximately $1,059,000 was capitalized in 2005. Amortization in the first six months of 2005 for these financing fees was $250,000.

The Company is currently in compliance with all bank covenants under its United States and foreign credit facilities. The covenants for the Company’s credit facility were set taking into account both the Company’s expected levels of capital expenditures and earnings for 2005 and the bank’s requirements for debt service, interest coverage and minimum consolidated tangible net worth, but there are risks and uncertainties that could result in a shortfall. If we do not meet the required minimums, the loans could be accelerated, and the Company might not have sufficient liquid resources to satisfy these obligations.

RESULTS OF OPERATIONS

Shipments and Orders


	FOR THREE MONTHS ENDED					FOR SIX MONTHS ENDED
	JUNE 30, 2005			JUNE 30, 2004		JUNE 30, 2005			JUNE 30, 2004

Net orders	$	26,761,000			25,201,000		56,547,000			51,447,000
Percentage increase		6.2	%				9.9	%
Net sales (shipments)		25,512,000			23,271,000		51,554,000			44,563,000
Percentage increase		9.6	%				15.7	%

Consolidated orders increased by approximately $1,560,000, or 6.2%, in the second quarter of 2005 and increased by approximately $5,100,000 or 9.9% in the first six months of 2005 when compared to the same periods in 2004. The change in orders in the second quarter of 2005 when compared to the same quarter of 2004 was an increase in the Domestic and International segments by 12.6% and 38.3%, respectively, and a decrease in the European segment by 21.8%. The change in the quarter comparison is more volatile because of the effect large contracts have on the smaller quarterly numbers, especially in the smaller segments. Orders have increased for the first six months of 2005 compared to the same period of 2004 in the Domestic, European and International segments by 8.1%, 13.8% and 9.0%, respectively.

Consolidated net sales increased in the second quarter of 2005 by approximately $2,241,000, or 9.6% and increased by approximately $6,991,000 or 15.7% in the first six months of 2005 when compared to the same periods in 2004. The change in net sales in the

second quarter of 2005 when compared to the same quarter of 2004 was the result of an increase in the Domestic and International segments by 25.4% and 16.4%, respectively, and a decrease in the European segment by 15.2%. Net sales have increased for the first six months of 2005 compared to the same period of 2004 in the Domestic and International segments by 27.1% and 17.8%, respectively, and decreased in the European segment by 1.3%. When Consolidated net sales, European segment net sales and International net sales for the first six months of 2005 are compared to the same period in 2004, a portion of the change is due to foreign currency translation. The impact from foreign currency translation on Consolidated net sales, European segment net sales and International segment net sales for the first six months of 2005 was an increase in net sales by 2.1%, 4.1% and 4.3%, respectively.

Backlog


	JUNE 30, 2005			DECEMBER 31, 2004

Backlog	$	39,027,000			34,034,000
Percentage increase		14.7	%

Increased orders caused the backlog of orders at June 30, 2005 to increase by approximately 14.7% to approximately $39,027,000 from approximately $34,034,000 at December 31, 2004.

Gross Profit


	FOR THREE MONTHS ENDED						FOR SIX MONTHS ENDED
	JUNE 30, 2005			JUNE 30, 2004			JUNE 30, 2005			JUNE 30, 2004

Gross profit	$	7,052,000			5,477,000			13,859,000			10,666,000
Percentage increase in gross profit		28.9	%					29.9	%
Gross profit margin		27.6	%		23.5	%		26.9	%		23.9	%

Gross profit and gross profit margin improved from 23.5% in the second quarter of 2004 to 27.6% in the second quarter of 2005 and improved from 23.9% in the first six months of 2004 to 26.9% in the first six months of 2005. These improvements were due primarily to price increases that we charged our customers, increased net sales, higher volumes generating a better absorption of fixed costs, a favorable mix of more profitable products and the benefits from our ongoing efforts to improve margins.

Selling, General and Administrative Expenses


	FOR THREE MONTHS ENDED						FOR SIX MONTHS ENDED
	JUNE 30, 2005			JUNE 30, 2004			JUNE 30, 2005			JUNE 30, 2004

Selling, general and administrative expenses	$	5,587,000			5,000,000			11,255,000			9,671,000
Less: research and development		464,000			442,000			947,000			886,000

Total selling, general and administrative less research and development	$	5,123,000			4,558,000			10,308,000			8,805,000

Percentage increase		12.4	%					17.1	%
Percentage of net sales		20.1	%		19.6	%		20.0	%		19.8	%

Selling, general and administrative expenses in the second quarter and first six months of 2005 increased by 12.4% and 17.1%, respectively, when compared to the same periods in 2004. The increase was caused primarily by the following: effect of currency translation (approximately $266,000), additional legal and accounting fees relating to the restatement of prior year results which was described in the 2004 10-K (approximately $160,000), one time benefit from sale of shares received from the demutualization of a mutual insurance company in first quarter 2004 (approximately $300,000), and employee incentive and profit sharing expenses (approximately $500,000).

Interest Expense

Interest expense increased by approximately $276,000 in the second quarter and $556,000 in the first six months of 2005 compared to the same periods in 2004. Higher interest rates, increased debt and approximately $250,000 of amortization of transaction costs associated with the new financing agreements caused the increase. The transaction costs will be amortized over the three year term of the financing agreement, which ends in January 2008.

Other non-operating Income (Loss)

Other non-operating income (loss) consists of the following:


	FOR THREE MONTHS ENDED						FOR SIX MONTHS ENDED
	JUNE 30, 2005			JUNE 30, 2004			JUNE 30, 2005			JUNE 30, 2004

Interest income	$	12,276			1,200			21,333			13,724
Exchange gain (loss)		38,372			(16,154	)		77,284			(77,707	)
Miscellaneous, net		(9,265	)		51,914			(15,787	)		55,301

Other non operating income (loss)	$	41,383			36,960			82,830			(8,680	)

The primary reason for the increase in non-operating income in the first six months of 2005 compared to the same period in 2004 was the gain from foreign exchange transactions versus a loss in 2004 caused by the stronger US dollar. The more significant items contained in miscellaneous, net are gains or losses from the sale of assets, rent received on leased property and cash discounts earned from vendors.

Income tax effective rates were 23.2% and 79.4% in the first six months of 2005 and 2004, respectively, and 23.7% and 79.9% in the second quarter of 2005 and 2004, respectively. Income tax expense on earnings before income taxes and minority interest was approximately $213,000 and $149,000, respectively, for the 2005 and 2004 second quarters and $343,000 and $262,000, respectively, for the 2005 and 2004 first six month periods. The 2004 rate resulted from losses in the Domestic segment that were not being benefited for tax purposes coupled with earnings and related tax expense in the European and International segments that generated income. The 2005 rate resulted from earnings in the Domestic segment that was benefited from prior losses that had not been previously benefited for tax purposes coupled with earnings and related tax expense from subsidiaries in the European and International segments that generated income in 2005.

The primary reason for the change from approximately break even results for the second quarter of 2004 and approximately $0.01 in the first six months of 2004 to an approximately $0.31 and $0.52 net income per diluted share in the respective periods of 2005 was the increase in shipments and gross profit described above offset by increased interest expense.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions for the reporting period and as of the financial statement date. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenues and expenses. Actual results could differ from those amounts. A more complete description of our accounting policies is presented in note 1 to the Consolidated Financial Statements included in our 2004 Form 10-K.

Critical accounting policies are those that are important to the portrayal of the Company’s financial condition and results, and which require management to make difficult, subjective and/or complex judgments. Critical accounting policies cover accounting matters that are inherently uncertain because the future resolution of such matters is unknown. The Company believes that critical accounting policies include accounting for percentage-of-completion contracts, accounting for allowances for doubtful accounts receivable, accounting for pensions, accounting for inventory obsolescence and accounting for income taxes.

Accounting for contracts using percentage-of-completion requires estimates of costs to complete each contract. Revenue earned is recorded based on accumulated incurred costs to total estimated costs to perform each contract. Management reviews these estimated costs on a monthly basis and revises costs and income recognized when changes in estimates occur. To the extent the estimate of costs to complete varies, so does the timing of recording profits or losses on contracts.

Management is required to make judgments, based on historical experience and future expectations, as to the collectibility of accounts receivable. The allowance for doubtful accounts represents allowances for customer trade accounts receivable that are estimated to be partially or entirely uncollectible. These allowances are used to reduce gross trade receivables to their net realizable value. The Company records these allowances based on estimates related to the following factors: (i) customer specific allowances; (ii) amounts based upon an aging schedule; and (iii) an estimated amount, based on the Company’s historical experience, for issues not yet identified.

Our accounting for pension benefits is primarily affected by our assumptions about the discount rate, expected and actual return on plan assets and other assumptions made by management, and is impacted by outside factors such as equity and fixed income market performance. Pension liability is principally the estimated present value of future benefits, net of plan assets. Pension expense is principally the sum of interest and service cost of the plan, less the expected return on plan assets and the amortization of the difference between our assumptions and actual experience. The expected return on plan assets is calculated by applying an assumed rate of return to the fair value of plan assets. If plan assets decline due to poor performance by the equity markets and/or long-term interest rates decline, as was experienced in 2002 and 2001, our pension liability and cash funding requirements will increase, ultimately increasing future pension expense.

Inventories are stated at the lower of cost or market value and are categorized as raw materials, work-in-progress or finished goods. Inventory reserves are recorded for damaged, obsolete, excess and slow-moving inventory. Management uses estimates to record these reserves. Slow-moving inventory is reviewed by category and may be partially or fully reserved for depending on the type of product and the length of time the product has been included in inventory.

A valuation allowance has been recorded for certain deferred tax assets, principally related to certain domestic and foreign net operating loss carryforwards. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.

NEW ACCOUNTING PRONOUNCEMENTS

In March 2005, the Securities and Exchange Commission (the “SEC”) announced that it had extended the compliance dates for non-accelerated filers and foreign private issuers to include in their annual reports a report by management on a company’s internal control over financial reporting and an accompanying auditor’s report (the “SEC Release”). The internal control reports are required by Section 404 of the Sarbanes-Oxley Act of 2002. The Company is a non-accelerated filer as defined under relevant SEC regulations. As a result of the SEC Release, the Company will not be required to include internal control reports in its annual report until its 2006 annual report, which is expected to be filed by the Company in 2007.

In December, 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”). SFAS 123R addresses the accounting for transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123R supersedes APB No. 25 and requires that such transactions be accounted for using a fair-value based method. SFAS 123R requires companies to recognize an expense for compensation cost related to share-based payment arrangements including stock options and employee stock purchase plans. SFAS 123R is effective for all awards granted, modified, repurchased, or cancelled after the beginning of the first annual reporting period beginning after June 15, 2005. SFAS provides for methods of applying this statement to existing awards during the transitional period. The Company is currently evaluating option valuation methodologies and assumptions related to its stock compensation plans. Current estimates of option values using the Black-Scholes method may not be indicative of results from valuation methodologies ultimately adopted.

In December, 2004, the FASB issued FASB Staff Position 109-2 “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“FSP 109-2”), in response to the American Jobs Creation Act of 2004 which was signed into law in October, 2004 and which provides for a special one-time tax deduction of 85% of certain foreign earnings that are repatriated (as defined). Based on the Company’s decision to reinvest rather than to repatriate current and prior year’s unremitted foreign earnings, the application of FSP 109-2 did not affect income tax expense or related disclosures in the period and is not expected to impact the measurement of income tax expense in future periods.

In November, 2004, the FASB issued SFAS No. 151, “Inventory Costs — an amendment of ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 is the result of a broader effort by the FASB to improve the comparability of cross-border financial reporting by working with the International Accounting Standards Board (“IASB”) toward development of a single set of high-quality accounting standards. The FASB and the IASB noted that ARB 43, Chapter 4 and IAS 2, “Inventories,” require that abnormal amounts of idle freight, handling costs, and wasted materials be recognized as period costs; however, the Boards noted that differences in the wording of the two standards could lead to inconsistent application of those similar requirements. The FASB concluded that clarifying the existing requirements in ARB 43 by adopting language similar to that used in IAS 2 is consistent with its goals of improving financial reporting in the United States and promoting convergence of accounting standards internationally. Adoption of SFAS 151 is required for fiscal years beginning after June 15, 2005. The provisions of SFAS 151 will be applied prospectively and are not expected to have a material impact on results of operations and financial position of the Company.

In May 2005, the FASB issued FASB Statement No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements” (“FAS 154”). FAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. FAS 154 also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The provisions of FAS 154 are effective for accounting changes and corrections of errors made in fiscal periods beginning after December 15, 2005. The adoption of the provisions of FAS 154 is not expected to have a material impact on the Company’s financial position or results of operations.

CAUTIONARY FACTORS

The discussions in this section and elsewhere contain various forward-looking statements concerning the Company’s prospects that are based on the current expectations and beliefs of management. Forward-looking statements may also be made by the Company from time to time in other reports and documents as well as oral presentations. When used in written documents or oral statements, the words “anticipate”, “believe”, “estimate”, “expect”, “objective”, and similar expressions are intended to identify forward-looking statements. The statements contained herein and such future statements involve or may involve certain assumptions, risks and uncertainties, many of which are beyond the Company’s control, that could cause the Company’s actual results and performance to differ materially from what is expected. In addition to the assumptions and other factors referenced specifically in connection with such statements, the following factors could impact the business and financial prospects of the Company:

	•		Factors affecting the economy generally, including the financial and business conditions of the Company’s customers, the demand for customers’ products and services that utilize the Company’s products, national and international events such as those of September 11, 2001, the current hostilities in the Middle East, and other threats or acts of terrorism.

	•		Factors affecting the Company’s financial performance or condition, including restrictions or conditions imposed by its current and prospective lenders, tax legislation, unanticipated restrictions on the Company’s ability to transfer funds from its

			subsidiaries, the costs of complying with recent accounting, disclosure and corporate governance requirements, and changes in applicable accounting principles or environmental laws and regulations.

	•		Factors affecting percentage of completion contracts, including the accuracy of estimates and assumptions regarding the timing and levels of costs to complete those contracts.

	•		Factors affecting the Company’s international operations, including relevant foreign currency exchange rates, which can affect the cost to produce the Company’s products or the ability to sell the Company’s products in foreign markets, and the value in United States dollars of sales made and costs incurred in foreign currencies. Other factors include foreign trade, monetary and fiscal policies; laws, regulations and other activities of foreign governments, agencies and similar organizations; and risks associated with having major facilities located in countries which have historically been less stable than the United States in several respects, including fiscal and political stability.

	•		Factors affecting the Company’s ability to hire and retain competent employees, including unionization of the Company’s non-union employees and changes in relationships with the Company’s unionized employees.

	•		The risk of strikes or other labor disputes at those locations that are unionized which could affect the Company’s operations.

	•		Factors affecting the fair market value of the Company’s common stock or other factors that would negatively impact the funding of or the value of securities held by the employee benefit plans.

	•		The cost and other effects of claims involving the Company’s products and other legal and administrative proceedings, including the expense of investigating, litigating and settling any claims.

	•		Factors affecting the Company’s ability to produce products on a competitive basis, including the availability of raw materials at reasonable prices.

	•		Unanticipated technological developments that result in competitive disadvantage and create the potential for impairment of existing assets.

	•		Failure to achieve and maintain effective internal controls pursuant to Section 404 of the Sarbanes-Oxley Act.

The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company is exposed to market risk stemming from changes in foreign exchange rates and interest rates. Changes in these factors could cause fluctuations in earnings and cash flows. The Company has significant foreign operations, for which the functional currencies are denominated primarily in the Euro and British Pound. As the values of the currencies utilized by the foreign countries in which the Company has operations increase or decrease relative to the U.S. dollar, the sales, expenses, profits, assets and liabilities of the Company’s foreign operations, as reported in the Company’s Consolidated Financial Statements, decrease or increase accordingly.

INTEREST RATE RISK

The Company’s debt structure and interest rate risk are managed through the use of fixed and floating rate debt. The Company’s primary exposure is to U.S. interest rates on the approximately $25,000,000 of floating rate debt outstanding at June 30, 2005. A 100 basis point movement in interest rates on floating rate debt outstanding at June 30, 2005 would result in a change in earnings or loss before income taxes of approximately $250,000 per year.

FOREIGN EXCHANGE RATE RISK

If foreign exchange rates would have been collectively 10% weaker against the U.S. dollar in the first six months of 2005, the approximately $1,045,000 net earnings would have been approximately $900,000.

The Company occasionally uses forward contracts to reduce fluctuations in foreign currency cash flows related to third party material purchases, intercompany product shipments and intercompany loans. At June 30, 2005, the Company had no forward exchange contracts outstanding.

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The Company’s management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on the evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of such period, the Company’s disclosure controls and procedures are not adequate and effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and that such information may not currently be accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, in a manner allowing timely decisions regarding required disclosure. Based on the evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are not adequate and effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.

As more fully described in the Company’s 2004 Form 10-K, on March 18, 2005 the Company announced that it was restating its financial statements covering the years 1999 through 2003. During the Company’s preparation of its year-end financial statements for 2004 the Company discovered accounting errors that were generated in the Company’s Italian subsidiary and were not previously detected in the translation to U.S. GAAP accounts or in the consolidation process. The errors did not affect the results of operations reported for 2003 or 2004. As a result, management concluded that the Company’s disclosure controls and procedures are not effective as of the end of the period covered by this report pending implementation of the changes to its internal controls described below.

CHANGE IN INTERNAL CONTROLS

During the period ended June 30, 2005, the Company has made changes and is making further changes in its internal controls to correct the deficiencies in its internal controls for the financial reporting of its foreign subsidiaries. Specifically, the Company’s financial staff, under the direction of the chief financial officer, will conduct on-site reviews at least annually. The on-site reviews will consist of various procedures, including a review of the key accounting policies of each subsidiary, a review of the reconciliation of the local statutory accounts to the US GAAP records, and a review of the work of the external accountants employed by the smaller subsidiaries. In addition, the Company will require that the subsidiary’s Controller or outsourced accountant is competent in English to facilitate more effective communication.

The Company believes that these changes in internal controls over financial reporting (as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) are reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

On May 10, 2005, the 2005 Annual Meeting of Shareholders of the Company was held. The following is a brief description of the matters voted upon at the meeting and tabulation of the voting therefor:

Proposal 1: Election of Directors.

Management’s nominees named below were elected as directors of the class whose term expires in 2008 by the indicated votes cast for and withheld with respect to each nominee. Of the 1,991,766 shares of Common Stock which were entitled to vote at the meeting, 1,557,083 shares were represented in person or by proxy and not less than 1,525,567 shares (98.0% of the shares represented) were voted for the election of all of management’s nominees. There were no abstentions or broker non-votes with respect to the election of directors.


Name of Nominee	For		Withheld

Robert D. Drake		1,525,567		31,516
Michael H. Joyce		1,526,781		30,301
Thomas L. Misiak		1,527,196		29,887

The terms of office as directors of Hubert Bursch, Roger H. Schroeder, David A. Zuege, Dale C. Boyke, Michael C. Sipek and Frank L. Schmit continued after the meeting. Further information concerning these matters is contained in the Company’s Proxy Statement dated April 20, 2005 with respect to the Company’s 2005 Annual Meeting of Shareholders.

ITEM 6. EXHIBITS.

See Exhibit Index following the last page of this Form 10-Q, which Exhibit Index is incorporated herein by reference.

SIGNATURES

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


		THE OILGEAR COMPANY
		Registrant

		/s/ David A. Zuege

		David A. Zuege
		President and CEO
		(Principal Executive Officer)

		/s/ Thomas J. Price

		Thomas J. Price
		VP-CFO and Secretary
		(Principal Financial and Chief Accounting Officer)

Date: August 22, 2005

THE OILGEAR COMPANY

COMMISSION FILE NUMBER 000-00822

EXHIBIT INDEX

Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2005


Exhibit		Exhibit Description
31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act).

31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act).

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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OILGEAR CO 10-Q