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, 2006


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		(I.R.S. Employer
incorporation or organization)		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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

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


Class		Outstanding as of June 30, 2006

Common Stock, $1.00 Par Value		2,039,034

TABLE OF CONTENTS


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 1. LEGAL PROCEEDINGS
ITEM 1A. RISK FACTORS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
SIGNATURES
EXHIBIT INDEX
Certification of CEO
Certification of CFO
Section 906 Certification of CEO
Section 906 Certification of CFO

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

THE OILGEAR COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS


	June 30, 2006			December 31, 2005
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	5,832,305			4,369,904
Trade accounts receivable, less allowance for doubtful receivables of $374,000 and $352,000 in 2006 and 2005, respectively		17,556,293			18,848,654
Costs and estimated earnings in excess of billings on uncompleted contracts		4,439,588			1,975,685
Inventories		24,301,496			25,365,389
Prepaid expenses		1,045,138			821,663
Other current assets		946,761			987,450

Total current assets		54,121,581			52,368,745

Property, plant and equipment, at cost:
Land		1,493,608			1,425,744
Buildings		12,516,014			12,419,010
Machinery and equipment		49,277,579			51,271,323
Drawings, patterns and patents		6,539,248			6,415,444

		69,826,449			71,531,521
Less accumulated depreciation and amortization		53,461,588			55,650,258

Net property, plant and equipment		16,364,861			15,881,263
Other assets		2,735,240			2,892,797

	$	73,221,682			71,142,805

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short term borrowings	$	9,311,577			15,349,189
Current installments of long term debt		1,266,618			1,263,112
Accounts payable		10,355,872			9,214,577
Billings in excess of costs and estimated earnings on uncompleted contracts		193,954			215,795
Customer deposits		1,658,779			1,867,640
Accrued compensation and employee benefits		3,693,427			4,564,977
Other accrued expenses and income taxes		4,749,815			3,171,385

Total current liabilities		31,230,042			35,646,675

Long term debt, less current installments		7,133,469			7,723,582
Unfunded employee retirement plan costs		12,397,839			12,164,509
Unfunded post retirement health care costs		6,552,000			6,600,000
Other noncurrent liabilities		842,856			849,994

Total liabilities		58,156,206			62,984,760

Minority interest in consolidated subsidiaries		1,121,801			1,090,848
Shareholders’ equity:
Common stock, par value $1 per share, authorized 4,000,000 shares; issued 2,039,034 and 2,012,255 shares at June 30, 2006 and December 31, 2005, respectively		2,039,034			2,012,255
Capital in excess of par value		9,807,211			9,516,435
Retained earnings		22,424,476			16,107,660

		34,270,721			27,636,350
Deduct:
Notes receivable from employees for purchase of Company common stock		(12,962	)		(18,664	)
Accumulated other comprehensive income (loss):
Foreign currency translation adjustment		(7,474	)		(395,721	)
Minimum pension liability adjustment		(20,306,610	)		(20,154,767	)

		(20,314,084	)		(20,550,488	)

Total shareholders’ equity		13,943,675			7,067,198

	$	73,221,682			71,142,805

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,
	2006			2005		2006			2005
Net sales	$	28,337,628			25,496,691		53,410,763			51,523,109
Cost of sales		21,896,832			18,483,736		40,118,101			37,578,623

Gross profit		6,440,796			7,012,955		13,292,662			13,944,486
Selling, general and administrative expenses		5,771,425			5,529,529		11,366,388			11,209,732
Expenses related to the Leeds, UK move		979,306			—		979,306			—
Gain on sale of Leeds, UK facility		(7,216,259	)		—		(7,216,259	)		—

Operating income		6,906,324			1,483,426		8,163,225			2,734,754
Interest expense		630,683			602,866		1,265,880			1,212,880
Other non-operating income (loss) , net		(5,138	)		65,559		74,488			132,226

Earnings before income taxes and minority interest		6,270,503			946,119		6,971,833			1,654,100
Income tax expense		454,046			213,746		618,772			342,715
Minority interest in net earnings		13,503			68,473		36,245			85,973

Net earnings	$	5,802,954			663,900		6,316,816			1,225,412

Basic weighted average outstanding shares		2,016,169			1,991,946		2,014,223			1,987,290

Diluted weighted average outstanding shares		2,040,965			2,021,601		2,038,000			2,018,102

Basic earnings per share of common stock	$	2.88			0.33		3.14			0.62

Diluted earnings per share of common stock	$	2.84			0.33		3.10			0.61

See accompanying notes to consolidated financial statements.

THE OILGEAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)


	FOR SIX MONTHS ENDED
	JUNE 30,
	2006			2005

Cash flows from operating activities:
Net earnings	$	6,316,816			1,225,412
Adjustments to reconcile net earnings to net cash provided (used) by operating activities:
Depreciation and amortization		1,505,410			1,663,486
Gain from sale of assets		(7,216,259	)		—
Amortization of deferred financing fees		275,940			286,122
Common and treasury stock issued in connection with compensation element of sales to employees and employee savings plan		323,257			7,836
Minority interest in consolidated subsidiaries		36,245			85,973
Changes in assets and liabilities:
Trade accounts receivable		1,859,487			(2,828,442	)
Inventories		1,562,425			(864,953	)
Billings, costs and estimated earnings on uncompleted contracts		(2,349,507	)		846,935
Prepaid expenses		(190,983	)		(140,078	)
Accounts payable		926,824			(1,072,912	)
Customer deposits		(263,644	)		1,273,848
Accrued compensation		(1,036,209	)		(805,931	)
Accrued rent expense		160,835			—
Other accrued expense and income taxes		1,380,105			338,476
Other, net		(89,707	)		(260,648	)

Net cash provided (used) by operating activities	$	3,201,033			(244,877	)

Cash flows from investing activities:
Additions to property, plant and equipment		(2,091,208	)		(597,311	)
Net proceeds from sale of assets		7,577,229			—

Net cash provided (used) by investing activities	$	5,486,021			(597,311	)

Cash flows from financing activities:
Net borrowings under line of credit agreements		(497,314	)		1,446,691
Repayment of Barclays bank demand loan		(5,812,000	)		—
Repayment of long term debt		(755,846	)		(8,197,758	)
Proceeds from issuance of long term debt		—			9,450,000
Payments of financing fees		—			(1,095,122	)
Payments received on notes receivable from employees		—			8,766

Net cash provided (used) by financing activities	$	(7,065,160	)		1,612,577
Effect of exchange rate changes on cash and cash equivalents		(159,493	)		(17,652	)

Net increase in cash and cash equivalents	$	1,462,401			752,737
Cash and cash equivalents:

At beginning of period		4,369,904			4,109,409

At end of period	$	5,832,305			4,862,146

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	1,009,102			927,234

Income taxes		445,091			223,780

See accompanying notes to consolidated financial statements.

THE OILGEAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)


	FOR THREE MONTHS ENDED						FOR SIX MONTHS ENDED
	JUNE 30,						JUNE 30,
	2006			2005			2006			2005
Net earnings	$	5,802,954			663,900			6,316,816			1,225,412
Other comprehensive income (loss):
Foreign currency translation adjustment		125,154			(493,744	)		388,247			(1,179,084	)
Minimum pension liability adjustment		(126,325	)		174,361			(151,843	)		223,548

Total comprehensive income	$	5,801,783			344,517			6,553,220			269,876

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 presentation of the results for the interim periods in accordance with accounting principles generally accepted in the United States of America. All such adjustments are of a normal recurring nature. Management assumes the reader will have access to the December 31, 2005 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 2005 Form 10-K.

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. The Company also provides aftermarket sales and rebuilding services which include exchange, factory rebuild and field repair service, along with customer education.

Segment Information


	FOR THREE MONTHS ENDED						FOR SIX MONTHS ENDED
	JUNE 30, 2006			JUNE 30, 2005			JUNE 30, 2006			JUNE 30, 2005
SALES TO UNAFFILIATED CUSTOMERS
Domestic	$	15,991,967			14,647,199			29,882,437			28,547,976
European		8,545,427			7,060,489			16,298,732			15,754,813
International		3,800,234			3,789,003			7,229,594			7,220,320

	$	28,337,628			25,496,691			53,410,763			51,523,109

INTERSEGMENT SALES
Domestic	$	1,634,939			2,381,483			3,687,044			4,351,675
European		110,686			414,157			598,628			1,088,502
OPERATING INCOME
Domestic	$	2,215,212			2,003,668			3,470,703			3,396,901
European (1)		5,010,974			(154,036	)		5,319,939			77,962
International		338,482			324,657			625,989			567,481
Corporate expenses, including R&D		(658,344	)		(690,863	)		(1,253,406	)		(1,307,590	)

Total (1)	$	6,906,324			1,483,426			8,163,225			2,734,754


(1)		The European segment operating income reflects the gain on the sale of the Leeds UK facility of approximately $7,216,000, costs related to moving and disruption caused by the move of the Leeds, UK facility to a new location of approximately $980,000 and an obsolete inventory charge of approximately $814,000 related to discontinuing the manufacturing of certain product lines that have been replaced by newer more efficient products. Excluding these items, the operating loss for the European segment for the three months and six months ended June 30, 2006 would have been approximately $411,000 and $102,000, respectively, and the consolidated operating income for the three months and six months ended June 30, 2006 would

have been approximately $1,484,000 and $2,741,000, respectively. Operating income was also lowered by the lost production caused by the Leeds, UK move and rent expense for the newly leased Leeds, UK facility which included a rent holiday until October 1, 2006 but the Company accrued rent expense through June 30, 2006 for approximately $161,000.

Identifiable assets at June 30, 2006 and December 31, 2005 consisted of the following:


	June 30,		December 31,
	2006		2005

IDENTIFIABLE ASSETS
Domestic	$	33,960,000		32,225,000
European		29,869,000		28,662,000
International		7,853,000		8,669,000
Corporate		1,540,000		1,587,000

Total	$	73,222,000		71,143,000

3. DEBT

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 at 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 at (x) 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.

The Loan Agreement and the EXIM Loan Agreement were amended in April 2006 to waive certain events of default and to reduce the German subsidiary cross collateralization cap on term loans C and D to zero.

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 (approximately $4,541,000). These loans are apportioned among: (i) a Pounds Sterling 2,000,000 (approximately $3,633,000) invoice discounting facility pursuant to an Agreement for the Purchase of Debts, (ii) a Pounds Sterling 250,000 (approximately $454,000) equipment loan pursuant to a Plant & Machinery Loan Agreement and (iii) a Pounds Sterling 250,000 (approximately $454,000) 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 (approximately $5,812,000) or 78% of the appraised value of certain land and buildings. The Company closed the sale of the Leeds facility on June 7, 2006 and received proceeds net of selling fees of Pounds Sterling 4,050,000 (approximately $7,577,000). $5,812,000 of the proceeds was used to pay off the Barclays Bank loan. The Company entered into a fifteen year lease agreement on January 26, 2006 with basic rent due quarterly of pounds sterling 225,000 (approximately $409,000) per year. Oilgear UK’s move to its new location in Leeds, England was completed in June 2006 and the first rent payment for the newly leased Leeds, UK facility which included a rent holiday is not due until October 1, 2006. The rent holiday is being amortized over the term of the lease.

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 is classifying its revolving loan facility as short-term debt, even though the revolving loan facility does not mature until January 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 January 2008.

4. INVENTORIES

Inventories at June 30, 2006 and December 31, 2005 consisted of the following:


	June 30, 2006			December 31, 2005

Raw materials	$	2,634,209			3,093,963
Work in process		18,594,614			19,497,769
Finished goods		4,026,673			3,679,657

	$	25,255,496			26,271,389

LIFO reserve		(954,000	)		(906,000	)

Total	$	24,301,496			25,365,389

Inventories stated on the last-in, first-out (LIFO) basis, including amounts allocated to contracts that have not been completed, are valued at $15,778,000 and $15,665,000 at June 30, 2006 and December 31, 2005, 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, 2006		JUNE 30, 2005		JUNE 30, 2006		JUNE 30, 2005
Net income for basic and diluted earnings	$	5,802,954		663,900		6,316,816		1,225,412
Weighted average common shares outstanding		2,016,169		1,991,946		2,014,223		1,987,290
Dilutive stock options		24,796		29,655		23,777		30,902

Dilutive average common shares outstanding		2,040,965		2,021,601		2,038,000		2,018,102
Basic income per common share	$	2.88		0.33		3.14		0.62
Diluted income per common share	$	2.84		0.33		3.10		0.61

Options to purchase 63,749 shares of common stock with a weighted average exercise price of $8.32 per share were outstanding at June 30, 2006. 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 1,095 shares of common stock were not included in the computations of diluted earnings per share for the three month and six month periods ended June 30, 2005, because the options’ exercise prices were greater than the average market price of common stock during the periods then ended.

6. SHARE-BASED COMPENSATION

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, Share-Based Payment (“SFAS No. 123R” or the “Statement”). This statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), and its related implementation guidance. This statement 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 requires companies to recognize compensation expense cost related to share- based payment arrangements including stock options and employee stock purchase plans based on the grant date fair value of the awards. On January 1, 2006, the Company adopted the provisions of SFAS No. 123R using the modified prospective method.

Prior to the adoption of SFAS No. 123R, the Company followed the intrinsic value method and made the required pro forma disclosures in accordance with SFAS No. 123. Accordingly, no compensation expense was recognized in connection with the issuance of stock options. However, compensation expense was recognized in connection with shares issued under the employee stock purchase plan. The adoption of SFAS No. 123R resulted in the Company recording compensation expense for the fair value of employee stock options for all unvested awards. The following table shows the effect of adopting SFAS No. 123R on selected reported items (“As Reported”) and what those items would have been under previous guidance under APB No. 25:


	For the Three Months Ended						For the Six Months Ended
	June 30, 2006						June 30, 2006
				Under						Under
	As Reported			APB No. 25			As Reported			APB No. 25
Earnings before income taxes and minority interest	$	6,270,503		$	6,309,493		$	6,971,833		$	7,049,388
Net earnings		5,802,954			5,841,943			6,316,816			6,394,371
Cash flows provided (used) by operating activities		2,210,309			2,210,309			3,201,033			3,201,033
Cash flows provided (used) by financing activities		(7,276,216	)		(7,276,216	)		(7,065,160	)		(7,065,160	)
Basic earnings per share	$	2.88		$	2.90		$	3.14		$	3.17
Diluted earnings per share	$	2.84		$	2.86		$	3.10		$	3.14

Results for 2005 have not been restated to reflect the adoption of SFAS No. 123R. As previously reported in the Form 10-Q/A for the second quarter of 2005, a pro forma calculation was made to disclose compensation expense and the impact on net earnings if the Company had been applying SFAS No. 123 in connection with the issuance of employee stock options. The pro forma results are indicated below.


	For the Three Months Ended			For the Six Months Ended
	June 30, 2005			June 30, 2005
Net earnings as reported	$	663,900		$	1,225,412
Add: Stock-based compensation expense included in reported net earnings, net of related tax effects		3,917			7,834
Deduct: Pro forma compensation expense related to stock options, net of related tax effects		(10,552	)		(21,105	)

Pro forma net earnings	$	657,265		$	1,212,141

Basic earnings per common share:
As reported	$	0.33		$	0.62
Pro forma		0.33			0 .61
Diluted earnings per common share:
As reported	$	0.33		$	0.61
Pro forma		0.33			0.60

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 4.0 years. The Black-Scholes option pricing model also used the following weighted-average assumptions: 2005- expected volatility of 81% and expected dividend yield of 0%; 2004- expected volatility of 45% and expected dividend yield of 0%; 2003- expected volatility of 43% 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 its 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.

Stock Options

Stock options are granted to senior executives and other key employees as determined by the Compensation Committee of the Board of Directors (the Committee). The exercise price of the options is determined by the Committee, but must be greater than or equal to the fair market value of the Company’s common stock when the option is granted. All stock options have five-year terms and vest incrementally, becoming fully exercisable after three years from the date of grant. The Committee establishes the period or periods of time within which the option may be exercised within the parameters of the Option Plan document. Upon the exercise of the stock options the Company will issue shares from treasury, if available, and if not available, then will issue new shares. Currently, all existing options vest 50% after one year from grant date, another 25% after two years from grant date, and the final 25% after three years from grant date. Accordingly, compensation expense is recognized 50% in the first year, 25% in the second year, and 25% in the third year. Stock option activity for the six months ended June 30, 2006 was as follows:


	Number of		Weighted Average		Weighted Average Remaining
	Options		Exercise Price		Contractual Lives (In Years)
Options outstanding at December 31, 2005		70,227	$	7.91
Granted		—		—
Exercised		6,124		3.57
Expired		354		9.75

Options outstanding at June 30, 2006		63,749	$	8.32		3.1

Options exercisable at June 30, 2006		5,749	$	3.31		2.2

There were 58,000 unvested stock options with a weighed-average grant-date fair value of $5.25 at both June 30, 2006, and December 31, 2005. As of June 30, 2006, there was $212,711 of total unrecognized compensation expense related to unvested stock options.

7. 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 hourly employees and union members 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 minimum required total contributions to be made in 2006 for the defined benefit retirement plan in the United States is approximately $2,121,000 of which approximately $680,000 was paid in the first six months of 2006. Net pension expense under these plans for the three and six months ended June 30 is comprised of the following:


	FOR THREE MONTHS ENDED						FOR SIX MONTHS ENDED
	JUNE 30, 2006			JUNE 30, 2005			JUNE 30, 2006			JUNE 30, 2005

Service cost	$	—			—			—			—
Interest cost on projected benefit obligation		450,000			460,000			900,000			920,000
Return on plan assets		(503,000	)		(461,000	)		(1,006,000	)		(922,000	)
Net amortization and deferral of net transition liability		316,000			321,000			632,000			642,000

Net pension expense	$	263,000			320,000			526,000			640,000

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 2006 are approximately $375,000, of which approximately $188,000 was paid in the first six months of 2006.

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


	FOR THREE MONTHS ENDED						FOR SIX MONTHS ENDED
	JUNE 30, 2006			JUNE 30, 2005			JUNE 30, 2006			JUNE 30, 2005

Service cost	$	12,000			10,000			24,000			20,000
Interest cost on projected benefit obligation		253,000			244,000			506,000			488,000
Return on plan assets		(238,000	)		(215,000	)		(476,000	)		(430,000	)
Net amortization and deferral of net transition liability		66,000			75,000			132,000			150,000

Net pension expense	$	93,000			114,000			186,000			228,000

(B) EMPLOYEE SAVINGS PLANS

In June 2006 the Company contributed 22,263 shares of the Company’s common stock to the Savings Plan to fund its 2005 profit sharing contributions.

(C) 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 and six months ended June 30 includes the following components:


	FOR THREE MONTHS ENDED						FOR SIX MONTHS ENDED
	JUNE 30, 2006			JUNE 30, 2005			JUNE 30, 2006			JUNE 30, 2005

Service cost	$	14,000			7,000			28,000			14,000
Interest cost		68,000			81,000			136,000			162,000
Net amortization and deferral		(50,000	)		(54,000	)		(100,000	)		(108,000	)

Net periodic post retirement benefit cost	$	32,000			34,000			64,000			68,000

8. INCOME TAXES

The Company’s effective tax rate is significantly below the U.S. statutory rate of 35% in 2006, primarily as a result of the tax impact of the sale of the Leeds, UK facility. The difference in the book and tax basis of the property had not been recognized previously as it was not more likely than not that it would be realized and had been offset with a valuation reserve. In 2006, the Company is recognizing the benefit of the book versus tax basis difference on the Leeds facility through the reversal of the valuation reserve and is also recognizing the tax benefit of reductions in its valuation reserves in the Domestic segment for net operating loss carryforwards that had not previously been benefited. The reversal of these valuations reserves reduces the effective tax rate of the Company to approximately 7.2% and 8.9% for the three and six months periods ended June 30, 2006, respectively.

The Company’s effective tax rate for the three and six month periods ended June 30, 2005 was 22.6% and 20.7%, respectively, which is below the U.S. statutory rate of 35%. This was due to the fact that the Company recorded tax expense on income in its International and European segments, however, was not able to record the tax benefit on its significant losses in the Domestic segment as it was not more likely than not the benefits would be realized.

In July, 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) that is effective for fiscal years commencing after December 15, 2006. The objective of FIN 48 was to increase the comparability in financial reporting of income tax uncertainties by requiring all companies to make explicit disclosures about uncertainties in the income tax positions, including a detailed roll-forward of tax benefits taken that do not qualify for financial statement recognition. FIN 48 will require companies to identify tax positions where there is a more-likely-than-not recognition threshold that the tax position taken in their tax returns would be sustained as filed. For these tax positions, the company should recognize the largest amount of the tax benefit that is great than 50 percent likely of being realized upon ultimate settlement with the taxing authority. The Company is currently evaluating the impact of FIN 48 to determine the impact on its deferred and current tax liability.

ITEM 2.

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

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”).

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”).

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.

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 certain of the foregoing subsidiaries (subject to dollar limitations for 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 was amended in April 2006 to waive certain events of default and to reduce the German subsidiary cross collateralization cap on term loans C and D to zero.

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 (approximately $5,812,000) or 78% of the appraised value of certain land and buildings. The Company closed the sale of the Leeds facility on June 7, 2006 and received proceeds net of selling fees of Pounds Sterling 4,050,000 (approximately $7,577,000). $5,812,000 of the proceeds was used to pay off the Barclays Bank loan. The Company entered into a fifteen year lease agreement on January 26, 2006 with basic rent due quarterly of pounds sterling 225,000 (approximately $409,000) per year. Oilgear UK’s move to its new location in Leeds, England was completed in June 2006 and the first rent payment for the newly leased Leeds, UK facility which included a rent holiday is not due until October 1, 2006 but the Company accrued rent expense through June 30, 2006 for approximately $161,000.

For the six months ended June 30, 2006, approximately $3,201,000 of cash was provided by operations compared to approximately $245,000 of cash used by operations during the same period in 2005. The proceeds from the sale of the Leeds, UK facility provided $7,577,000 of cash during the first six months of 2006. These proceeds were used to pay off the $5,812,000 Barclays bank demand note, approximately $980,000 for moving and move disruption costs and approximately $790,000 for two new Mazak machining centers. Contracts that recognize revenue by the percentage-of-completion accounting method used approximately $2,350,000 of cash during the first six months of 2006 compared to providing $847,000 during the same period of 2005. The largest of these contracts is supplying a hydraulic and electronic system for a forging machine in France that was completely shipped in 2005 and that will be commissioned in 2006. The balance due on this contract, approximately $2,100,000, is expected to be received in 2006. The Company expects to receive payments for most of the remaining contracts which utilize percentage-of-completion accounting, approximately $12,548,000, in 2006. The increase in orders and especially the increase in demand for our meter products was the primary reason for the increase in inventory by approximately $865,000 for the six months ended June 30, 2005. During the first six months of 2006, inventory decreased by approximately $1,562,000, of which, $1,305,000 of the decrease came from the operations in Leeds, UK. $814,000 of the decrease in Leeds is related to a provision to increase the reserve for obsolete inventory, which is explained later in management’s discussion of gross margin. Inventory turns were 3.07 for the six months ended June 30, 2006, compared to 3.02 for the six months ended June 30, 2005. Deposits from contacts that require customers to deposit cash before shipment used approximately $264,000 of cash during the first six months of 2006 compared to providing approximately $1,274,000 of cash for the first six months of 2005. A 34% increase in the backlog of orders from December 31, 2005 resulted in an increase in purchased goods and services to support the increase in production which resulted in a $927,000 increase in accounts payable at June 30, 2006. Due to the February 2005 credit facility the Company was able to make significant payments to vendors and catch up with the required pension contributions which caused accounts payable and accrued compensation and pension expense to use cash of approximately $1,073,000 and approximately $806,000, respectively, in the first six months of 2005. The decrease in accrued compensation and pension expense in the amount of $1,036,000 in the first six months of 2006 reflects the payments of accrued incentive compensation ($917,000) and profit sharing ($240,000) in the second quarter of 2006. Fees paid that relate to the new financing agreement are being amortized over the thirty-six month term of the bank agreement which were approximately $276,000 and $286,000 for the six month periods ending June 30, 2006 and 2005, respectively. Other accrued expenses and income taxes provided approximately $1,380,000 and approximately $338,000 of cash in the first six months of 2006 and 2005, respectively. The primary transactions causing the increase in other accrued expenses and income taxes as of June 30, 2006 were accruals for costs and expenses resulting from the Leed, UK move, (approximately $1,024,000) and taxes on the gain from the sale of the Leeds, UK facility (approximately $340,000). Other-net is made up of changes in various deposits, deferred fees, and non trade receivables. The change in these items used approximately $90,000 and approximately $261,000 in the first six months of 2006 and 2005, respectively.

Property, plant and equipment additions consisting primarily of purchases of machinery and equipment for the new leased facility in the UK were approximately $2,091,000 in the first six months of 2006 compared to approximately $597,000 in the first six months of 2005. Property, plant and equipment additions are expected to total less than $2,700,000 for 2006.

The February 2005 bank agreement allowed the Company to finance the increase in orders, and therefore, borrowings exceeded repayments by approximately $1,613,000 at June 30, 2005. During the six months ended June 30, 2006, $7,065,160 of bank borrowings were paid down (mainly the Barclays loan of $5,812,000).

WORKING CAPITAL


	June 30, 2006		December 31, 2005

Current assets	$	54,122,000		52,369,000
Current liabilities		31,230,000		35,647,000
Working capital		22,892,000		16,722,000
Current ratio		1.73		1.47

Working capital increased by approximately $6,170,000 at June 30, 2006 compared to December 31, 2005. The $7,577,000 net proceeds from the sale of the Leeds, UK facility was the primary reason working capital increased. These proceeds were used to pay down short term borrowings by $5,812,000. An increase in engineered construction orders using percentages-of-completion accounting caused costs and estimated earnings in excess of billings on uncompleted contracts to increase by approximately $2,464,000.

CAPITALIZATION


	June 30, 2006			December 31, 2005

Interest bearing debt	$	17,712,000			24,336,000
Shareholders’ equity		13,944,000			7,067,000
Debt and equity		31,656,000			31,403,000
Ratio		56.0	%		77.5	%

The capitalization of the Company increased during the first six months of 2006, primarily as a result of the $7,577,000 proceeds from the sale of the Leeds, UK facility which we used to pay off the $5,812,000 Barclays bank demand and pay the costs to move the Leeds, UK facility to its new location.

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 2006 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, 2006			June 30, 2005		JUNE 30, 2006			JUNE 30, 2005
Net orders	$	27,549,000		$	26,746,000		62,641,000			56,516,000
Percentage increase		3.0	%				10.8	%
Net sales		28,338,000			25,497,000		53,411,000			51,523,000
Percentage increase		11.1	%				3.7	%

Net orders increased by approximately $803,000, or 3.0%, in the second quarter of 2006 and increased by approximately $6,125,000 or 10.8% in the first six months of 2006 when compared to the same periods in 2005. The change in orders in the second quarter of 2006 when compared to the same quarter of 2005 was an increase in the Domestic and European segments by 8.0% and 28.9%, respectively, and a decrease in the International segment by 33.3%. 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 2006 compared to the same period of 2005 in the Domestic and European segments by 11.7% and 19.9%, respectively, and decreased in the International segment by 8.2%. Components, aftermarket and construction contracts for engineered systems all contributed to the increase in the Domestic segment orders increase whereas the European increase was from construction contracts to build engineered systems for the forging and extrusion industry as well as the United Kingdom government.

Net sales increased in the second quarter of 2006 by approximately $2,841,000, or 11.1% and increased by approximately $1,888,000, or 3.7%, in the first six months of 2006 when compared to the same periods in 2005. The change in net sales in the second quarter of 2006 when compared to the same quarter of 2005 was the result of an increase in the Domestic, European and International segments by 9.2%, 21.0% and 0.3%, respectively. Net sales have increased for the first six months of 2006 compared to the same period of 2005 in the Domestic, European and International segments by 4.7%, 3.5% and 0.1%, respectively. When consolidated net sales, European segment net sales and International net sales for the first six months of 2006 are compared to the same period in 2005, 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 2006 was to decrease net sales by 1.4%, decrease net sales by 4.5% and increase net sales by 0.7%, respectively. Components, after market and construction contracts for engineered systems all contributed to the increase in the Domestic segment net sales whereas the European increase was from construction contracts to build engineered systems for the forging and extrusion industry.

Backlog


	June 30, 2006		December 31, 2005

Backlog	$	36,095,000		26,864,000
Percentage increase				34.4	%

Increased orders caused the backlog of orders at June 30, 2006 to increase by approximately $9,231,000, or 34.4%, to approximately $36,095,000 from approximately $26,864,000 at December 31, 2005.

Gross Profit


	FOR THREE MONTHS ENDED						FOR SIX MONTHS ENDED
	JUNE 30, 2006			JUNE 30, 2005			JUNE 30, 2006			JUNE 30, 2005
Gross profit	$	6,441,000			7,013,000			13,293,000			13,944,000
Percentage increase (decrease) in gross profit		(8.2	%)		26.8	%		(4.7	%)		30.1	%
Gross profit margin		22.7	%		27.5	%		24.9	%		27.1	%

As part of the Leeds, UK facility move to a new location, the Company is making strategic changes to increase profitability. New production machines have been purchased that will increase quality as well as reduce manufacturing costs. Management made a strategic decision to discontinue certain product lines at the Leeds, UK facility that can be replaced by more efficient product lines the Company manufactures at its other facilities. As a result of this strategic decision the obsolescence reserve has been increased by $814,000 with a corresponding charge to cost of sales in the second quarter of 2006. Gross profit decreased by $572,000 and $651,000 for the three month and six month periods, respectively and gross profit margin decreased from 27.5% in the second quarter of 2005 to 22.7% in the second quarter of 2006 and decreased from 27.1% in the first six months of 2005 to 24.9% in the first six months of 2006. Excluding the $814,000 obsolescence charge, the gross profit would have increased by $214,000 and $163,000 for the three month and six month periods, respectively and gross profit margin would have decreased from 27.5% in the second quarter of 2005 to 25.6% in the second quarter of 2006 and decreased from 27.1% in the first six months of 2005 to 26.4% in the first six months of 2006. The decrease in gross margin was also affected by the Leeds, UK facility move which negatively affected the level of production activity in the second quarter of 2006 at the Leeds, UK factory.

Selling, General and Administrative Expenses


	FOR THREE MONTHS ENDED						FOR SIX MONTHS ENDED
	JUNE 30, 2006			JUNE 30, 2005			JUNE 30, 2006			JUNE 30, 2005
Selling, general and administrative expenses	$	5,771,000			5,530,000			11,366,000			11,210,000
Less: research and development		472,000			464,000			928,000			947,000

Total selling, general and administrative less research and development	$	5,299,000			5,066,000			10,438,000			10,263,000

Percentage increase		4.6	%					1.7	%
Percentage of net sales		18.7	%		19.9	%		19.5	%		19.9	%

Selling, general and administrative expenses in the second quarter and first six months of 2006 increased by 4.6% and 1.7%, respectively, when compared to the same periods in 2005. The foreign exchange rate used to translate these foreign currencies into US dollars caused an increase of approximately $1,000 for the three months ended June 30, 2006 and a decrease of $146,000 in the first six months of 2006 in selling, general and administrative expenses less research and development. Rent expense of $161,000 for the new Leeds, UK facility is the primary reason for the increase in selling, general and administrative expenses in the second quarter of 2006. The increase in year to date selling, general and administrative expenses is due to the $161,000 of rent on the new Leeds facility, and $247,000 of increased legal and audit fees resulting from the restatements of the 2004 Form 10-K and 2005 Form 10-Q’s offset by the currency impact noted above. Minor changes to all other selling, general and administrative items make up the difference in the total change.

Gain on sale of Leeds, UK facility and Related Expenses

In the second quarter of 2006 the Company completed the sale of its Leeds, UK facility for net proceeds of approximately $7,577,000 which results in a pre-tax gain of approximately $7,216,000. In connection with the sale we incurred various move related costs totaling approximately $979,000.

Interest Expense

Interest expense increased by approximately $28,000 in the second quarter and $53,000 in the first six months of 2006 compared to the same periods in 2005. Higher interest rates caused the increase.

Non-operating Income (loss)

Non-operating income (loss) consists of the following:


	FOR THREE MONTHS ENDED					FOR SIX MONTHS ENDED
	JUNE 30, 2006			JUNE 30, 2005		JUNE 30, 2006		JUNE 30, 2005
Interest income	$	11,228			12,973		22,556		26,100
Exchange gain (loss)		(30,580	)		38,372		23,504		77,284
Rent income		14,214			14,214		28,428		28,842

Other non operating income(loss)	$	(5,138	)		65,559		74,488		132,226

The primary reason for the change in other non-operating income (loss) in the second quarter and the first six months of 2006 compared to the same periods in 2005 was the gain (loss) from foreign exchange transactions in the second quarter of 2006.

Income tax effective rates were 7.2% and 22.6% for the three months ended June 30, 2006 and 2005, respectively, 8.8% and 20.7% for the first six months of 2006 and 2005. Income tax expense on earnings before income taxes and minority interest was approximately $454,000 and $214,000, respectively, for the three months ended June 30, 2006 and 2005, respectively, and $619,000 and $343,000 for the six months ended June 30, 2006 and 2005, respectively.

The primary reason for the change from $0.33 earnings per diluted share for the second quarter of 2005 and approximately $0.61 earnings per diluted share in the first six months of 2005 to $2.84 and $3.10 earnings per diluted share in the respective periods of 2006 was the gain from the sale of the Leeds, UK facility.

Cautionary factors

Certain matters discussed in this Form 10-Q are “forward-looking statements” intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as the Company “believes,” “anticipates,” “expects” or words of similar import. Similarly, statements that describe the Company’s future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated. In addition to the assumptions and other factors referenced specifically in connection with such statements, the following 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, and national and international events; factors affecting the Company’s financial performance or condition, including restrictions or conditions imposed by current or prospective lenders, tax legislation, and changes in accounting principles; 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 fluctuations in currencies, changes in laws and political or financial insecurity of foreign governments; hire and retain competent employees, including unionization of non-union employees and strikes or work stoppages; any further decrease in stock price as a result of market conditions; changes in the law or standards applicable to the Company, including environmental laws and accounting pronouncements; availability of raw materials; unanticipated technological developments that result in competitive disadvantages and may impair existing assets; and factors set forth in the Company’s periodic reports filed with the SEC in accordance with the Securities Exchange Act. Shareholders, potential investors and other readers are urged to consider these factors and those set forth in the Company’s filings with the SEC carefully in evaluating the forward-looking statements. The forward-looking statements made herein are only made as of the date of this Form 10-Q and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

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 2005 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 July, 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) that is effective for fiscal years commencing after December 15, 2006. The objective of FIN 48 was to increase the comparability in financial reporting of income tax uncertainties by requiring all companies to make explicit disclosures about uncertainties in the income tax positions, including a detailed roll-forward of tax benefits taken that do not qualify for financial statement recognition. FIN 48 will require companies to identify tax positions where there is a more-likely-than-not recognition threshold that the tax position taken in their tax returns would be sustained as filed. For these tax positions, the company should recognize the largest amount of the tax benefit that is great than 50 percent likely of being realized upon ultimate settlement with the taxing authority. The Company is currently evaluating the impact of FIN 48 to determine the impact on its deferred and current tax liability.

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 amends SFAS 123 and 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. On January 1, 2006, the Company adopted the provisions of SFAS 123R using the modified prospective method. Refer to the disclosures under “Share-Based Compensation” presented in Note 6 to the Consolidated Financial Statements for the expense that was included in the Consolidated Statements of Operations in the first three and six months of 2006.

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 were adopted on January 1, 2006, and did not have a material impact on results of operations and financial position of the Company.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, to replace APB Opinion No. 20 and FASB Statement No. 3. The statement changes the requirements for the accounting for and reporting of a change in accounting principle and carries forward without change the guidance contained in Opinion 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. SFAS No. 154 applies to accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. This Statement 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. As part of that effort, the FASB and the IASB identified opportunities to improve financial reporting by eliminating certain narrow differences between their existing accounting standards. Reporting of accounting changes was identified as an area in which financial reporting in the United States could be improved by eliminating differences between Opinion 20 and IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. The Company adopted this statement beginning January 1, 2006.

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 $17,700,000 of floating rate debt outstanding at June 30, 2006. A 100 basis point movement in interest rates on floating rate debt outstanding at June 30, 2006 would result in a change in earnings or loss before income taxes of approximately $177,000 per year.

FOREIGN EXCHANGE RATE RISK

If foreign exchange rates would have been collectively 10% weaker against the US dollar at June 30, 2006, the net earnings would have decreased by approximately $151,000.

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, 2006, 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 date, 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 such officers have also concluded that the Company’s disclosure controls and procedures are also not effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated or communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, in a manner allowing timely decisions regarding required disclosure.

CHANGE IN INTERNAL CONTROLS

There have been some changes in internal controls during the six months ended June 30, 2006. The Company will continue to make changes to its disclosure controls to adequately accumulate information to effectively record, process, summarize and report information on a timely basis. Specifically, on a quarterly basis, the Company will send a formal accounting and disclosure checklist to management at all locations. In addition, 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 each 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 1. LEGAL PROCEEDINGS.

The Company is a defendant in a product liability lawsuit for which the claimant is claiming an approximately $1,500,000 loss resulting from lost or late shipments and additional costs of shipments during the time the claimant’s machine was not operating due to a failure of a manifold supplied by Oilgear. The case will be litigated in the courts and the Company believes it has a strong defense against this claim. The estimated range of loss that could result from this legal action is from $0 to $1,500,000 plus interest. We believe that any loss incurred would be adequately covered by product liability insurance.

The Company is also a defendant in several other product liability actions which it believes are adequately covered by insurance, and certain other litigation incidental to its business, none of which is expected to materially impact the Company’s operations or financial results.

ITEM 1A. RISK FACTORS.

A discussion of the significant risks associated with the Company’s business and operations is set forth under the heading “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005. There have been no material changes in the risks related to the Company from those disclosed in that Form 10-K.

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

On May 9, 2006, the 2006 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 2009 by the indicated votes cast for and withheld with respect to each nominee. Of the 2,012,255 shares of Common Stock which were entitled to vote at the meeting, 1,878,766 shares were represented in person or by proxy and not less than 1,878,766 shares (93.4% 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
Hubert Bursch		1,864,642		14,124
Roger H. Schroeder		1,869,442		9,324
David A. Zuege		1,868,017		30,302

The terms of office as directors of Robert D. Drake, Michael H. Joyce, Thomas L. Misiak, 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 19, 2006 with respect to the Company’s 2006 Annual Meeting of Shareholders.

Proposal 2: A proposal to adopt The Oilgear Company 2006 Equity Incentive Plan was also adopted at the 2006 Annual Meeting, with 1,166,359 votes cast for, 46,737 votes cast against, 4,515 abstained and 661,155 broker non-votes.

ITEM 5. OTHER INFORMATION.

On May 9, 2006, the Company’s shareholders approved The Oilgear Company 2006 Equity Incentive Plan (the “Plan”) at the Company’s annual meeting of shareholders. A description of the Plan is provided in the Proxy Statement for the annual meeting.

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 quarterly 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 14, 2006

THE OILGEAR COMPANY
COMMISSION FILE NUMBER 000-00822

EXHIBIT INDEX

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2006


Exhibit		Exhibit Description
10.1		The Oilgear Company 2006 Equity Incentive Plan (1)

10.2		Agreement for Lease relating to 37 Burley Road, Leeds, England between Zurich Assurance Ltd. And Oilgear Towler Limited. (2)

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


(1)		Incorporated by reference from the Proxy Statement for the Company’s 2006 Annual Meeting of Stockholders, filed with the Commission of April 19, 2006.

(2)		Incorporated by reference from the Company’s form 8-K filed with the Commission on August 4, 2006.

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OILGEAR CO 10-Q