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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

OR

Commission file number 000-00822

THE OILGEAR COMPANY
(Exact name of registrant as specified in its charter)

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

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 ___X___                 NO_____

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

YES ______                NO__X___

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

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PART I — FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS.

THE OILGEAR COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

See accompanying notes to consolidated financial statements.

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THE OILGEAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

See accompanying notes to consolidated financial statements.

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

See accompanying notes to consolidated financial statements.

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

See accompanying notes to consolidated financial statements.

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THE OILGEAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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. All such adjustments are of a normal recurring nature. Management assumes the reader will have access to the December 31, 2003 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 Form 10-K.

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.

Segment information is as follows:

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Inventories

Inventories at March 31, 2004 and December 31, 2003 consisted of the following:

Inventories stated on the last-in, first-out (LIFO) basis, including amounts allocated to contracts that have not been completed, are valued at $15,132,000 and $14,192,000 at March 31, 2004 and December 31, 2003, respectively. The remaining inventory is stated on the first-in, first-out (FIFO) or average cost basis.

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. The Company’s policy is to fund pension costs to conform to the Employee Retirement Income Security Act of 1974. The minimum required contributions for 2004 for these defined benefit retirement plans are approximately $2,946,000 of which $112,000 was paid in the first quarter of 2004.

Net pension expense under these plans for the three months ended March 31 is comprised of the following:

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. The minimum required contributions for 2004 are approximately $395,000 of which $99,000 was paid in the first quarter of 2004.

Net pension expense under this plan for the three months ended March 31 is comprised of the following:

(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 domestic employees are provided retiree health care benefits up to the amount of credits each employee accumulates during his or her employment with the Company. All bargaining unit domestic retirees after February 22, 1996 are provided retiree health care benefits in accordance with the employment agreement at the time of their retirement. 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 100% 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 months ended March 31 includes the following components:

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EARNINGS PER SHARE

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

Options to purchase 121,493 shares of common stock with a weighted average exercise price of $5.50 per share were outstanding at March 31, 2004. Options to purchase 98,738 shares of common stock with a weighted average exercise price of $6.92 per share were outstanding at March 31, 2003.

Options to purchase 67,993 and 75,238 shares of common stock were not included in the computations of diluted earnings per share for the three month periods ended March 31, 2004 and 2003, 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:

The fair value of the Company’s stock options used to compute pro forma net earnings (loss) and earnings (loss) 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: March 31, 2004- expected volatility of 43% and expected dividend yield of 0%; March 31, 2003- expected volatility of 23% 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. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the option’s vesting period.

COSTS ASSOCIATED WITH EXIT ACTIVITIES

During the first quarter of 2003, the Company recorded $237,000 in charges related to: (i) a downsizing of the corporate staff; and (ii) additional costs to move the manufacturing formerly performed in Longview, Texas to Milwaukee, Wisconsin. The amount recorded includes $176,000 of employee termination benefits for 15 notified employees and $61,000 for moving expenses. Approximately $78,000 and $159,000 of these charges were recorded in cost of sales and selling, general and administrative expenses, respectively. There were no costs associated with exit activity in the first quarter of 2004. The Company had utilized all accruals related to exit activities as of December 31, 2003.

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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 at the Company’s subsidiaries in England and India and a bank revolving line of credit in the United States.

For the three months ended March 31, 2004, approximately $169,000 of cash was used by operations compared to approximately $628,000 of cash used by operations during the same period in 2003. The switch from a net loss of approximately $969,000 in the first quarter of 2003 to a net earnings of approximately $10,000 in the 2004 first quarter was the principal reason for the improvement in cash used in the first quarter of 2004 compared to the same period in 2003.

Property, plant and equipment additions consisting primarily of purchases of machinery and equipment were approximately $275,000 in the first three months of 2004 compared to approximately $278,000 in the first three months of 2003. Property, plant and equipment additions are expected to total approximately $1,200,000 for 2004.

WORKING CAPITAL

Working capital had a slight decrease of $226,000 at March 31, 2004 compared to December 31, 2003. Approximately one half of the decrease was the result of a decline in the foreign currency exchange rates. Days sales outstanding in receivables were 68 and 66 at March 31, 2004 and December 31, 2003, respectively.

Inventory turns were 2.82 and 2.89 for the twelve months ending March 31, 2004 and December 31, 2003, respectively.

CAPITALIZATION

The capitalization of the Company had only a slight change during the first quarter of 2004.

Based on the potential sale of our land and buildings in Leeds, England, Barclays Bank plc provided us with a bridge loan for 750,000 British pounds in May 2003 and a commitment for another 750,000 British pounds to be drawn when the property’s zoning is changed to residential. The rezoning process is in the final stages of completion and we expect the Leeds governing body to change the zoning during the second quarter of 2004. The interest rate on the loan is LIBOR plus 2.25% and the loan is secured by the Leeds facility. The Barclays loans will be paid off when we receive the proceeds, expected to be approximately 4,050,000 British pounds, from the sale of this facility.

The Company is in negotiations to refinance its senior debt facility which expires April 1, 2005. We expect to finalize the agreement during the second quarter of 2004.The March 2004 amendment to the credit agreement with the current bank required a $100,000 fee if the Company did not receive a firm commitment for the new financing by April 30, 2004. We expect to receive the new financing commitment in May 2004 and the current bank’s fee was paid.

The Company is currently in compliance with all bank covenants in its Credit Agreements. The covenants were set taking into account both the Company’s expected levels of capital expenditures and earnings for 2004 and early 2005 and the bank’s requirements for debt service 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.

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RESULTS OF OPERATIONS

Shipments and Orders

Orders increased by approximately $2,521,000, or 10.6%, in the first three months of 2004 when compared to the same period in 2003.

When the orders received in the first quarter of 2004 are compared to the same period of 2003, Domestic segment orders increased by approximately $3,480,000, or 29.8%, International segment orders increased by approximately $711,000, or 20.8%, and European segment orders decreased by approximately $1,670,000, or 19.3%.

The improving economy in the United States caused orders for most of our products to increase in the Domestic segment with the largest increase coming from contracts for highly engineered construction projects. In the European segment, the first quarter of 2003 was the fourth best quarterly order intake in the last five years. If the first quarter of 2004 is compared to that quarter, the first quarter of 2004 had a decrease as referenced above. However, if the first quarter of 2004 is compared to the average quarterly order intake over the last five years, it had an increase of 4.1%.

Consolidated net sales increased in the first three months of 2004 by 5.3% when compared to the same period in 2003, but when the foreign currency exchange difference is taken out consolidated net sales decreased by 1.4%.

In the Domestic segment and the International segment the increased orders received in the last two quarters resulting from the recovering economies in those segments was the primary reason for the net sales increases of approximately 14.7% and 21.9%, respectively, in those two segments for the first three months of 2004 compared to the same period of 2003. The European segment’s net sales in the first three months of 2004 decreased by approximately 9.7% when compared to the same period in 2003. After excluding the effect of the currency exchange, the European segment decrease in net sales was approximately 23.6% for the first three months of 2004 when compared to the same period in 2003. However, the first quarter of 2003 was the highest net sales quarter for the European segment in the last five years. If the first quarter of 2004 was compared to the average quarterly net sales over the last five years, net sales for the first quarter of 2004 were 20.5% higher than the average.

Backlog

Backlog of orders at March 31, 2004 has increased by approximately 17.1% to approximately $33,867,000 from approximately $28,912,000 at December 31, 2003.

When backlog at March 31, 2004 is compared to December 31, 2003, the Domestic segment backlog increased by 42.2% to approximately $14,658,000, the European segment backlog decreased by 4.3% to approximately $14,692,000 and the International segment backlog increased by 39.1% to approximately $4,517,000.

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Gross Profit

Our gross profit margin increased in the first three months of 2004 to approximately 24.4% compared to approximately 20.9% in the same period of 2003. The gross profit margin in the first quarter of 2003 was negatively affected by the operating problems at our Fremont, Nebraska plant. Those operational problems had been alleviated by the end of 2003. The resolution of these problems was the primary reason for the improved gross profit margin in the first three months of 2004 as compared to 2003.

Selling, General and Administrative Expenses

Selling, general and administrative expenses in the first three months of 2004 decreased by 5.2% when compared to the same period in 2003. However, if these expenses are adjusted to take out the foreign exchange translation difference, the decrease is 12.6%. The primary reasons for the change are the one time severance costs in 2003, the cost reductions from down-sizing, lower outside consulting fees and a one-time benefit from the sale of shares received on insurance policies owned by the company as a result of a demutualization of the insurance company that issued the policies.

Non-operating Income (Loss)

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

The primary reason for the decrease in miscellaneous income in the first three months of 2004 compared to the same period in 2003 was from the gain on the sale of machinery and equipment in the first three months in 2003 at our closed Longview, Texas plant.

Income tax effective rates were 78.7% and (14.6%) in the first three months of 2004 and 2003, respectively. We had income tax expense of $112,888 for the three months ended March 31, 2004 on earnings before income taxes and minority interest of $143,478. We had income tax expense of $121,360 for the three months ended March 31, 2003 on losses before income taxes and minority interest of $832,177. This is a result of significant losses in the Domestic segment that are not being benefited for tax purposes coupled with earnings and related tax expense in the European and International segments that are generating income.

The primary reason for the change from a net loss of approximately $.50 per share in the first quarter of 2003 to approximately break even results in the first quarter of 2004 was the increase in gross profit described above.

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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 2003 Consolidated Financial Statements included in the Company’s 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 and accounting for inventory obsolescence.

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 represent 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.

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NEW ACCOUNTING PRONOUNCEMENTS

In December 2003, the FASB issued a revised Interpretation No. 46, Consolidation of Variable Interest Entities (“Interpretation 46R”), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. Interpretation 46R replaces Interpretation No. 46, Consolidation of Variable Interest Entities, which was issued in January 2003. The Company will be required to apply Interpretation 46R to interests in variable interest entities (“VIE”) created after December 31, 2003. For variable interests in VIEs created before January 1, 2004, the interpretation will be applied beginning on January 1, 2005. For any VIEs that must be consolidated under Interpretation 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date Interpretation 46R first applies may be used to measure the assets, liabilities and non-controlling interest of the VIE. The adoption of Interpretation 46R did not have a material impact on the Company’s interim first 2004 financial statements.

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:

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.

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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 $23,000,000 of floating rate debt outstanding at March 31, 2004. A 100 basis point movement in interest rates on floating rate debt outstanding at March 31, 2004 would result in a change in earnings or loss before income taxes of approximately $230,000 per year.

FOREIGN EXCHANGE RATE RISK

If foreign exchange rates would have been collectively 10% weaker against the U.S. dollar in the first quarter of 2004, the break-even operating results would instead have been a net loss of approximately $100,000.

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 March 31, 2004, 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 the end of such period, the Company’s disclosure controls and procedures are 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.

CHANGE IN INTERNAL CONTROLS

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II — OTHER INFORMATION

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K.

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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.

Date:   May 17, 2004

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THE OILGEAR COMPANY
COMMISSION FILE NUMBER 000-00822
EXHIBIT INDEX

Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2004

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