UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

OR

Commission file number 000-00822

THE OILGEAR COMPANY

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

Not Applicable

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 R       NO £

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

YES £       NO R

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.

4

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)

1.  Basis of Presentation

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

On March 18, 2005, the Company announced that it would restate previously issued financial statements to write off certain assets on its balance sheet that were capitalized in error by the Company’s Italian subsidiary, Oilgear Towler Srl, from 1997 through 2002. Also, the economic lives used to calculate depreciation on fixed assets used by the Italian subsidiary have been changed to more appropriately reflect the expected useful lives of the assets. The required adjustments did not affect net earnings or (loss) for 2003 or 2004. See note 2, “Restatement of Consolidated Financial Statements”, of the Notes to Consolidated Financial Statements in the 2004 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.

Segment Information

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3.  Identifiable Assets

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

4.  Debt

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

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

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

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

      Principal on Term Loan A amortizes in 60 equal monthly installments of $34,166.66; principal on Term Loan B amortizes in 120 equal monthly installments of $39,166.66; principal on Term Loan C amortizes in 120 equal monthly installments of $7,000; and principal on Term Loan D amortizes in 120 equal monthly installments of $15,500. Mandatory prepayments of the term loans are required upon the sales of certain assets and from excess cash flow, if available.

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

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

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

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

      Also on February 7, 2005, the Company’s subsidiary in the United Kingdom, Oilgear Towler Limited (“Oilgear UK”), entered into a series of financing arrangements with Venture Finance PLC (“Venture Finance”). The Venture Finance facilities provide for aggregate loans to Oilgear UK of Pounds Sterling 2,500,000. These loans are apportioned among: (i) a Pounds Sterling 2,000,000 invoice discounting facility pursuant to an Agreement for the Purchase of Debts, (ii) a Pounds Sterling 250,000 equipment loan pursuant to a Plant & Machinery Loan Agreement and (iii) a Pounds Sterling 250,000 stock loan pursuant to a Stock Loan Agreement. The Venture facilities are each dated as of January 28, 2005 and have a stated maturity of three years.

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

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

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

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

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

5.  Inventories

Inventories at March 31, 2005 and December 31, 2004 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 $15,917,000 and $15,327,000 at March 31, 2005 and December 31, 2004, respectively. The remaining inventory is stated on the first-in, first-out (FIFO) or average cost basis.

6.  EARNINGS PER SHARE

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

Options to purchase 58,467 shares of common stock with a weighted average exercise price of $4.37 per share were outstanding at March 31, 2005. 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 2,995 and 67,993 shares of common stock were not included in the computations of diluted earnings per share for the three month periods ended March 31, 2005 and 2004, respectively, because the options’ exercise prices were greater than the average market price of common stock during the periods then ended.

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

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The fair value of the Company’s stock options used to compute pro forma net earnings and earnings per share disclosures is the estimated fair value at grant date using the Black-Scholes option pricing model with a risk-free interest rate equivalent to 3 year Treasury securities and an expected life of 3.5 years. The Black-Scholes option pricing model also used the following weighted- average assumptions: 2005- expected volatility of 45% and expected dividend yield of 0%; 2004- 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 the Company’s options and may not be representative of the future effects on reported net earnings or the future stock price of the Company’s common stock. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the option’s vesting period.

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 Company was delinquent in its funding of estimated contributions for its United States plans at December 31, 2004 and made contributions in February 2005 totaling $1,747,000, as a result of which it is current in its required minimum contributions at March 31, 2005. The minimum required total contributions to be made in 2005 for the defined benefit retirement plan in the United States is approximately $2,181,000. Net pension expense under these plans for the three 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 but continues to accrue service costs due to statutory

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requirements. The minimum required contributions for 2005 are approximately $388,000, of which approximately $97,000 was paid in the first three months of 2005.

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 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 months ended March 31 includes the following components:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

     For the three months ended March 31, 2005, approximately $5,036,000 of cash was used by operations compared to approximately $169,000 of cash used by operations during the same period in 2004. The largest use of cash was for contracts on percentage of completion where we have not billed our customer. The largest of these contracts is supplying a hydraulic and electronic system for a forging machine in France that will be completely shipped in 2005 but the forging machine may not be commissioned until 2006. All the remaining payments, approximately $4,300,000, from our customer are expected in 2005 and 2006. The increase in the backlog of orders in process has increased inventory, which used cash. Due to the new credit facility were able to make significant payments to vendors and pension contributions current, which used approximately $933,000 each. The transaction costs of the new banking arrangement used approximately $1,500,000. Inventory turns were 3.05 at March 31, 2005 compared to 2.88 at March 31, 2004.

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Property, plant and equipment additions consisting primarily of purchases of machinery and equipment were approximately $222,000 in the first three months of 2005 compared to approximately $275,000 in the first three months of 2004. Property, plant and equipment additions are expected to total less than $1,200,000 for 2005.

WORKING CAPITAL

Working capital increased by approximately $6,733,000 at March 31, 2005 compared to December 31, 2004. The new finance arrangement is the primary cause for the improvement.

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CAPITALIZATION

The capitalization of the Company increased during the first three months of 2005, primarily as a result of increased borrowing from the new bank agreement.

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

RESULTS OF OPERATIONS

Shipments and Orders

Orders increased by approximately $3,540,000, or 13.5%, in the first quarter of 2005 when compared to the same quarter in 2004. Net sales increased in the first quarter of 2005 by approximately $4,751,000, or 22.3% in the first quarter of 2005 when compared to the same quarter in 2004.

Backlog

Increased orders caused the backlog of orders at March 31, 2005 to increase by approximately 11.0% to approximately $37,778,000 from approximately $34,034,000 at December 31, 2004.

Gross Profit

Gross profit as a percent of sales improved from 24.4% to 26.1% in the first quarter of 2005, as higher volumes generated a better utilization of fixed costs and we benefited from our ongoing efforts to improve margins.

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Our gross profit margin increased in the first quarter of 2005 to approximately 26.1% compared to approximately 24.4% in the same quarter of 2004. Improved margins were due to price increases that we charged our customers, higher volumes generating a better absorption of fixed costs and the benefits from our ongoing efforts to improve margins.

Selling, General and Administrative Expenses

Selling, general and administrative expenses in the first quarter of 2005 increased by 22.1%, when compared to the same quarter in 2004. The increase was caused primarily by the following; effect of currency translation (approximately $180,000), extra legal and accounting fees relating to the restatement of prior year results which was described in the 2004 10-K (approximately $160,000), one time benefit from sale of shares of insurance policy in first quarter 2004 (approximately $300,000) and increases in healthcare, consulting and employee incentive expenses.

Interest Expense

Interest expense increased by approximately $280,000 in the first quarter of 2005 compared to the same period in 2004. Higher interest rates, increased debt and amortization of transaction costs associated with the new financing agreements caused the increase.

Non-operating Income (Loss)

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

The primary reason for the increase in non-operating income in the first quarter of 2005 compared to the same quarter in 2004 was the gain from foreign exchange transactions.

Income tax effective rates were 22.6% and 78.7% in the first quarters of 2005 and 2004, respectively. For the first quarter of 2005 and 2004, income tax expense on earnings before income taxes and minority interest was $128,969 and $112,888 respectively. The 2004 rate resulted from losses in the Domestic segment that were not being benefited for tax purposes coupled with earnings and related tax expense in the European and International segments that generated income. In 2005, the tax rate benefited from prior year losses.

The primary reason for the change from a break even first quarter in 2004 to an approximately $.21 net income per diluted share in the first quarter of 2005 was the increase in shipments and gross profit described above.

CRITICAL ACCOUNTING POLICIES

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

     Critical accounting policies are those that are important to the portrayal of the Company’s financial condition and results, and which require management to make difficult, subjective and/or complex judgments. Critical accounting policies cover accounting matters that are inherently uncertain because the future resolution of such matters is unknown. The Company believes that critical

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accounting policies include accounting for percentage-of-completion contracts, accounting for allowances for doubtful accounts receivable, accounting for pensions, accounting for inventory obsolescence and accounting for income taxes.

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

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

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

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

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

NEW ACCOUNTING PRONOUNCEMENTS

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

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

     In December, 2004, the FASB issued FASB Staff Position 109-2 “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“FSP 109-2”), in response to the American Jobs Creation Act of 2004 which was signed into law in October, 2004 and which provides for a special one-time tax deduction of 85% of certain foreign earnings that are repatriated (as defined). Based on the Company’s decision to reinvest rather than to repatriate current and prior year’s

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unremitted foreign earnings, the application of FSP 109-2 did not affect income tax expense or related disclosures in the period and is not expected to impact the measurement of income tax expense in future periods.

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

CAUTIONARY FACTORS

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

	•	Factors affecting the economy generally, including the financial and business conditions of the Company’s customers, the demand for customers’ products and services that utilize the Company’s products, national and international events such as those of September 11, 2001, the current hostilities in the Middle East, and other threats or acts of terrorism.
	•	Factors affecting the Company’s financial performance or condition, including restrictions or conditions imposed by its current and prospective lenders, tax legislation, unanticipated restrictions on the Company’s ability to transfer funds from its subsidiaries, the costs of complying with recent accounting, disclosure and corporate governance requirements, and changes in applicable accounting principles or environmental laws and regulations.
	•	Factors affecting percentage of completion contracts, including the accuracy of estimates and assumptions regarding the timing and levels of costs to complete those contracts.
	•	Factors affecting the Company’s international operations, including relevant foreign currency exchange rates, which can affect the cost to produce the Company’s products or the ability to sell the Company’s products in foreign markets, and the value in United States dollars of sales made and costs incurred in foreign currencies. Other factors include foreign trade, monetary and fiscal policies; laws, regulations and other activities of foreign governments, agencies and similar organizations; and risks associated with having major facilities located in countries which have historically been less stable than the United States in several respects, including fiscal and political stability.
	•	Factors affecting the Company’s ability to hire and retain competent employees, including unionization of the Company’s non-union employees and changes in relationships with the Company’s unionized employees.
	•	The risk of strikes or other labor disputes at those locations that are unionized which could affect the Company’s operations.
	•	Factors affecting the fair market value of the Company’s common stock or other factors that would negatively impact the funding of or the value of securities held by the employee benefit plans.
	•	The cost and other effects of claims involving the Company’s products and other legal and administrative proceedings, including the expense of investigating, litigating and settling any claims.
	•	Factors affecting the Company’s ability to produce products on a competitive basis, including the availability of raw materials at reasonable prices.

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	•	Unanticipated technological developments that result in competitive disadvantage and create the potential for impairment of existing assets.
	•	Failure to achieve and maintain effective internal controls pursuant to Section 404 of the Sarbanes-Oxley Act.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

INTEREST RATE RISK

The Company’s debt structure and interest rate risk are managed through the use of fixed and floating rate debt. The Company’s primary exposure is to U.S. interest rates on the approximately $27,000,000 of floating rate debt outstanding at March 31, 2005. A 100 basis point movement in interest rates on floating rate debt outstanding at March 31, 2005 would result in a change in earnings or loss before income taxes of approximately $270,000 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 2005, the approximately $425,000 net earnings would have been approximately $300,000.

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, 2005, the Company had no forward exchange contracts outstanding.

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

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

As more fully described in the Company’s 2004 Form 10-K and in note 1 of the notes to consolidated financial statements, on March 18, 2005 the Company announced that it was restating its financial statements covering the years 1999 through 2003. During the Company’s preparation of its year-end financial statements for 2004 the Company discovered accounting errors that were generated in the Company’s Italian subsidiary and were not previously detected in the translation to GAAP accounts or in the consolidation process. The errors did not affect the results of operations reported for 2003 or 2004. As a result,, management concluded that the Company’s disclosure controls and procedures are not effective as of the end of the period covered by this report pending implementation of the changes to its internal controls described below.

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CHANGE IN INTERNAL CONTROLS

      During the period ended March 31, 2005, the Company has made changes and is making further changes in its internal controls to correct the deficiencies in its internal controls for the financial reporting of its foreign subsidiaries. Specifically, the Company’s financial staff, under the direction of the chief financial officer, will conduct on site reviews at least annually. The on-site reviews will consist of various procedures including a review of the key accounting policies of each subsidiary, a review of the reconciliation of the local statutory accounts to the US GAAP records, and a review the work of the external accountants employed by the smaller subsidiaries. In addition, the Company will require that the subsidiary’s Controller or outsourced accountant is competent in English to facilitate more effective communication.

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

PART II — OTHER INFORMATION

ITEM 6. EXHIBITS.

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

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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.

	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: May 16, 2005

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THE OILGEAR COMPANY

Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2005

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