Net European Sales for the second quarter of 2005 were $32,573,000, an increase of $5,489,000 or 20.3% compared to $27,084,000 during the second quarter of 2004.  The increase was a result of internal sales growth due to continued aggressive marketing initiatives which has expanded our market presence and the acquisition of Spearhead.

Gross profit for the second quarter of 2005 was $21,885,000 (22.2% of net sales) compared to $21,096,000 (23.5% of net sales) during the same period in 2004, an increase of $789,000.  The increase was attributable to higher sales levels particularly in the European sector.  The Company's Industrial Division had unusually high tractor sales for the quarter which, generally are at lower margins and accounted for the majority of the margin percentage decrease of 1.3%.  The Company continues to be affected by higher fuel prices which also negatively impacted the second quarter margins in 2005.

Selling, general and administrative expense ("SG&A") was $15,058,000 (15.3% of net sales) during the second quarter of 2005 compared to $13,200,000 (14.7% of net sales) during the same period of 2004, an increase of $1,858,000.  The increase in SG&A was a result of the addition of Spearhead in the amount of $312,000 and higher marketing expense, specifically commissions on higher sales and costs for various trade shows in all three segments. 

            Interest expense was $898,000 for the second quarter of 2005 compared to $527,000 during the same period in 2004, an increase of $371,000.  The increase reflected higher interest rates in 2005 along with increased borrowings during the quarter.

            Other income (expense), net was $22,000 of income during the second quarter of 2005 compared to $64,000 of expense in the second quarter of 2004.   The gain in the second quarter of 2005 is all from exchange rate gains.  During the second quarter of 2004, the Company recorded a gain of $544,000 from insurance proceeds related to a fire in the paint system at the Company's Seguin, Texas facility.  The asset destroyed in the fire was fully depreciated and the amount received was for a new paint system which was capitalized.  The Company also wrote off $600,000 against the machinery and equipment assets in the Company's Guymon, Oklahoma facility which was closed in 2001 and has been held for resale since that time.  The Company's desire to speed up the disposal of the remaining equipment led to this reduction in its carrying cost.

            The Company's net income after tax was $4,210,000 or $.43 per share on a diluted basis for the second quarter of 2005 compared to $4,832,000 or $.49 per share on a diluted basis for the second quarter of 2004.  The decrease of $622,000 resulted from the factors described above.

Six Months Ended June 30, 2005 vs. Six Months Ended June 30, 2004

Net sales for the first quartersix months of 2005 were $91,293,000,$189,673,000, an increase of $11,577,000$20,141,000 or 14.5%11.9% compared to $79,716,000$169,532,000 for the first six months of 2004.  The increase was mainly a result of improved market penetration in Europe and to the acquisitions of Rousseau in March of 2004 and Spearhead in February 2005.

Net North American Agricultural sales were $64,463,000 in 2005 compared to $63,413,000 for the same period in 2004, an increase of $1,050,000 or 1.7%.  The Company's agricultural market started the year with higher prices for cattle and other agricultural commodities along with increased order rates.  New order rates declined in the second quarter due to higher dealer inventory levels and farmers cautious about spending.

Net North American Industrial sales increased during the first six months by $6,129,000 or 10.4% to $64,941,000 for 2005 compared to $58,812,000 during the same period in 2004. The increase came from higher sales in mowing equipment along with an unusual increase in tractor sales, specifically during the second quarter of 2005.  Industrial markets have seen a significant rise in overall governmental income but funds are primarily being used for increased Medicaid and security costs.  Sales of Schwarze sweepers were higher during the first six months of 2005 compared to the same time in 2004 as dealer sales experienced increased market activity.

Net European sales for the first six months of 2005 were $60,269,000, an increase of $12,962,000 or 27.4% compared to $47,307,000 during the same period of 2004.  The increase was primarily attributable to improved market conditions in the Company's U.S. agricultural and European markets as well asa result of the acquisitions of Rousseau in March 2004 and Spearhead in February 2005 in the Company's European operations.

Net North American Agriculturaland internal sales were $34,886,000 in 2005 compared to $32,102,000 for the same period in 2004, an increase of $2,784,000 or 8.7%.  The increase wasgrowth due to improved market conditions as well as continued higher prices for cattleaggressive marketing initiatives and other agricultural commodities.  The Company's Rhino product line accounted for the majority of the increase.

Net North American Industrial sales increased during the first quarter by $1,320,000 or 4.8% to $28,711,000 for 2005 compared to $27,391,000 during the same period in 2004.  The increase came from primarily higher sales from mowing equipment.  Industrial markets have shown steady improvement but are still below historical levels.

Net European Sales for the first quarter of 2005 were $27,696,000, an increase of $7,473,000 or 37.0% compared to $20,223,000 during the first quarter of 2004.  The increase was a result of the acquisition of Rousseau in March 2004 and Spearhead in February 2005.  Internal growth also played a major part in the revenue increase due to continued improvements in cross selling of products and aggressive marketing initiatives.related products.

Gross profit for the first quartersix months of 2005 was $18,886,000 (20.7%$40,771,000 (21.5% of net sales) compared to $17,263,000 (21.7%$38,359,000 (22.6% of net sales) during the same period in 2004, an increase of $1,623,000.$2,412,000.  The increase was mainly attributabledue to improvedhigher sales from all three segments oflevels specifically in our business.European Division.  The reduction in the gross margin percentCompany was a result of continuedaffected by high steel and fuel prices. prices which negatively impacted the first quarter margins of 2005.  Also lower margins in the second quarter from unusual higher sales of tractors in the Company's industrial sector.

Selling, general and administrative expenses ("SG&A") were $14,443,000 (15.8%$29,501,000 (15.6% of net sales) during the first quartersix months of 2005 compared to $12,249,000  (15.4%$25,449,000 (15.0% of net sales) during the same period of 2004, an increase of $2,194,000.$4,052,000.  SG&A for the first quartersix months of 2005 was up due to $900,000 inincreased mainly as a result of the higher marketing expenses of $2,204,000 relating to increased commissions and trade shows and the acquisitions of Rousseau and Spearhead in the amount of $660,000 and to a lesser extent increased accruals related to higher audit fees totaling $102,000.$973,000.

Interest expense was $594,000$1,492,000 for the first quartersix months of 2005 compared to $515,000$1,042,000 during the same period in 2004, an increase of $79,000.$450,000.  The increase reflectedwas due to higher interest rates in 2005 along with increased borrowing.borrowings to support higher levels of working capital.

Other Incomeincome (expense), net was $99,000 of income of $77,000 forduring the first quartersix months of 2005 compared to an$895,000 of expense in the first six months of 831,000 in 2004.  TheIn 2005, the income came from exchange rate gains.  In 2004, expense included a losslosses of $434,000 on the sale of Dabekausen, the Company's distribution operation located in the Netherlands, and a write down of $150,000 in Alamo Group's investment in a small business investment company, and from exchange rate losses onloss of $356,000 relating to foreign currency contracts on accounts receivable transactions in our European operations.

Provision for income taxes was $1,578,000 (38.0%) in  Also, during the firstsecond quarter of 2005, comparedthe Company recorded a gain of $544,000 from insurance proceeds related to $1,484,000 (39.2%) duringa fire in the same periodpaint system at the Company's Seguin, Texas facility.  The asset destroyed in 2004.the fire was fully depreciated and the amount received was for a new paint system which was capitalized.  The decreaseCompany also wrote off $600,000 against the machinery and equipment assets in percentagethe Company's Guymon, Oklahoma facility which was mainly dueclosed in 2001 and has been held for resale since that time.  The Company's desire to research and development credits from Schulte, our Canadian operation.speed up the disposal of the remaining equipment has led to this reduction in its carrying cost. 

The Company's net income after tax was $2,573,000$6,783,000 or $0.26$.68 per share on a diluted basis for the first quartersix months of 2005 compared to 2,304,0007,136,000 or $0.23$.72 per share on a diluted basis for the first quartersix months of 2004.  The increasedecrease of $269,000$353,000 resulted from the factors described above.

Liquidity and Capital Resources

In addition to normal operating expenses, the Company has ongoing cash requirements which are necessary to expand the Company's business, including inventory purchases and capital expenditures.  The Company's inventory and accounts payable levels typically build in the first half of the year and in the fourth quarter in anticipation of the spring and fall selling seasons.  Accounts receivable historically build in the first and fourth quarters of each year as a result of fall preseason sales programs and out of season sales.  These sales enhance the Company's production ability during the off season.

As of March 31,June 30, 2005, the Company had working capital of $147,171,000$151,024,000, which represents an increase of $33,988,000$37,841,000 from working capital of $113,183,000 as of December 31, 2004.  The increase in working capital was primarily from higher levels of accounts receivable and inventory and cashlevels due to seasonality and the acquisition of Spearhead.

Capital expenditures were $1,055,000$6,154,000 for the first threesix months of 2005, compared to $1,258,000$2,453,000 during the first threesix months of 2004.  During the second quarter of 2005, the Company purchased the Schwarze manufacturing facility and land in Huntsville, Alabama which had been leased on a long-term basis.  The purchase price was $3,506,000.  Without this purchase, capital expenditures were $2,648,000 for the six month period.  The Company expects to fund capital expenditures from operating cash flows orand through its revolving credit facility, described below.

The Company was authorized by its Board of Directors in 1997 to repurchase up to 1,000,000 shares of the Company's common stock to be funded through working capital and credit facility borrowings.  There were no shares purchasedrepurchased during 2004 as well asor in the first quartersix months of 2005.  The authorization to repurchase up to 1,000,000 shares remains available less 42,600 shares, previously repurchased.purchased.

Net cash provided by financing activities was $37,598,000$40,218,000 during the three monthsix-month period ending March 31,June 30, 2005, compared to $19,833,000$12,001,000 net cash provided by financing activities for the same period in 2004.  The increase was due to extended terms on fall preseason sales programs which were at higher levels in 2005.

On August 25, 2004, the Company entered into a five year $70 million Amended and Restated Revolving Credit Agreement with its lenders, Bank of America, JPMorgan Chase Bank, and Guaranty Bank.  This contractually committed, unsecured facility allows the Company to borrow and repay amounts drawn at floating or fixed interest rates based upon Prime or LIBOR rates.  Proceeds may be used for general corporate purposes or, subject to certain limitations, acquisitions.  The loan agreement contains among other things the following financial covenants:  Minimum Fixed Charge Coverage Ratios, Minimum Consolidated Tangible Net Worth, Consolidated Funded Debt to EBITDA Ratio and Minimum Asset Coverage Ratio, along with limitations on dividends, other indebtedness, liens, investments and capital expenditures.  The covenants in the Amended and Restated Revolving Credit Agreement reflect the change to the operating leverage ratio made in the June 2003 amendment discussed above.  The Agreement in its entirety was filed as an Exhibit on Form 8-K filed on August 27, 2004.  As of March 31,June 30, 2005, there was $50,000,000$55,000,000 borrowed under the revolving credit facility.  At March 31,June 30, 2005, $2,692,000$2,642,000 of the revolver capacity was committed to irrevocable standby letters of credit issued in the ordinary course of business as required by vendors' contracts.  There are three smaller additional lines of credit, one for the Company's European operation in the amount of 4,000,000 British pounds, one for our Canadian operation in the amount of 3,000,000 Canadian dollars, and one for our Australian operation in the amount of 1,300,000 Australian dollars.  As of March 31,June 30, 2005 there were no British pounds borrowed against the European line of credit, 2,125,000475,000 Canadian dollars were outstanding on the Canadian line of credit and 800,000 Australian dollars outstanding under its facility.  The Canadian revolving credit facility is guaranteed by the Company.  The Australian facility is secured by a letter of credit issued by the Company.  The Company's borrowing levels for working capital are seasonal with the greatest utilization generally occurring in the first quarter and early spring.  As of March 31,June 30, 2005, the Company is in compliance with the terms and conditions of its credit facilities.

Management believes that the bank credit facility and the Company's ability to internally generate funds from operations should be sufficient to meet the Company's cash requirements for the foreseeable future.

Critical Accounting Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP.  The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities.  Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements.  Management believes the following critical accounting policies reflect its more significant estimates and assumptions used in the preparation of the Consolidated Financial Statements.  For further information on the critical accounting policies, see Note 1 of our Notes to Consolidate Financial Statements.

Critical Accounting Policies

Allowance for Doubtful Accounts

The Company evaluates the collectibility of its accounts receivable based on a combination of factors.  In circumstances where it is aware of a specific customer's inability to meet its financial obligations, it records a specific reserve to reduce the amounts recorded to what it believes will be collected.  For all other customers, it recognizes reserves for bad debt based on historical experience of bad debts as a percentpercentage of revenues for each business unit, adjusted for relative improvements or deteriorations in the agings and changes in current economic conditions.

The Company evaluates all aged receivables that are over 60 days old and will reserve specifically on a 90-day basis.  The Company's U.S. operations have Uniform Commercial Code ("UCC") filings on practically all wholegoods each customer purchases.Company has a secured interest in most of its wholegood sales.  This allows the Company, in timesthe event of a difficult economy when the customer is unable to paynonpayment or has filed for bankruptcy (usually Chapter 11),deteriorating financial condition, to repossess the customer's inventory.  This also allows Alamo Group to maintain only a reserve over its cost which usually represents the margin on the original sales price.

The bad debt reserve balance was $1,772,000$1,746,000 at March 31,June 30, 2005 and $1,832,000 aton December 31, 2004.  The decrease was primarily from improved conditionscollections in the industrial and agricultural sector.

Sales DiscountsU.S. operations.  The Company does not believe that there are any collectibility concerns within these reserves outside the normal course of business.

Sales Discounts 

At March 31,June 30, 2005 the Company had $9,385,000$8,072,000 in reserves for sales discounts compared to $6,786,000 at December 31, 2004 on product shipped to our customers under various promotional programs.  The increase was due primarily fromto additional discounts givenavailable on the Company's Rhino and M&W products which are ordered during the pre-season, which runs from SeptemberJuly to December of each year and are shipped through the firstsecond quarter of 2005.  The Company reviews the reserve quarterly based on the analysis made on each program outstandingin effect at the time. 

The Company bases its reserves on historical data relating to discounts taken by the customercustomers under each program.  Historically between 85% and 95% of the Company's customers who qualify for each program, actually take the discount that is available.

Inventories - - Obsolescence and Slow Moving Inventory

The Company had $6,091,000$6,522,000 at March 31,June 30, 2005 and $4,947,000 at December 31, 2004 in reservereserves to cover obsolescence and slow moving inventory. The increase was due primarily due to currency exchange rate fluctuations and to a lesser extent increased reserves in U.S. operational facilities.fluctuations.  The obsolescence and slow moving policy states that the reserve in general is to be calculated on a basis of: 1) no inventory usage over a three year period and inventory with quantity on hand is deemed obsolete and reserved at 100 percent and 2) slow moving inventory with little usage requires a 100 percent reserve on items that have a quantity greater than a three year supply.  There may be exceptions to the obsolete and slow moving classifications if approved by an officer of the Company based on specific identification of an item or items that are deemed to be either included or excluded from this classification.