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

                                  FORM 10-QSB/A

(Mark One)

|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934 For the quarterly period ended MARCH 31, 2005

                                       or

|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
    for the transition period from _______________ to _______________


                        Commission File Number: 333-44586

                             Thomas Equipment, Inc.
        -----------------------------------------------------------------
        (Exact name of small business issuer as specified in its charter)

              Delaware                                   58-356680
 ---------------------------------          ------------------------------------
   (State or other jurisdiction             (I.R.S. Employer Identification No.)
 of incorporation or organization)

                 1818 North Farwell Avenue, Milwaukee, WI 53202
                 ----------------------------------------------
                    (Address of principal executive offices)

                                 (312) 224-8812
                          ---------------------------
                          (Issuer's telephone number)

      Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|

      State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 21,250,000 shares of common
stock, $.0001 par value per share, as of September 30, 2005.

      Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|

<PAGE>

                       Statement Regarding This Amendment

      We are amending our Form 10-QSB for the period ended March 31, 2005, as
previously filed on May 13, 2005. These financial statements have been restated
to record as equity the beneficial conversion feature related to certain of our
convertible debt, in accordance with EITF 98-5 and EITF 00-27. As a result, we
have recorded $2,374,000 as a discount from certain of our convertible debt
issued in January and February 2005. $190,000 of this discount was amortized to
"Net financial expense" in our accompanying consolidated statements of
operations during the three and six months ended March 31, 2005. Accordingly,
the effect on our accompanying consolidated balance sheet as of March 31, 2005
was a decrease in liabilities and corresponding increase in stockholders' equity
of $2,184,000. The effect on our consolidated statements of operations for the
three and six months ended March 31, 2005 was an increase in our net loss of
$190,000. Basic and diluted loss per share for the three and six months ended
March 31, 2005 increased by $0.01 and $0.01, respectively.

      In addition, as a result of comments received from the staff of the
Securities and Exchange Commission in connection with the filing of our
Registration Statement on Form SB-2, we have modified the footnote disclosure
related to our acquisition of Pneutech and expanded the footnote disclosure
related to our debt and made other modifications to the footnotes. In addition,
we have restated the manner in which the acquisition of assets from our
Predecessor is disclosed in the Statement of Cash Flows. We have also revised
our Discussion of Financial Position and Results of Operations to present
separately the discussions of our results and those of our predecessor. We have
also provided information, as of October 3, 2005, on the status of our loans
from Laurus Master Fund, Ltd. In all other material respects, this Amended
Quarterly Report on Form 10-QSB/A is unchanged from the Quarterly Report on Form
10-QSB previously filed by the Company on May 13, 2005.

      This amendment should also be read in conjunction with our Annual Report
on Form 10-K for the fiscal year ended June 30, 2005 and our Registration
Statement on Form S-1, filed on October 3, 2005, together with any subsequent
amendments thereof.


                                       2
<PAGE>

ITEM 1.   FINANCIAL STATEMENTS

                             THOMAS EQUIPMENT, INC.

                               Successor Business

                           CONSOLIDATED BALANCE SHEET
                              AS OF MARCH 31, 2005
                  (Unaudited - in thousands, except share data)

================================================================================

ASSETS

Current assets:

  Cash                                                                $    1,111
  Accounts receivable, net of allowance for
    doubtful accounts of $446                                             25,269
  Inventories, net                                                        36,475
  Prepaid expenses                                                         1,804
  Other assets                                                               235
                                                                      ----------
                                                                          64,894

Property, plant and equipment, net                                        19,695

Deferred finance costs                                                     1,455

Other assets                                                               2,384

Goodwill                                                                   5,224
                                                                      ----------
                                                                      $   93,652
                                                                      ==========

                                                                    (continued-)


                                       3
<PAGE>

                             THOMAS EQUIPMENT, INC.

                               Successor Business

                           CONSOLIDATED BALANCE SHEET
                              AS OF MARCH 31, 2005
                  (Unaudited - in thousands, except share data)

                                                                    (-continued)

LIABILITIES AND STOCKHOLDERS' EQUITY                               (as restated)

Liabilities

Current liabilities:

  Credit facilities                                                   $   9,762
  Convertible credit facility                                            12,465
  Trade payables                                                         19,844
  Warranty liability                                                        420
  Other payables and accrued liabilities                                  7,138
  Current portion of long term debt                                       8,419
  Current portion of convertible long term debt                           2,448
  Current portion of capital lease obligations                              137
                                                                      ---------
                                                                         60,633

Long term debt                                                            1,360
Convertible long term debt                                                2,357
Capital lease obligations                                                 4,965
Deferred taxes                                                              547
Redeemable preferred stock of subsidiary                                  8,220

Stockholders' Equity:

Common stock                                                                  2
Additional paid in capital                                               27,710
Accumulated deficit                                                     (12,092)
Accumulated other comprehensive income (loss)                               (50)
                                                                      ---------
                                                                         15,570
                                                                      ---------
                                                                      $  93,652
                                                                      =========

================================================================================

See accompanying notes to consolidated financial statements.


                                       4
<PAGE>

                             THOMAS EQUIPMENT, INC.

          CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

                  (Unaudited - in thousands, except share data)

<TABLE>
<CAPTION>
=========================================================================================================================

                                                Successor Business    |                  Predecessor Business
                                        ----------------------------  | --------------------------------------------
                                             (as                      |
                                           restated)                  |
                                            Three      (as restated)  |                    Three            Nine
                                            Months       Six Months   |     Three          Months           Months
                                             Ended          Ended     |  Months Ended      Ended            Ended
                                           March 31,      March 31,   |   September       March 31,       March 31,
                                             2005           2005      |   30, 2004          2004            2004
                                        ------------    ------------  | ------------    ------------    ------------
<S>                                     <C>             <C>             <C>             <C>             <C>
Sales                                   $     17,036    $     31,452  | $     13,857    $     12,622    $     39,199
                                                                      |
Cost of sales                                 14,770          26,912  |       11,770          10,902          33,978
                                        ------------    ------------  | ------------    ------------    ------------
                                                                      |
Gross profit                                   2,266           4,540  |        2,087           1,720           5,221
                                                                      |
Operating expenses:                                                   |
                                                                      |
Selling                                        1,759           3,120  |        1,797           1,561           4,632
General and administrative                     1,931           3,346  |        2,221           1,588           4,263
Provision for doubtful receivables                57             131  |           41             265           1,228
Stock based compensation                          --           6,431  |           --              --              --
Other (income) expense                           226             442  |         (884)           (103)           (763)
                                        ------------    ------------  | ------------    ------------    ------------
                                               3,973          13,470  |        3,175           3,311           9,360
                                        ------------    ------------  | ------------    ------------    ------------
                                                                      |
Operating loss                                (1,707)         (8,930) |       (1,088)         (1,591)         (4,139)
                                                                      |
Net financial expense (income)                 2,227           3,162  |          499             (14)             19
                                        ------------    ------------  | ------------    ------------    ------------
                                                                      |
Net loss before income taxes                  (3,934)        (12,092) |       (1,587)         (1,577)         (4,158)
                                                                      |
Provision for income taxes                        --              --  |           15              17              49
                                        ------------    ------------  | ------------    ------------    ------------
                                                                      |
Net loss                                $     (3,934)   $    (12,092) | $     (1,602)   $     (1,594)   $     (4,207)
                                        ============    ============  | ============    ============    ============
                                                                      |
Weighted average shares outstanding       20,435,393      20,214,088  |    8,643,000       2,643,000       2,643,000
                                        ------------    ------------  | ------------    ------------    ------------
                                                                      |
Basic and diluted loss per share        $      (0.19)   $      (0.60) | $      (0.19)   $      (0.60)   $      (1.59)
                                        ============    ============  | ============    ============    ============
                                                                      |
Reconciliation of Comprehensive Loss:                                 |
                                                                      |
Net loss                                $     (3,934)   $    (12,092) | $     (1,602)   $     (1,594)   $     (4,207)
Other comprehensive income (loss) -                                   |
foreign currency translation                     176             (50) |         (726)            269            (633)
                                        ------------    ------------  | ------------    ------------    ------------
Total comprehensive loss                $     (3,758)   $    (12,142) | $     (2,328)   $     (1,325)   $     (4,840)
                                        ============    ============  | ============    ============    ============

=========================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.


                                       5
<PAGE>

                             THOMAS EQUIPMENT, INC.

                               Successor Business

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
           (Unaudited - in thousands, except share and per share data)

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
                                                   Common Stock          Additional                    Other
                                            -------------------------     Paid-In    Accumulated    Comprehensive
                                                Shares        Amount      Capital      Deficit          Loss       Total
                                            -----------------------------------------------------------------------------
<S>                                         <C>           <C>          <C>          <C>           <C>           <C>
Balances, October 1, 2004 (Inception)                --   $       --   $       --   $        --   $        --   $       --

Common stock issued in exchange for net
liabilities in a recapitalization             1,075,000           --           --            --            --           --

Contribution of services by founders                 --           --          322            --            --          322

Common stock sold on October 11, 2004 to
founders for cash                            16,945,000            2        2,127            --            --        2,129

Stock-based compensation related to common
stock sold on October 11, 2004 to founders           --           --        5,520            --            --        5,520

Common stock sold on November 9, 2004 to
Laurus for cash                               1,980,000           --           20            --            --           20

Stock-based compensation related to common
stock sold on November 9, 2004 to Laurus
for cash                                             --           --          911            --            --          911

Warrants for 2,200,000 common shares
issued to Laurus on November 9, 2004 in
connection with financing                            --           --        2,178            --            --        2,178

Option for 4,020,000 common shares issued
to Laurus on November 9, 2004 in
connection with financing                            --           --        4,060            --            --        4,060

Warrants for 400,000 common shares issued
to Laurus on January 26, 2005 in
connection with financing                            --           --        1,542            --            --        1,542

Beneficial conversion feature of January
26, 2005 convertible debt financing with
Laurus                                               --           --          962            --            --          962

Warrants for 250,000 common shares issued
on January 31, 2005 in connection with
professional services                                --           --        1,295            --            --        1,295
</TABLE>

                                                                    (continued-)


                                       6
<PAGE>

                             THOMAS EQUIPMENT, INC.

                               Successor Business

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
          (Unaudited - in thousands, except share and per share data)

                                                                    (-continued)

<TABLE>
<CAPTION>
                                            -----------------------------------------------------------------------------

                                                   Common Stock       Additional                       Other
                                            ------------------------   Paid-In      Accumulated    Comprehensive
                                              Shares        Amount     Capital        Deficit          Loss         Total
                                           ------------------------------------------------------------------------------
<S>                                         <C>          <C>          <C>          <C>           <C>           <C>
Acquisition of Pneutech on February 28,
2005:

   Common stock issued                       1,082,640           --        3,470           --            --         3,470
   Warrants for 211,062 common shares               --           --          260           --            --           260

Common stock issued on February 28, 2005
in repayment of Pneutech debt                  167,360           --          494           --            --           494

Warrants for 150,000 common shares issued
to Laurus on February 28, 2005 in
connection with financing                           --           --          488           --            --           488

Beneficial conversion feature of February
28, 2005 convertible debt financing with
Laurus                                              --           --        1,412           --            --         1,412

Warrants for 1,000,000 common shares
issued on February 28, 2005 to Roynat in
connection with financing                           --           --        2,649           --            --         2,649

Currency translation adjustment                     --           --           --           --           (50)          (50)

Net loss for the period, as restated                --           --           --      (12,092)           --       (12,092)
                                           ------------------------------------------------------------------------------
Balances, March 31, 2005, as restated       21,250,000   $        2   $   27,710   $  (12,092)   $      (50)   $   15,570
                                           ==============================================================================

=========================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.


                                       7
<PAGE>

                             THOMAS EQUIPMENT, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (Unaudited - in thousands)

<TABLE>
<CAPTION>
                                                                     Successor       |
                                                                     Business        |                Predecessor Business
                                                                   --------------    |     -----------------------------------------
                                                                                     |           Three                     Nine
                                                                     Six Months      |           Months                    Months
                                                                       Ended         |           Ended                     Ended
                                                                   March 31, 2005    |     September 30, 2004         March 31, 2004
                                                                   --------------    |     ------------------         --------------
<S>                                                                   <C>                       <C>                      <C>
Cash Flows From Operating Activities:                                                |
                                                                                     |
Net loss                                                              $(12,092)      |          $ (1,602)                $ (4,207)
Adjustments to reconcile net loss to net cash used in                                |
  operating activities:                                                              |
    Stock compensation                                                   6,431       |                --                       --
    Amortization of debt discounts and premium                           1,773       |                --                       --
    Depreciation and amortization                                          994       |               531                    1,209
    Gain on sale of property, plant and equipment                           --       |                (3)                     (29)
    Contribution of services                                               322       |                --                       --
    Allowance for doubtful receivables                                     131       |
Net change in working capital items                                     (3,800)      |            (1,111)                    (382)
Net change in employee future benefit liabilities                           --       |                 8                       33
                                                                      --------       |          --------                 --------
Net Cash Used In Operating Activities                                   (6,241)      |            (2,177)                  (3,376)
                                                                      --------       |          --------                 --------
                                                                                     |
Cash Flows From Investing Activities:                                                |
                                                                                     |
  Cash paid for acquisition of assets of Thomas                        (18,119)      |                --                       --
  Cash paid for acquisition of Pneutech, Inc.                           (3,845)      |                --                       --
  Insurance claim received                                                  --       |                --                      587
  Proceeds on sale of property, plant and equipment                         --       |                20                       47
  Purchase of property, plant and equipment                               (195)      |              (292)                    (977)
                                                                      --------       |          --------                 --------
Net Cash Used In Investing Activities                                  (22,159)      |              (272)                    (343)
                                                                      --------       |          --------                 --------
                                                                                     |
Cash Flows From Financing Activities:                                                |
                                                                                     |
  Proceeds from debt issuance                                           15,970       |                --                       --
  Net repayments of advances from affiliated companies                      --       |              (588)                   4,339
  Increase in bank advances                                             12,911       |             2,277                     (779)
  Proceeds from sales of common stock                                    2,149       |                --                       --
  Deferred financing costs                                              (1,394)      |                --                       --
  Payments on capital lease obligations                                   (249)      |                --                       --
                                                                      --------       |          --------                 --------
Net Cash Provided By Financing Activities                               29,387       |             1,689                    3,560
                                                                      --------       |          --------                 --------
                                                                                     |
Net Increase (Decrease) In Cash                                            987       |              (760)                    (159)
                                                                                     |
Effect Of Exchange Rate Changes On Cash                                    124       |                23                       86
                                                                                     |
Cash, Beginning Of Period                                                   --       |               823                       80
                                                                      --------       |          --------                 --------
                                                                                     |
Cash, End Of Period                                                   $  1,111       |          $     86                 $      7
                                                                      ========       |          ========                 ========
</TABLE>

                                                                    (continued-)


                                       8
<PAGE>

                             THOMAS EQUIPMENT, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                           (Unaudited - in thousands)

                                                                    (-continued)
<TABLE>
<CAPTION>
                                                                     Successor       |
                                                                     Business        |               Predecessor Business
                                                                   --------------    |    -----------------------------------------
                                                                                     |          Three                     Nine
                                                                     Six Months      |          Months                    Months
                                                                       Ended         |          Ended                     Ended
                                                                   March 31, 2005    |    September 30, 2004         March 31, 2004
                                                                   --------------    |    ------------------         --------------
<S>                                                                   <C>                      <C>                      <C>
                                                                                     |
Supplemental Disclosure Of Cash Flow Information -                                   |
  Interest paid                                                       $    818       |         $     15                 $     --
                                                                      ========       |         ========                 ========
                                                                                     |
Supplemental Disclosures Of Non-Cash Investing And                                   |
Financing Activities:                                                                |
                                                                                     |
   Stock based compensation                                           $  6,431       |         $     --                 $     --
                                                                      ========       |         ========                 ========
   Debt discounts for warrants, options and beneficial                               |
     conversion features                                              $ 13,785       |         $     --                 $     --
                                                                      ========       |         ========                 ========
   Property and equipment acquired under capital leases               $  5,254       |         $     --                 $     --
                                                                      ========       |         ========                 ========
   Warrants issued for professional services                          $  1,295       |         $     --                 $     --
                                                                      ========       |         ========                 ========
   Common shares and warrants issued in Pneutech Inc                                 |
     acquisition                                                      $  3,730       |         $     --                 $     --
                                                                      ========       |         ========                 ========

=================================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.


                                       9
<PAGE>

                             THOMAS EQUIPMENT, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Unaudited - in thousands, except share and per share data)

1.    Organization and description of the business

      We have two business segments, Thomas Equipment and Pneutech.

      Thomas Equipment manufactures and distributes through a worldwide network
of dealers and distributors a full line of skid steer and mini skid steer
loaders as well as attachments, mobile screening plant and mini excavators for
the industrial and construction industry. Thomas also manufactures a complete
line of potato harvesting and handling equipment for the agricultural industry.
Thomas has a manufacturing facility in Centreville, New Brunswick, Canada and
also operates six retail stores in New Brunswick, Prince Edward Island, Maine,
Colorado and Illinois.

      Pneutech and its subsidiaries (Rousseau, Hydramen and Samsung Industry),
which we acquired on February 28, 2005, are engaged in the fluid power industry
providing distribution and manufacturing of pneumatic and hydraulic components
and systems for the industrial market, distribution and manufacturing of
hydraulic components and systems for the mobile market and manufacturing of
hydraulic cylinders and metal gaskets for the industrial market. Pneutech
maintains nine manufacturing and distribution facilities in Canada and one
manufacturing plant in South Korea.

2.    Acquisitions

      On October 11, 2004, we (Thomas Equipment, Inc. or "TEQI," formerly Maxim
Mortgage Corporation, a Delaware corporation) entered into an Agreement and Plan
of Reorganization with Thomas Equipment 2004 Inc. ("TE2004"), a Canadian
corporation and Thomas Ventures Inc. ("TVI"), a Delaware corporation (both
TE2004 and TVI were formed in 2004 for the purposes of the asset acquisition
described below). Under the terms of the agreement, we acquired 100% of the
common stock of TE2004 and TVI in exchange for the issuance by us of 16,945,000
common shares. Although TEQI was the legal acquirer, TE2004 was considered the
accounting acquirer and as such the acquisition was accounted for as a
recapitalization. Immediately prior to the reorganization, TEQI had 1,075,000
shares of common stock outstanding (after a 1-40 reverse split) and no net
assets or liabilities. The officers and directors of TE2004 and TVI assumed
similar positions with TEQI. As a result, the accompanying condensed
consolidated financial statements represent the results of operations and cash
flows of the accounting acquirer (TE2004) from the date of inception, October 1,
2004.

Acquisition of Assets of Thomas Equipment Limited

      On November 9, 2004, TE2004 acquired the fixed assets and inventory of
Thomas Equipment Limited ("Thomas Equipment Limited" an unrelated Company)
effective as of October 1, 2004. The acquisition was accounted for by the
purchase method in accordance with Financial Accounting Standards Board
Statement No. 141 ("SFAS 141") and the results of operations are included in
these consolidated financial statements from the date of acquisition. The
aggregate purchase price (including capital leases), calculated in accordance
with SFAS 141, was $37.2 million.

The following is a summary of the assets acquired at the date of acquisition, at
fair value:

Assets acquired:

       Inventory                                               $       24,543
       Fixed assets                                                    12,639
                                                               --------------
       Assets acquired                                         $       37,182
                                                               ==============

      During the quarter ended March 31, 2005 the purchase price was finalized
which resulted in an increase to inventory of $2,425 and an increase to fixed
assets of $948. The adjustments related to the finalization of the inventory
balances based on the final inventory count and the allocation of transaction
costs. The fair values assigned to the assets acquired were determined by
management based on a review of the related accounting records of Thomas
Equipment Limited, physical inspection, counts and evaluations of the assets and
review of an analysis completed by an independent third party valuation firm.


                                       10
<PAGE>

                             THOMAS EQUIPMENT, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Unaudited - in thousands, except share and per share data)

      During the negotiation of the asset acquisition, the Company and the
vendor agreed to a lease for the manufacturing facility and three sales offices.
Although it was the Company's original intention to purchase these leased
assets, we elected to accept the vendor's offer of a lease alternative. The
terms of the capital leases require minimum annual payments of $493 plus taxes,
maintenance and certain other expenses. We have the right at any time prior to
the expiration of the leases to purchase the properties for $4,953 (translated
to U.S. dollars on March 31, 2005). Similarly, Thomas Equipment Limited has the
right to require us to purchase the properties subject to certain provisions
such as a favorable environmental study (Note 9).

      The purchase price of the assets was funded with cash consideration
totalling $18,119 which was sourced from loans received from Laurus Master Fund,
Ltd. (see Notes 7 and 8) and cash received from our founders for common stock.
The balance of the purchase price of $19,063 was financed with the vendor
(Thomas Equipment Limited) and its parent company (McCain Foods Limited), with a
vendor take back note of $2,260 (see Note 6); capital lease financing provided
by the vendor of $5,254 (see Note 9); the sale of preferred shares of our
subsidiary TE2004 of $8,370 to McCain (see Note 10); and the balance of $3,179
was a short term note payable to the vendor due in three payments starting one
month after closing and then each of the two following months.

      The difference between our value, and allocation, of the purchase price
and that which Thomas Equipment Limited reported in their financial statements
primarily arises from third party costs we incurred in connection with the
transaction and the use of a different discount rate with respect to the capital
lease obligations.

Acquisition of Pneutech Inc.

      On February 28, 2005, we acquired 100% of the common stock of Pneutech, in
exchange for 1,082,640 shares of our common stock and warrants to purchase
211,062 shares of common stock, exercisable at $3.00 per share. The common stock
issued was valued at $3.50 per share, based on the market price of our common
stock on December 22, 2004, the date the terms of the acquisition were agreed to
and announced. Clifford Rhee, the President and a member of our Board of
Directors, had a controlling interest in Pneutech. As a result, the fair value
of the shares issued and the resulting allocation to goodwill in Pneutech has
been reduced by the proportionate share of his post-combination ownership
percentage. An additional 167,360 shares of our common stock were issued to an
unrelated party as of the closing in exchange for the cancellation of
approximately $494 of debt owed by Pneutech.

      As part of the consideration paid for the acquisition of Pneutech, we:

      o     Redeemed 929 preference shares and 530,000 special shares owned by
            3156176 Canada, Inc. for an aggregate of $508. Clifford Rhee, the
            President and a member of the Board of Directors of Thomas and
            Pneutech is the beneficial owner of 3156176 Canada, Inc., which was
            the owner of approximately 47% of the common shares, and all of the
            929 preference shares and 530,000 special shares of Pneutech. Mr.
            Rhee received 467,767 shares of our common stock in exchange for his
            common shares in Pneutech;

      o     Repaid Roynat Capital $2,259 in consideration for the cancellation
            of its Pneutech preferred shares and payment of accrued dividends
            thereon;

      o     Repaid Roynat Capital $1,008 in consideration for the cancellation
            of warrants previously issued by Pneutech to Roynat Capital;


                                       11
<PAGE>

                             THOMAS EQUIPMENT, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Unaudited - in thousands, except share and per share data)

      The following is a summary of the net assets acquired at the date of
acquisition, at fair value:

<TABLE>
<S>                                                                              <C>
Net assets acquired
       Trade receivables                                                         $ 11,943
       Inventories                                                                  9,302
       Prepaids and other assets                                                    1,200
       Bank indebtedness                                                           (9,612)
       Accounts payable                                                            (8,782)
       Accrued and other liabilities                                               (1,599)
       Property and equipment                                                       7,868
       Other assets                                                                   502
       Goodwill                                                                     5,127
       Notes payable                                                               (8,374)
                                                                                 --------
       Net assets acquired                                                       $  7,575
                                                                                 ========

Consideration paid:
       Common shares (1,082,640) issued to Pneutech shareholders                 $  3,470
       Warrants for common shares (211,062) issued to Pneutech shareholders           260
       Cash paid to redeem Pneutech preference shares and special shares              508
       Cash paid to redeem Pneutech preferred shares                                2,259
       Cash paid to redeem Pneutech common stock warrants                           1,008
       Cash paid for transaction costs                                                 70
                                                                                 --------
       Consideration                                                             $  7,575
                                                                                 ========
</TABLE>

      Concurrently with the closing of the Pneutech acquisition on February 28,
2005, we entered into the following refinancing transactions

      o     Redeemed notes payable totaling $494 by issuing 167,360 common
            shares;

      o     Repaid Roynat Capital $3,227 in full satisfaction of all amounts due
            pursuant to a convertible debenture issued by Pneutech to Roynat
            Capital;

      o     Sold a subordinated debenture to Roynat Merchant Capital Inc. with a
            face amount of $5,343; and issued warrants to Roynat Merchant
            Capital Inc. to purchase 1,000,000 shares of common stock at an
            exercise price of $3.00 per share. The subordinated debenture was
            due and payable in full on December 30, 2005 and bore interest at
            the stated rate of 15% per annum. The subordinated debenture was
            repaid in full in April 2005.

      The redemption of the preference shares, special shares, preferred shares,
common stock warrants and the repayment of the Roynat Capital debenture were
funded by the sale of the subordinated debenture to Roynat Merchant Capital Inc.
(see Note 6) and a loan from Laurus Master Fund, Ltd. (see Note 7).

      Because Mr. Rhee had a controlling interest in Pneutech, the fair value
increase in the assets acquired and the allocation to goodwill in Pneutech has
been reduced by the proportionate share of his post-combination ownership
percentage.

      The results of operations and financial position of Pneutech have been
included in our consolidated financial statements since the acquisition date.
The following unaudited pro forma financial information for the three and nine
months ended March 31, 2005 and 2004 includes the historical and pro forma
effects of the October 1, 2004 acquisition of the business and certain assets of
Thomas Equipment Limited and the February 28, 2005 acquisition of Pneutech Inc.
and its subsidiaries, together with other pro forma adjustments, as if these
transactions had taken place at the beginning of the periods presented.


                                       12
<PAGE>

                             THOMAS EQUIPMENT, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Unaudited - in thousands, except share and per share data)

      The unaudited pro forma financial information is not necessarily
indicative of what the results of operations actually would have been if the
transactions had in fact occurred at the beginning of the periods presented.
Moreover, they are not intended to be indicative of future results of operations
or financial position.

(in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                          Nine           Nine
                                            Three          Three          Months         Months
                                            Months         Months         Ended          Ended
                                         Ended March    Ended March      March 31,      March 31,
                                           31, 2005       31, 2004         2005           2004
                                           --------       --------       --------       --------
<S>                                        <C>            <C>            <C>            <C>
Sales                                      $ 25,073       $ 23,952       $ 71,859       $ 71,472
                                           =====================================================

Net income (loss)                          $ (4,808)      $ (1,198)      $ (9,849)      $ (6,726)
                                           =====================================================

Earnings per share: basic and diluted      $  (1.80)      $  (0.45)      $  (0.46)      $  (2.52)
                                           =====================================================
</TABLE>

3.    Basis of presentation and summary of significant accounting policies

Basis of presentation

      The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and the instructions
to Form 10-QSB and Rule 310 of Regulation SB of the Securities and Exchange
Commission (the "SEC"). Accordingly, these consolidated financial statements do
not include all of the footnotes required by accounting principles generally
accepted in the United States of America. In management's opinion, all
adjustments (consisting of normal and recurring adjustments) considered
necessary for a fair presentation have been included. Operating results for the
three and six months ended March 31, 2005 are not necessarily indicative of the
results that may be expected for the year ending June 30, 2005.

      The accompanying unaudited consolidated financial statements, as of and
for the three and six months ended March 31, 2005, are those of Thomas
Equipment, Inc. the successor. The statements of operations and of cash flows
include the accounts of Thomas Equipment Limited, our predecessor, for the three
months ended September 30, 2004 and for the three and nine months ended March
31, 2004.

Accounting Policies

      The following accounting policies are those of the Successor, which do not
differ from those of the Predecessor during all periods presented.

Principles of consolidation

      The consolidated financial statements include the accounts of TEQI and its
wholly owned subsidiaries TVI, TE2004 and Thomas Europe NV from October 1, 2004,
the date that TE2004 acquired the business operations and certain assets of
Thomas Equipment Limited. The accounts of Pneutech and its subsidiaries are
included from March 1, 2005, the date that TEQI acquired Pneutech. All
inter-company accounts and transactions have been eliminated in consolidation.


                                       13
<PAGE>

                             THOMAS EQUIPMENT, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Unaudited - in thousands, except share and per share data)

Use of estimates

      In preparing our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect the
reported amounts in the financial statements and the accompanying notes. The
reported amounts of revenues and expenses during the reporting period may be
affected by the estimates and assumptions we are required to make. Estimates
that are critical to the accompanying consolidated financial statements include
the amortization periods for debt issuance costs and the valuation, and
amortization, of discounts arising from warrants, options and beneficial
conversion features on convertible securities, as well as estimates that arise
from the provisions for doubtful accounts, warranties and inventory
obsolescence, contingent liabilities, the valuation of deferred income tax
assets, assumptions used in stock-based compensation calculations and estimating
depreciation of tangible assets. The markets for our products are characterized
by intense competition and price competition, all of which could impact the
future realizability of our assets. Management bases its estimates and
judgements on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgements about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results could differ
from these estimates. Estimates and assumptions are reviewed periodically and
the effects of revisions are reflected in the financial statements in the period
they are determined to be necessary.

Translation of foreign currencies

      Our functional currency is the Canadian dollar. Our foreign currency
transactions and balances are translated into Canadian dollars using the
temporal method. Under this method, monetary assets and liabilities denominated
in foreign currencies are translated into Canadian dollars at rates of exchange
prevailing at the balance sheet date. Revenue and expenses are translated into
Canadian dollars at the rate of exchange prevailing at the transaction date. The
resulting foreign currency exchange gains and losses are included in earnings
for the periods presented.

      Assets and liabilities are then translated into United States dollars
(reporting currency) at the exchange rate in effect at each period end.
Revenues, expenses, gains and losses are translated into United States dollars
at the average rate of exchange prevailing during the period. All translation
effects of exchange rate changes are included as a separate component of
stockholders' equity.

Revenue recognition

      In accordance with Staff Accounting Bulletin 104 - Revenue Recognition in
Financial Statements ("SAB 104"), revenue is generally recognized and earned
when all of the following criteria are satisfied: a) persuasive evidence of
sales arrangements exist; b) delivery has occurred; c) the sales price is fixed
or determinable, and d) collectibility is reasonably assured.

      Delivery and sales of equipment and service parts are recorded when title
and all risks of ownership are transferred to the independent dealer,
distributor, OEM or retail customer which generally occurs when the equipment or
parts are shipped to the customer or dealer. No right of return exists on sales
of equipment except for goods sold under buy back arrangements (see below) which
are not recorded as sales.

      In some circumstances, goods are shipped to dealers and distributors on a
consignment basis under which title and risk of ownership are not transferred to
the dealers and distributors. Accordingly, sales revenues are not recorded until
a retail customer has purchased the goods.


                                       14
<PAGE>

                             THOMAS EQUIPMENT, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Unaudited - in thousands, except share and per share data)

      To assure that collectibility is reasonably assured we perform ongoing
credit evaluations of all of our customers and generally do not require
collateral as we believe we have collection measures in-place to limit the
potential for significant losses.

      We make appropriate provisions based on experience for costs such as
doubtful receivables, sales incentives and product warranty costs. Generally,
sales incentives are granted only at the time of sale as a price reduction and
are immediately recorded as a reduction of revenues.

      Our standard invoice terms are established by marketing region. When a
sale is made to a dealer, the dealer is responsible for payment even if the
product is not sold to an end customer and that dealer must make payment within
the standard terms to avoid interest costs. Late payment interest of 12% p.a.
charged to customers who have overdue accounts is not recognized until received.

      Although we currently have no significant arrangements, financing revenue
will be recorded over the terms of the related receivables using the interest
method.

Buy back arrangements

      Sales contracts are entered into with a dealer/distributor that carries
inventory for rental activities. These contracts include a guaranteed buy back
value of 65% - 70% of the original sales value at the end of the three year
period if the dealer/distributor has not sold the equipment to a retail
customer. These transactions are not recorded as sales, but are instead
accounted for as operating leases with net proceeds on the initial transfer of
the equipment to the dealer/distributor recorded as a liability on the balance
sheet. The liability is subsequently reduced on a pro rata basis over the
three-year period to the amount of the guaranteed buy back value at that date,
with corresponding credits to sales in the consolidated statement of operations.

      The equipment will be included on the balance sheet at cost and amortized
on a straight-line basis over its estimated useful life of three years with
corresponding debits to cost of sales. The deferred revenue and unamortized
carrying value of the equipment is removed from the balance sheet and included
in sales and costs of sales respectively in the consolidated statement of
operations if the dealer/distributor resells the equipment to a retail customer
during the buy back period.

      We also sell equipment to dealers in the United States for retail
activities. These sales are subject to State imposed buy back provisions under
certain conditions (principally upon termination of the dealer's contract by us
and bankruptcy of the dealer.) Revenue from these sales transactions is
recognized at time of sale as they satisfy the right of return conditions under
SFAS 48 "Revenue Recognition when Right of Return Exists" and Staff Accounting
Bulletin No. 104 "Revenue Recognition in Financial Statements".

Trade-ins and used equipment

      Used equipment received under a trade in is valued at its estimated net
realizable value with the difference between the trade-in allowance and the net
realizable value being recognized as a reduction in revenues for the associated
sale. Trade-in allowances are generally only granted at the time of a new sale.
To date we have not accepted a significant amount of trade-ins.

Allowance for doubtful accounts

      The allowance for doubtful accounts is evaluated on a regular basis and
adjusted based upon management's best estimate of probable losses inherent in
receivables, based on historical experience, including the historical loss
experience of the predecessor company. Receivables are determined to be past due
if they have not been paid by the payment due dates. Debts are written off
against the allowance when deemed to be uncollectible. Subsequent recoveries, if
any, are credited to the allowance when received.


                                       15
<PAGE>

                             THOMAS EQUIPMENT, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Unaudited - in thousands, except share and per share data)

Product warranties

      At the time a sale to a dealer is recognized, the company records the
estimated future warranty costs. These costs are estimated based on historical
warranty claims, including the historical warranty experience of the predecessor
company. Warranty provisions are included as a component of cost of sales.

Shipping and handling costs

      Shipping and handling costs related to finished goods are reported as a
component of cost of sales in the consolidated statement of operations.

Cash and cash equivalents

      Cash and cash equivalents include cash on hand and balances with banks,
net of bank overdrafts, and highly liquid temporary money market instruments
with original maturities of three months or less. Bank borrowings are considered
to be financing activities.

Inventory

      Inventories related to the Thomas Equipment business segment are valued at
the lower of cost and net realizable value with cost being determined on a
standard cost basis, which approximates the first-in, first-out basis and
includes the cost of materials, direct labor and manufacturing overhead. Used
equipment is valued at net realizable value.

      Inventories related to Pneutech and its subsidiaries are valued at the
lower of cost and net realizable value with cost being determined on an average
cost basis. The cost of goods in process includes the cost of raw materials,
direct labor and manufacturing overhead.

      We evaluate our inventory for excess and obsolescence on a quarterly
basis. In preparing our evaluation we look at the expected demand for our
products for the next six to twelve months in order to determine whether or not
such raw materials, WIP and finished goods require a change in the inventory
reserve in order to record the inventory at net realizable value. After
discussions with the senior management team, a reserve is established so that
inventory is appropriately stated at the lower of cost or net realizable value.

Property, plant and equipment

      Property, plant and equipment are carried at cost less accumulated
depreciation. Depreciation is provided from the date assets are put into service
at rates to depreciate the carrying cost of the property, plant and equipment
over their estimated useful lives on a straight-line basis as follows:

      Property and plant under capital leases, excluding land      10-20 years
      Production machinery and equipment                           10-15 years
      Office furniture and equipment                                   8 years
      Computer equipment                                               3 years
      Automotive equipment                                             3 years

      We evaluate the carrying value of property, plant and equipment when
events and circumstances warrant such a review. If the carrying values of the
assets are considered to be impaired, a loss is recognized based on the amount
by which the carrying value exceeds the fair market value of the asset.


                                       16
<PAGE>

                             THOMAS EQUIPMENT, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Unaudited - in thousands, except share and per share data)

Long-lived assets

      Statement of Financial Accounting Standards (SFAS) 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" requires that long-lived
assets, including certain identifiable intangibles, be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying value of
the assets in question may not be recoverable. We have reviewed long lived
assets during the quarter ended March 31, 2005 and determined that no impairment
loss need be recognized.

Deferred finance charges

      Deferred finance charges are amortized over the terms of the related party
credit facilities, using the effective interest method.

Redeemable preferred shares

      Preferred shares of our subsidiary that are redeemable at the option of
the holder have been classified as a liability in the consolidated balance sheet
and dividends paid or accrued on these shares have been classified as a
financial expense in our consolidated statements of operations.

Debt with detachable warrants and/or beneficial conversion

      We account for the issuance of detachable stock purchase warrants in
accordance with Accounting Principles Board Opinion 14 ("APB 14"), whereby we
separately measure the fair value of the debt and the detachable warrants and
allocate the proceeds from the debt on a pro-rata basis to each. The resulting
discount from the fair value of the debt allocated to the warrants, which is
accounted for as paid-in capital, is amortized over the estimated life of the
debt.

      In accordance with the provisions of Emerging Issues Task Force Issue 98-5
("EITF 98-5") and EITF 00-27, we allocate a portion of the proceeds received to
any embedded beneficial conversion feature, based on the difference between the
effective conversion price of the proceeds allocated to the convertible debt and
the fair value of the underlying common stock on the date the debt is issued. In
the event the convertible debt also had detachable stock purchase warrants, we
first allocate proceeds to the stock purchase warrants and the debt and then
allocate the resulting debt proceeds between the beneficial conversion feature,
which is accounted for as paid-in capital, and the initial carrying amount of
the debt. The discount resulting from the beneficial conversion feature is
amortized over the estimated life of the debt.

Advertising costs

      Advertising costs of $308 for the six months ended March 31, 2005 were
expensed as incurred and reported as a component of selling expenses.

Research and development costs

      Research and development costs of $520 for the six months ended March 31,
2005 were expensed as incurred and include salaries, contractor fees, building
costs, utilities and administrative expenses.

Income taxes

      We utilize Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been included in the consolidated financial statements or tax returns.
Under this method, deferred income taxes are recognized for the tax consequences
in future years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each period end based on enacted tax
laws and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amounts expected to be
realized.


                                       17
<PAGE>

                             THOMAS EQUIPMENT, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Unaudited - in thousands, except share and per share data)

      We have recorded a full valuation allowance against the benefits that
would result from losses incurred to date, based on a history of losses from the
predecessor owner of the assets purchased, as we are unable to determine if the
losses will be utilized. However, at Pneutech there were timing differences
related to property, plant and equipment which resulted in a net liability at
March 31, 2005.

Net loss per share

      We compute net loss per share in accordance with Statement of Financial
Accounting Standards No. 128 "Earnings per Share" ("SFAS 128") and SEC Staff
Accounting Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS 128 and SAB
98, basic net loss per share is computed by dividing the net loss available to
common stockholders for the period by the weighted average number of common
shares outstanding during the period. Diluted net loss per share is computed by
dividing the net loss for the period by the number of common and common
equivalent shares outstanding during the period. During the period when they
would be anti-dilutive, common stock equivalents (consisting of options to
purchase 4,020,000 common shares, warrants to purchase 4,211,062 common shares
and debt convertible into up to 18,600,000 common shares) are not considered in
the computations. Because the Company has incurred net losses for all periods,
basic loss per share and diluted loss per share are the same.

Stock - based compensation

      We account for equity instruments issued to employees for services based
on the fair value of the equity instruments issued, and account for equity
instruments issued to those other than employees based on the fair value of the
consideration received or the fair value of the equity instruments, whichever is
more reliably measurable.

New pronouncements

SFAS 123(R) 'Share-Based Payments'

      In December 2004, the Financial Accounting Standards Board issued
Statement No. 123 ("SFAS 123 (R)"), Share-Based Payments. SFAS 123 (R) requires
all entities to recognize compensation expense in an amount equal to the fair
value of shared-based payments such as stock options granted to employees. We
will be required to apply SFAS 123 (R) on a modified prospective method. Under
this method, we are required to record compensation expense (as previous awards
continue to vest) for the unvested portion of previously granted awards that
remain outstanding at the date of adoption. In addition, we may elect to adopt
SFAS 123 (R) by restating previously issued financial statements, basing the
amounts on the expense previously calculated and reported in the pro forma
disclosures that had been required by SFAS 123. SFAS 123 (R) is effective for
the first reporting period beginning after December 31, 2005. We do not believe
that the adoption of SFAS 123 (R) will have a material impact on our
consolidated financial statements.

SFAS 153 'Exchanges of Nonmonetary Assets an Amendment of APB Opinion No. 29'

      In December 2004, FASB Statement No. 153 was issued amending APB Opinion
No. 29 to eliminate the exception allowing nonmonetary exchanges of similar
productive assets to be measured based on the carrying value of the assets
exchanged as opposed to being measured at their fair values. This exception was
replaced with a general exception for exchanges of nonmonetary assets that do
not have commercial substance. A nonmonetary exchange has commercial substance
if the future cash flows of the entity are expected to change significantly as a
result of the exchange. The provisions of this statement are effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. The adoption of this statement is not expected to have a material impact
on our consolidated financial statements.


                                       18
<PAGE>

                             THOMAS EQUIPMENT, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Unaudited - in thousands, except share and per share data)

Restatement

      These financial statements have been restated to record as equity the
beneficial conversion feature related to certain of our convertible debt, in
accordance with EITF 98-5 and EITF 00-27. As a result, we have recorded $2,374
as a discount from certain of our convertible debt issued in January and
February 2005. $190 of this discount was amortized to "Net financial expense" in
our accompanying consolidated statements of operations during the three and six
months ended March 31, 2005. Accordingly, the effect on our accompanying
consolidated balance sheet as of March 31, 2005 was a decrease in liabilities
and corresponding increase in stockholders' equity of $2,184. The effect on our
consolidated statements of operations for the three and six months ended March
31, 2005 was an increase in our net loss of $190. Basic and diluted loss per
share for the three and six months ended March 31, 2005 increased by $0.01 and
$0.01, respectively.

4.    Inventories, net

Raw materials and spare parts                                          $   8,402
Work in process                                                            2,503
Finished goods - new                                                      23,311
Finished goods - used                                                      1,973
Packaging and supplies                                                       286
                                                                       ---------
                                                                       $  36,475
                                                                       =========

5.    Property, plant and equipment

                                                       Accumulated     Net Book
                                              Cost     Depreciation     Value

Land                                         $ 1,364                   $ 1,364
Property and plant under capital leases        8,581      $   270        8,311
Production machinery and equipment             7,949          357        7,592
Office furniture and equipment                   639           16          623
Computer equipment                               679           62          617
Automotive equipment                             743           59          684
Construction in process                          504           --          504
                                             ---------------------------------
                                             $20,459      $   764      $19,695
                                             =================================


                                       19
<PAGE>

                             THOMAS EQUIPMENT, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Unaudited - in thousands, except share and per share data)

6.    Long term debt

<TABLE>
<S>                                                                                                    <C>
Note payable to Thomas Equipment Limited, bearing interest at 4%, with annual
principal repayments plus interest, maturing on October 31, 2006. Funds were
used to finance the acquisition of Thomas Equipment Limited assets.                                    $ 2,219
                                                                                                       -------

Debenture payable to Roynat Merchant Capital Inc., bearing interest at 15% (effective rate of
approximately 125%), due December 30, 2005, repaid April 19, 2005.  Funds were used to refinance
liabilities assumed in the Pneutech Inc. acquisition.  As security, the Company provided
collateral of property and equipment. There are no material debt covenants. Roynat Merchant
Capital Inc. has accepted a second position to Laurus Master Fund.                                        5,343

Debt discount, net of amortization of $265, related to warrants to purchase 1,000,000 common
shares at an exercise price of $3 per share.  The warrants are exercisable at any time and expire
on August 28, 2006.  The warrants were valued using the Black-Scholes option pricing model based
on the market price of the common shares at the time the warrants were issued (Note 12).                (2,384)
                                                                                                       -------
                                                                                                         2,959
                                                                                                       -------
Various loans with interest rates ranging from Canadian prime rate plus 1.5% to 8.45% (Canadian
prime was 5.75% at March 31, 2005), amortized from 2007 to 2009, repayable in monthly instalments
of principal of $28 plus interest, assumed on the acquisition of Pneutech Inc.                             524

Samsung Industries - various loans with interest rates ranging from 4.12% to 12.00% repayable
through 2012, assumed on the acquisition of Pneutech Inc.                                                2,997

Private loans with interest rates ranging from 3% to 8%, with regular principal
and interest payments providing for repayment by 2006, assumed on the acquisition of Pneutech Inc.       1,080
                                                                                                       -------

Total                                                                                                    9,779
Less: current portion                                                                                   (8,419)
                                                                                                       -------
                                                                                                       $ 1,360
                                                                                                       =======
Principal repayments are as follows, for the fiscal years ending June 30:

2005                                                                                                   $   852
2006                                                                                                     8,352
2007                                                                                                     1,930
2008                                                                                                       247
2009                                                                                                       223
thereafter                                                                                                 559
</TABLE>

The debenture payable to Roynat Merchant Capital Inc. and the Samsung Industries
loans were repaid on April 19, 2005 with part of the proceeds from the sale of
preferred stock and warrants (see Note 17).


                                       20
<PAGE>

                             THOMAS EQUIPMENT, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Unaudited - in thousands, except share and per share data)

7.    Convertible long term debt

<TABLE>
<S>                                                                                                    <C>
Term loan, with Laurus Master Funds Ltd. ("Laurus,"), bearing interest at US prime plus 3% (8.2%
at March 31, 2005) with monthly principal repayments of $207 per month plus interest. Funds were
used to finance the acquisition of Thomas Equipment Limited assets.  As security, the Company has
provided a general security agreement on Thomas Equipment, Inc. and a second position on all
assets of Pneutech, Inc.  See Note 17 for a discussion of the current status of this loan.             $ 6,000

Debt discount, net of amortization of $244, related to 4,020,000 options to purchase shares of
common stock and 2,200,000 warrants to purchase common stock issued to Laurus.  The options and
warrants have an exercise price of $0.01 per share and $2.25 per share, respectively, and are
exercisable at any time.  The warrants expire on November 9, 2011. The proceeds allocated to the
options and warrants of $4,060 and $2,178, respectively, were credited to additional paid in
capital and the resulting discount from the related debts is being amortized over the term of
those debts of three years.  The value assigned to the options and warrants was allocated between
the convertible long term debt and convertible credit facility based on the value of the debt
The options and warrants were valued using the Black-Scholes option pricing model based on the
market price of the common shares at the time the options and warrants were issued (Note 12).           (1,495)

Premium: the principal may be prepaid at our option with a 5% premium, plus accrued interest.              103
                                                                                                       -------
                                                                                                         4,608
                                                                                                       -------
Term loan with Laurus, bearing interest at US prime plus 3% (8.2% at March 31, 2005) with monthly
principal repayments of $66 per month plus interest. Funds were used to refinance liabilities
assumed in the Pneutech Inc. acquisition. As security, the Company has provided a general security
agreement on Thomas Equipment, Inc. and a second position on all assets of Pneutech, Inc. See Note
17 for a discussion of the current status of this loan.                                                  1,900

Debt discount, net of amortization of $49, related to warrants to purchase 150,000 common shares
at an exercise price of $2.25 per share.  The warrants are exercisable at any time and expire on
February 28, 2012.  The proceeds allocated to the warrants of $488 were credited to additional
paid-in capital and the resulting discount from the related debt is being amortized over the term
of the debt of 32 months.  The warrants were valued using the Black-Scholes option pricing model
based on the market price of the common shares at the time the warrants were issued (Note 12).            (439)

Discount related to the beneficial conversion feature, net of amortization of $132.  After
allocating a portion of the proceeds to the warrants, it was determined that all the remaining
proceeds of the debt should be allocated to the embedded conversion feature.  As such, $1,412 was
credited to additional paid-in capital.  The discount is being amortized over the term of the
debt of 32 months.                                                                                      (1,280)

Premium: the principal may be prepaid at our option with a 5% premium, plus accrued interest.               16
                                                                                                       -------
                                                                                                           197
                                                                                                       -------

Less current portion                                                                                    (2,448)
                                                                                                       -------
                                                                                                       $ 2,357
                                                                                                       -------

Principal repayments start in July 2005 and are as follows, for the fiscal years ending June 30:
2005                                                                                                   $     0
2006                                                                                                     3,270
2007                                                                                                     3,270
2008                                                                                                     1,360
</TABLE>


                                       21
<PAGE>

                             THOMAS EQUIPMENT, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Unaudited - in thousands, except share and per share data)

The principal repayments and interest payments for the term loans can be made in
cash or common stock at the option of the holder. Payments in cash are subject
to a 3% premium (though no premium is charged if the payments are added to the
convertible credit facility). Payments in common stock have a fixed conversion
price of $1.50 per common share

The term loans can be converted to common stock at any time, at the option of
the holder, at a conversion price of $1.50 per common share

8.    Convertible credit facility and other credit facilities

      Effective November 9, 2004, the company entered into a three-year $16,000
revolving credit facility agreement with Laurus Master Fund Ltd. ("Laurus").
Included in the total credit facility is a secured convertible minimum borrowing
note of $8,000. The purpose of the credit facility was to provide TE2004 with
funds to purchase the inventory and fixed assets of Thomas Equipment Limited and
other general corporate purposes. The credit facility is secured by
substantially all of our assets.

      On January 26, 2005, we received an increase in the credit facility with
Laurus from $16,000 to $20,000. Laurus charged a fee of $128 and received
warrants to purchase 400,000 common shares at an exercise price of $2.25 per
share.

      The revolving loan bears interest at the greater of 7.5% or The Wall
Street Journal published US prime rate plus 3%. We are also required to pay fees
of 0.30% per annum on the average monthly unused amount of the revolving
facility and a 1% per month fee on the balance in excess of the borrowing limit.

      The credit facility provides for borrowings utilizing an asset based
formula using eligible receivables, inventory, and fixed assets, less any
reserves. At March 31, 2005, the amount of available borrowings pursuant to the
formula was as follows:

      Available borrowings supported by asset base               $18,660
      Less: amount borrowed under revolving credit facility       18,504
                                                                 -------
      Excess availability                                        $   156
                                                                 =======

      Laurus may require us to convert into common stock all or a portion of the
amount outstanding under the credit facility, together with interest and fees
thereon, at any time at a conversion price of $1.50 per common share. Laurus has
contractually agreed not to convert any portion of the credit facility if
exercising the conversion option results in Laurus holding in excess of 9.99% of
our outstanding shares of common stock.

<TABLE>
<S>                                                                                           <C>
   Amount borrowed under the revolving credit facility.
   Funds were used to finance the acquisition of Thomas Equipment Limited assets and
   to fund operations since the acquisition.                                                  $ 18,504

          Debt discount related to 4,020,000 options to purchase shares of common stock
          and 2,200,000 warrants to purchase common stock, issued to Laurus.  The
          options and warrants have an exercise price of $0.01 per share and $2.25 per
          share, respectively, and are exercisable at any time.  The warrants expire on
          November 9, 2011. The proceeds allocated to the options and warrants of $4,060
          and $2,178, respectively, were credited to additional paid in capital and the
          resulting discount from the related debts is being amortized over the term of
          those debts of three years.  The value assigned to the options and warrants
          was allocated between the convertible long term debt and convertible credit
          facility based on the value of the debt.  Warrants to purchase 400,000 common
          shares at an exercise price of $2.25 per share were issued in January 2005 in
          connection with an increase in the credit facility.  The warrants are
          exercisable at any time and expire on January 26, 2012.  The proceeds
          allocated to these warrants of $1,542 was credited to additional paid in
          capital.                                                                              (5,302)
</TABLE>


                                       22
<PAGE>

                             THOMAS EQUIPMENT, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Unaudited - in thousands, except share and per share data)

<TABLE>
<S>                                                                                           <C>
          Amortization of the above discounts totalled $739 through March 31, 2005.

          The warrants were valued using the Black-Scholes option pricing model
          based on the market price of the common shares at the time the options
          and warrants were issued (Note 12).

          Discount, net of amortization of $58, related to the beneficial conversion
          feature of amounts received above the original $16,000 credit facility.  After
          allocating a portion of the proceeds received above the original $16,000 to
          the warrants, it was determined that the remaining proceeds of that portion of
          the debt should all be allocated to the embedded beneficial conversion
          feature.  As such, $962 was credited to additional paid-in capital and is
          being amortized over the remaining term of the debt of 33 months.                       (904)

          Premium: the principal may be prepaid at our option with a 5% premium, plus
          accrued interest.                                                                        167
                                                                                              --------
                                                                                              $ 12,465
                                                                                              ========
</TABLE>

      Any principal repayments and interest payments on $8,000 of this
outstanding balance of the credit facility can be made in cash or common stock.
Payments in cash are subject to a 3% premium (though no premium is charged if
the payments are added to the convertible credit facility). Payments in common
stock have a fixed conversion price of $1.50 per common share.

      As security, the Company has provided a general security agreement on
Thomas Equipment, Inc. and a second position on all assets of Pneutech, Inc. See
Note 17 for a discussion of the current status of this loan.

Other credit facilities

<TABLE>
<S>                                                                                           <C>
   Subsidiaries' lines of credit                                                              $  9,762
                                                                                              ========
</TABLE>

      The subsidiary companies have authorized operating lines of credit at
Canadian prime rate plus 0.3% and 1.5% (4.55% and 5.75% at March 31, 2005)
totalling $10,686, of which, $924 is unused at March 31, 2005. As security, the
subsidiary companies have pledged property, general security agreements,
assignments of inventory and book debts, guarantees by related companies and
shareholders, and an assignment of fire and theft insurance.


                                       23
<PAGE>

                             THOMAS EQUIPMENT, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Unaudited - in thousands, except share and per share data)

9.    Capital lease obligations

      Under the terms of the Purchase Agreement with Thomas Equipment Limited,
we entered into two two-year capital lease agreements with Thomas Equipment
Limited. Pursuant to the leases, we have the right at any time prior to the
expiration of the leases to purchase the leased properties for $4,953 (based on
the March 31, 2005 exchange rate). In addition, Thomas Equipment Limited has a
right to require us to purchase the leased properties at the expiration of the
leases. The leases require annual payments of $493 plus realty taxes,
maintenance, heat and certain other expenses. We have recorded the leases as
capital leases with future minimum repayments as follows:

      Fiscal year ending June 30:

      2005                                                    $  123
      2006                                                       493
      2007                                                     5,077
                                                              ------
                                                               5,693
      Less: amounts representing interest                        591
                                                              ------
                                                              $5,102
                                                              ------

      The company used a discount rate of approximately 8% in the capital lease
accounting which represents the Company's effective borrowing rate at the time
the leases were entered into (Thomas Equipment Limited used a different discount
rate which approximated their effective borrowing rate).

10.   Redeemable preferred shares

      The Company has 5,000,000 shares of preferred stock authorized, $0.0001
par value. At March 31, 2005, no shares were issued and outstanding. On April
19, 2005, as described in Note 17, we sold 25,000 preferred shares.

      In connection with the financing of the asset acquisition from Thomas
Equipment Limited (Note 2), we issued to the parent of Thomas Equipment Limited,
1,000 shares of redeemable preferred stock of our subsidiary Thomas Equipment
2004 Inc.. The preferred shares carry a cumulative dividend of 8% per annum. We
are required to purchase the preferred shares from the holder on April 26, 2006,
if not earlier redeemed. A default rate of 12% is due if we fail to redeem by
April 26, 2006. The face amount of the shares is $8,220 (translated at March 31,
2005) which we determined to also be their fair value at the time of issuance as
the dividend rate approximated the market rate we would pay for similar
financing. The shares are currently redeemable for $8,476 (their face amount of
$8,220 plus $256 of accrued but unpaid dividends). The holder of these shares
has the right to be an observer at our board meetings.

11.   Common stock

      At March 31, 2005, we have 200,000,000 authorized shares of common stock,
par value $0.0001, 21,250,000 shares issued and outstanding.

      In October, 2004, immediately prior to the reorganization, we completed a
1 for 40 reverse stock split. After the reverse stock split, Maxim's
shareholders retained 1,075,000 shares of common stock in the reorganization,
which has been recorded at the value of the net assets (liabilities) assumed
which amounted to $0.

      We issued 16,945,000 shares to our founders for $2,451 (which includes non
cash service contributions of $322) or an average of approximately $0.14 per
share. The fair value of the common stock was estimated to be $0.47 per share,
based on the cash price of $0.50 paid by certain of our founders and the trading
price of the shares immediately after the reorganization of $0.45. The
difference resulted in an immediate expense of $5,520 which consisted of the
common stock fair value of $7,971 less stock subscription consideration of
$2,129 in cash and non cash service contributions of $322.


                                       24
<PAGE>

                             THOMAS EQUIPMENT, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Unaudited - in thousands, except share and per share data)

      On November 9, 2004, in connection with the issuance of debt and obtaining
the credit facility, we sold 1,980,000 shares to Laurus for $20. Based on the
estimated fair value of $0.47, we recorded $911 of "stock-based compensation"
expense for this issuance.

      On February 28, 2005, we issued 1,082,640 shares in connection with the
acquisition of Pneutech and 167,360 shares to repay certain debt owed by
Pneutech.

12.   Stock options and warrants

      We use the Black-Scholes option pricing model to value options and
warrants, based on the market price of our common stock at the time the options
or warrants are issued.

      On November 9, in connection with the issuance of debt and obtaining the
credit facility, we issued an option to purchase 4,020,000 shares of common
stock and 2,200,000 warrants to purchase common stock to Laurus. The options and
warrants have an exercise price of $0.01 per share and $2.25 per share,
respectively, and are exercisable at any time. The warrants expire on November
9, 2011. The proceeds allocated to the options and warrants of $4,060 and
$2,178, respectively, were credited to additional paid in capital and the
resulting discount from the related debts is being amortized over the term of
those debts of three years. The value assigned to the options and warrants was
allocated between the convertible long term debt and convertible credit facility
based on the value of the debt.

      On January 26, 2005, in connection with an increase in the credit facility
with Laurus from $16,000 to $20,000, we issued to Laurus warrants to purchase
400,000 common shares at an exercise price of $2.25 per share. The warrants are
exercisable at any time and expire on January 26, 2012. The proceeds allocated
to the warrants of $1,542 were credited to additional paid-in capital and the
resulting discount from the related debt is being amortized over the remaining
term of that debt of 33 months.

      On January 31, 2005, in connection with investor relations services, we
issued warrants to Redwood Consultants to purchase 250,000 common shares at an
exercise price of $4 per share. The warrants are exercisable at any time and
expire on January 31, 2008. Because the value of the services to be provided
could not be reliably measured, we used the fair value of the warrants of
$1,295, which amount was credited to additional paid-in capital and is being
recognized as an expense over the estimated life of the services of one year.

      On February 28, 2005, in connection with the acquisition of Pneutech and
as part of the purchase price consideration, we issued warrants to the former
Pneutech shareholders to purchase 211,062 common shares at an exercise price of
$3 per share. The warrants are exercisable at any time and expire on February
28, 2010. The warrants were valued at $260, which was recorded as part of the
consideration paid for the acquisition of Pneutech.

      Also on February 28, 2005, in connection with the sale to Laurus of an
additional secured convertible term note with a principal amount of $1,900, we
issued to Laurus warrants to purchase 150,000 common shares at an exercise price
of $2.25 per share. The warrants are exercisable at any time and expire on
February 28, 2012. The proceeds allocated to the warrants of $488 were credited
to additional paid-in capital and the resulting discount from the related debt
is being amortized over the term of that debt of 32 months.

      Also on February 28, 2005, in connection with the acquisition of Pneutech
and the sale of a $5,343 principal amount debenture to Roynat Merchant Capital
Inc., we issued to Roynat warrants to purchase 1,000,000 common shares at an
exercise price of $3 per share. The warrants are exercisable at any time and
expire on August 28, 2006. The proceeds allocated to the warrants of $2,649 were
credited to additional paid-in capital and the resulting discount from the
related debt is being amortized over the term of that debt of ten months. As
described in Note 17, the debenture was repaid on April 19, 2005 and the
unamortized discount at that date was expensed.

      On April 19, 2005, in connection with the sale of preferred stock, we
issued additional common stock warrants, as described in Note 17.


                                       25
<PAGE>

                             THOMAS EQUIPMENT, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Unaudited - in thousands, except share and per share data)

13.   Segment information

      Our principal operations relate to the manufacturing, sale and
distribution through a worldwide network of dealers, distributors and retailers
of skid steer and mini skid steer loaders, attachments, parts, mobile screening
plants and mini excavators for the industrial and construction industry and
potato harvesting and handling equipment for the agriculture industry. Because
of the integrated nature of our manufacturing operation and common
administrative and marketing support functions, the business is treated by
management as a single operating segment for the purpose of making operating
decisions and assessing performance.

      Revenues by destination and product group were as follows:

<TABLE>
<CAPTION>
                                   Successor Business           |                    Predecessor Business
                            ---------------------------------   |   ------------------------------------------------------
                             Three Months       Six Months      |    Three Months        Three Months         Nine Months
                                Ended              Ended        |        Ended               Ended              Ended
                              March 31,          March 31,      |    September 30,         March 31,           March 31,
                                 2005              2005         |        2004                 2004               2004
                            ---------------    --------------   |   ----------------    ----------------    --------------
<S>                         <C>                <C>                  <C>                 <C>                 <C>
Thomas Equipment            $        12,160    $       26,576   |   $         13,857    $         12,622    $       39,199
Pneutech                              4,876             4,876   |                 --                  --                --
                            ---------------------------------   |   ------------------------------------------------------
                            $        17,036    $       31,452   |   $         13,857    $         12,622    $       39,199
                            =================================   |   ======================================================
                                                                |
Canada                      $         5,981    $        7,890   |   $          2,883    $          1,268    $        7,038
USA                                   5,067            11,440   |              7,177               8,493            22,814
Europe                                5,043             9,330   |              2,517                 964             6,323
Rest of world                           945             2,792   |              1,280               1,897             3,024
                            ---------------------------------   |   ------------------------------------------------------
Total sales to                                                  |
external customers          $        17,036    $       31,452   |   $         13,857    $         12,622    $       39,199
                            =================================   |   ======================================================
                                                                |
Industrial and                                                  |
construction                $        16,913    $       30,836   |   $          2,147    $         12,551    $       34,960
Agriculture                             123               616   |              1,710                  71             4,239
                            ---------------------------------   |   ------------------------------------------------------
                                                                |
Total sales to                                                  |
external customers          $        17,036    $       31,452   |   $         13,857    $         12,622    $       39,199
                            =================================   |   ======================================================
</TABLE>

      During the periods presented, no single customer accounted for more than
10% of our revenues.

      Property, plant and equipment by geographical area as of March 31, 2005
were as follows:

         Canada                                      $  14,847
         USA                                                66
         Korea                                           4,782
                                                     ---------
         Total                                       $  19,695
                                                     =========


                                       26
<PAGE>

                             THOMAS EQUIPMENT, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Unaudited - in thousands, except share and per share data)

14.   Contingencies and commitments

Litigation

      We are potentially subject to various claims and litigation arising out of
the ordinary course and conduct of our business including product liability,
intellectual property, labour and employment, environmental and tax matters. We
do not consider our exposure to such claims and litigation to be material to the
consolidated financial statements.

Warranties

      Our products are sold with a one year comprehensive bumper to bumper
warranty except for loader sales in North America and Australia, which have a
three year bumper to bumper warranty, followed by a power train warranty in
years four and five. We generally determine our total warranty liability by
applying historical claims rate experience to the estimated amount of equipment
that has been sold and is still under warranty based on dealer inventories and
retail sales. The historical claims rate is primarily determined by a review of
claims costs and current quality developments.

Other commitments

      We have entered into operating lease agreements to lease certain premises
and office equipment. The annual rent of premises consists of a minimum rent
plus realty taxes, maintenance, heat and certain other expenses. Minimum rent
payable for premises and office equipment in the aggregate and for each of the
next five years is as follows:

      Fiscal years ending June 30:
      2005                                                        $  213
      2006                                                           749
      2007                                                           540
      2008                                                           398
      2009                                                           326

Guarantees

      We have entered into an arrangement with a dealer / distributor under
which sales to that dealer / distributor will include a guaranteed buy back
value at the end of a three year period if that dealer / distributor has not
sold the equipment to a retail customer. There is no potential liability at the
balance sheet date as no sales have been made to the dealer / distributor.

15.   Financing expense

      Capital leases                                                     $  187
      Credit facility                                                       672
      Amortization of deferred financing costs                              121
      Amortization of debt discount / Beneficial Conversion feature       1,487
      Amortization of debt premium                                          286
      Note payable - related party                                           44
      Dividends on preferred shares                                         256
      Amortization of warrants for consulting services                      109
                                                                         ------
      Total                                                              $3,162
                                                                         ======


                                       27
<PAGE>

                             THOMAS EQUIPMENT, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Unaudited - in thousands, except share and per share data)

16.   Fair value and financial risks

Fair value

      Our financial instruments include cash and short term deposits, bank
advances, trade accounts and financing receivables and accounts payable. Due to
the short-term maturity of cash and short-term deposits, bank advances, trade
accounts receivable, accounts payable and accrued liabilities, the carrying
values of these instruments are reasonable estimates of their fair values.

Credit risk

      Our financial assets that are exposed to credit risk consist primarily of
cash, trade accounts and financing receivables.

      We are exposed to normal credit risk from customers. Trade accounts and
financing receivables have significant concentrations of credit risk in the
industrial and construction industry and, on a geographical basis, in the USA as
disclosed in Note 13.

Interest rate risk

      We are exposed to interest rate risk as future changes in the prevailing
level of interest rates affect the cash flows associated with financing
receivables and debt obligations. We have not entered into any financial
instrument contracts to hedge the interest rate exposure associated with these
items.

Foreign currency risk

      Our foreign currency translation policy is described in Note 3. We do not
enter into foreign currency futures and forwards contracts to manage exposure to
foreign currency fluctuations. As at March 31, 2005, our exposure in
non-Canadian dollars was: receivables of $14,331, payables of $11,517, credit
facilities of $18,504 and cash of $1,227.

17.   Recent events

      On April 19, 2005, we entered into agreements with several accredited
investors for the sale of an aggregate of 25,000 shares of series A preferred
stock (the "Preferred Stock"), and warrants to purchase an aggregate of
2,083,333 shares of common stock exercisable at a price of $3.75 per share at
any time during a period of five years (the "Warrants"). The securities were
sold for an aggregate cash consideration of $25,000. The securities were issued
in a private placement transaction pursuant to Section 4(2) and Regulation D
under the Securities Act of 1933, as amended. The Company also agreed to cause a
resale registration statement covering the common stock issuable upon conversion
of the Preferred Stock and exercise of the Warrants to be effective within six
months of the closing date.

      The Preferred Stock is convertible into 8,333,333 shares of common stock
at the rate of $3.00 per share and pays a dividend of 5% per annum in cash. The
Preferred Stock may be converted at anytime upon five days notice by the
Preferred Stockholders. The Company can require the holders to convert up to 20%
of their Preferred Stock per month, if the common stock trades at an average
price of $6.00 per share for 20 consecutive days, with average volume of 150,000
shares per day. At any time commencing after three years from the closing date,
the Company can redeem the Preferred Stock. If the redemption occurs in the
fourth year after issuance, the redemption amount is 200% of the stated value.
If the redemption occurs during the fifth year after issuance, the redemption
amount is 225% of the stated value. The holder can require the Company to redeem
the Preferred Stock at 110% of the stated value, together with accrued
dividends, after five years or upon certain events, including:

      o     failure to deliver common stock when required;


                                       28
<PAGE>

                             THOMAS EQUIPMENT, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Unaudited - in thousands, except share and per share data)

      o     failure to effect registration of the common stock; or

      o     a bankruptcy event.

      The Company paid the placement agent of the offering a fee of 6% of the
aggregate proceeds, together with warrants to purchase 500,000 shares of common
stock at an exercise price of $3.00 per share for a period of five years. The
warrants are exercisable at any time and expire on April 19, 2010.

      The proceeds received from the sale of the preferred stock and the
warrants were used to repay the debenture to Roynat Merchant Capital Inc.,
certain Samsung Industries long term debt and for general working capital
purposes.

      As of October 3, 2005, we have not yet filed a registration statement
required by the Registration Rights Agreement with the purchasers of our Series
A Preferred Stock. If that required registration statement is not filed and
effective by October 19, 2005, we will begin to incur damages of 1% per month of
the face amount of the preferred stock of $25,000. If the registration statement
never becomes effective, the maximum damages we may have to pay aggregate
approximately $13,500. Furthermore, if the registration statement is not
effective by April 19, 2006, the holders of the series A preferred stock have
the option to require redemption with a 10% premium.

      As of October 3, 2005, we are not currently in compliance with our
obligations to register the shares of common stock issuable to Laurus. However,
Laurus has waived, through October 15, 2005, the imposition of all penalties
under the Registration Rights Agreement and its right to accelerate payment of
our obligations. In consideration for this waiver, we paid Laurus a fee of $898,
which was less than the damages we would have incurred while not in compliance
through October 15, 2005. Because non-compliance did not occur until July 22,
2005, (subsequent to year end), this amount will be recorded in our first
quarter of fiscal 2006 (quarter ended September 30, 2005). In addition, as this
amount was included in an over-advance from Laurus under our revolving credit
facility with them, the fee will not have a material impact on our Liquidity.
Upon the expiration of the waiver, assuming our Registration Statement is not
then effective, we will incur penalties in the amount of 2% per month of the
original principal amount due under the notes of $22,000. If our registration
statement never becomes effective and we are required to pay penalties to Laurus
of 2% per month from October 15, 2005 until the option and warrants sold to
Laurus expire at the end of their seven year life, the penalties would aggregate
approximately $32,000. In addition, our failure to comply with the Laurus
registration obligations after October 15, 2005 will constitute an event of
default which will entitle Laurus, in its sole discretion, to demand payment in
full of all obligations due to them, together with a 15% premium on the
principal amount of notes then outstanding. We and Laurus have had discussions
concerning the status of the obligations and Laurus has not given any indication
that they intend to demand payment of the obligations due to them. However, any
such demand would be detrimental to our financial condition as we do not have
sufficient cash to repay the Laurus obligations. Further, we granted a security
interest to Laurus in substantially all of our assets. Any attempt by Laurus to
foreclose on our assets could cause us to curtail our current operations.


                                       29
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
         FINANCIAL CONDITION AND RESULTS OF OPERATIONS

      The following discussion and analysis of the financial condition and
results of our operations relates to the successor company Thomas Equipment,
Inc. since our inception on October 1, 2004, and to our predecessor company
Thomas Equipment Limited and therefore covers periods prior and subsequent to
our acquisition of the business and assets of the predecessor company. We
acquired Pneutech on February 28, 2005 and its results of operations from that
date are included in our operating results.

      The following discussion and other sections of this Form 10-QSB contain
forward-looking statements that involve a number of risks and uncertainties.
These forward-looking statements are made pursuant to the "safe-harbor"
provisions of the Private Securities Litigation Reform Act of 1995 and are made
based on management's current expectations or beliefs, as well as assumptions
made by, and information currently available to, management. All statements
regarding future events, our future financial performance and operating results,
our business strategy and our financing plans are forward-looking statements. In
many cases, you can identify forward-looking statements by terminology, such as
"may," "will," "should," "expects," "intends," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," or "continue," or the negative
of such terms and other comparable terminology. These statements are only
predictions. Known and unknown risks, uncertainties and other factors could
cause our actual results to differ materially from those projected in the
forward-looking statements.

      THE INFORMATION CONTAINED IN THIS FORM 10-Q IS NOT A COMPLETE DESCRIPTION
OF OUR BUSINESS OR THE RISKS ASSOCIATED WITH AN INVESTMENT IN US. READERS ARE
REFERRED TO DOCUMENTS FILED BY THOMAS WITH THE SECURITIES AND EXCHANGE
COMMISSION, SPECIFICALLY OUR MOST RECENT FORM SB-2 AND OTHER FILINGS, WHICH
IDENTIFY IMPORTANT RISK FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM
THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS.

      Amounts reported throughout this discussion derived from specific
financial statements are translated at various period end rates, average period
rates or specific transaction rates, as appropriate. Other amounts not related
to results of operations or financial condition have been translated to U.S.
dollars at the March 31, 2005 rate of $0.822 per Canadian dollar.

 UNLESS OTHERWISE MARKED, ALL AMOUNTS ARE IN U.S. DOLLARS IN THOUSANDS, EXCEPT
                            SHARE AND PER SHARE DATA

Overview
--------------------------------------------------------------------------------

      Thomas Equipment, Inc., the successor business, has two business segments,
Thomas Equipment and Pneutech.

      Thomas Equipment manufactures and distributes through a worldwide network
of dealers and distributors a full line of skid steer and mini skid steer
loaders as well as attachments, mobile screening plants and six models of mini
excavators. In addition to industrial and construction products, Thomas
Equipment manufactures a complete line of potato harvesting and handling
equipment, and also operates six retail stores, three in Atlantic Canada, one in
Presque Isle, Maine, one in Aurora, Colorado and one in Chicago, Illinois.
Thomas Equipment Limited originated in 1943 as a manufacturer of farm equipment
and in 1964, was acquired by McCain Foods Limited. In 1969, Thomas Equipment
Limited further diversified its product line with the development of the world's
first hydrostatic drive skid steer loader. Today, this business manufactures a
full line of skid steer loaders, attachments, screening plants, excavators, and
other agricultural and industrial equipment as noted above.


                                       30
<PAGE>

      Pneutech, established in 1973, and its subsidiaries are engaged in the
fluid power industry providing distribution and manufacturing of pneumatic and
hydraulic components and systems for the industrial market, distribution and
manufacturing of hydraulic components and systems for the mobile market and
manufacturing of hydraulic cylinders and metal gaskets for the industrial
market. Pneutech is a strategic supplier to Thomas Equipment, as well as 15,000
other active customers. During the year ended June 30, 2004, Pneutech supplied
Thomas with approximately $4 million in hydrostatic transmission equipment (8%
of Pneutech's sales and 8% of Thomas' cost of sales during that period).
Pneutech maintains nine manufacturing and distribution facilities in Canada and
one manufacturing plant in South Korea. It has a diverse array of capabilities
in the distribution of fluid power components as well as manufacturing spiral
wound metal gaskets and steel components.

      Although a significant portion of our sales are transacted in the U.S.,
Korea and Europe, most of our assets and operations are in Canada and, as a
result, our functional currency for recording transactions is the Canadian
dollar, which is then translated into U.S. dollars for reporting purposes.

Reorganization of Maxim Mortgage Corporation to Thomas Equipment, Inc.

      On October 11, 2004, Thomas Equipment, Inc., formerly Maxim Mortgage
Corporation, entered into an Agreement and Plan of Reorganization with Thomas
Equipment 2004 Inc. and Thomas Ventures Inc., both of which were formed in 2004
for the purposes of the asset acquisition described below. Prior to the
reorganization:

      Maxim Mortgage Corporation had no active business operations;

      Clifford Rhee, our president and a principal stockholder, was the sole
      officer and director of Thomas Equipment 2004, Inc.; and

      David Marks, our Chairman and a principal stockholder, was the sole
      officer and director of Thomas Ventures, Inc.

      Immediately before the acquisition of Thomas Equipment 2004 and Thomas
Ventures, we had minimal business operations and sought a new line of business
to create value for our shareholders. Prior to November 2004, Clifford Rhee,
then president of Pneutech Inc. and currently president of Thomas Equipment and
Pneutech became aware that Thomas Equipment Limited had an interest in disposing
of the Thomas Equipment Limited assets. The purchase price for the assets was
based upon the net book value of the assets. Mr. Rhee negotiated for the
purchase of the assets by Pneutech, but funding for the acquisition by Pneutech
was not available. It was determined by Mr. Rhee that funding would be more
readily available if the company were publicly traded. Mr. Rhee initially
considered including both Pneutech and the Thomas Equipment Limited assets in a
public vehicle, but ultimately determined it would be more practical to include
only the Thomas Equipment Limited assets. After a period of time operating
Thomas Equipment and Pneutech as separate entities, it was determined that the
entities should be combined, since Pneutech was already a supplier to Thomas
Equipment.

      Under the terms of the agreement, we acquired 100% of the common stock of
Thomas Equipment 2004 and Thomas Ventures in exchange for the issuance by us of
16,945,000 common shares (approximately 94% of the outstanding shares
immediately after the reorganization). The average share price paid for the
16,945,000 shares of Thomas Equipment 2004 and Thomas Ventures exchanged for
shares of Thomas Equipment stock was $.0775. Current officers, directors and
principal stockholders of Thomas Equipment, who beneficially own in the
aggregate approximately 77% of the outstanding common stock of Thomas Equipment,
owned the following aggregate shares of common stock of Thomas Equipment 2004,
Inc. and Thomas Ventures, Inc.:


                                       31
<PAGE>

<TABLE>
<CAPTION>
                                                                              Average
      Name                                                  Shares         Price Paid
      -------------------------------------------------------------------------------
<S>                                                     <C>                    <C>
      Frank P. Crivello                                 10,336,706             $.1874
      Frank P. Crivello SEP IRA                          2,010,000             $.0124
      4237901 Canada Inc. (owned by Clifford Rhee)       2,875,294               $.01
      David Marks                                          500,000               $.01
</TABLE>

      Although we were the legal acquirer, Thomas Equipment 2004 has been
identified as the accounting acquirer and as such the acquisition has been
accounted for as a recapitalization. The officers and directors of Thomas
Equipment 2004 and Thomas Ventures assumed similar positions with us. As a
result, our consolidated financial statements represent the results of
operations and cash flows of the accounting acquirer from the date of its
inception, October 1, 2004.

      Immediately prior to the reorganization:

      Thomas Equipment 2004, Inc. issued an aggregate of 12,945,000 shares of
its common stock to 13 accredited investors for an aggregate consideration of
$129. Of such shares, 8,746,706 shares were purchased for $87 by Frank Crivello,
a principal stockholder, 100,000 shares were purchased by Frank Crivello's
spouse for $1,500,000 shares were purchased for $5 by David Marks, our Chairman
and a principal stockholder, and 2,875,294 shares were purchased for $28 by a
corporation controlled by Clifford Rhee, our President and a principal
stockholder.

      Thomas Ventures, Inc. issued an aggregate of 4,000,000 shares of its
common stock to four accredited investors, for an aggregate consideration of
$2,000. Of such shares, 160,000 shares were purchased by the Frank Crivello SEP
IRA, and 3,590,000 shares were purchased by Frank Crivello.

      The fair value of the common stock was estimated to be $0.47 per share,
based on the cash price of $0.50 paid by certain of our founders and the trading
price of the shares immediately after the reorganization of $0.45. The
difference between the consideration received and the fair value resulted in an
immediate expense of $5,520.

Acquisition of Operating Assets from Predecessor Business - Thomas Equipment
Limited

      On November 9, 2004, Thomas Equipment 2004 acquired, effective as of
October 1, 2004, the business, fixed assets and inventory of Thomas Equipment
Limited, a wholly-owned subsidiary of McCain Foods Limited, an unrelated
company, for $37,182. Thomas Equipment Limited is considered to be a predecessor
business of ours. As a result, we have included discussions of its results of
operations for the periods prior to the acquisition.

      Prior to acquisition, Thomas Equipment Limited was not generating
sufficient cash flows to cover its operating costs and to fund investments in
working capital and additions to property, plant and equipment, and also had a
working capital deficit and shareholder's deficit at the date acquired. We have
obtained a flexible borrowing base in connection with the acquisition of Thomas
Equipment Limited's business and certain of its assets to fund our operations
which we believe will provide us with sufficient resources to operate for the
next twelve months (see discussion of Liquidity and Capital Resources below).

      The acquisition was made pursuant to an Agreement of Purchase and Sale of
Assets between Thomas Equipment 2004 and Thomas Equipment Limited, made as of
October 1, 2004. The purchase price paid was $37,182, paid as follows:

      o     $200 was paid upon execution of the acquisition agreement on October
            11, 2004;

      o     $16,267 was paid in cash upon the closing of the acquisition;


                                       32
<PAGE>

      o     $2,260 is payable in two equal, annual payments (commencing one year
            after the closing), pursuant to a promissory note which bears
            interest at 4% per annum;

      o     $8,370 received for 1,000 Thomas Equipment 2004 preference shares
            that were sold on closing to McCain Foods Limited, the parent of
            Thomas Equipment Limited; and

      o     $3,179 was due in installments for inventory at October 1, 2004 in
            excess of $20.2 million. These installments have been paid.

      o     $5,254 in capital lease obligations were entered into with Thomas
            Equipment Limited.

      o     $1,652 was paid for transaction costs related to the acquisition.

      In connection with the foregoing, the following agreements were also
entered into:

      o     Customary non-competition, non-solicitation and confidentiality
            agreements were granted by Thomas Equipment Limited and McCain
            Foods.

      o     Thomas Equipment and Thomas Equipment 2004 entered into two two-year
            lease agreements with Thomas Equipment Limited, pursuant to which we
            leased three properties from Thomas Equipment Limited in
            Centreville, Florenceville and Grand Falls, New Brunswick and a
            property in Presque Isle, Maine.

      o     Thomas Equipment 2004 sold to McCain 1,000 preference shares for a
            price of $8,370. The holder of the preference shares is entitled to
            receive dividends at the rate of 8% per annum, payable annually on a
            cumulative basis. The preference shares are redeemable at the option
            of Thomas Equipment 2004 or the holder, for CD$10,000 ($8,220 at
            March 31, 2005), plus accrued and unpaid dividends. We are required
            to purchase the shares from McCain on April 26, 2006, if not earlier
            redeemed.

      o     A corporation controlled by Clifford Rhee, our new President,
            together with Igor Kent, Mr. Rhee's business partner, have jointly
            agreed to guarantee the obligations of Thomas Equipment 2004 to
            redeem McCain's preference shares in Thomas Equipment 2004.

      In connection with the foregoing, the Company has also agreed with McCain,
for certain periods of time:

            o     to retain Clifford Rhee as President and Chief Executive
                  Officer of the Company; and
            o     not to reorganize, dissolve, make a voluntary assignment for
                  the benefit of creditors or otherwise take action to seek
                  protection from creditors.

      Concurrently with the closing of the acquisition of the Thomas Equipment
Limited assets, we entered into agreements with Laurus Master Fund, Ltd, a
Cayman Islands corporation, pursuant to which we sold convertible notes, an
option and a warrant to purchase common stock to Laurus in a private offering
pursuant to exemption from registration under Section 4(2) of the Securities Act
of 1933. The securities sold to Laurus were:

      o     A secured convertible minimum borrowing note with a principal amount
            of $8,000, which is convertible to common stock at a price of $1.50
            per share;

      o     A secured convertible revolving note with a principal amount not to
            exceed $16,000, including the minimum borrowing amount, which is
            convertible to common stock at a price of $1.50 per share;

      o     A secured convertible term note with a principal amount of $6,000,
            which is convertible to common stock at a price of $1.50 per share;


                                       33
<PAGE>

      o     A common stock purchase warrant to purchase 2,200,000 shares of
            common stock of Thomas Equipment, at a purchase price of $2.25 per
            share, exercisable for a period of seven years;

      o     An option to purchase 4,020,000 shares of common stock of Thomas
            Equipment, at a purchase price of $.01 per share; and

      o     1,980,000 shares of our common stock for a total purchase price of
            $20.

      We are permitted to borrow an amount based upon eligible accounts
receivable, inventory and fixed assets, as defined in the agreements with
Laurus. We must pay certain fees for any unused portion of the credit facility
or in the event the facility is terminated prior to expiration. Our obligations
under the notes are secured by all of our assets. The notes mature on November
9, 2007. Annual interest on the notes is equal to the "prime rate" published in
The Wall Street Journal from time to time, plus 3.0%, provided, that, such
annual rate of interest may not be less than 7.5%, subject to certain downward
adjustments resulting from certain increases in the market price of our common
stock.

      The $6,000 principal amount of the secured convertible term note is
repayable at the rate of $207 per month together with accrued but unpaid
interest, commencing on July 1, 2005. Such amounts may be paid, at the holder's
option (i) in cash with a 3% premium; or (ii) in shares of common stock,
assuming the shares of common stock are registered under the Securities Act of
1933. If paid in shares of common stock the number of shares to be issued shall
equal the total amount due, divided by $1.50. If the average closing price of
the common stock for five consecutive trading days prior to an amortization date
is equal to or greater than $1.65, we may require the holder to convert into
common stock an amount of principal, accrued interest and fees due under the
secured convertible term note equal to a maximum of 25% of the aggregate dollar
trading volume of the common stock for the 22 consecutive trading days prior to
a notice of conversion. The term note may be redeemed by us in cash by paying
the holder 105% of the principal amount, plus accrued interest. The holder of
the secured convertible term note may require us to convert all or a portion of
the secured convertible term note, together with interest and fees thereon at
any time. The number of shares to be issued shall equal the total amount to be
converted, divided by $1.50.

      The $8,000 principal amount of the secured convertible minimum borrowing
note, together with accrued interest thereon is payable on November 9, 2007. The
secured convertible minimum borrowing note may be redeemed by us in cash by
paying the holder 105% of the principal amount, plus accrued interest. The
holder of the term note may require us to convert all or a portion of the term
note, together with interest and fees thereon at any time. The number of shares
to be issued shall equal the total amount to be converted, divided by $1.50.

      Upon an issuance of shares of common stock below the fixed conversion
price, the fixed conversion price of the notes will be reduced accordingly. The
conversion price of the secured convertible notes may be adjusted in certain
circumstances such as if we pay a stock dividend, subdivide or combine
outstanding shares of common stock into a greater or lesser number of shares, or
take such other actions as would otherwise result in dilution. 115% of the full
principal amount of the secured convertible notes are due upon default under the
terms of the secured convertible notes. We are not currently in compliance with
our obligations to register the shares of common stock issuable to Laurus. Since
July 21, 2005, we have been accruing penalties in the amount of 2% of the
maximum amount due under the notes, per month. If we have not completed the
registration of the shares issuable to Laurus by August 20, 2005, it would also
constitute a default under the notes. Laurus has contractually agreed to
restrict its ability to convert the secured convertible notes if such conversion
would exceed the difference between the number of shares of common stock
beneficially owned by the holder or issuable upon exercise of the warrant and
the option held by such holder and 9.99% of our outstanding shares of common
stock.


                                       34
<PAGE>

      On January 26, 2005, Thomas Equipment and Laurus amended certain terms of
the original agreements to increase the maximum principal amount of the secured
convertible revolving note to $20,000. In addition, we issued Laurus a common
stock purchase warrant exercisable to purchase 400,000 shares of our common
stock for a period of seven years at a price of $2.25 per share.

Acquisition of Operating Businesses - Pneutech, Inc. and Subsidiaries

      On February 28, 2005, we acquired 100% of the common stock of Pneutech, in
exchange for the issuance by us of a total of 1,082,640 shares of our common
stock and warrants to purchase 211,062 shares of common stock, exercisable at
$3.00 per share. Based on the market price of our common stock when the terms of
the Pneutech acquisition were agreed and announced, the common stock was valued
at $3,470. The warrants were valued at $260 using the Black-Scholes option
pricing model, based on the value of our common stock when the acquisition terms
were agreed and announced. An additional 167,360 shares of common stock were
issued as of the closing in exchange for the cancellation of approximately $494
of debt owed by Pneutech. We also paid $6,494 to repay certain Pneutech debt and
preferred stock and to redeem outstanding stock warrants.

      Upon the closing, Pneutech also redeemed all of its 929 preference shares
and 530,000 special shares, which were owned by 3156176 Canada, Inc., for an
aggregate of $508. Clifford Rhee, the President and a member of the Board of
Directors of Thomas and Pneutech is the beneficial owner of 3156176 Canada,
Inc., which was the owner of approximately 47% of the common shares, and all of
the 929 preference shares and 530,000 special shares of Pneutech. Mr. Rhee
received 467,767 shares of our common stock in exchange for his common shares in
Pneutech. Neither Mr. Rhee nor any other officer, director or principal
stockholder of Thomas received any benefits or other consideration in connection
with the acquisition of Pneutech, except as disclosed above. Since the closing
of the acquisition, Mr. Rhee continues to serve as President of both the Company
and Pneutech. Clifford Rhee, David Marks, Kenneth Shirley and James Patty, the
members of our Board of Directors, were appointed as members of the Pneutech
board upon the closing. Mr. Rhee generally negotiated on behalf of Pneutech, in
concert with the other principal stockholder of Pneutech, while David Marks,
chairman of Thomas, negotiated on behalf of Thomas. Mr. Rhee's conflict of
interest was disclosed to the shareholders of Pneutech.

Roynat Merchant Capital Inc.

      Concurrently with the acquisition of Pneutech, in order to refinance
existing debt of Pneutech and to fund the acquisition by us, we entered into
financing agreements with Roynat Merchant Capital Inc. Roynat Capital Inc., an
affiliate of Roynat Merchant Capital, had provided financing to Pneutech which
was terminated upon the closing of the acquisition. In connection therewith, on
the closing the following transactions occurred:

      o     Roynat Capital was paid $2,259 in consideration for the cancellation
            of its Pneutech preferred shares and payment of accrued dividends
            thereon;

      o     Roynat Capital was paid $1,008 in consideration for the cancellation
            of warrants previously issued by Pneutech to Roynat Capital;

      o     Roynat Capital was paid $3,227 in full satisfaction of all amounts
            due pursuant to a convertible debenture issued by Pneutech to Roynat
            Capital;

      o     we sold a subordinated debenture to Roynat Merchant Capital Inc.
            with a face amount of $5,343; and

      o     we issued warrants to Roynat Merchant Capital Inc. to purchase
            1,000,000 shares of common stock at an exercise price of $3.00 per
            share.


                                       35
<PAGE>

      The subordinated debenture was due and payable in full on December 30,
2005 and bore interest at the stated rate of 15% per annum. The subordinated
debenture was repaid in full in April 2005.

Laurus Master Fund, Ltd.

      Concurrently with the acquisition of Pneutech, we amended certain terms of
the original agreements with Laurus, as follows:

      o     we issued to Laurus an additional secured convertible term note in
            the principal amount of $1,900, which is convertible to common stock
            at a price of $1.50 per share;

      o     we issued to Laurus a common stock purchase warrant for 150,000
            shares of common stock exercisable for a period of seven years at a
            price of $2.25 per share; and

      o     the payments on the previously issued secured convertible term note
            in the principal amount of $6,000 were delayed until July 1, 2005,
            at which time the initial monthly payment in the amount of $207 is
            due and shall be due each month thereafter until the note is paid in
            full.

      The $1,900 principal amount of the secured convertible term note is
repayable at the rate of $66 per month together with accrued but unpaid
interest, commencing on July 1, 2005. Such amounts may be paid, at the holder's
option (i) in cash with a 3% premium; or (ii) in shares of common stock,
assuming the shares of common stock are registered under the Securities Act of
1933. If paid in shares of common stock the number of shares to be issued shall
equal the total amount due, divided by $1.50. If the average closing price of
our common stock for five consecutive trading days prior to an amortization date
is equal to or greater than $1.65, we may require the holder to convert into
common stock an amount of principal, accrued interest and fees due under the
secured convertible term note equal to a maximum of 25% of the aggregate dollar
trading volume of the common stock for the 22 consecutive trading days prior to
a notice of conversion. The secured convertible term note may be redeemed by us
in cash by paying the holder 105% of the principal amount, plus accrued
interest. The holder of the term note may require us to convert all or a portion
of the secured convertible term note, together with interest and fees thereon at
any time. The number of shares to be issued shall equal the total amount to be
converted, divided by $1.50.

      Upon an issuance of shares of common stock below the fixed conversion
price, the fixed conversion price of the secured convertible notes will be
reduced accordingly. The conversion price of the secured convertible notes may
be adjusted in certain circumstances such as if we pay a stock dividend,
subdivide or combine outstanding shares of common stock into a greater or lesser
number of shares, or take such other actions as would otherwise result in
dilution.

      Laurus has contractually agreed to restrict its ability to convert all
convertible notes if such conversion would exceed the difference between the
number of shares of common stock beneficially owned by the holder or issuable
upon exercise of the warrant and the option held by such holder and 9.99% of our
outstanding shares of common stock.


                                       36
<PAGE>

      As of October 3, 2005, we are not currently in compliance with our
obligations to register the shares of common stock issuable to Laurus. However,
Laurus has waived, through October 15, 2005, the imposition of all penalties
under the Registration Rights Agreement and its right to accelerate payment of
our obligations. In consideration for this waiver, we paid Laurus a fee of $898,
which was less than the damages we would have incurred while not in compliance
through October 15, 2005. Because non-compliance did not occur until July 22,
2005, (subsequent to year end), this amount will be recorded in our first
quarter of fiscal 2006 (quarter ended September 30, 2005). In addition, as this
amount was included in an over-advance from Laurus under our revolving credit
facility with them, the fee will not have a material impact on our Liquidity.
Upon the expiration of the waiver, assuming our Registration Statement is not
then effective, we will incur penalties in the amount of 2% per month of the
original principal amount due under the notes of $22,000. If our registration
statement never becomes effective and we are required to pay penalties to Laurus
of 2% per month from October 15, 2005 until the option and warrants sold to
Laurus expire at the end of their seven year life, the penalties would aggregate
approximately $32,000. In addition, our failure to comply with the Laurus
registration obligations after October 15, 2005 will constitute an event of
default which will entitle Laurus, in its sole discretion, to demand payment in
full of all obligations due to them, together with a 15% premium on the
principal amount of notes then outstanding. We and Laurus have had discussions
concerning the status of the obligations and Laurus has not given any indication
that they intend to demand payment of the obligations due to them. However, any
such demand would be detrimental to our financial condition as we do not have
sufficient cash to repay the Laurus obligations. Further, we granted a security
interest to Laurus in substantially all of our assets. Any attempt by Laurus to
foreclose on our assets could cause us to curtail our current operations.

      As of October 3, 2005, we have not yet filed a registration statement
required by the Registration Rights Agreement with the purchasers of our Series
A Preferred Stock. If that required registration statement is not filed and
effective by October 19, 2005, we will begin to incur damages of 1% per month of
the face amount of the preferred stock of $25,000. If the registration statement
never becomes effective, the maximum damages we may have to pay aggregate
approximately $13,500. Furthermore, if the registration statement is not
effective by April 19, 2006, the holders of the series A preferred stock have
the option to require redemption with a 10% premium.

                      REMAINDER OF PAGE INTENTIONALLY BLANK


                                       37
<PAGE>

                              RESULTS OF OPERATIONS
--------------------------------------------------------------------------------

      Although the revenue generating activities of Thomas Equipment Limited,
the predecessor business, remained significantly intact after the acquisition,
there have been changes in our distribution strategy, cost structure, and
financing activities. Additionally, unlike the predecessor business, we do not
currently engage in hedging transactions although we may do so in the future. As
a result, we believe that the expenses of the predecessor business are not
representative of our current business, financial condition or results of
operations. Accordingly, where practicable we have included various forward
looking statements regarding effects of our new operating structure.

      Because of the integrated nature of Thomas Equipment's manufacturing
operations and common administrative and marketing support functions, the Thomas
Equipment business is treated by management as a single operating segment for
the purpose of making operating decisions and assessing performance.

The discussion that follows of Results of Operations is in the following
sections:

      o     Results of operations for the three months ended March 31, 2005
            (successor);
      o     Results of operations for the three months ended March 31, 2004
            (predecessor);
      o     Results of operations for the six months ended March 31, 2005
            (successor);
      o     Results of operations for the three months ended September 30, 2004
            (predecessor);
      o     Results of operations for the nine months ended March 31, 2004
            (predecessor);

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2005

      The information contained in this section is that of the successor Thomas
Equipment, Inc. for the three months ended March 31, 2005 (unaudited), which
includes the one month, since acquisition, of Pneutech, Inc.

------------------------------------------------------------------

Revenues                                       $17,036     100.0%
  Cost of Sales                                 14,770      86.7%
Gross Profit                                     2,266      13.3%
  Selling Expenses                               1,759      10.3%
  G&A Expenses                                   1,931      11.3%
  Provision for Doubtful Accounts                   57       0.3%
  Stock Based Compensation                          --         --
  Other (Income) expense                           226       1.3%
Operating Loss                                  (1,707)    (10.0%)
Net Financial (Income) Expense                   2,227      13.1%
  Provision for Income Taxes                        --         --
Net Loss                                        (3,934)    (23.1%)

------------------------------------------------------------------

Revenues

      For the three months ended March 31, 2005, revenues were $17,036 and
include $4,876 for the one month of Pneutech since its acquisition. Excluding
Pneutech, overall sales volumes in the quarter ended March 31, 2005 remained
relatively unchanged from the quarter ended December 31, 2004.

Cost of Sales and Gross Profit

      For the three months ended March 31, 2005 cost of sales were $14,770 and
include $3,808 for the one month of Pneutech since its acquisition. As a
percentage of sales, costs of sales were 86.7% for the three months ended March
31, 2005 which is a slight increase from 84.2% during the quarter ended December
31, 2004. This slight increase is mainly due to an increase in the price of
steel.


                                       38
<PAGE>

      As a result of the above, gross profit margin was $2,266 or 13.3%.

Selling Expenses

      For the three months ended March 31, 2005, selling expenses were $1,759
and include $339 for the one month of Pneutech since its acquisition. As a
percentage of sales, selling costs were 10.3% which is an increase from 9.4%
during the quarter ended December 31, 2004. This increase primarily resulted
from additional expenditures in focusing on increasing our market share.

General and Administrative Expenses

      For the three months ended March 31, 2005, General and Administrative
expenses were $1,931 and include $573 for the one month of Pneutech since its
acquisition. As a percentage of sales, general and administrative costs were
11.3% which is an increase from 8.5% during the quarter ended December 31, 2004.
This increase is primarily the result of professional fees related to becoming
public.

Provision for Doubtful Accounts

      Provision for doubtful accounts expense was $57 for the quarter ended
March 31, 2005. Because of our limited history, we use the historical experience
of our predecessor in providing for credit losses.

Other (Income) Expense, Net

      Other (income) expense, consisting of foreign currency losses and other
miscellaneous expenses, amounted to an expense of $226 in the quarter ended
March 31, 2005.

Net Financial (Income) Expense

      Net financial (income) expense, consisting of interest income (expense),
amortization of debt discounts and debt premiums and dividends on preferred
stock, amounted to an expense of $2,227 in the quarter ended March 31, 2005. In
the current fiscal year we entered into various debt agreements which resulted
in financing charges consisting of amortization of deferred financing costs,
warrant, stock option, beneficial conversion feature and premium amortization of
approximately $1,440 (an effective interest rate of 8%); dividends on preferred
shares of approximately $163 (an effective interest rate of 8%) and interest
charges on issued debt of $620.

Provision for Income Taxes

      During the quarter ended March 31, 2005, we experienced a loss for tax
purposes. Our predecessor had historically experienced operating losses and
management is uncertain as to whether we will be able to utilize these tax
losses before they expire. As a result, we have provided a reserve for the
income tax benefits associated with our net operating losses, until such time
profitability is reasonably assured and it becomes more likely than not that we
will be able to utilize such assets.

Net Loss

      As a result of the above, we reported a net loss of $3,934 for the quarter
ended March 31, 2005.


                                       39
<PAGE>

Comprehensive Loss

      For the quarter ended March 31, 2005, we recorded a gain for currency
translation adjustments of $176. This gain is the result of differences in our
functional currency, the Canadian dollar, and our reporting currency, the U.S.
dollar.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2004

      The information contained in this section is that of our predecessor,
Thomas Equipment Limited, for the three months ended March 31, 2004 (unaudited).

------------------------------------------------------------------

Revenues                                      $12,622      100.0%
  Cost of Sales                                10,902       86.4%
Gross Profit                                    1,720       13.6%
  Selling Expenses                              1,561       12.4%
  G&A Expenses                                  1,588       12.6%
  Provision for Doubtful Accounts                 265        2.1%
  Stock Based Compensation                         --          --
  Other (Income) expense                         (103)      (0.8%)
Operating Loss                                 (1,591)     (12.6%)
Net Financial (Income) Expense                    (14)         --
  Provision for Income Taxes                       17          --
Net Loss                                       (1,594)     (12.6%)

------------------------------------------------------------------

Revenues

      For the three months ended March 31, 2004, Thomas Equipment Limited had
revenues of $12,622. Selling prices were increased during the quarter to
compensate for escalating raw material increases (approximately 3%). The impact
of this increase was approximately $400.

Cost of Sales and Gross Profit

      For the three months ended March 31, 2004, Thomas Equipment Limited's cost
of sales was $10,902. As a percentage of sales, costs of sales were 86.4% for
the three months ended March 31, 2004. This percentage is similar to that of
Thomas Equipment Limited's fiscal years ended June 30, 2004 and 2003.

      As a result of the above, gross profit margin was $1,720 or 13.6%.

Selling Expenses

      For the three months ended March 31, 2004, Thomas Equipment Limited's
selling expenses were $1,561. As a percentage of sales, selling costs were 12.4%
which is a 5% increase from fiscal year 2003. This increase primarily resulted
from additional expenditures in 2004 as Thomas Equipment Limited exited from
auction sales and focused on increasing dealer sales.

General and Administrative Expenses

      For the three months ended March 31, 2004 Thomas Equipment Limited's
general and administrative expenses were $1,588. As a percentage of sales,
general and administrative costs were 12.6%.


                                       40
<PAGE>

Provision for Doubtful Accounts

      Provision for doubtful accounts expense for Thomas Equipment Limited was
$265 for the three months ended March 31, 2004. During this period, Thomas
Equipment Limited was increasing its provision to compensate for certain
accounts that were becoming overdue, as determined by the predecessor's
management review during the quarter ended March 31, 2004.

Other (Income) Expense, Net

      Other (income) expense, consisting primarily of foreign currency gains and
losses, amounted to an income of $103 during the three months ended March 31,
2004. During this period, Thomas Equipment Limited, had net revaluation gains on
its foreign currency forward exchange contracts entered into to manage some of
the company's foreign exchange risk on its U.S. dollar sales due to the
weakening of the U.S. dollar against the Canadian dollar over the period.

Net Financial (Income) Expense

      During the three months ended March 31, 2004, Thomas Equipment Limited had
net financial expense of $14. Most of Thomas Equipment Limited's financial
support from the McCain group was in the form of preferred shares resulting in
interest charges from affiliates within the McCain group offset by other net
interest income which primarily came from receivables.

Provision for Income Taxes

      Thomas Equipment Limited experienced operating and tax losses. Thomas
Equipment Limited had historically experienced operating losses, and as Thomas
Equipment Limited's management were uncertain as to whether Thomas Equipment
Limited would be able to utilize these tax losses before they expire, they
provided a reserve for the income tax benefits associated with Thomas Equipment
Limited's net future tax assets which primarily relate to its cumulative net
operating losses.

Net Loss

      As a result of the above, Thomas Equipment Limited reported a net loss of
$1,594 for the three months ended March 31, 2004.

Comprehensive Loss

      Currency translation adjustments amounted to a gain of $269 for the three
months ended March 31, 2004 related to the translation of accounts to U.S.
dollars for reporting purposes.


                                       41
<PAGE>

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 2005.

      The information contained in this section is that of the successor Thomas
Equipment, Inc. for the six months ended March 31, 2005 (unaudited), which
includes the one month, since acquisition, of Pneutech, Inc.

----------------------------------------------------------------

Revenues                                       $31,452   100.0%
  Cost of Sales                                 26,912    85.6%
Gross Profit                                     4,540    14.4%
  Selling Expenses                               3,120     9.9%
  G&A Expenses                                   3,346    10.6%
  Provision for Doubtful Accounts                  131     0.4%
  Stock Based Compensation                       6,431    20.4%
  Other (Income) Expense                           442   (1.4%)
Operating Loss                                  (8,930)  (28.4%)
 Net Financial (Income) Expense                  3,162    10.1%
  Provision for Income Taxes                        --       --
Net Loss                                       (12,092)  (38.4%)

----------------------------------------------------------------

Revenues

      For the six months ended March 31, 2005, revenues were $31,452 and include
$4,876 for the one month of Pneutech since its acquisition. Excluding Pneutech
overall sales, volumes in the quarters ended March 31, 2005 and December 31,
2004 remained relatively unchanged.

Cost of Sales and Gross Profit

      For the six months ended March 31, 2005 cost of sales were $26,912 and
include $3,808 for the one month of Pneutech since its acquisition. As a
percentage of sales, costs of sales were 85.6%.

      As a result of the above, gross profit margin was $4,540 or 14.4%.

Selling Expenses

      For the six months ended March 31, 2005, selling expenses were $3,120 and
include $339 for the one month of Pneutech since its acquisition. As a
percentage of sales, selling costs were 9.9%. This percentage is slightly below
what we experienced during the three months ended March 31, 2005 (10.3%).

General and Administrative Expenses

      For the six months ended March 31, 2005, General and Administrative
expenses were $3,346 and include $573 for the one month of Pneutech since its
acquisition. As a percentage of sales, general and administrative costs were
10.6% which is an increase from 8.3% during our first quarter of operations
ended December 31, 2004. This increase is primarily the result of professional
fees incurred during the quarter ended March 31, 2005 related to becoming
public.

Provision for Doubtful Accounts

      Provision for doubtful accounts expense was $131 for the six months ended
March 31, 2005. Because of our limited history, we use the historical experience
of our predecessor in providing for credit losses.


                                       42
<PAGE>

Stock Based Compensation

      At our inception and during the quarter ended December 31, 2004, we issued
16,945,000 shares to our founders for $2,451 or an average of $0.14 per share
and sold 1,980,000 shares to Laurus for $20. The fair value of the common stock
was estimated to be $0.47 per share, based on the cash price of $0.50 paid by
certain of our founders and the trading price of the shares immediately after
the reorganization of $0.45. We have recorded $6,431 as an immediate expense for
the difference in the values.

Other (Income) Expense, Net

      Other (income) expense, consisting primarily of foreign currency gains and
losses and other miscellaneous items, amounted to an expense of $442 in the six
months ended March 31, 2005.

Net Financial (Income) Expense

      Net financial (income) expense, consisting of interest income (expense),
amortization of debt discounts and debt premiums and dividends on preferred
stock, amounted to an expense of $3,162 for the six months ended March 31, 2005.
Since inception, we entered into various debt agreements which resulted in
financing charges consisting of amortization of deferred financing costs,
warrants, stock option, beneficial conversion feature and premiums of
approximately $2,000 (an effective interest rate of 8%); dividends on preferred
shares of approximately $256 (an effective interest rate of 8%) and interest
charges on issued debt of approximately $900 (an effective interest rate of
8%).

Provision for Income Taxes

      During the six months ended March 31, 2005, we experienced a loss for tax
purposes. Our predecessor had historically experienced operating losses and
management is uncertain as to whether we will be able to utilize these tax
losses before they expire. As a result, we have provided a reserve for the
income tax benefits associated with our net operating losses, until such time as
profitability is reasonably assured and it becomes more likely than not that we
will be able to utilize such assets.

Net Loss

      As a result of the above, we reported a net loss of $12,092 for the six
months ended March 31, 2005.

Comprehensive Loss

      Currency translation adjustments amounted to a loss of $50 for the six
months ended March 31, 2005 related to the translation of accounts to U.S.
dollars for reporting purposes.


                                       43
<PAGE>

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004

      The information contained in this section is that of our predecessor,
Thomas Equipment Limited, for the three months ended September 30, 2004
(unaudited).

---------------------------------------------------------------

Revenues                                     $13,857    100.0%
  Cost of Sales                               11,770     84.9%
Gross Profit                                   2,087     15.1%
  Selling Expenses                             1,797     13.0%
  G&A Expenses                                 2,221     16.0%
  Provision for Doubtful Accounts                 41      0.3%
  Other (Income) Expense                        (884)    (6.4%)
Operating Loss                                (1,088)    (7.6%)
 Net Financial (Income) Expense                  499      3.6%
  Provision for Income Taxes                      15      0.1%
Net Loss                                      (1,602)   (11.6%)

---------------------------------------------------------------

Revenues

      For the three months ended September 30, 2004, Thomas Equipment Limited's
revenues were $13,857, which on an annualized basis is similar to fiscal year
2004.

Cost of Sales and Gross Profit

      For the three months ended September 30, 2004, Thomas Equipment Limited's
cost of sales was $11,770. As a percentage of sales, costs of sales were 84.9%
for the three months ended September 30, 2004. This percentage is similar to
that of Thomas Equipment Limited's fiscal years ended June 30, 2004.

      As a result of the above, gross profit margin was $2,087 or 15.1% which
was similar to that of fiscal year ended June 30, 2004.

Selling Expenses

      For the three months ended September 30, 2004, Thomas Equipment Limited's
selling expenses were $1,797. As a percentage of revenues, selling costs were
13.0% which is an increase from fiscal year ended June 30, 2004 and was due to
additional expenditures in 2004 resulting from Thomas Equipment Limited's
decision to exit the auction sales business and focus on increasing dealer
sales.

General and Administrative Expenses

      For the three months ended September 30, 2004, Thomas Equipment Limited's
general and administrative expenses were $2,221 or 16.0% of revenues. As a
percentage this is a significant increase from their fiscal year ended June 30,
2004 and is primarily related to higher product liability insurance premiums and
deductible costs, higher legal fees resulting from marketing the company for
sale, completion of an environmental audit and more aggressive attempts to
collect delinquent accounts, and higher employee benefit costs due to the
reduction in the discount rate used to determine the annual benefit cost.

Provision for Doubtful Accounts

      Provision for doubtful accounts expense for Thomas Equipment Limited was
$41 for the three months ended September 30, 2004, as determined by the
predecessor's management review during this period.


                                       44
<PAGE>

Other (Income) Expense, Net

      Other (income) expense, consisting primarily of foreign currency gains and
losses, severance accruals and other miscellaneous items, amounted to an income
of $884 during the three months ended September 30, 2004. During this period,
Thomas Equipment Limited, had net revaluation gains on its foreign currency
forward exchange contracts entered into to manage some of the company's foreign
exchange risk on its U.S. dollar sales due to the weakening of the U.S. dollar
against the Canadian dollar over the period. The foreign exchange gains in 2004
were partly offset by special termination benefit costs of $791 recorded by
Thomas Equipment Limited in the three months ended September 30, 2004 in
connection with the group of employees whose positions were terminated in July
2004.

Net Financial (Income) Expense

      During the three months ended September 30, 2004, Thomas Equipment Limited
had net financial expense of $499. Most of Thomas Equipment Limited's financial
support from the McCain group was in the form of preferred shares until the end
of fiscal year 2004 resulting in interest charges from affiliates within the
McCain group offset by other net interest income which primarily came from
receivables. However, the preferred shares were converted to advances from
affiliate in late fiscal 2004 and therefore the debt was outstanding during the
entire three months ended September 30, 2004 resulting in interest charges
greater than in the past.

Provision for Income Taxes

      Thomas Equipment Limited experienced operating and tax losses. Thomas
Equipment Limited had historically experienced operating losses, and as Thomas
Equipment Limited's management were uncertain as to whether Thomas Equipment
Limited would be able to utilize these tax losses before they expire, they
provided a reserve for the income tax benefits associated with Thomas Equipment
Limited's net future tax assets which primarily relate to its cumulative net
operating losses

Net Loss

      As a result of the above, Thomas Equipment Limited reported a net loss of
$1,602 for the three months ended September 30, 2004.

Comprehensive Loss

      Currency translation adjustments amounted to a loss of $726 for the three
months ended September 30, 2004 related to the translation of accounts to U.S.
dollars for reporting purposes.


                                       45
<PAGE>

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 2004

      The information contained in this section is that of our predecessor,
Thomas Equipment Limited, for the nine months ended March 31, 2004 (unaudited).

--------------------------------------------------------------

Revenues                                    $39,199    100.0%
  Cost of Sales                              33,978     86.7%
Gross Profit                                  5,221     13.3%
  Selling Expenses                            4,632     11.8%
  G&A Expenses                                4,263     10.9%
  Provision for Doubtful Accounts             1,228      3.1%
  Stock Based Compensation                       --        --
  Other (Income) Expense                       (763)    (1.9%)
Operating Loss                               (4,139)   (10.6%)
 Net Financial (Income) Expense                  19        --
  Provision for Income Taxes                     49        --
Net Loss                                     (4,207)   (10.7%)

--------------------------------------------------------------

Revenues

      For the nine months ended March 31, 2004, Thomas Equipment Limited had
revenues of $39,199. Selling prices were increased during the quarter to
compensate for escalating raw material increases (approximately 3%).

Cost of Sales and Gross Profit

      For the nine months ended March 31, 2004, Thomas Equipment Limited's cost
of sales was $33,978. As a percentage of sales, costs of sales were 86.7% for
the three months ended March 31, 2004. This percentage is similar to that of
Thomas Equipment Limited's fiscal years ended June 30, 2004 and 2003.

      As a result of the above, gross profit margin was $5,221 or 13.3%.

Selling Expenses

      For the nine months ended March 31, 2004, Thomas Equipment Limited's
selling expenses were $4,632. As a percentage of sales, selling costs were 11.8%
which is similar to fiscal year 2003.

General and Administrative Expenses

      For the nine months ended March 31, 2004, Thomas Equipment Limited's
general and administrative expenses were $4,263. As a percentage of sales,
general and administrative costs were 10.9%. This is a significant increase from
fiscal year 2003 and is primarily related to higher product liability insurance
premiums and deductible costs, higher legal fees resulting from marketing the
company for sale, completion of an environmental audit and more aggressive
attempts to collect delinquent accounts, and higher employee benefit costs due
to the reduction in the discount rate used to determine the annual benefit cost.


                                       46
<PAGE>

Provision for Doubtful Accounts

      Provision for doubtful accounts expense for Thomas Equipment Limited was
$1,228 for the nine months ended March 31, 2004. During this period, Thomas
Equipment Limited was increasing its provision to compensate for certain
accounts that were becoming overdue, as determined by the predecessor's
management review during the quarter ended March 31, 2004.

Other (Income) Expense, Net

      Other (income) expense, consisting primarily of foreign currency gains and
losses, amounted to an income of $763 in during the nine months ended March 31,
2004. During this period, Thomas Equipment Limited, had net revaluation gains on
its foreign currency forward exchange contracts entered into to manage some of
the company's foreign exchange risk on its U.S. dollar sales due to the
weakening of the U.S. dollar against the Canadian dollar over the period.

Net Financial (Income) Expense

      During the nine months ended March 31, 2004 Thomas Equipment Limited had
net financial income of $19. Most of Thomas Equipment Limited's financial
support from the McCain group was in the form of preferred shares resulting in
interest charges from affiliates within the McCain group offset by other net
interest income which primarily came from receivables.

Provision for Income Taxes

      Thomas Equipment Limited experienced operating and tax losses. Thomas
Equipment Limited had historically experienced operating losses, and as Thomas
Equipment Limited's management was uncertain as to whether Thomas Equipment
Limited would be able to utilize these tax losses before they expire, they
provided a reserve for the income tax benefits associated with Thomas Equipment
Limited's net future tax assets which primarily relate to its cumulative net
operating losses

Net Loss

      As a result of the above, Thomas Equipment Limited reported a net loss of
$4,207 for the nine months ended March 31, 2004.

Comprehensive Loss

      Currency translation adjustments amounted to a loss of $633 for the nine
months ended March 31, 2004 related to the translation of accounts to U.S.
dollars for reporting purposes.


                                       47
<PAGE>

Critical Accounting Policies and Estimates
--------------------------------------------------------------------------------

      The preparation of financial statements in conformity with United States
generally accepted accounting principles requires the management of Thomas
(Thomas Equipment and Pneutech) to make estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Our management routinely makes judgments and
estimates about the effects of matters that are inherently uncertain.

      Our critical accounting policies are those where we have made the most
difficult, subjective or complex judgments in making estimates, and/or where
these estimates can significantly impact our financial results under different
assumptions and conditions. Our critical accounting policies are:

      o     Revenue Recognition

      o     Allowance for Doubtful Accounts

      o     Warranty Obligations

      o     Inventory Obsolescence

Revenue recognition

      In accordance with Staff Accounting Bulletin 104 - Revenue Recognition in
Financial Statements ("SAB 104"), revenue is generally recognized and earned
when all of the following criteria are satisfied a) persuasive evidence of sales
arrangements exist; b) delivery has occurred; c) the sales price is fixed or
determinable, and d) collectibility is reasonably assured. It is the fourth
criteria that requires us to make significant estimates. In those cases where
all four criteria are not met, we defer recognition of revenue until the period
these criteria are satisfied. In some cases where collectibility is an issue, we
defer revenue recognition until the cash is actually received.

Allowance for doubtful accounts

      The allowance for doubtful accounts is evaluated on a regular basis and
adjusted based upon management's best estimate of probable losses inherent in
receivables, based on historical experience. For the current period we used the
historical loss experience of the predecessor company. Receivables are
determined to be past due if they have not been paid by the payment due dates.
Debts are written off against the allowance when deemed to be uncollectible.
Subsequent recoveries, if any, are credited to the allowance when received.

Product warranties

      At the time a sale to a dealer is recognized, the company records the
estimated future warranty costs. These costs are estimated based on historical
warranty claims. For the current period we used the historical warranty
experience of the predecessor company. Warranty provisions are included as a
component of cost of sales.

Inventory obsolescence

      We evaluate our inventory for excess and obsolescence on a quarterly
basis. In preparing our evaluation, we look at the expected demand for our
products for the next six to twelve months in order to determine whether or not
such raw materials, WIP and finished goods require a change in the inventory
reserve in order to record the inventory at net realizable value. After
discussions with the senior management team, a reserve is established so that
inventory is appropriately stated at the lower of cost or net realizable value.


                                       48
<PAGE>

Recent Accounting Pronouncements
--------------------------------------------------------------------------------

      The following recent accounting pronouncements primarily relate to Thomas
Equipment from October 1, 2004 forward (the date of inception and the
acquisition of Thomas Equipment Limited's business). However, certain
pronouncements were adopted in Thomas Equipment Limited's (our predecessor's)
financial statements and the effects of adoption on their financial statements
have also been included below.

FIN 46 'Consolidation of Variable Interest Entities' (VIE's)

      In January 2003, the FASB issued FASB Interpretation No. 46 (revised in
December 2003 as FIN 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. We
are required to apply FIN 46R to all variable interests in VIE's commencing in
fiscal 2004. For variable interests in VIE's created before January 1, 2004, the
assets, liabilities and non-controlling interests of the VIE initially are
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 FIN 46R first
applies may be used to measure the assets, liabilities and non-controlling
interest of the VIE. The application of FIN 46R to variable interests in VIE's
had no effect on our financial statements as neither Thomas Equipment Limited or
Thomas Equipment have variable interests in VIE's.

SFAS 150 'Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity'

      FASB Statement No. 150 was issued in May 2003 and establishes standards
for the classification and measurement of certain financial instruments with
characteristics of both liabilities and equity and includes required disclosures
for financial instruments within its scope. This Statement is effective for
instruments entered into or modified after May 31, 2003 and is otherwise
effective as of July 1, 2003, except for mandatorily redeemable financial
instruments of non-public companies. For such mandatorily redeemable financial
instruments, the Statement was effective for Thomas Equipment Limited as of
January 1, 2004. The application of Statement 150 resulted in the
reclassification of the Class E preferred shares in Thomas Equipment Limited
from the temporary equity section to the liabilities section of the Consolidated
Balance Sheet for the period July 1, 2003 to the date of their redemption (June
23, 2004) and dividends paid on these shares in 2004 were treated as interest as
opposed to a charge to the deficit.

SFAS 143 'Accounting for Asset Retirement Obligations'

      In June 2001, FASB Statement No. 143 was issued which requires the Company
to record the fair value of an asset retirement obligation as a liability in the
period in which it incurs a legal obligation associated with the retirement of
tangible long-lived assets that result from the acquisition, construction,
development and/or normal use of the assets. The Company also would record a
corresponding asset that is depreciated over the life of the asset. Subsequent
to the initial measurement of the asset retirement obligation, the obligation
would be adjusted at the end of each period to reflect the passage of time and
changes in the estimated future cash flows underlying the obligation. The
Company was required to adopt Statement 143 on July 1, 2003. The adoption of
Statement 143 had no effect on Thomas Equipment Limited's financial statements.

FIN 45 'Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness to Others, an interpretation of
FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No.
34'

      In November 2002, FASB Interpretation No. 45 was issued which enhances the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the Interpretation were
applicable to guarantees issued or modified after December 31, 2002 and the
disclosure requirements were effective for financial statements of interim or
annual periods ending after December 15, 2002. Thomas Equipment Limited entered
into a sales contract with a dealer / distributor which is being accounted for
pursuant to Interpretation No. 45.


                                       49
<PAGE>

SFAS 132 'Employers' Disclosures about Pensions and Other Postretirement
Benefits'

      In December 2003, FASB Statement No. 132 (revised) was issued which
prescribes the required employers' disclosures about pension plans and other
postretirement benefit plans; but it does not change the measurement or
recognition of those plans. The Statement retains and revises the disclosure
requirements contained in the original Statement 132. It also requires
additional disclosures about the assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other postretirement
benefit plans. The Statement generally is effective for fiscal years ending
after December 15, 2003. Thomas Equipment Limited incorporated the requirements
of Statement 132 (revised) in their financial statements for fiscal year 2004.
We did not continue the use of a defined benefit plan after the acquisition of
Thomas Equipment Limited's business, and as such the adoption of this Statement
did not have an effect on our financial statements.

SFAS 146 'Accounting for Costs Associated with Exit or Disposal Activities'

      In June 2002, FASB Statement No. 146 was issued which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity". The provisions of
Statement 146 were effective for exit or disposal activities initiated after
December 31, 2002, with early application encouraged. Thomas Equipment Limited
undertook a restructuring of its operations during fiscal year 2004 which was
accounted for pursuant to Statement 146, as discussed above.

SFAS 123(R) 'Share-Based Payments'

      In December 2004, the Financial Accounting Standards Board issued
Statement Number 123 ("FAS 123 (R)"), Share-Based Payments. FAS 123 (R) requires
all entities to recognize compensation expense in an amount equal to the fair
value of shared-based payments such as stock options granted to employees. The
Company will be required to apply FAS 123 (R) on a modified prospective method.
Under this method, the Company is required to record compensation expense (as
previous awards continue to vest) for the unvested portion of previously granted
awards that remain outstanding at the date of adoption. In addition, the Company
may elect to adopt FAS 123 (R) by restating previously issued financial
statements, basing the amounts on the expense previously calculated and reported
in the pro forma disclosures that had been required by FAS 123. FAS 123 (R) is
effective for the first reporting period beginning after June 15, 2005. The
Company does not believe that the adoption of FAS 123 (R) will have a material
impact on the financial statements as there are only 30,000 options, issued to
directors, to purchase 30,000 shares of common stock outstanding at March 31,
2005.

SFAS 153 'Exchanges of Nonmonetary Assets an Amendment of APB Opinion No. 29'

      In December 2004, FASB Statement No. 153 was issued amending APB Opinion
No. 29 to eliminate the exception allowing nonmonetary exchanges of similar
productive assets to be measured based on the carrying value of the assets
exchanged as opposed to being measured at their fair values. This exception was
replaced with a general exception for exchanges of nonmonetary assets that do
not have commercial substance. A nonmonetary exchange has commercial substance
if the future cash flows of the entity are expected to change significantly as a
result of the exchange. The provisions of this statement are effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. The adoption of this statement is not expected to have a material impact
on our financial statements.


                                       50
<PAGE>

Liquidity and Capital Resources
--------------------------------------------------------------------------------

SIX MONTHS ENDED MARCH 31, 2005 FOR THOMAS EQUIPMENT, INC.

      Prior to our acquisition of the operations and certain assets of Thomas
Equipment Limited, they were not generating sufficient cash flows to cover their
operating costs and to fund investments in working capital and additions to
property, plant and equipment. Thomas Equipment Limited also had a working
capital deficit and shareholder's deficiency at the date we acquired their
business and certain assets.

      During the six months from inception on October 1, 2004 through March 31,
2005, we had a net loss of $12,092 which included non-cash items totaling
$9,651, consisting primarily of stock based compensation, depreciation, and
amortization of debt discount related to the issuance of warrants. We acquired
only inventory and property, plant and equipment along with Thomas Equipment
Limited's business and did not acquire receivables. Accordingly, we initially
relied on our borrowings to fund the payment of our operating expenses until the
credit terms offered to customers on sales since our inception started to come
due. We initially continued the credit terms that had historically been extended
by our predecessor. For example, approximately $3 million of sales in our first
quarter ended December 31, 2004 had terms of seven to twelve months; at June 30,
77% of these receivables were collected. As a result, we collected only $16,177
from sales during the six months ended March 31, 2005 while our receivables
increased to $25,269 which include receivables assumed in the Pneutech
acquisition of approximately $12,000. At July 31, 2005, as a result of
improvements in our credit terms and collections, our receivables had been
reduced to approximately $22,800, Offsetting a portion of the low level of cash
received during the six months ended March 31, 2005 was an increase in trade
payables and other accrued liabilities of $14,779. As a result, net cash used in
operating activities during the six months ended March 31 was $6,241.

      Changes in demand for our products and currency exchange rates will affect
the amount of cash we realize on sales and the costs of our operations thereby
affecting our cash provided by or (used in) operating activities. Similarly, as
substantially all of our debt has variable interest rates, a change in interest
rates will affect our cash flows from operations.

      Net cash used in investing activities was $22,159 of which $195 was used
for the purchase of new machinery and equipment, while $18,119 was used in the
acquisition of assets from Thomas Equipment Limited and $3,845 was used in the
acquisition of Pneutech.

      Net cash provided by financing activities was $29,387 consisting primarily
of $2,149 in proceeds from the sale of our common stock principally to founders
and $28,881 in net borrowings under our debt and credit facilities, which was
used primarily to fund the acquisition of assets from Thomas Equipment Limited
and the acquisition of Pneutech. At March 31, 2005, the significant portion of
our debt and redeemable preferred stock have terms of 18 to 36 months with
interest rates ranging from 4% to 8.2%. Except for the redeemable preferred
stock ($8,220), which is due on April 26, 2006, $26,404 of debt at March 31,
2005 is convertible into shares of our common stock at $1.50 per share. Upon
conversion, the lender may not own more than 9.99% of our common shares
outstanding.

      As our debt is substantially payable in U.S. dollars and our functional
currency is the Canadian dollar, changes in exchange rates between the two
currencies could have a positive or negative impact on the amount and our
ability to repay such debt. In addition, our convertible debts have prepayment
penalties ranging from 3% to 5% for early payment or payments in cash (as the
lender wishes to be paid through conversion to common shares).

      In connection with the acquisition of Thomas Equipment Limited's assets,
we entered into two two-year capital leases of $5,254 for the purchase of land
and buildings from Thomas Equipment Limited. The terms of the capital leases
require minimum annual payments of $493 plus taxes, maintenance and certain
other expenses. We have the right at any time prior to the expiration of the
leases to purchase the properties for $4,953 (translated to U.S. dollars on
March 31, 2005). Similarly, Thomas Equipment Limited has the right to require us
to purchase the properties subject to certain provisions such as a favorable
environmental study.


                                       51
<PAGE>

      At July 31, 2005 we had approximately $3,000 cash on hand and an
availability of approximately $4,100 under our credit facilities at Thomas
Equipment and an availability of approximately $800 under our credit facilities
at Pneutech. Coupled with combined (i.e. Pneutech and Thomas Equipment)
receivables of approximately $22,800 at July 31, 2005, we believe we have
sufficient resources to fund our operations for at least the next twelve months.
As such we do not believe, in the short-term, we will have the same difficulties
and concerns about our ability to continue as a going concern as our
predecessor.

      As of October 3, 2005, we are not currently in compliance with our
obligations to register the shares of common stock issuable to Laurus. However,
Laurus has waived, through October 15, 2005, the imposition of all penalties
under the Registration Rights Agreement and its right to accelerate payment of
our obligations. In consideration for this waiver, we paid Laurus a fee of $898,
which was less than the damages we would have incurred while not in compliance
through October 15, 2005. Because non-compliance did not occur until July 22,
2005, (subsequent to year end), this amount will be recorded in our first
quarter of fiscal 2006 (quarter ended September 30, 2005). In addition, as this
amount was included in an over-advance from Laurus under our revolving credit
facility with them, the fee will not have a material impact on our Liquidity.
Upon the expiration of the waiver, assuming our Registration Statement is not
then effective, we will incur penalties in the amount of 2% per month of the
original principal amount due under the notes of $22,000. If our registration
statement never becomes effective and we are required to pay penalties to Laurus
of 2% per month from October 15, 2005 until the option and warrants sold to
Laurus expire at the end of their seven year life, the penalties would aggregate
approximately $32,000. In addition, our failure to comply with the Laurus
registration obligations after October 15, 2005 will constitute an event of
default which will entitle Laurus, in its sole discretion, to demand payment in
full of all obligations due to them, together with a 15% premium on the
principal amount of notes then outstanding. We and Laurus have had discussions
concerning the status of the obligations and Laurus has not given any indication
that they intend to demand payment of the obligations due to them. However, any
such demand would be detrimental to our financial condition as we do not have
sufficient cash to repay the Laurus obligations. Further, we granted a security
interest to Laurus in substantially all of our assets. Any attempt by Laurus to
foreclose on our assets could cause us to curtail our current operations.

Subsequent financing activities

      On April 19, 2005, we entered into agreements with several accredited
investors for the sale of an aggregate of 25,000 shares of series A preferred
stock (the "Preferred Stock"), and warrants to purchase an aggregate of
2,083,333 shares of common stock exercisable at a price of $3.75 per share at
any time during a period of five years (the "Warrants"). The securities were
sold for an aggregate cash consideration of $25,000. The securities were issued
in a private placement transaction pursuant to Section 4(2) and Regulation D
under the Securities Act of 1933, as amended. The Company also agreed to cause a
resale registration statement covering the common stock issuable upon conversion
of the Preferred Stock and exercise of the Warrants to be effective within six
months of the closing date.

      The Preferred Stock is convertible into 8,333,333 shares of common stock
at the rate of $3.00 per share and pays a dividend of 5% per annum in cash. The
Preferred Stock may be converted at anytime upon five days notice by the
Preferred Stockholders. The Company can require the holders to convert up to 20%
of their Preferred Stock per month, if the common stock trades at an average
price of $6.00 per share for 20 consecutive days, with average volume of 150,000
shares per day. At any time commencing after three years from the closing date,
the Company can redeem the Preferred Stock. If the redemption occurs in the
fourth year after issuance, the redemption amount shall be 200% of the stated
value. If the redemption occurs during the fifth year after issuance, the
redemption amount shall be 225% of the stated value. The holder can require the
Company to redeem the Preferred Stock at 110% of the stated value, together with
accrued dividends, after five years or upon certain events, including:

      o     failure to deliver common stock when required;
      o     failure to effect registration of the common stock; or
      o     a bankruptcy event.


                                       52
<PAGE>

      The Company paid the placement agent of the offering a fee of 6% of the
aggregate proceeds, together with warrants to purchase 500,000 shares of common
stock at an exercise price of $3.00 per share for a period of five years.

      From the net cash proceeds of approximately $23,500 from this offering,
approximately $5,300 was used to repay a debenture held by Roynat Merchant
Capital; approximately $4,900 was used to finance the construction of our
facility in Busan, South Korea; and the balance was used to reduce our vendor
payables and provide additional working capital.

      As of October 3, 2005, we have not yet filed a registration statement
required by the Registration Rights Agreement with the purchasers of our Series
A Preferred Stock. If that required registration statement is not filed and
effective by October 19, 2005, we will begin to incur damages of 1% per month of
the face amount of the preferred stock of $25,000. If the registration statement
never becomes effective, the maximum damages we may have to pay aggregate
approximately $13,500. Furthermore, if the registration statement is not
effective by April 19, 2006, the holders of the series A preferred stock have
the option to require redemption with a 10% premium.

      On June 15, 2005, Pneutech entered into a credit facilities agreement with
the Royal Bank of Canada. Pneutech's subsidiaries, Rousseau Controls, Inc. and
Hydramen Fluid Power Limited are also parties to the credit agreement. Under the
terms of the credit agreement, Pneutech will be provided with a CD$15,000
revolving credit facility and Pneutech and its subsidiaries will also be
provided an additional CD$750 revolving lease line of credit. The effectiveness
of the Credit Agreement with Royal Bank of Canada is dependent upon satisfactory
completion of a security agreement and other documents ancillary to the credit
agreement. The proceeds of the loan will be used to repay Pneutech's obligations
to HSBC Bank Canada and obligations of the subsidiaries to the Royal Bank of
Canada.

      Pneutech is permitted to borrow an amount based upon its eligible accounts
receivable and eligible unencumbered inventory, as defined in the credit
agreement. The loans will generally accrue interest at the bank's prime rate,
plus 0.25%, which is payable monthly in arrears. The obligations under the
credit agreement will be secured by all of the assets of Pneutech and its
subsidiaries, including but not limited to inventory and accounts receivable. In
addition, Thomas Equipment will provide a guarantee of all obligations under the
credit agreement. The obligations under the credit agreement are payable in full
on March 30, 2006.

Off-Balance Sheet Arrangements
--------------------------------------------------------------------------------

      We currently have no off balance sheet arrangements.

Qualitative and Quantitative Disclosures about Market Risk
--------------------------------------------------------------------------------

      We are exposed to certain market risks which exist as part of our ongoing
business operations. We currently do not engage in derivative and hedging
transactions to mitigate the affects of the risks below. In the future, we may
enter into foreign currency forward contracts to manage foreign currency risk.
Because the operating structure of our business is different from that of our
predecessor, Thomas Equipment Limited, we have described only those risks as
they apply to our current operating environment. Thomas Equipment Limited did
engage in certain derivative and hedging transactions, as well as borrowing
activities through its parent - all of which affected the degree to which market
risks affected Thomas Equipment Limited

Interest Rates

      Because our debt is primarily tied to borrowing rates in the United
States, changes in U.S. interest rates would affect the interest paid on our
borrowings and/or earned on our cash and cash equivalents. Based on our overall
interest rate exposure at March 31, 2005, a near-term change in interest rates,
based on historical small movements, would not materially affect our operations
or the fair value of interest rate sensitive instruments. Our debt instruments
have variable interest rates and terms and, therefore, a significant change in
interest rates could have a material adverse effect on our financial position or
results of operations if we are unable to change the prices we charge to
customers for our products.


                                       53
<PAGE>

      We considered the historical volatility of short term interest rates and
determined that it was reasonably possible that an adverse change of 100 basis
points could be experienced in the near term. Based on our borrowings at March
31, 2005, a hypothetical 1.00% (100 basis-point) increase in interest rates
would result in additional expenses of approximately $95 for the quarter or an
annual increase in expenses of approximately $380.

Foreign Currency Fluctuations

      Our exposure to foreign currency translation gains and losses arises from
the translation of our statements from our functional currency, the Canadian
dollar, into U.S. dollars for reporting purposes. To date, translation gains and
losses have not been material.

      Pneutech has costs and revenues primarily denominated in Canadian dollars
and the Korean WON, while Thomas Equipment has significant revenues denominated
in U.S. dollars and its costs are primarily incurred in Canadian dollars and is
therefore exposed to risks arising from currency fluctuations between these two
currencies.

      We currently do not engage in hedging transactions to manage these risks.
However, we may do so in the future.


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<PAGE>

ITEM 3. Controls And Procedures.

Disclosure Controls and Procedures

      We carried out an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Rule 13a-15 of
the Securities Exchange Act of 1934 (the "Exchange Act") under the supervision
and with the participation of our chief executive officer, chief financial
officer and other members of our management team. Our disclosure controls and
procedures are designed to provide reasonable assurance of achieving their
objectives. Although we hired a considerable number of the staff from the
predecessor business, we have new management and are using financial accounting
consultants. Any system of controls can provide only reasonable, and not
absolute, assurance that the objectives of the control system are met. In
addition, the design of any control system is based in part upon certain
assumptions about the likelihood of future events. Because of these and other
inherent limitations of control systems, there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions. Based upon the evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures, the chief executive officer
and chief financial officer concluded that our disclosure controls and
procedures were effective as of March 31, 2005 in timely alerting them to
material information required to be included in our Exchange Act filings.

Management's Report on Internal Control Over Financial Reporting

      We will be required by the Sarbanes-Oxley Act to include an assessment of
our internal control over financial reporting and attestation from an
independent registered public accounting firm in our Annual Report on Form 10-K
beginning with our filing for our fiscal year ending as early as June 30, 2006
and as late as June 30, 2008, depending on the market value of our common stock
held by non-affiliates.

Changes in Internal Control Over Financial Reporting

      There have been no changes in our internal controls over financial
reporting during the quarter ended December 31, 2004, which have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.


                                       55
<PAGE>

                           PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings.

      None.

ITEM 2. Unregistered Sales Of Equity Securities And Use Of Proceeds.

Pneutech

      On December 22, 2004, we entered into an Agreement and Plan of
Amalgamation (the "Agreement"), with 4274458 Canada, Inc., a Canadian
corporation wholly-owned by the Company, and Pneutech, Inc., as amended
effective February 28, 2005. Under the terms of the Agreement which was
completed on February 28, 2005 (the "Closing"), the Company acquired 100% of the
common stock of Pneutech, in exchange for the issuance by us of a total of
1,082,639 shares of our common stock and warrant to purchase 211,062 shares of
common stock, exercisable at $3.00 per share. An additional 167,359 shares of
common stock were issued as of the Closing in exchange for the cancellation of
approximately CD$612,000 of debt owed by Pneutech.

Roynat

      Concurrently with the acquisition of Pneutech, the Company entered into
financing agreements with Roynat Merchant Capital Inc. ("Roynat US"). RoyNat
Capital Inc. ("Roynat Capital"), an affiliate of Roynat US, had provided
financing to Pneutech which was terminated upon the Closing. In connection
therewith, on the Closing the following transactions occurred:

      o     the Company sold a subordinated debenture to Roynat for $5,343,000;
            and
      o     the Company issued warrants to Roynat US to purchase 1,000,000
            shares of common stock at an exercise price of $3.00 per share.

      The subordinated debenture was due and payable in full on December 30,
2005, with interest at the rate of 15% per annum. The entire principal and
accrued interest was repaid on April 19, 2005.

      The Company is obligated to file a registration statement registering the
resale of all shares of the Company's common stock issuable upon exercise of the
Roynat US warrant within 60 days from the Closing and to have such registration
statement declared effective within 180 days of the Closing. If the registration
statement has not been declared effective within 180 days from Closing, or has
been declared effective but is no longer effective for a period of more than 20
days, the Company is obligated to pay Roynat US an additional fee of $50,000 per
month or portion thereof for any such non-compliance. The Company may also incur
additional fees of $50,000 per month for non-compliance with certain other
obligations arising under the registration rights agreement.

Laurus Master Fund, Ltd.

      On November 9, 2004, the Company entered into agreements with Laurus
Master Fund, Ltd, a Cayman Islands corporation ("Laurus"), pursuant to which the
Company sold convertible debt, an option and a warrant to purchase common stock
of the Company to Laurus in a private offering pursuant to exemption from
registration under Section 4(2) of the Securities Act of 1933, as amended. On
February 28, 2005, the Company and Laurus amended certain terms of the original
agreements, including the following:

      o     the Company issued an additional secured convertible term note in
            the principal amount of $1,900,000 to Laurus;


                                       56
<PAGE>

      o     the Company issued Laurus a common stock purchase warrant
            exercisable to purchase 150,000 shares of common stock for a period
            of seven years at a price of $2.25 per share; and

      o     the payments on the previously issued secured convertible term note
            in the principal amount of $6,000,000 shall not commence until July
            1, 2005, at which time the initial monthly payment in the amount of
            $206,896 shall be due and shall be due each month thereafter until
            the note is paid in full.

      The principal amount of the secured convertible term note is repayable at
the rate of $65,517 per month together with accrued but unpaid interest,
commencing on July 1, 2005. Such amounts may be paid, at the holder's option (i)
in cash with a 3% premium (though no premuim is charged if the payments are
added to the convertible credit facility); or (ii) in shares of common stock,
assuming the shares of common stock are registered under the Securities Act of
1933. If paid in shares of common stock the number of shares to be issued shall
equal the total amount due, divided by $1.50. If the average closing price of
the common stock for five consecutive trading days prior to an amortization date
is equal to or greater than $1.65, the Company may require the holder to convert
into common stock an amount of principal, accrued interest and fees due under
the term note equal to a maximum of 25% of the aggregate dollar trading volume
of the common stock for the 22 consecutive trading days prior to a notice of
conversion. The term note may be redeemed by the Company in cash by paying the
holder 105% of the principal amount, plus accrued interest. The holder of the
term note may require the Company to convert all or a portion of the term note,
together with interest and fees thereon at any time. The number of shares to be
issued shall equal the total amount to be converted, divided by $1.50.

      Upon an issuance of shares of common stock below the fixed conversion
price, the fixed conversion price of the notes will be reduced accordingly. The
conversion price of the secured convertible notes may be adjusted in certain
circumstances such as if we pay a stock dividend, subdivide or combine
outstanding shares of common stock into a greater or lesser number of shares, or
take such other actions as would otherwise result in dilution.

      115% of the full principal amount of the convertible note is due upon
default under the terms of convertible note. Laurus has contractually agreed to
restrict its ability to convert all convertible notes of the Company if such
conversion would exceed the difference between the number of shares of common
stock beneficially owned by the holder or issuable upon exercise of the warrant
and the option held by such holder and 9.99% of the outstanding shares of common
stock of the Company.

      As of October 3, 2005, we are not currently in compliance with our
obligations to register the shares of common stock issuable to Laurus. However,
Laurus has waived, through October 15, 2005, the imposition of all penalties
under the Registration Rights Agreement and its right to accelerate payment of
our obligations. In consideration for this waiver, we paid Laurus a fee of $898,
which was less than the damages we would have incurred while not in compliance
through October 15, 2005. Because non-compliance did not occur until July 22,
2005, (subsequent to year end), this amount will be recorded in our first
quarter of fiscal 2006 (quarter ended September 30, 2005). In addition, as this
amount was included in an over-advance from Laurus under our revolving credit
facility with them, the fee will not have a material impact on our Liquidity.
Upon the expiration of the waiver, assuming our Registration Statement is not
then effective, we will incur penalties in the amount of 2% per month of the
original principal amount due under the notes of $22,000. If our registration
statement never becomes effective and we are required to pay penalties to Laurus
of 2% per month from October 15, 2005 until the option and warrants sold to
Laurus expire at the end of their seven year life, the penalties would aggregate
approximately $32,000. In addition, our failure to comply with the Laurus
registration obligations after October 15, 2005 will constitute an event of
default which will entitle Laurus, in its sole discretion, to demand payment in
full of all obligations due to them, together with a 15% premium on the
principal amount of notes then outstanding. We and Laurus have had discussions
concerning the status of the obligations and Laurus has not given any indication
that they intend to demand payment of the obligations due to them. However, any
such demand would be detrimental to our financial condition as we do not have
sufficient cash to repay the Laurus obligations. Further, we granted a security
interest to Laurus in substantially all of our assets. Any attempt by Laurus to
foreclose on our assets could cause us to curtail our current operations.


                                       57
<PAGE>

Redwood

On January 31, 2005, the Company issued warrants to purchase an aggregate of
250,000 shares of common stock at a price of $4.00 per share, exercisable for a
period of two years. The warrants were issued in connection with services
provided to the Company.

ITEM 3. Defaults Upon Senior Securities.

      None.

ITEM 4. Submission Of Matters To A Vote Of Security Holders.

      There were no matters submitted to a vote of security holders during the
period covered by this report.

ITEM 5. Other Information.

      None.

ITEM 6. Exhibits.

Exhibit
Number      Description
--------------------------------------------------------------------------------
4.1         Amendment Agreement, dated as of February 28, 2005, by and among
            Laurus Master Fund, Ltd., Thomas Equipment, Inc. and Thomas
            Ventures, Inc.(1)

4.2         Secured Convertible Term Note issued to Laurus Master Fund, Ltd.,
            dated February 28, 2005.(1)

4.3         Common Stock Purchase Warrant issued to Laurus Master Fund, Ltd.,
            dated February 28, 2005.(1)

4.4         Reaffirmation and Ratification Agreement, dated as of February 28,
            2005, by Thomas Equipment, Inc., Thomas Ventures, Inc. and Thomas
            Equipment 2004, Inc. in favor of Laurus Master Fund, Ltd.(1)

4.5         Subordination and Intercreditor Agreement by and among by Thomas
            Equipment, Inc., Thomas Ventures, Inc. and Thomas Equipment 2004,
            Inc., Pneutech Inc., Rousseau Controls Inc., Hydraman Fluid Power
            Limited and Roynat Merchant Capital Inc. in favor of Laurus Master
            Fund, Ltd.(1)

4.6         Subscription Agreement between Roynat Merchant Capital Inc., Thomas
            Equipment, Inc., Thomas Equipment 2004 Inc., Thomas Ventures, Inc.,
            Pneutech Inc., Rousseau Controls Inc. and Hydraman Fluid Power
            Limited, dated as of February 28, 2005 (1)

4.7         Debenture in the Amount of CD$6,500,000 in favor of Roynat Merchant
            Capital Inc., dated as of February 28, 2005(1)

4.8         Common Stock Purchase Warrant in favor of Roynat Merchant Capital
            Inc., dated as of February 28, 2005

4.9         Registration Right Agreement between Thomas Equipment, Inc. and
            Roynat Merchant Capital Inc., dated as of February 28, 2005(1)

4.10        General Security Agreement between Roynat Merchant Capital Inc.,
            Thomas Equipment, Inc. and Thomas Ventures, Inc., dated as of
            February 28, 2005(1)

10.1        Amended and Restated Agreement and Plan of Amalgamation, among
            Thomas Equipment, Inc., 4274458 Canada, Inc. and Pneutech, Inc.,
            dated as of February 28, 2005 (1)

31.1        Certification by Chief Executive Officer pursuant to Rule 13a-14(a)
            or 15d-14(a), as adopted pursuant to Section 302 of the
            Sarbanes-Oxley Act of 2002

31.2        Certification by Chief Financial Officer pursuant to Rule 13a-14(a)
            or 15d-14(a), as adopted pursuant to Section 302 of the
            Sarbanes-Oxley Act of 2002

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

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

1.    Filed as an exhibit to the Company's Current Report on Form 8-K, dated as
      of February 28, 2005.


                                       58
<PAGE>

                                   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.

                                    THOMAS EQUIPMENT, INC.


Dated: October 7, 2005              By: /s/ Clifford M. Rhee
                                        ---------------------------------------
                                        Clifford M. Rhee,
                                        President (Principal Executive Officer)


Dated: October 7, 2005              By: /s/ Luigi Lo Basso
                                        ---------------------------------------
                                        Luigi Lo Basso,
                                        Chief Financial Officer (Principal
                                        Financial and Accounting Officer


                                       59