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

                                    FORM 10-Q

(Mark One)

[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
      For the quarterly period ended SEPTEMBER 30, 2005

                                       or

[_]   TRANSITION REPORT PURSUANT TO 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 registrant as specified in its charter)

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

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

                                 (312) 224-8812
              (Registrant's telephone number, including area code)

Indicate by checkmark whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes |X| No |_|

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12B-2) Yes |_| No |X|

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|

As of November 11, 2005, 21,250,000 shares of common stock, $.0001 par value per
share, were outstanding.


                                       1
<PAGE>

                                      INDEX

Item                                                                        Page
------                                                                      ----

                         PART I - FINANCIAL INFORMATION

Item 1.   Financial Statements (unaudited)

          Condensed Consolidated Balance Sheet as of September 30,
          2005 and June 30, 2005                                              4

          Consolidated Statement of Operations for the Three Months
          Ended September 30, 2005 (Successor) and the Three Months
          Ended September 30, 2004 (Predecessor)                              5

          Consolidated Statement of Stockholders' Equity (Deficit)
          for the Three Months Ended September 30, 2005 (Successor)           6

          Consolidated Statement of Cash Flows for the Three Months
          Ended September 30, 2005 (Successor) and the Three Months
          Ended September 30, 2004 (Predecessor)                              7

          Notes to Condensed Consolidated Financial Statements                8

Item 2.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations                                          22

Item 3.   Quantitative and Qualitative Disclosures About Market Risk         31

Item 4.   Controls and Procedures                                            32

                           PART II - OTHER INFORMATION

Item 1.   Legal Proceedings                                                  33

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds        33

Item 3.   Defaults Upon Senior Securities                                    33

Item 4.   Submission of Matters to a Vote of Security Holders                33

Item 5.   Other Information                                                  33

Item 6.   Exhibits                                                           33


                                       2
<PAGE>

POTENTIAL MODIFICATIONS TO DISCLOSURE AND ACCOUNTING - we are currently
responding to comments provided by the Staff of the Securities and Exchange
Commission in connection with our registration statement on Form S-1. These
comments affect our past filings and may affect this filing. The most recent
comments relate to our accounting for certain convertible debt and preferred
stock agreements that have warrants, options, and related registration rights.
We have responded to such comments and, in this filing, we have treated the
warrants and options that have registration rights associated with them as
derivative liabilities (although the terms of certain of these have been
subsequently modified). In addition, we have adjusted the June 30, 2005 balance
sheet to reflect this accounting. However, as of November 14, 2005, we have not
yet amended our Annual Report on Form 10K, filed on September 28, 2005, to
reflect these adjustments.

Continuing to be at question is whether our convertible debt and preferred stock
are "conventional convertible" instruments. We have responded to the Staff's
comments, explaining why, at the time they were issued, we believed that these
instruments were "conventional". However, this topic has recently been addressed
and clarified by the Financial Accounting Standards Board's Emerging Issues Task
Force in Issue 05-2 (EITF 05-2). We issued these instruments prior to EITF 05-2
and interpreted the term "conventional" differently as it relates to certain
special anti-dilution provisions. We understand that the SEC Staff has recently
issued a number of comment letters to other registrants related to this topic
and our interpretation may not be appropriate. As a result, we may be required
to bifurcate the conversion features of some or all of these convertible
instruments and record them as derivative liabilities and then mark the
liabilities to their fair value at each reporting date. We have preliminary
estimates that the derivative instrument liability that we may have to record if
the conversion features are bifurcated is approximately $73 million and $97
million at September 30, 2005 and June 30, 2005, respectively.

                                       3
<PAGE>



                         PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

                             THOMAS EQUIPMENT, INC.

                      CONDENSED CONSOLIDATED BALANCE SHEET
                  (Unaudited - in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                 September 30,    June 30,
                                                                                      2005          2005
                                                                                 -------------    --------
                                                                                               (as restated)
<S>                                                                              <C>              <C>
ASSETS

Current assets:

  Cash                                                                           $       3,499    $  3,800
  Accounts receivable, net of allowance for doubtful accounts of $342 and $235          22,862      24,425
  Inventories                                                                           35,647      35,574
  Prepaid expenses and other assets                                                      3,204       4,096
                                                                                 -------------    --------
      Total current assets                                                              65,212      67,895

Property, plant and equipment, net                                                      22,977      21,504
Deferred finance costs and other assets                                                  1,637       1,677
Goodwill                                                                                 5,466       5,175
                                                                                 -------------    --------
      Total assets                                                               $      95,292    $ 96,251
                                                                                 =============    ========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:

  Revolving credit facilities                                                    $      11,043    $ 10,813
  Convertible credit facility                                                           11,387       9,961
  Trade payables                                                                        16,425      14,489
  Warranty liability                                                                     1,350       1,280
  Other payables and accrued liabilities                                                 4,336       5,211
  Current portion of long term obligations                                               1,675       1,851
  Current portion of convertible long term debt                                          3,276       3,276
  Redeemable preferred stock of subsidiary                                               8,601       8,142
  Derivative financial instruments                                                       2,440          --
                                                                                 -------------    --------
      Total current liabilities                                                         60,533      55,023

Long term obligations                                                                    6,937       6,716
Convertible long term debt                                                                 623       1,304
Deferred taxes                                                                             385         366
Derivative financial instruments                                                        33,601      40,581
                                                                                 -------------    --------
                                                                                       102,079     103,990
                                                                                 -------------    --------

Redeemable convertible preferred stock, series A                                        20,093      17,598

Stockholders' Equity (Deficit)

  Common stock                                                                               2           2
  Additional paid in capital                                                            10,008      12,845
  Accumulated deficit                                                                  (34,319)    (37,748)
  Accumulated other comprehensive income (loss)                                         (2,571)       (436)
                                                                                 -------------    --------
      Total stockholders' equity (deficit)                                             (26,880)    (25,337)
                                                                                 -------------    --------

Total liabilities and stockholders' equity (deficit)                             $      95,292    $ 96,251
                                                                                 =============    ========
</TABLE>

See accompanying notes to condensed consolidated financial statements


                                       4
<PAGE>

                             THOMAS EQUIPMENT, INC.

      CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
                  (Unaudited - in thousands, except share data)

<TABLE>
<CAPTION>
                                                                    Successor    |  Predecessor
                                                                     Business    |    Business
                                                                   ------------  |  ------------
                                                                      Three      |  Three Months
                                                                   Months Ended  |     Ended
                                                                   September 30, |  September 30,
                                                                       2005      |      2004
                                                                   ------------  |  ------------
<S>                                                                <C>              <C>
Sales                                                              $     26,115  |  $     13,857
Cost of sales                                                            21,537  |        11,770
                                                                   ------------  |  ------------
Gross profit                                                              4,578  |         2,087
                                                                   ------------  |  ------------
                                                                                 |
Operating expenses:                                                              |
  Selling                                                                 2,279  |         1,797
  General and administrative                                              3,551  |         2,221
  Provision for doubtful receivables                                         84  |            41
  Other (income)                                                         (2,840) |          (884)
                                                                   ------------  |  ------------
                                                                          3,074  |         3,175
                                                                   ------------  |  ------------
                                                                                 |
Operating income (loss)                                                   1,504  |        (1,088)
                                                                                 |
  Net financial expense                                                   2,615  |           499
  Derivative instrument (income), net                                    (4,540) |            --
                                                                   ------------  |  ------------
                                                                                 |
Net income (loss) before income taxes                                     3,429  |        (1,587)
                                                                                 |
Provision for income taxes                                                   --  |            15
                                                                   ------------  |  ------------
                                                                                 |
Net income (loss)                                                  $      3,429  |  $     (1,602)
Dividends and accretion on series A preferred stock                      (2,837) |            --
                                                                   ------------  |  ------------
Net income (loss) attributable to common shareholders              $        592  |  $     (1,602)
                                                                   ============  |  ============
                                                                                 |
Weighted average shares outstanding, basic                           21,250,000  |     8,643,000
                                                                   ------------  |  ------------
Weighted average shares outstanding, diluted                         51,700,000  |     8,643,000
                                                                   ------------  |  ------------
                                                                                 |
Basic income (loss) per share                                      $       0.03  |  $      (0.19)
                                                                   ============  |  ============
Diluted income (loss) per share                                    $       0.00    $       (0.19)
                                                                   ============  |  ============
                                                                                 |
Reconciliation of Comprehensive Income (Loss):                                   |
Net income (loss)                                                  $      3,429  |  $     (1,602)
Other comprehensive income (loss) - foreign currency translation         (2,135) |          (726)
                                                                   ------------  |  ------------
Total comprehensive income (loss)                                  $      1,294  |  $     (2,328)
                                                                   ============  |  ============
</TABLE>

See accompanying notes to condensed consolidated financial statements


                                       5
<PAGE>

                             THOMAS EQUIPMENT, INC.

                               Successor Business

            CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
               (Unaudited - in thousands, except number of shares)

<TABLE>
<CAPTION>
                                               Common Stock      Additional                       Other
                                          --------------------    Paid-In      Accumulated    Comprehensive
                                            Shares     Amount     Capital        Deficit          Loss          Total
                                          ----------   -------   ----------    -----------    -------------    --------
<S>                                       <C>          <C>       <C>           <C>            <C>              <C>
Balances, July 1, 2005, as restated       21,250,000   $     2   $   12,845    $   (37,748)   $        (436)   $(25,337)

Accretion of discount from warrants on
  series A preferred stock and premium
  payable on redemption                           --        --       (2,525)            --               --      (2,525)

Dividends on series A preferred stock             --        --         (312)            --               --        (312)

Currency translation adjustment                   --        --           --             --           (2,135)     (2,135)

Net income for the period                         --        --           --          3,429               --       3,429
                                          ----------   -------   ----------    -----------    -------------    --------
Balances, September 30, 2005              21,250,000   $     2   $   10,008    $   (34,319)   $      (2,571)   $(26,880)
                                          ==========   =======   ==========    ===========    =============    ========
</TABLE>

See accompanying notes to condensed consolidated financial statements


                                       6
<PAGE>

                             THOMAS EQUIPMENT, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (Unaudited - in thousands)

<TABLE>
<CAPTION>
                                                                                Successor    |  Predecessor
                                                                                 Business    |    Business
                                                                               ------------  |  ------------
                                                                               Three Months  |  Three Months
                                                                                  Ended      |     Ended
`                                                                              September 30, |  September 30,
                                                                                   2005      |      2004
                                                                               ------------  |  ------------
<S>                                                                            <C>              <C>
Cash Flows From Operating Activities:
  Net income (loss)                                                            $      3,429  |  $     (1,602)
  Adjustments to reconcile net income (loss) to net cash used in operating
  activities:                 |
    Amortization of debt discounts, premiums and deferred financing fees                637  |            --
    Unrealized gains on derivative instruments                                       (4,540) |            --
    Amortization of professional fee warrants                                           334  |            --
    Depreciation and amortization                                                       586  |           528
    Unrealized foreign exchange gain on U.S. $ denominated debt                      (2,906) |            --
    Allowance for doubtful accounts                                                      84  |            --
  Net change in working capital items                                                 4,120  |        (1,103)
                                                                               ------------  |  ------------
Net Cash Provided By (Used In) Operating Activities                                   1,744  |        (2,177)
                                                                               ------------  |  ------------
                                                                                             |
Cash Flows From Investing Activities:                                                        |
  Purchase of property, plant and equipment                                          (1,377) |          (272)
                                                                               ------------  |  ------------
Net Cash Used In Investing Activities                                                (1,377) |          (272)
                                                                               ------------  |  ------------
                                                                                             |
Cash Flows From Financing Activities:                                                        |
  Deferred financing fees                                                               (73) |            --
  Net repayments of advances from affiliated companies                                   --  |          (588)
  Increases (decreases) in credit facilities                                           (303) |            --
  Increases (decreases) in convertible credit facilities                              1,020  |            --
  Increase in bank advances                                                              --  |         2,277
  Payments on long term obligations and convertible long term debt                   (1,210) |            --
  Payments on capital lease obligations                                                (125) |            --
                                                                               ------------  |  ------------
Net Cash Provided By (Used In) Financing Activities                                    (691) |         1,689
                                                                               ------------  |  ------------
                                                                                             |
Net Increase (Decrease) in Cash                                                        (324) |          (760)
Effect of Exchange Rate Changes on Cash                                                  23  |            23
Cash, Beginning of Period                                                             3,800  |           823
                                                                               ------------  |  ------------
Cash, End of Period                                                            $      3,499  |  $         86
                                                                               ============  |  ============
                                                                                             |
Supplemental Disclosure of Cash Flow Information                                             |
  Interest paid                                                                $        842  |  $         15
                                                                               ============  |  ============
                                                                                             |
Supplemental Disclosure of Cash Flow Information                                             |
  Debt premiums                                                                $        239  |  $         --
                                                                               ============  |  ============
</TABLE>

See accompanying notes to condensed consolidated financial statements


                                       7
<PAGE>

Thomas Equipment, Inc
Notes to Condensed Consolidated Financial Statements
(Unaudited - in thousands except share and per share data)

1.    Organization and description of the business

      On November 9, 2004, Thomas Equipment, Inc. ("we", "us", "our",
"Successor" or "Successor Business") acquired the business, fixed assets and
inventory of Thomas Equipment Limited ("Thomas Equipment Limited", "Predecessor"
or "Predecessor Business), an unrelated company, effective as of October 1,
2004, which was our date of inception. On February 28, 2005, we acquired 100% of
the common stock of Pneutech Inc. ("Pneutech").

      We have two business segments, Thomas Equipment and Pneutech.

      Thomas Equipment Inc. and its subsidiaries manufacture and distribute
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
Equipment also manufactures a complete line of potato harvesting and handling
equipment for the agricultural industry. Thomas Equipment has manufacturing and
assembly facilities in Centreville, New Brunswick, Canada and Busan, South Korea
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),
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.    Basis of presentation

      The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in our Annual Report on Form 10-K for the fiscal year
ended June 30, 2005. The accompanying unaudited condensed 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-Q and Rule 210 of Regulation S-K of the Securities
and Exchange Commission (the "SEC"). Accordingly, these condensed 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 months ended September 30, 2005 are not necessarily
indicative of the results that may be expected for the year ending June 30,
2006.

      The accompanying unaudited condensed consolidated financial statements, as
of and for the three months ended September 30, 2005, are those of Thomas
Equipment, Inc. the Successor. The statements of operations and of cash flows
include those of Thomas Equipment Limited, our Predecessor, for the three months
ended September 30, 2004.

Principles of consolidation

      The consolidated financial statements include the accounts of Thomas
Equipment, Inc. and its wholly owned subsidiaries. All inter-company accounts
and transactions have been eliminated in consolidation.

Use of estimates

      In preparing our 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.

                                       8
<PAGE>

Thomas Equipment, Inc
Notes to Condensed Consolidated Financial Statements
(Unaudited - in thousands except share and per share data)

      Estimates that are critical to the accompanying financial statements arise
from assessing the collectability of accounts receivable, the use and
recoverability of inventory, the realization of any deferred tax assets, tax
contingencies, useful lives for depreciation and amortization periods of
tangible and intangible assets, long-lived asset impairments and the
determination and valuation of derivative financial instruments. 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 revised
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.

Derivative financial instruments

      We do not use derivative instruments to hedge exposures to cash flow,
market, or foreign currency risks.

      We review the terms of convertible debt and equity instruments we issue to
determine whether there are embedded derivative instruments, including the
embedded conversion option, that are required to be bifurcated and accounted for
separately as a derivative financial instrument. When the risks and rewards of
any embedded derivative instrument are not "clearly and closely" related to the
risks and rewards of the host instrument, the embedded derivative instrument is
generally required to be bifurcated and accounted for separately. If the
convertible instrument is debt, or has debt-like characteristics, the risks and
rewards associated with the embedded conversion option are not "clearly and
closely" related to that debt host instrument. The conversion option has the
risks and rewards associated with an equity instrument, not a debt instrument,
because its value is related to the value of our common stock. Nonetheless, if
the host instrument is considered to be "conventional convertible debt" (or
"conventional convertible preferred stock"), bifurcation of the embedded
conversion option is generally not required. However, if the instrument is not
considered to be conventional convertible debt (or conventional convertible
preferred stock), bifurcation of the embedded conversion option may be required
in certain circumstances. Generally, where the ability to physical or net-share
settle the conversion option is deemed to be not within the control of the
company, the embedded conversion option is required to be bifurcated and
accounted for as a derivative financial instrument liability.

      In connection with the sale of convertible debt and equity instruments, we
may also issue freestanding options or warrants. Additionally, we may issue
options or warrants to non-employees in connection with consulting or other
services they provide. Although the terms of the options and warrants may not
provide for net-cash settlement, in certain circumstances, physical or net-share
settlement is deemed to not be within the control of the company and,
accordingly, we are required to account for these freestanding options and
warrants as derivative financial instrument liabilities, rather than as equity.

                                       9
<PAGE>

Thomas Equipment, Inc
Notes to Condensed Consolidated Financial Statements
(Unaudited - in thousands except share and per share data)

      Derivative financial instruments are initially measured at their fair
value. For derivative financial instruments that are accounted for as
liabilities, the derivative instrument is initially recorded at its fair value
and is then re-valued at each reporting date, with changes in the fair value
reported as charges or credits to income. For option-based derivative financial
instruments, we use the Black-Scholes option pricing model to value the
derivative instruments.

      In circumstances where the embedded conversion option in a convertible
instrument is required to be bifurcated and there are also other embedded
derivative instruments in the convertible instrument that are required to be
bifurcated, the bifurcated derivative instruments are accounted for as a single,
compound derivative instrument.

      When the embedded derivative instrument is to be bifurcated and accounted
for as a liability, the total proceeds received are first allocated to the fair
value of the bifurcated derivative instrument. If freestanding options or
warrants were also issued and will be accounted for as derivative instrument
liabilities (rather than as equity), the proceeds are next allocated to the fair
value of those instruments. The remaining proceeds, if any, are then allocated
to the convertible instrument itself, usually resulting in that instrument being
recorded at a discount from its face amount. In circumstances where a
freestanding derivative instrument is to be accounted for as an equity
instrument, the proceeds are allocated between the convertible instrument and
the derivative equity instrument, based on their relative fair values.

      To the extent that the fair values of the bifurcated and/or freestanding
derivative instrument liabilities exceed the total proceeds received, an
immediate charge to income is recognized, in order to initially record the
derivative instrument liabilities at their fair value. The discount from the
face value of the convertible debt instrument is amortized over the life of the
instrument through periodic charges to income, using the effective interest
method. When the instrument is convertible preferred stock, the periodic
amortization of the discount is charged directly to retained earnings.

      The classification of derivative instruments, including whether such
instruments should be recorded as liabilities or as equity, is re-assessed at
the end of each reporting period. Derivative instrument liabilities are
classified in the balance sheet as current or non-current based on whether or
not net-cash settlement of the derivative instrument could be required within 12
months of the balance sheet date.

3.    Liquidity and going concern

      Our consolidated financial statements were prepared using accounting
principles generally accepted in the United States of America applicable to a
going concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business.

      We have outstanding convertible debt, together with a common stock option
and warrants, held by Laurus. We were previously not in compliance with the
obligations imposed by our Registration Rights Agreement with Laurus to register
the shares of common stock issuable to Laurus on conversion of the debt or
exercise of the option or warrants. However, as of October 28, 2005, the
Registration Rights Agreement was terminated in its entirety. Previously, our
failure to comply with the Laurus registration obligations after October 31,
2005 would have constituted an event of default which would 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.

      As of November 14, 2005, we are not currently in compliance with our
obligations to register the shares of common stock underlying the 1,000,000
warrants issued to Roynat Merchant Capital Inc. Under the Registration Rights
Agreement with Roynat, because this registration statement was not effective by
August 31, 2005, we began to incur damages of $50 per month. If the registration
statement never becomes effective, the maximum damages we may have to pay
aggregate approximately $600. We are currently seeking to obtain a waiver from
Roynat that would mitigate these penalties.

We have not yet filed a registration statement required by the Registration
Rights Agreement with the purchasers of our convertible Series A preferred
stock. Because that required registration statement was not filed and effective
by October 19, 2005, we have begun, since October 20, 2005, to incur penalties
of 1% per month of the face amount of the preferred stock of $25,000 ($210 per
month). 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.

                                       10
<PAGE>

Thomas Equipment, Inc
Notes to Condensed Consolidated Financial Statements
(Unaudited - in thousands except share and per share data)

      We do not currently have the ability to repay the preferred stock in the
event of a demand by the holders. Furthermore, we granted a security interest to
Laurus in substantially all of our assets and, accordingly, in the event of any
default under our agreements with Laurus, they could conceivably attempt to
foreclose on our assets which could cause us to curtail our operations.

      Our immediate plans include continuing efforts to finalize the
registration of certain of our outstanding common stock and the common stock
underlying certain of our outstanding warrants. We filed our first registration
statement on April 21, 2005 and, through four subsequent amendments, have
responded to numerous comments from the SEC Staff. We received some additional
comments related to the amendment we filed on October 3, 2005 which we believe
will be substantially responded to in our next amendment, which we expect to
file during November 2005. Subsequently, we intend to devote our resources to
registering the common stock issuable on conversion of the preferred stock so as
to minimize any penalties and/or ability of the preferred stockholders to demand
redemption.

      In addition to the above, we believe that our operating results will
improve dramatically during the fiscal year ending June 30, 2006. A significant
portion of our fiscal 2005 net loss arose from non-cash items related primarily
to stock-based compensation, amortization of debt discounts and changes in the
fair value of derivative liabilities related to outstanding options and
warrants. In addition, we experienced a number of non-recurring expenses
associated with our SEC filings and organizational start-up of approximately
$2,000. Finally, we have already been successful in positively impacting our
liquidity and operations as evidenced by the following:

      o     We have started to increase utilization of a new supplier for a
            major product component used by our Thomas Equipment division, which
            will save us approximately $2,000 during the next twelve months,

      o     We have recently increased our pricing by an average of
            approximately 4.5% while other supplier costs have increased only
            2%, which will result in additional profits of approximately $1,500,

      o     We have orders for new sales of approximately $30,000 which will be
            assembled in our new facility in Korea, where our costs are lower,
            providing additional gross profit of approximately $6,000 and
            operating income of approximately $4,000.

      We may also elect to convert certain Laurus debt to common stock, and/or
refinance the indebtedness. We have letters of understanding from two lenders
for a credit facility and a term loan of up to an aggregate of approximately
$44,000 ($6,800 of the term loan would be guaranteed by the New Brunswick
government) that will reduce our annual interest costs by approximately $1,000
and decrease annual principal payments by approximately $2,000.

      For all the reasons mentioned above, we believe that we have adequate
short term borrowing capability and that we will be able to sustain our
operations and continue as a going concern for a reasonable period of time.

4.    Product 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. Warranty provisions are included
as a component of cost of sales.

                                       11
<PAGE>

Thomas Equipment, Inc
Notes to Condensed Consolidated Financial Statements
(Unaudited - in thousands except share and per share data)

A reconciliation of the changes in the warranty liability is as follows:

                                       September 30, 2005    June 30, 2005
                                       ------------------    -------------

Balance, beginning of period           $            1,280    $          --
Liabilities assumed from predecessor                   --              895
Warranty obligations honored                         (126)            (179)
Accruals for warranties                               126              562
Foreign exchange                                       70                2
                                       ------------------    -------------
                                       $            1,350    $       1,280
                                       ==================    =============


Subsequent to our acquisition of certain assets of the Predecessor, we agreed to
assume responsibility for the warranty liability of the Predecessor on equipment
sold prior to October 1, 2004. Based on an assessment of that warranty liability
at the time we assumed it, the Predecessor paid us C$1,100 ($895) for our
assumption of that liability.

5.    Net income or loss per share

      We compute net income or 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 income or loss per share is computed by dividing the net
income or loss available to common stockholders for the period, after deducting
dividends and accretion of discounts and redemption premium on our series A
preferred stock, by the weighted average number of common shares outstanding
during the period. Diluted net income or loss per share is computed by dividing
the net income or loss for the period by the total number of common and common
equivalent shares outstanding during the period. During the period when they
would be anti-dilutive, common stock equivalents (which during the three months
ended September 30, 2005 consisted of options to purchase 4,020,000 common
shares, warrants to purchase 6,794,395 common shares, debt convertible into a
maximum of up to 18,600,000 common shares and preferred stock convertible into
8,333,333 common shares) are not considered in the computations. Common stock
issuable on the assurred exercise of options and warrants is computed based on
the treasury stock method using the average market price for the period, which
for the quarter ended September 30, 2005 was $3.95.

6.    Inventories

                                September 30, 2005   June 30, 2005
                                ------------------   -------------

Raw materials and spare parts   $            6,630   $       8,905
Work in process                              4,208           3,863
Finished goods - new                        22,442          20,797
Finished goods - used                        2,097           1,775
Packaging and supplies                         270             234
                                ------------------   -------------
                                $           35,647   $      35,574
                                ==================   =============


7.    Revolving credit facilities

      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 was provided with a CD$15,000
(U.S.$12,902 at September 30, 2005) revolving credit facility and Pneutech and
its subsidiaries were also provided with an additional CD$750 (U.S.$645 at
September 30, 2005) revolving lease line of credit. The credit facility became
effective on August 12, 2005. The proceeds of the facility were used to repay
Pneutech's obligations to HSBC Bank Canada and existing obligations of the
subsidiaries to the Royal Bank of Canada.

                                       12
<PAGE>

Thomas Equipment, Inc
Notes to Condensed Consolidated Financial Statements
(Unaudited - in thousands except share and per share data)

      The credit facility permits Pneutech to borrow an amount based upon its
eligible accounts receivable and eligible unencumbered inventory, as defined in
the credit agreement. At September 30, 2005, the total amount available under
the CD$15,000 revolving credit facility was CD$11,400 (U.S.$9,805), of which
CD$800 (U.S.$688) was unused. The loans generally accrue interest at the bank's
prime rate, plus 0.25%, which is payable monthly in arrears. The obligations
under the credit agreement are secured by all of the assets of Pneutech and its
subsidiaries, including but not limited to inventory and accounts receivable. In
addition, we have provided a guarantee of all obligations under the credit
agreement. The obligations under the credit agreement are payable in full on
March 30, 2006.

8.    Convertible credit facility

      Effective November 9, 2004, and as amended on January 26, 2005, the
company entered into a three-year $20,000 revolving credit facility agreement
with Laurus. Included in the total credit facility is a secured convertible
minimum borrowing note of $8,000. The credit facility is secured by
substantially all of our assets. See Note 17 "Recent Events" regarding the
status of this facility and certain recent amendments to our agreements with
Laurus. In addition, we have agreed with Laurus to increase the total facility
to $22,000, subject to required third-party approvals and completion of required
documentation.

      The revolving loan bears interest at the greater of 7.5% or The Wall
Street Journal published US prime rate plus 3% (9.75% at September 30, 2005). 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 September 30, 2005, the amount of available borrowings pursuant to
the formula was as follows:

Available borrowings supported by asset base            $19,760
Less: amount borrowed under revolving credit facility    18,774
                                                        -------
Excess availability                                     $   986
                                                        =======


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, subject to
adjustment in certain circumstances. 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.

Amount borrowed under the revolving credit facility     $ 18,774
Debt discount related to common stock options and
  warrants issued to Laurus                               (8,530)
Accrued interest                                             764
Premium                                                      379

                                                        --------
Carrying amount at September 30, 2005                   $ 11,387
                                                        ========


      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.
All principal and interest cash payments are subject to a premium of 3% (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, subject to adjustment in certain circumstances.

                                       13
<PAGE>

Thomas Equipment, Inc
Notes to Condensed Consolidated Financial Statements
(Unaudited - in thousands except share and per share data)

9.    Convertible long term debt

<TABLE>
<CAPTION>
                                                                               September 30,
                                                                                    2005
                                                                               -------------
<S>                                                                            <C>
$6,000 term loan with Laurus, bearing interest at U.S. prime rate plus 3%
  (9.75% at September 30, 2005) with monthly principal repayments beginning
  July 1, 2005 of $207 per month plus interest                                 $       5,379
Debt discount, related to common stock options and warrants issued to Laurus          (1,714)
Accrued interest                                                                         174
Premium                                                                                  275
                                                                               -------------
                                                                                       4,114
                                                                               -------------

$1,900 term loan with Laurus, bearing interest at U.S. prime plus 3%
  (9.75% at September 30, 2005) with monthly principal repayments
  beginning July 1, 2005 of $66 per month plus interest                                1,703

Prepaid interest                                                                        (104)
Debt discount, related to common stock warrants issued to Laurus                        (898)
Beneficial conversion feature                                                         (1,000)
Premium                                                                                   84
                                                                               -------------
                                                                                        (215)
                                                                               -------------

Total convertible long term debt                                                       3,899
Less current portion                                                                   3,276
                                                                               -------------
                                                                               $         623
                                                                               =============
</TABLE>


      The principal repayments and interest payments for the term loans can be
made in cash or common stock at the option of the holder. All principal and
interest cash payments are subject to a premium of 3% (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, subject
to adjustment in certain circumstances. 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, subject to adjustment in certain circumstances. See Note
17 "Recent Events" regarding the status of these term loans and certain recent
amendments to our agreements with Laurus.

10.   Long term obligations

<TABLE>
<CAPTION>
                                                                             September 30,
                                                                                  2005
                                                                             -------------
<S>                                                                          <C>
Note payable to Predecessor, bearing interest at 4%, with two equal annual
  principal repayments plus interest, maturing on October 31, 2006                  $2,322

Capital lease obligations                                                            5,277

Private loans with interest rates ranging from 3% to 8%, with regular
  principal and interest payments providing for repayment by 2006                    1,013
                                                                             -------------
                                                                                     8,612
Less: current portion                                                               (1,675)
                                                                             -------------
                                                                             $       6,937
                                                                             =============
</TABLE>

                                       14
<PAGE>

Thomas Equipment, Inc
Notes to Condensed Consolidated Financial Statements
(Unaudited - in thousands except share and per share data)

      We previously 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
$5,183 (based on the exchange rate at September 30, 2005). In addition, Thomas
Equipment Limited has the right to require us to purchase the leased properties
at the expiration of the leases. The leases require annual payments of $516 plus
realty taxes, maintenance, heat and certain other expenses.

11.   Redeemable preferred stock of subsidiary

      In connection with the financing of the asset acquisition from the
Predecessor, we issued to the parent of the Predecessor, 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 $8,601 (translated at September 30, 2005). The
shares are currently redeemable for $9,227 (their face amount of $8,601 plus
$626 of accrued but unpaid dividends). The holder of these shares has the right
to be an observer at our board meetings.

12.   Derivative financial instrument liabilities

      We use the Black-Scholes option pricing model to value options and
warrants that are recorded as derivative liabilities. In valuing the options and
warrants at September 30, 2005, we used the market price of our common stock on
that date of $3.90, the volatility of our common stock based on its market price
each business day since our inception on October 1, 2004 of 163%, a risk-free
rate of return of 3%, an expected dividend yield of 0% and the remaining period
to the expiration date of the options or warrants. The 4,020,000 options issued
to Laurus have no stated expiration date; for the purposes of valuing these
options using the Black-Scholes option pricing model, they are assumed to have
an expiry date of November 9, 2011 (i.e. an initial life of seven years, the
same as all warrants issued to Laurus). All options and warrants can be
exercised by the holder at any time.

      At September 30, 2005, the following derivative liabilities related to
common stock options and warrants were outstanding:

<TABLE>
<CAPTION>
                                                              Number of    Exercise                   Value -        Value -
                                                              Options or   Price Per    Value -      June 30,     September 30,
Issue Date          Expiry Date                                Warrants      Share     Issue Date       2005           2005
-----------------   -----------                               ----------   ---------   ----------   -----------   -------------
<C>                 <C>           <C>                         <C>          <C>         <C>          <C>           <C>
11-09-2004              N/A       Option issued to Laurus
                                  in connection with
                                  financing                    4,020,000   $    0.01   $4,060,000   $17,206,000   $  15,678,000

11-09-2004          11-09-2011    Warrants issued to Laurus
                                  in connection with
                                  financing                    2,200,000        2.25    2,222,000     9,296,000       8,316,000

01-26-2005          01-26-2012    Warrants issued to Laurus
                                  in connection with
                                  financing                      400,000        2.25    3,000,000     1,692,000       1,516,000

02-28-2005          02-28-2012    Warrants issued to Laurus
                                  in connection with
                                  financing                      150,000        2.25      898,000       634,000         570,000

02-28-2005          08-28-2006    Warrants issued to Roynat
                                  in connection with
                                  financing                    1,000,000        3.00    5,410,000     3,170,000       2,440,000

04-19-2005          04-19-2010    Warrants issued in
                                  connection with series A
                                  preferred stock              2,083,333        3.75    9,208,000     8,583,000       7,521,000
                                                              ----------                            -----------   -------------
Total outstanding                                              9,853,333                            $40,581,000   $  36,041,000
                                                              ==========                            ===========   =============
</TABLE>

                                       15
<PAGE>

Thomas Equipment, Inc
Notes to Condensed Consolidated Financial Statements
(Unaudited - in thousands except share and per share data)

13.   Capital stock

      At September 30, 2005, we have 200,000,000 authorized shares of common
stock, par value $0.0001, 21,250,000 shares issued and outstanding.

      We have 5,000,000 shares of preferred stock authorized, $0.0001 par value.
At September 30, 2005, 25,000 shares of series A preferred stock were issued and
outstanding, as follows.

<TABLE>
<CAPTION>
                                                                                   September 30,
                                                                                        2005
                                                                                   -------------
<S>                                                                                <C>

25,000 shares of Series A redeemable convertible preferred stock - stated amount   $      25,000

Preferred stock discount, related to warrants issued to purchasers                        (9,208)

Discount amortized to date and accretion to date of 10% premium payable on
redemption                                                                                 4,301
                                                                                   -------------

Carrying amount at September 30, 2005                                              $      20,093
                                                                                   =============
</TABLE>

      The Series A redeemable convertible 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 holders. Upon an issuance of shares of
common stock below the fixed conversion price, the fixed conversion price will
be adjusted according to a formula that is intended to maintain the holders in
no better or worse position than before such issuance. The conversion price may
also 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.

      We can require the holders to convert up to 20% of their preferred stock
per month, if our 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 three years after issuance (after April 19, 2008), we can redeem the
preferred stock at 200% of the stated value if the redemption occurs in the
fourth year and 225% of the stated value if the redemption occurs during the
fifth year. The holders 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 failure to effect registration of the common
stock.

                                       16
<PAGE>

Thomas Equipment, Inc
Notes to Condensed Consolidated Financial Statements
(Unaudited - in thousands except share and per share data)

14.   Financing expense

Capital leases                               $   95
Credit facility                                 184
Convertible credit facility                     876
Amortization of deferred financing fees         132
Amortization of debt premium                    239
Dividends on preferred stock of subsidiary      166
Waiver fee paid to Laurus                       898
Other                                            25
                                             ------
Total                                        $2,615
                                             ======


15.   Common stock warrants issued to non-employees

      We use the Black-Scholes option pricing model to value warrants issued to
non-employees, based on the market price of our common stock at the time the
warrants are issued. All outstanding warrants may be exercised by the holder at
any time. During the three months ended September 30, 2005 and as at that date,
we had the following warrants outstanding:

<TABLE>
<CAPTION>
                                              Exercise
                                  Number of   Price Per
Issue Date          Expiry Date   Warrants      Share                   Issued For
-----------------   -----------   ---------   ---------   ---------------------------------------
<S>                 <C>           <C>         <C>         <C>
01-31-2005          01-31-2008      250,000   $    4.00   Investor relations services

02-28-2005          02-28-2010      211,062   $    3.00   Acquisition of Pneutech

04-19-2005          04-19-2010      500,000   $    3.00   Placement fee, Series A preferred stock

                                  ---------
Total outstanding                   961,062
                                  =========
</TABLE>


                                       17
<PAGE>

Thomas Equipment, Inc
Notes to Condensed Consolidated Financial Statements
(Unaudited - in thousands except share and per share data)

16.   Segment information

Successor

      We determine and disclose our segments in accordance with SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information" which uses
a "management" approach for determining segments. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the reportable
segments. Our management reporting structure provides for the following
segments:

Thomas Equipment

      Thomas Equipment manufactures a full line of skid loaders, attachments,
mini skid steers, and screening plants, as well as a full line of mini
excavators and equipment trailers. We also manufacture a complete line of potato
harvesting and handling equipment. Thomas Equipment has approximately a 3.5%
share of the worldwide mini skid market, and is considered the market leader in
the U.S. with its 400 series screening plant model.

Pneutech

      Pneutech manufactures and distributes a full line of pneumatic and
hydraulic components and systems for the industrial and mobile market and also
manufactures hydraulic cylinders and metal gaskets for the industrial market.
Pneutech has three wholly-owned subsidiaries, Hydramen Fluid Power, Ltd.,
Rousseau Controls, Inc., and Samsung Industry Co., Ltd. Pneutech has over thirty
years of experience in the field of fluid power and specializes in the design,
engineering, manufacture and distribution of pneumatic and hydraulic systems and
components for all automation and motion control applications.

Hydramen

      Since 1986, Hydramen Fluid Power has been designing and manufacturing
welded hydraulic cylinders. The welded cylinders are widely used on mobile
hydraulics such as dump trucks, telescoping applications on utility vehicles and
recycling trucks to name a few. Hydramen is engaged in full aftermarket sales
and service of its products as well as other makes and models.

Rousseau

      Rousseau Controls specializes in the design and fabrication of hydraulic
and pneumatic equipment as well as electrically-operated and/or electronically
controlled systems. These projects are usually produced for a customer's
specific needs. Normally we do not perform the function of a general contractor
and usually, when involved in new construction, act as a sub-contractor.
Rousseau provides engineering assistance to its customers in their applications
and will undertake consulting engineering services when requested.

Samsung

      Samsung Industry Co. Ltd., located in Busan, South Korea, is one of Asia's
premier manufacturers of spiral wound metal gaskets and gland packing. Since
1985, the company has been engaged in sales and service of sealing products to
various oil & gas refineries and petrochemical plants. The company has long-term
supply contracts with major corporations such as Daiwoo Heavy Industries and
Hyundai HHI-Ship Building Division.


                                       18
<PAGE>

Thomas Equipment, Inc
Notes to Condensed Consolidated Financial Statements
(Unaudited - in thousands except share and per share data)

      The following table presents financial information with respect to the
segments that management uses to make decisions:

                                                Successor Business
                                                ------------------
                                                Three Months Ended
                                                September 30, 2005
                                                ------------------
Sales:
  Thomas                                        $           12,838
  Pneutech                                                   6,226
  Rousseau                                                   5,126
  Samsung                                                    2,764
  Hydramen                                                     430
                                                ------------------
    Subtotal                                                27,384
  Elimination of inter segment sales                        (1,269)
                                                ------------------
    Consolidated total                          $           26,115
                                                ==================

Depreciation and amortization:
  Thomas                                        $              362
  Pneutech                                                      65
  Rousseau                                                      44
  Samsung                                                      100
  Hydramen                                                      15
                                                ------------------
    Consolidated total                          $              586
                                                ==================

Net financial expense:
  Thomas                                        $            2,443
  Pneutech                                                     121
  Rousseau                                                      42
  Samsung                                                        6
  Hydramen                                                       3
                                                ------------------
    Consolidated total                          $            2,615
                                                ==================

Net income (loss):
  Thomas                                        $            2,216
  Pneutech                                                     869
  Rousseau                                                     115
  Samsung                                                      249
  Hydramen                                                     (20)
                                                ------------------
    Consolidated total                          $            3,429
                                                ==================

Property, plant and equipment:
  Thomas                                        $           15,576
  Pneutech                                                   1,996
  Rousseau                                                     659
  Samsung                                                    4,495
  Hydramen                                                     251
                                                ------------------
    Subtotal                                                22,977
  Eliminations                                                  --
                                                ------------------
    Consolidated total                          $           22,977
                                                ==================


                                       19
<PAGE>

Thomas Equipment, Inc
Notes to Condensed Consolidated Financial Statements
(Unaudited - in thousands except share and per share data)

Revenues by geographic destination and product group were as follows:

                                    Successor Business
                                    ------------------
                                    Three Months Ended
                                    September 30, 2005
                                    ------------------

Canada                              $           13,477
USA                                              4,359
Europe                                           3,781
Rest of world                                    4,498
                                    ------------------
Total sales to external customers   $           26,115
                                    ==================

Industrial and construction         $           24,276
Agriculture                                      1,839
                                    ------------------
Total sales to external customers   $           26,115
                                    ==================


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

Property, plant and equipment assets by geographical area were as follows:

                                    Successor Business
                                    ------------------
                                    September 30, 2005
                                    ------------------

Canada                              $           14,541
USA                                                 51
Korea                                            8,385
                                    ------------------
Total                               $           22,977
                                    ==================


Predecessor

      Our principal operations related 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 was 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:

                                    Three Months Ended
                                    September 30, 2004
                                    ------------------

Canada                              $            2,883
USA                                              7,177
Europe                                           2,517
Rest of world                                    1,280
                                    ------------------
Total sales to external customers   $           13,857
                                    ==================

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

Industrial and construction         $           12,147
Agriculture                                      1,710
                                    ------------------
Total sales to external customers   $           13,857
                                    ==================


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


                                       20
<PAGE>

Thomas Equipment, Inc
Notes to Condensed Consolidated Financial Statements
(Unaudited - in thousands except share and per share data)

17.   Recent events

      On October 28, 2005, we and Laurus entered into an agreement pursuant to
which the Registration Rights Agreement dated as of November 9, 2004 between the
Company and Laurus was terminated in its entirety. As a result of such
agreement, we are no longer required to register all of the shares of common
stock held by Laurus or underlying options, warrants and convertible debt held
by them.

      Previously, we were not in compliance with our obligations to register the
shares of common stock held by or issuable to Laurus. However, Laurus had
previously waived, through October 31, 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
(see Note 14), which was less than the damages we would have incurred while not
in compliance through October 31, 2005. As this amount was included in an
over-advance from Laurus under our revolving credit facility with them, the fee
did not have a material impact on our liquidity.

      In connection with the October 28, 2005 agreement, the Company and Laurus
also agreed:

o     To remove from our agreements all adjustments to the interest rate payable
      on the convertible debt resulting from changes in the trading price of our
      common stock;

o     To remove the requirement that the shares be registered before they can be
      used for repayment of the convertible debt obligations; and

o     To remove from our agreements the provisions related to the convertible
      debt that adjust the fixed conversion price in the event that we issue
      common stock at a lower price than the fixed conversion price and to
      replace such provisions with traditional value-weighted anti-dilution
      provisions.

      In full consideration for all amounts due or which might otherwise have
become due to Laurus pursuant to the Registration Rights Agreement, we agreed to
pay Laurus a fee of $600, which will be recorded in our second quarter ending
December 31, 2005. We have also agreed with Laurus to increase our revolving
convertible credit facility to $22,000 subject to required third-party approvals
and completion of required documentation.

      Assuming execution of the above modifications to the Laurus debt
agreements, certain warrants and options issued in connection with the Laurus
debt will be reclassified from derivative liabilities and will be credited to
equity at their then fair values. When classified as equity, any subsequent
changes in the fair value are not required to be recognized.

      Had these modifications occurred on September 30, 2005 or June 30, 2005,
our condensed consolidated balance sheet would have been as follows:

                  PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET
                           (Unaudited - in thousands)

                                                     September 30,    June 30,
                                                         2005           2005
                                                       --------       -------

TOTAL ASSETS                                           $ 95,292       $96,251
                                                       ========       =======

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

    Total liabilities                                  $ 75,999       $75,174
    Redeemable convertible preferred stock, series A     20,093        17,598
    Total stockholders' equity (deficit)                   (800)        3,479
                                                       --------       -------

TOTAL LIABILITIES AND  STOCKHOLDERS' EQUITY            $ 95,292       $96,251
                                                       ========       =======

      As of November 14, 2005, we are not currently in compliance with our
obligations to register the shares of common stock underlying the 1,000,000
warrants issued to Roynat Merchant Capital Inc. Under the Registration Rights
Agreement with Roynat, because this registration statement was not effective by
August 31, 2005, we began to incur damages of $50 per month. If the registration
statement never becomes effective, the maximum damages we may have to pay
aggregate approximately $600. We are currently seeking to obtain a waiver from
Roynat that would mitigate these penalties.

      As of November 14, 2005, we have not yet filed a registration statement
required by the Registration Rights Agreement with the purchasers of our Series
A Preferred Stock. Because that required registration statement was not filed
and effective by October 19, 2005, we have begun, since October 20, 2005, 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.

                                       21
<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. for the three months ended September 30, 2005 and to our predecessor
company Thomas Equipment Limited for the three months ended September 30, 2004,
the period prior to our acquisition of the business and assets of the
predecessor company on October 1, 2004. We acquired Pneutech on February 28,
2005 and its results of operations are included in our operating results.

      The financial statements underlying the discussion that follows are those
of the Predecessor for the three months ended September 30, 2004 and our
unaudited consolidated financial statements as of September 30, 2005 and for the
three months then ended. The discussion should be read in conjunction with those
financial statements and the notes thereto.

      Our functional currency is the Canadian dollar. Except where otherwise
noted, all amounts reported throughout this discussion are stated in thousands
of U.S. dollars, except for the number of shares and per share data. Amounts
derived from specific financial statement items are translated from Canadian
dollars to U.S. dollars 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 into U.S. dollars at
the September 30, 2005 translation rate of $0.8601 U.S. dollars per Canadian
dollar.

      This discussion contains forward-looking statements that involve risks and
uncertainties. 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. In evaluating
these statements, you should specifically consider various factors, including,
but not limited to, those set forth under "Risk Factors That May Impact Future
Operating Results" and elsewhere in this Report.

      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 for the industrial and construction industry. Thomas Equipment also
manufactures a complete line of potato harvesting and handling equipment for the
agricultural industry. Thomas Equipment has manufacturing and assembly
facilities in Centreville, New Brunswick, Canada and Busan, South Korea and also
operates six retail stores - three in Atlantic Canada, one in Presque Isle,
Maine, one in Aurora, Colorado and one in Lynnwood, Illinois.

      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, 2005, 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.
Geographic information on our revenues and property, plant and equipment is
included in Note 16 to the condensed consolidated financial statements, included
in Item 1 of this Report on Form 10-Q.


                                       22
<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.

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

      o     Results of operations for the three months ended September 30, 2005
            (successor);

      o     Results of operations for the three months ended September 30, 2004
            (predecessor);

       RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005

The information contained in this section is that of the successor Thomas
Equipment, Inc. for the three months ended September 30, 2005 (unaudited).

-------------------------------------------------------------------
Revenues                                        $ 26,115    100.0%
  Cost of Sales                                   21,537     82.5%
Gross Profit                                       4,578     17.5%
  Selling Expenses                                 2,279      8.7%
  G&A Expenses                                     3,551     13.6%
  Provision for Doubtful Accounts                     84      0.3%
  Other (Income)                                  (2,840)   (10.9)%
Operating Income                                   1,504      5.8%
  Net Financial Expense                            2,615     10.0%
  Derivative Instruments (Income), net            (4,540)   (17.4%)
  Provision for Income Taxes                          --       --
Net Income                                         3,429     13.2%
-------------------------------------------------------------------


Revenues

      For the three months ended September 30, 2005, revenues were $26,115
      (including $14,270 for Pneutech), compared with $28,681 for the fourth
      quarter of fiscal 2005 ended June 30, 2005. Overall sales volumes in the
      quarter ended September 30, 2005 were slightly lower due to seasonality.

Cost of Sales and Gross Profit

      For the three months ended September 30, 2005 cost of sales were $21,537
      and include $11,385 for Pneutech. As a percentage of sales, costs of sales
      were 82.5% for the three months ended September 30, 2005, compared with
      80.4% for the quarter ended June 30, 2005, reflecting the effect of the
      lower sales on the absorption of manufacturing overheads.

      As a result of the above, gross profit margin was $4,578 or 17.5%.


                                       23
<PAGE>

Selling Expenses

      For the three months ended September 30, 2005, selling expenses were
      $2,279 and include $958 for Pneutech. As a percentage of sales, selling
      costs were 8.7% which is a decrease from 9.8% during the quarter ended
      June 30, 2005. This decrease resulted from reduced commission costs on the
      lower sales for the quarter and lower travel-related and advertising
      costs.

General and Administrative Expenses

      For the three months ended September 30, 2005, general and administrative
      expenses were $3,551 and include $1,326 for Pneutech. As a percentage of
      sales, general and administrative costs were 13.6% which is a decrease
      from 16.1% during the quarter ended June 30, 2005. This decrease is a
      result of a reduction in professional fees related to our SEC filing start
      up costs

Provision for Doubtful Accounts

      Provision for doubtful accounts expense was $84 for the quarter ended
      September 30, 2005. Because of our limited history, we use the historical
      experience of our predecessor, as well as our own experience since
      inception, in providing for credit losses.

Other (Income) Expense, Net

      Other (income) expense, consisting primarily of foreign currency gains of
      $2,906 and other miscellaneous expenses, amounted to an income of $2,840
      in the quarter ended September 30, 2005.

Net Financial Expense

      Net financial expense for the quarter ended September 30,2005 was $2,615
      which consisted mainly of interest on credit facilities and convertible
      credit facilities of $1,060, a waiver fee paid to Laurus of $898,
      accretion of debt premiums on Laurus borrowings of $239, amortization of
      deferred financing fees of $132 and dividends on subsidiary preferred
      stock of $166.

Derivative Instruments (Income), net

      Derivative instruments (income) of $4,540 represents the net change during
      the quarter ended September 30, 2005 in the fair value of our derivative
      instrument liabilities related to certain options and warrants.

Provision for Income Taxes

      During the quarter ended September 30, 2005, we experienced a loss for tax
      purposes. As we are uncertain as to whether we will be able to utilize
      these tax losses before they expire, 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 Income

      As a result of the above, we reported a net income of $3,429 for the
      quarter ended September 30, 2005. After recognizing dividends and
      accretion of discounts and redemption premium on our series A preferred
      stock of $2,837, the net income attributable to common shareholders was
      $592.

Comprehensive Loss

      For the quarter ended September 30, 2005, we recorded a loss for currency
      translation adjustments of $2,135. This loss is the result of differences
      in our functional currency, the Canadian dollar, and our reporting
      currency, the U.S. dollar.


                                       24
<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%)
-----------------------------------------------------


Going Concern

      The financial statements of the predecessor business, Thomas Equipment
Limited, have been prepared on a going concern basis which contemplates the
realization of assets and the satisfaction of liabilities and commitments in the
normal course of business for the foreseeable future. This company 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 the
business was acquired by Thomas Equipment.

      These conditions cast substantial doubt upon the validity of the going
concern assumption. Thomas Equipment Limited's parent, McCain Foods Limited, has
committed to provide financial support to ensure Thomas Equipment Limited is
able to settle its obligations after the sale of its business, fixed assets and
inventory to Thomas Equipment. However, this commitment is limited to Thomas
Equipment Limited's remaining obligations as they become due and does not
involve any continued financial support of the business now operated by Thomas
Equipment.

      As a result, the ability of Thomas Equipment to continue as a going
concern and to meet its obligations as they fall due is dependant upon our
ability to secure additional financing as required and upon attaining profitable
operations (see Liquidity and Capital Resources section below for further
discussion on this matter).

Market Conditions and Company Developments in 2004

      In 2004, Thomas Equipment Limited continued to operate under challenging
market conditions. The weakness of the U.S. dollar negatively impacted Thomas
Equipment Limited's financial performance, as the majority of Thomas Equipment
Limited's costs and expenses were incurred in Canadian dollars. In addition,
escalating raw material costs, particularly steel (the world steel price index
rose approximately 125% between June 2003 and June 2004) put pressure on gross
margins and the uncertainty of raw material costs is expected to continue to
remain a challenge for Thomas Equipment in the future.


                                       25
<PAGE>

      Thomas Equipment Limited's market share in the Canadian loader market for
2004 was approximately 3.76% compared to approximately 3.50% in 2003, based on
information obtained from the Association of Equipment Manufacturers.

      2004 represented a vital year for Thomas Equipment Limited in terms of
innovation. The new to market T900 Screen, which is less expensive and more
mobile compared to a competitor's similar product, was developed to meet the
needs and wants of customers. Product lines were also expanded to include a
variety of loaders and mini skids (T320, T205, T250/ T255, 35DT).

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, and higher employee benefit costs due to
      the curtailment losses recognized in the period resulting from the July
      2004 restructuring and subsequent sale of the business.

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.

Other (Income) Expense, Net

      Other (income) expense consists primarily of foreign exchange gains and
      losses and restructuring charges, and amounted to a net income of $884 for
      the three months ended September 30, 2004. Foreign exchange gains arose in
      the three months ended September 30, 2004 due to a weakening of the U.S.
      dollar against the Canadian dollar during this period, creating fair value
      gains for Thomas Equipment Limited's foreign exchange contracts. The
      restructuring charges in the three months ended September 30, 2004 relate
      to special termination expenses associated with the group of employees
      whose positions were terminated in July 2004.


                                       26
<PAGE>

Net Financial (Income) Expense

      Net financial (income) expense for the three months ended September 30,
      2004 amounted to a net expense of $499. Most of Thomas Equipment Limited's
      financial support came from the McCain group in the form of preferred
      shares until June 2004, when they were redeemed and replaced with interest
      bearing debt. The interest expense in the three months ended September 30,
      2004 primarily relates to interest on the intercompany debt that replaced
      the preferred shares. Other interest amounts recorded in the period, which
      were not significant, primarily relate to late payment interest received,
      financing and notional interest charged on financing receivables and bank
      charges.

Provision for Income Taxes

      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. The amounts
      recorded as an income tax expense related to large corporation taxes and
      income taxes incurred by its European subsidiary, Thomas Europe NV.

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

      For the three months ended September 30, 2004, Thomas Equipment Limited
      recorded a loss for currency translation adjustments of $726 as a result
      of differences in translating its financial statements in its functional
      currency, the Canadian dollar, into its reporting currency, the U.S.
      dollar.

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

New pronouncements

SFAS 154 'Accounting Changes and Error Corrections--a replacement of APB Opinion
No. 20 and FASB Statement No. 3

      In May 2005, the Financial Accounting Standards Board ("FASB") issued
Statement No. 154. This Statement replaces APB Opinion No. 20, Accounting
Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements, and changes the requirements for the accounting for, and
reporting of, a change in accounting principle. This Statement applies to all
voluntary changes in accounting principle. It also applies to changes required
by an accounting pronouncement in the unusual instance that the pronouncement
does not include specific transition provisions. When a pronouncement includes
specific transition provisions, those provisions should be followed. SFAS 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. It will only affect our financial statements
if we change any of our accounting principles. At this time, no such changes are
contemplated or anticipated.

Recently adopted accounting standards

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. 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 did not have a material impact on our
financial statements.


                                       27
<PAGE>

SFAS 152 'Accounting for Real Estate Time-Sharing Transactions--an amendment of
FASB Statements No. 66 and 67'

      Issued by the FASB in December 2004, this Statement is effective for
financial statements for fiscal years beginning after June 15, 2005. This
statement did not have any affect on our financial statements.

SFAS 151 'Inventory Costs--an amendment of ARB No. 43, Chapter 4'

      Issued by the FASB in November 2004, this Statement amends the guidance in
ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that ".
.. . under some circumstances, items such as idle facility expense, excessive
spoilage, double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges. . . ." This Statement requires that those
items be recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal." In addition, this Statement requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. The provisions of this
statement are effective for inventory costs incurred during fiscal periods
beginning after June 15, 2005. The adoption of this statement did not have a
material impact on our financial statements.

SFAS 123(R) 'Share-Based Payments'

      In December 2004, the FASB issued Statement No. 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 share-based
payments such as stock options granted to employees. FAS 123 (R) is effective
for the first reporting period beginning after June 15, 2005. The adoption of
FAS 123 (R) did not have a material impact on our financial statements.


                                       28
<PAGE>

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

THREE MONTHS ENDED SEPTEMBER 30, 2005

      During the three months ended September 30, 2005, we had a net income of
$3,429 which included non-cash items totaling $5,805, consisting primarily of
depreciation, amortization of debt discount related to the issuance of warrants,
unrealized foreign exchange gains and derivative instrument income. As a result,
net cash used in operating activities during the three months ended September 30
was $1,744.

      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 $1,377, all of which was used
for the purchase of new machinery and equipment.

      Net cash used by financing activities was $691 consisting primarily of
$1,020 in net borrowings under our debt and credit facilities. At September 30,
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 ($8,601), which is due on April 26, 2006, $14,548
of debt at September 30, 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. Our Series A preferred stock of $20,093 at September
30, 2005 is convertible into shares of our common stock at $3.00 per share.

      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 of 5% for early payment or 3% for 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 for the purchase of land and
buildings from Thomas Equipment Limited. The terms of the capital leases require
minimum annual payments of $516 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 $5,183. Similarly, Thomas Equipment Limited has the
right to require us to purchase the properties subject to certain provisions
such as a favorable environmental study.

      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 generally accrue interest at the bank's prime rate, plus
0.25%, which is payable monthly in arrears. The obligations under the credit
agreement are secured by all of the assets of Pneutech and its subsidiaries,
including but not limited to inventory and accounts receivable. In addition, we
have provided a guarantee of all obligations under the credit agreement. The
obligations under the credit agreement are payable in full on March 30, 2006.

      At October 31, 2005 we had approximately $1,000 cash on hand and an
availability of approximately $1,700 under our credit facilities. Coupled with
receivables of approximately $24,000 at October 31, 2005, we believe we have
sufficient resources to fund our operations for at least the next twelve months.
As such, and assuming the imposition of minimal registration rights penalties,
we do not believe we will have the same difficulties and concerns about our
ability to continue as a going concern as our predecessor.


                                       29
<PAGE>

      As of November 14, 2005, we are in the process of amending our
Registration Statement on Form S-1, to register up to 5,417,360 shares of common
stock to be sold in a secondary offering by certain selling stockholders. We
will not receive any proceeds from the sale of shares of common stock in the
offering. However, we will receive the sale price of any common stock we sell to
the selling stockholders upon exercise of the 1,250,000 warrants that they hold.
We expect to use the proceeds received from the exercise of the warrants, if
any, for general working capital purposes.

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

      We currently have no off balance sheet arrangements.

Contractual Obligations
--------------------------------------------------------------------------------

      The impact that our contractual obligations as of September 30, 2005 are
expected to have on our liquidity and cash flow in future periods is as follows:

<TABLE>
<CAPTION>
                                        Less than                               More Than
                               Total     1 Year     1 - 3 Years   3 - 5 Years    5 Years
                              -------   ---------   -----------   -----------   ---------
<S>                           <C>       <C>         <C>           <C>           <C>
Long-term debt (1)            $45,166   $  13,644   $    31,479   $        43   $      --

Capital lease obligations     $ 5,700   $     517   $     5,183   $        --   $      --

Operating lease obligations   $ 3,078   $     960   $     1,296   $       822   $      --
</TABLE>

      (1) Amounts represent the expected principle cash payments of our
long-term debt and subsidiary's preferred stock.


Risk Factors That May Impact Future Operating Results
--------------------------------------------------------------------------------

      Investing in our common stock has a high degree of risk. Investors should
carefully consider these risks and uncertainties before investing in our common
stock. There are many factors that affect our business and the results of our
operations, some of which are beyond our control. Actual results in future
periods could differ materially from those projected in any forwardlooking
statement we may make because of a number of risks and uncertainties, including
general economic, business and industry conditions; the level and intensity of
competition in our markets and the pricing pressures that may result; local
economic and labor conditions, political instability, unexpected regulatory
changes, trade protection measures, changes in tax laws; fluctuations in foreign
currency exchange rates; our inability to meet the covenants or other
requirements of our loan agreements, the ability to accurately predict product
demand or meet customer commitments; the ability to timely and effectively
manage new product introductions; the ability to effectively manage operating
costs; the level of demand for the products we offer; the ability to manage
inventory levels to minimize excess inventory and inventory obsolescence; and
the effect of armed hostilities, terrorism, natural disasters and public health
issues on the global economy generally, on the level of demand for our products
and on our ability to manage our business in such an environment.

      Each of the risks we face may materially and adversely affect our
business, results of operations and financial condition. These risks may cause
the market price of our common stock to decline, which may cause an investor to
lose all or a part of the money they paid to buy our common stock. For a
discussion of these and other factors affecting our business and prospects, see
"Item 7 - Risk Factors That May Impact Future Operating Results" in our Annual
Report on Form 10-K for the fiscal year ended June 30, 2005. That cautionary
discussion of risks, uncertainties and possible inaccurate assumptions relevant
to our business and our products sets forth the factors that we think could
cause our actual results to differ materially from expected results.


                                       30
<PAGE>

ITEM 3. 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 September 30, 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.

      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
September 30, 2005, a hypothetical 1.00% (100 basis-point) increase in interest
rates would result in additional expenses of approximately $87 for the quarter
or an annual increase in expenses of approximately $350.

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.


                                       31
<PAGE>

ITEM 4. 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 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 operations 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
September 30, 2005 in timely alerting them to material information required to
be included in our Exchange Act filings.

      There was no change in our internal controls or in other factors that
could affect these controls during our last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.


                                       32
<PAGE>

                           PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings.

      None.

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

      None.

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 #                           Description
---------   --------------------------------------------------------------------
10.1        Forbearance Agreement among Thomas Equipment, Inc., Thomas Ventures,
            Inc., and Laurus Master Fund, Ltd., dated as of September 13, 2005.
            (1)

10.2        Waiver by Laurus Master Fund, Ltd., in favor of Thomas Equipment,
            Inc., dated as of September 19, 2005. (1)

10.3        Waiver by Laurus Master Fund, Ltd., in favor of Thomas Equipment,
            Inc., dated as of October 20, 2005.

10.4        Agreement among Thomas Equipment, Inc., Thomas Ventures, Inc., and
            Laurus Master Fund, Ltd, dated as of October 28, 2005. (2)

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 Registration Statement on Form S-1,
      filed October 3, 2005.

2.    Filed as an exhibit to the Company's Report on Form 8-K, filed November 2,
      2005.


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<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:   November 14, 2005           By: /s/ CLIFFORD M. RHEE
                                        ----------------------------------------
                                         Clifford M. Rhee,
                                         President (Principal Executive Officer)

                                     By: /s/ LUIGI LO BASSO
                                        ----------------------------------------
                                         Luigi Lo Basso,
                                         Chief Financial Officer (Principal
                                         Financial and Accounting Officer)


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