The following tables set forth, for the periods indicated, certain financial percentages:

                                 Three Months Ended         Nine Months Ended
                                    September 30,             September 30,
(As Percentages of Net Sales)      2008         2007         2008        2007
North American
   Industrial                        43.6   %    48.3  %      46.0 %      49.3 %
   Agricultural                      19.9   %    24.8  %      21.8 %      24.0 %
European                             36.5   %    26.9  %      32.2 %      26.7 %
   Total sales, net                 100.0   %   100.0  %     100.0 %     100.0 %

                                       Three Months Ended      Nine Months Ended
                                         September 30,           September 30,
(Cost Trends and Profit Margin, as
Percentages of Net Sales)                2008         2007       2008        2007

Gross margin                              19.9 %       20.9 %     19.6 %      19.6 %
Income from operations                     5.3 %        6.1 %      5.2 %       4.9 %
Income before income taxes                 4.5 %        5.0 %      4.5 %       3.6 %
Net income                                 3.0 %        3.3 %      3.0 %       2.4 %

Overview

This report contains forward-looking statements that are based on Alamo Group's current expectations. Actual results in future periods may differ materially from those expressed or implied because of a number of risks and uncertainties which are discussed below and in the Forward-Looking Information section.

In the first nine months of 2008 the Company's net income increased compared to the first nine months of 2007 primarily due to steady markets during the first half of the year and the benefits from efficiency initiatives we began in 2006. The acquisitions of both Henke and Rivard have been accretive to the Company's net income for 2008. Industrial Division sales without the Henke acquisition were up 6% during the first nine months of 2008 mainly from increased excavator and vacuum truck business which more than offset lower sweeper sales. Sales in the Agricultural Division at the start of the year initially reflected strong market conditions but have since shown some softening during the third quarter of 2008 due to the weakness in the economy and reduced prices for agricultural commodities. Delays in obtaining key components from outside suppliers have also led to continued late deliveries. European sales revenues improved over 2007 primarily due to export sales outside its principal markets and the acquisition of Rivard.

While our outlook remains positive, we are concerned that our markets could be negatively affected by a variety of factors such as the downturn in the overall economy; inflation particularly with raw materials such as steel and energy costs which while coming down, are still above historical levels; increased levels of government regulations; changes in farm incomes due to commodity prices or governmental aid programs; credit availability; adverse situations that could affect our customers such as animal disease epidemics, weather conditions such as droughts and floods; and budget constraints or revenue shortfalls in governmental entities to which the Company sells its products. These and other factors can affect our future business.

Results of Operations

Three Months Ended September 30, 2008 vs. Three Months Ended September 30, 2007

Net sales for the third quarter of 2008 were $148,707,000, an increase of $22,751,000 or 18.1% compared to $125,956,000 for the third quarter of 2007. The increase was primarily attributable to the acquisition of Rivard in the amount of $17,415,000 and a continued steady demand in nearly all segments of the Company's business.

Net North American Industrial sales increased during the third quarter by $3,941,000 or 6.5% to $64,803,000 for 2008 compared to $60,862,000 during the same period in 2007. The majority of the increase came from excavator and vacuum truck business. Sweeper sales continue to be weak, particularly in the parking lot contractor sector.

Net North American Agricultural sales were $29,555,000 in 2008 compared to $31,210,000 for the same period in 2007, a decrease of $1,655,000 or 5.3%. The decrease was the result of supply issues that delayed deliveries of key components which led to late shipments. We also saw some softness in market conditions due to lower agricultural commodity prices, credit availability and overall economic weakness.

Net European Sales for the third quarter of 2008 were $54,349,000, an increase of $20,465,000 or 60.4% compared to $33,884,000 during the third quarter of 2007. The majority of the increase was primarily due to the acquisition of Rivardand continued improvement in export sales.

Gross profit for the third quarter of 2008 was $29,610,000 (19.9% of net sales) compared to $26,382,000 (20.9% of net sales) during the same period in 2007, an increase of $3,228,000. Rivard contributed gross profit of $3,473,000 for the three months ended September 30, 2008. Offsetting the impact of the Rivard acquisition were a small decrease in gross profits due to increases in steel, steel products and energy prices which, while softening, continue to be above historical levels.

Selling, general and administrative expense ("SG&A") was $21,795,000 (14.7% of net sales) during the third quarter of 2008 compared to $18,716,000 (14.9% of net sales) during the same period of 2007, an increase of $3,079,000. The increase in SG&A was primarily from the addition of Rivard in the amount of $2,212,000.

Interest expense was $2,024,000 for the third quarter of 2008 compared to $2,025,000 during the same period in 2007, a decrease of $1,000.

Other income (expense) was $222,000 of income during the third quarter of 2008 compared to $235,000 of income in the third quarter of 2007. The gains in both 2008 and 2007 are entirely from changes in exchange rates.

Provision for income taxes was $2,251,000 (33.6% of income before taxes) for the third quarter of 2008 compared to $2,074,000 (33.0% of income before taxes) in the third quarter of 2007.

The Company's net income after tax was $4,453,000 or $.45 per share on a diluted basis for the third quarter of 2008 compared to $4,216,000 or $.42 per share on a diluted basis for the third quarter of 2007. The increase of $237,000 resulted from the factors described above.

Nine Months Ended September 30, 2008 vs. Nine Months Ended September 30, 2007

Net sales for the first nine months of 2008 were $434,648,000, an increase of $56,559,000 or 15.0% compared to $378,089,000 for the first nine months of 2007. The increase was primarily attributable to the acquisitions of Rivard and Henkein the amount of $25,992,000, and continued steady demand for our products in most of the Company's segments

Net North American Industrial sales increased during the first nine months by $13,356,000 or 7.2% to $199,866,000 for 2008 compared to $186,510,000 during the same period in 2007. The increase was due from higher sales in the excavator and vacuum truck business along with the acquisition of Henke in the amount of $1,662,000. Negatively impacting this segment were soft conditions in the sweeper market, specifically the parking lot contractor business.

Net North American Agricultural sales were $94,826,000 in 2008 compared to $90,521,000 for the same period in 2007, an increase of $4,305,000 or 4.8%. The increase was mainly due to steady market conditions, specifically mowing and front-end loader equipment. During the third quarter of 2008, this division experienced delays in deliveries of key components from suppliers which prevented us from meeting commitments to our customers in a timely fashion.

Net European Sales for the first nine months of 2008 were $139,956,000, an increase of $38,898,000 or 38.5% compared to $101,058,000 during the same period of 2007. The increase was primarily due to the Rivard acquisition in the amount of $24,330,000, and to a lesser extent higher export sales outside our core markets, along with improved agricultural market conditions in the first half of 2008.

Gross profit for the first nine months of 2008 was $85,095,000 (19.6% of net sales) compared to $74,293,000 (19.6% of net sales) during the same period in 2007, an increase of $10,802,000. The increase was mainly due to improved market conditions in all three of the Company's segments along with the acquisitions of Henke and Rivard. Negatively affecting the Company's gross margin were higher steel, steel products and energy prices.

Selling, general and administrative expense ("SG&A") were $62,518,000 (14.4% of net sales) during the first nine months of 2008 compared to $55,929,000 (14.8% of net sales) during the same period of 2007, an increase of $6,589,000. The increase in SG&A for the first nine months of 2008 primarily came from the additions of Henke and Rivard in the amount of $3,362,000 along with increased sales commissions from higher sales.

Interest expense was $5,748,000 for the first nine months of 2008 compared to $6,415,000 during the same period in 2007, a decrease of $667,000. The decrease was due to lower interest rates in the first nine months of 2008.

Other income (expense) was $881,000 of income during the first nine months of 2008 compared to $469,000 of income in the first nine months of 2007. The gain in 2008 is from changes in exchange rates and the income in 2007 was a gain of $150,000 relating to a sale of the Company's investment in a small business investment company and from exchange rate gains in the amount of $319,000.

Provision for income taxes was $6,490,000 (33.6% of income before taxes) for the first nine months of 2008 compared to $4,381,000 (32.5% of income before taxes) in the first nine months of 2007.

The Company's net income after tax was $12,850,000 or $1.29 per share on a diluted basis for the first nine months of 2008 compared to $9,084,000 or $0.91 per share on a diluted basis for the first nine months of 2007. The increase of $3,766,000 resulted from the factors described above.

Liquidity and Capital Resources

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

As of September 30, 2008, the Company had working capital of $171,968,000 which represents an increase of $2,577,000 from working capital of $169,391,000 as of December 31, 2007. The increase in working capital was primarily from higher levels of accounts receivable due to the growth in sales and the acquisition of Rivard.

Capital expenditures were $5,052,000 for the first nine months of 2008, compared to $6,733,000 during the first nine months of 2007. Capital expenditures for 2008 are expected to be below 2007 levels. The Company expects to fund expenditures from operating cash flows or through its revolving credit facility, described below.

The Company was authorized by its Board of Directors in 1997 to repurchase up to 1,000,000 shares of the Company's common stock to be funded through working capital and credit facility borrowings. There were no shares purchased in 2007 or the nine months of 2008. The authorization to repurchase up to 1,000,000 shares remains available less 42,600 shares previously repurchased.

Net cash provided by financing activities was $10,300,000 during the nine month period ending September 30, 2008, compared to $9,261,000 for the same period in 2007. The financing activities were higher in 2008 due to increased pre-season sales and the acquisition of Rivard.

On August 25, 2004, the Company entered into a five year $70 million Amended and Restated Revolving Credit Agreement with its lenders, Bank of America, JPMorgan Chase Bank, and Guaranty Bank. This contractually committed, unsecured facility allows the Company to borrow and repay amounts drawn at floating or fixed interest rates based upon Prime or LIBOR rates. Proceeds may be used for general corporate purposes or, subject to certain limitations, acquisitions. The loan agreement contains among other things the following financial covenants: Minimum Fixed Charge Coverage Ratios, Minimum Consolidated Tangible Net Worth, Consolidated Funded Debt to EBITDA Ratio and Minimum Asset Coverage Ratio, along with limitations on dividends, other indebtedness, liens, investments and capital expenditures.

On February 3, 2006, the Company amended and restated the credit agreement to increase the Company's existing credit facility from $70 million to $125 million. Pursuant to the terms of the Amended and Restated Revolving Credit Agreement, the Company has the ability to request an increase in commitments by $25 million. In addition, the existing credit facility was modified in other respects, including reducing the asset coverage ratio and lowering the interest margins.

On March 30, 2006 the Company entered into the Fourth Amendment of the Amended and Restated Revolving Credit Agreement, dated March 30, 2006 (the "Amended and Restated Revolving Credit Agreement"), between the Company and Bank of America, N.A., J.P. Morgan Chase Bank and Guaranty Bank, as its lenders. Pursuant to the terms of the Amended and Restated Revolving Credit Agreement, the Company added Gradall Industries, Inc., formerly Alamo Group (OH) Inc., and N.P. Real Estate Inc. as members of the Obligated Group. The Amendment also allows for capital expenditures not to exceed $14.0 million for the fiscal year ending 2006 and $10.0 million in the aggregate during each fiscal year thereafter.

On May 7, 2007, the Company entered into the Fifth Amended and Restated Revolving Credit Agreement with Bank of America, N.A., JPMorgan Chase Bank, Guaranty Bank and Rabobank, as its lenders. The Amended and Restated Revolving Credit Agreement provides for a $125 million unsecured revolving line of credit for five years with the ability to expand the facility to $175 million, subject to bank approval. In addition to the extended term of the loan to 2012, other major changes were improvements in the leverage ratio, minimum asset coverage ratio and an increase in annual allowable capital expenditures up to $17.5 million. The banks agreed to eliminate the fixed charge coverage ratio and minimum net worth requirement along with a reduction in the applicable interest rate margin. The applicable interest margin fluctuates quarterly, either up or down based upon the Company's leverage ratio.

On May 13, 2008, Alamo Group Europe Limited expanded its overdraft facility with Lloyd's TSB Bank plc from £ 1.0 million to £ 5.5 million. The facility is expected to be renewed on or about October 31, 2008 and outstandings currently bear interest at Lloyd's Base Rate plus 1.1% per annum. The facility is unsecured but guaranteed by the U.K. subsidiaries of Alamo Group Europe Limited. As of September 30, 2008, there were no outstanding balances in British pounds borrowed against the U.K. overdraft facility.

As of September 30, 2008, there was $86,000,000 borrowed under the revolving credit facility. At September 30, 2008, $878,000 of the revolver capacity was committed to irrevocable standby letters of credit issued in the ordinary course of business as required by vendors' contracts resulting in approximately $38,000,000 in available borrowings.

There are additional lines of credit, for the Company's French operations in the amount of 9,300,000 Euros, which includes the Rivard credit facilities, for our Canadian operation in the amount of 3,500,000 Canadian dollars, and for our Australian operation in the amount of 800,000 Australian dollars. As of September 30, 2008, 182,000 Euros were borrowed against the French line of credit, 581,000 Canadian dollars were outstanding on the Canadian line of credit and 500,000 Australian dollars were outstanding under its facility. The Canadian and Australian revolving credit facilities are guaranteed by the Company. The Company's borrowing levels for working capital are seasonal with the greatest utilization generally occurring in the first quarter and early spring.

As of September 30, 2008, the Company is in compliance with the terms and conditions of its credit facilities.

On July 27, 2006, the Company filed a shelf registration statement on Form S-3 with the SEC to register 2,300,000 shares of common stock for offer and sale by the Company from time to time in accordance with the Securities Exchange Act. This filing had a two year life and was withdrawn on May 30, 2008, prior to its cancellation and can be reinstated if deemed appropriate by management.

Management believes that the Company's ability to internally generate funds from operations and secure financing from external sources will be sufficient to meet the Company's cash requirements for the foreseeable future.

Critical Accounting Estimates

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

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

Critical Accounting Policies

Allowance for Doubtful Accounts

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

The Company evaluates all aged receivables that are over 60 days old and reserves specifically on a 90-day basis. The Company's North American operations have security interest on most wholegoods each customer purchases. This allows the Company in times of a difficult economy when the customer is unable to pay or has filed for bankruptcy (usually Chapter 11), to repossess the customer's inventory. It also allows Alamo Group to maintain a reserve over its cost which usually represents the margin on the original sales price.

In our European operation, the Company purchases credit insurance which covers mainly insolvency for a majority of its accounts receivable in the U.K. and France. Coverage limits range from 60% to 90% of the amount outstanding depending on credit limits set by the insurer.

The bad debt reserve balance was $1,809,000 at September 30, 2008 and $1,922,000 at December 31, 2007.

Sales Discounts

At September 30, 2008 the Company had $6,160,000 in reserves for sales discounts compared to $6,338,000 at December 31, 2007 on products shipped to our customers under various promotional programs. The decrease was due primarily from lower additional discounts reserved on the Company's agricultural products during the pre-season, which runs from September to December of each year and orders are shipped through the first quarter of 2008. The Company reviews the reserve quarterly based on analysis made on each program outstanding at the time.

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

Inventories - Obsolescence and Slow Moving

The Company had $8,222,000 at September 30, 2008 and $8,526,000 at December 31, 2007 in reserve to cover obsolescence and slow moving inventory. The obsolescence and slow moving policy states that the reserve is to be calculated on a basis of: 1) no inventory usage over a three year period and inventory with quantity on hand is deemed obsolete and reserved at 100 percent and 2) slow moving inventory with little usage requires a 100 percent reserve on items that have a quantity greater than a three year supply. There are exceptions to the obsolete and slow moving classifications if approved by an officer of the Company based on specific identification of an item or items that are deemed to be either included or excluded from this classification. In cases where there is no historical data management makes a judgment based on a specific review of the inventory in question to determine what reserves, if any are appropriate. New products or parts are generally excluded from the reserve policy until a three year history has been established.

The reserve is reviewed and if necessary, adjustments made, on a quarterly basis. The Company relies on historical information to support its reserve. Once the inventory is written down, the Company does not adjust the reserve balance until the inventory is sold.

Warranty

The Company's warranty policy is generally to provide its customers warranty for up to one year on all equipment and 90 days for parts.

Warranty reserve, as a percent of sales, is calculated by taking at the current twelve months of expenses and prorating that based on twelve months of sales with a nine month lag period. The Company's historical experience is that a customer takes approximately ninety days to nine months from the time the unit is received and put into operation to file any warranty claim. A warranty reserve is established for each different marketing group. Reserve balances are evaluated on a quarterly basis and adjustments are made when required.

The current warranty reserve balance was $5,562,000 at September 30, 2008 and $4,865,000 at December 31, 2007. The majority of the increase came from the acquisition of Rivard. The Company has a long-term liability for extended warranty policies sold to customers in the amount of $330,000 at September 30, 2008 and $218,000 at December 31, 2007 existed relating to some of our industrial product lines with a life expectancy of 1 to 5 years.

Product Liability

At September 30, 2008 the Company had accrued $135,000 in reserves for product liability cases compared to $200,000 at December 31, 2007. The Company accrues primarily on a case by case basis and adjusts the balance quarterly.

During most of 2008, the self insured retention (S.I.R.) for U.S. product liability coverage for rotary mowers was $150,000 while the S.I.R. for all other products was at $100,000 per claim. On September 30, 2008 the Company renewed its insurance coverage and the S.I.R. for rotary mowers was reduced from $150,000 to $100,000. The S.I.R. for all other products remained at $100,000. The Company also carries product liability coverage in Europe, Canada and Australia which contain substantially lower S.I.R.'s or deductibles.

Forward-Looking Information

Statements that are not historical are forward-looking. When used by or on behalf of the Company, the words "estimate," "believe," "intend" and similar expressions generally identify forward-looking statements made by or on behalf of the Company.

Forward-looking statements involve risks and uncertainties. These uncertainties include factors that affect all businesses operating in a global market, as well as matters specific to the Company and the markets it serves. Particular risks and uncertainties facing the Company at the present include changes in market conditions; increased competition; decreases in the prices of agricultural commodities, which could affect our customer's income levels; budget constraints or income shortfalls which could affect the purchases of our type of equipment by governmental customers; credit availability for both the Company and its customers, adverse weather conditions such as droughts and floods which can affect buying patterns of the Company's customers and related contractors; the price and availability of critical raw materials, particularly steel and steel products; energy cost; increased cost of new governmental regulations which effect corporations; the potential effects on the buying habits of our customers due to diseases such as mad cow; the Company's ability to develop and manufacture new and existing products profitably; market acceptance of new and existing products; the Company's ability to maintain good relations with its employees; and the ability to hire and retain quality employees.

In addition, the Company is subject to risks and uncertainties facing the industry in general, including changes in business and political conditions and the economy in general in both domestic and international markets; weather conditions affecting demand; slower growth in the Company's markets; financial market changes including increases in interest rates and fluctuations in foreign exchange rates; actions of competitors; the inability of the Company's suppliers, customers, creditors, public utility providers and financial service organizations to deliver or provide their products or services to the Company; seasonal factors in the Company's industry; unforeseen litigation; government actions including budget levels, regulations and legislation, primarily relating . . .