The accompanying unaudited consolidated financial statements of Insituform Technologies, Inc. and its subsidiaries (“Insituform” or the “Company”) reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows.flows as of and for the three and six months ended June 30, 2008 and 2007. The unaudited consolidated financial statements have been prepared in accordance with the requirements of Form 10-Q and, consequently, do not include all the disclosures normally made in an Annual Report on Form 10-K. Accordingly, the unaudited consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s 2007 Annual Report on Form 10-K.10-K filed with the Securities and Exchange Commission on March 10, 2008.

The results of operations for the three and six months ended March 31,June 30, 2008 are not necessarily indicative of the results to be expected for the full year.

Earnings (loss) per share have been calculated using the following share information:

The effect of in-the-money stock options, restricted stock, restricted stock units and deferred stock units of 419,088354,617 were not considered in the calculation of loss per share in the three-monthsix-month period ended March 31,June 30, 2007 as the effect would have been anti-dilutive.

The Company excluded 708,384468,690 and 204,930544,541 stock options infor the three-month periodsthree months ended March 31,June 30, 2008 and 2007, respectively, and 543,491 and 465,541 stock options for the six months ended June 30, 2008 and 2007, respectively, from the diluted earnings per share calculations for the Company’s common stock because they were anti-dilutive as their exercise prices were greater than the average market price of common shares for each period.

On March 29, 2007, the Company announced plans to exit its tunneling business in an effort to align better align its operations with its long-term strategic initiatives. In the years leading up to 2007, operating results in the tunneling business causedlimited the CompanyCompany’s ability to divert cash away from its pursuit ofinvest in international and inorganic growth.growth opportunities. The tunneling business also was management intensive.required a significant amount of senior management’s time. The closure has enabled the Company to realign its management structure and reallocate management resources and Company capital to implement its long-term strategy.

The Company has classified the results of operations of its tunneling business as discontinued operations for all periods presented. At March 31,June 30, 2008, substantially all existing tunneling business activity had been completed.

In the first quarter of 2008, the Company recorded a net closure charge reversal of $0.5 million related to employee termination benefits, retention incentives and equipment and other asset transactions. In the first quarter of 2007, the Company recorded $16.8 million in closure costs related to the tunneling business. The Company recorded a total of $4.8 million (pre-tax) related to closure activities, including expense for $3.6 million (pre-tax) associated with lease terminations and buyouts, $1.1 million (pre-tax) for employee termination benefits and retention incentives and $0.1 million related to debt financing fees paid on March 28, 2007 in connection with certain amendments to the Company’s Senior Notes and credit facility relating to the closure of the tunneling business. The Company also incurred impairment charges for goodwill and other intangible assets of $9.0 million in the first quarter of 2007. In addition, in 2007, the Company recorded charges totaling $3.0 million (pre-tax) for equipment and other assets. No net closure charges were recorded in the second quarter of 2008 or 2007.

Operating results for discontinued operations are summarized as follows for the three months ended March 31 (in thousands):

Balance sheet data for discontinued operations was as follows at March 31,June 30, 2008 and December 31, 2007 (in thousands):

Acquired intangible assets include license agreements, customer relationships and patents and trademarks. Intangible assets at March 31,June 30, 2008 and December 31, 2007 were as follows (in thousands):

On March 28, 2007, the Company amended its $65.0 million Senior Notes, Series 2003-A, due April 24, 2013, to include in the definition of EBITDA all non-recurring charges taken during the year ended December 31, 2007 relating to the Company’s exit from the tunneling operation to the extent deducted in determining consolidated net income for such period, subject to a maximum amount of $34.2 million. In connection with the amendment, the Company paid the noteholders an amendment fee of 0.05% of the outstanding principal balance of Senior Notes, or $32,500.

In February 2007, the Company made the final scheduled payment of $15.7 million on its Senior Notes, Series A, due February 14, 2007.

On April 4, 2008, the Company amended its $35.0 million credit facility with Bank of America, N.A., to extend the maturity date of the credit facility to April 30, 2009 and increase the Company’s borrowing rates on Eurodollar loans and letters of credit by 0.25% (now ranging from 1.25% to 2.25%), among other things. 

On March 28, 2007, the Company amended its $35.0 million credit facility with Bank of America, N.A., to incorporate by reference certain amendments to its Senior Notes, Series 2003-A, due April 24, 2013, described above. In connection with the amendment, the Company paid Bank of America, N.A., an amendment fee of 0.05% of the borrowing capacity of the credit facility, or $17,500.

At March 31,June 30, 2008, the Company had $15.4 million in letters of credit issued and outstanding under aits credit facility with Bank of America, $14.5 million of which was collateral for the benefit of certain of the Company’s insurance carriers and $0.9 million was collateral for work performance. The $35.0 million credit facility allows the Company to borrow under a line of credit and/or through standby letters of credit. There were no other outstanding borrowings under the line of credit facility at March 31,June 30, 2008, resulting in $19.6 million in available borrowing capacity under the line of credit facility as of that date.

During 2007, there wasIn May 2008, the Company entered into financing ofarrangements for certain annual insurance premiums in the amount of $2.6$0.7 million, of which $0.7$0.1 million was repaid in the second quarter of 2008. At June 30, 2008, $0.6 million remained outstanding. The Company intends to repay these notes in full by the end of the first quarter of 2008. $0.4 million remained outstanding at March 31, 2008. These notes will be repaid in full during 2008.2009.

At March 31,June 30, 2008 and 2007, the Company had no outstanding borrowings on the credit facility.facility other than issued and outstanding letters of credit.

At March 31,June 30, 2008, the Company was in compliance with all of its debt covenants as required under the Senior Notes and credit facility. The Company believes it has adequate resources to fund future cash requirements and debt repayments for at least the next twelve months with cash generated from operations, existing cash balances, additional short- and long-term borrowingborrowings and the sale of assets.

Under the terms of the Senior Notes, Series 2003-A, prepayment could cause the Company to incur a “make-whole” payment to the holder of the notes. At March 31,June 30, 2008, this make-whole payment would have approximated $11.7$7.9 million.

At March 31,June 30, 2008, the Company had two active equity-based compensation plans under which equity-based awards may be granted, including stock appreciation rights, restricted shares of common stock, performance awards, stock options and stock units. There wereare 2.2 million shares authorized for issuance under these plans. At March 31,June 30, 2008, approximately 1.4 million shares remained available for future issuance under these plans.

Stock awards, which include restricted stock shares and restricted stock units, of the Company’s common stock are awarded from time to time to executive officers and certain key employees of the Company. Stock award compensation is recorded based on the award date fair value and charged to expense ratably through the restriction period. Forfeitures of unvested stock awards cause the reversal of all previous expense recorded as a reduction of current period expense.

A summary of stock award activity during the first quarter ofsix months ended June 30, 2008 follows:

Expense associated with stock awards was $0.4$0.9 million and $0.3$0.6 million in the first quartersix months of 2008 and 2007, respectively. Unrecognized pre-tax expense of $4.3$5.8 million related to stock awards is expected to be recognized over the weighted average remaining service period of 3.12.6 years for awards outstanding at March 31,June 30, 2008.

Deferred stock units are awarded to directors of the Company and represent the Company’s obligation to transfer one share of the Company’s common stock to the granteeaward recipient at a future date and generally are fully vested on the date of grant.award. In addition, certain awards of deferred stock units were made in connection with the service of the Company’s Chairman of the Board, Alfred L. Woods, as the Company’s Interim Chief Executive Officer from August 13, 2007 to April 14, 2008. These awards vested on April 14, 2008. The expense related to the issuance of deferred stock units is recorded according to vesting.

A summary of deferred stock unit activity during the first quarter ofsix months ended June 30, 2008 follows:

Expense associated with awards of deferred stock units in the first quarter ofthree and six months ended June 30, 2008 or 2007 was not material.$1.1 million compared to $0.6 million in the same periods in 2007.

Stock options on the Company’s common stock are awardedgranted from time to time to executive officers and certain key employees of the Company. Stock options granted generally have a term of seven years and an exercise price equal to the market value of the underlying common stock on the date of grant.

A summary of stock option activity during the first quarter ofsix months ended June 30, 2008 follows:

The weighted average grant-date fair value of options granted in the first threesix months ofended June 30, 2008 was $5.24.$5.31.

The following table summarizes the outstanding options at March 31,June 30, 2008:

The following table summarizes the outstanding options that were exercisable at March 31,June 30, 2008:

The intrinsic values above are based on the Company’s closing stock price of $13.83$15.23 on March 31,June 30, 2008. TheIn the first six months of 2008, the Company collected no amounts from stock option exercises in the first quarter of 2008. The Company collected $0.6$0.2 million from stock option exercises that had a total intrinsic value of $0.3 million in the first quarter of 2007.$0.1 million. In the first quartersix months of 2007, the Company collected $1.1 million for option exercises that had a total intrinsic value of $0.5 million. In the six months ended June 30, 2008 and 2007, the Company recorded expense of $0.3$0.7 million and $0.9$2.0 million, respectively, related to stock option awards.grants. Unrecognized pre-tax expense of $1.7$1.8 million related to stock awardsoption grants is expected to be recognized over the weighted average remaining service periodcontractual term of 4.7 years for awards outstanding at March 31,June 30, 2008.

The Company uses a lattice-based option pricing model. The fair value of stock options awardedgranted during the six month periods ended June 30, 2008 and 2007 was estimated at the date of grant based on the assumptions presented in the table below. Volatility, expected term and dividend yield assumptions were based on the Company’s historical experience. The risk-free rate was based on a U.S. treasury note with a maturity similar to the option award’sgrant’s expected term.

For the three months ended March 31,June 30, 2008 and 2007, comprehensive income was $3.6$2.6 million and $(13.6)$7.1 million, respectively. For the six months ended June 30, 2008 and 2007, comprehensive income (loss) was $6.2 million and $(6.5) million, respectively. The Company’s adjustment to net income (loss) to calculate comprehensive income (loss) was $1.7$(0.8) million and $3.9 million for the three months ended March 31,June 30, 2008 and 2007, respectively, and $0.9 million and $5.6 million for the six months ended June 30, 2008 and 2007, respectively, and consisted entirelyprimarily of cumulative foreign currency translation adjustments.

In December 2003, Environmental Infrastructure Group, L.P. (“EIG”) filed suit in the District Court of Harris County, Texas, against several defendants, including Kinsel Industries, Inc. (“Kinsel”), a wholly-owned subsidiary of the Company, seeking unspecified damages. The suit alleges, among other things, that Kinsel failed to pay EIG monies due under a subcontractor agreement. In February 2004, Kinsel filed an answer, generally denying all claims, and also filed a counter-claim against EIG based upon EIG’s failure to perform work required of it under the subcontract. In June 2004, EIG amended its complaint to add the Company as an additional defendant and included a claim for lost opportunity damages. In December 2004, the Company and Kinsel filed third-party petitions against the City of Pasadena, Texas, on the one hand, and Greystar-EIG, LP, Grey General Partner, LLC and Environmental Infrastructure Management, LLC (collectively, the “Greystar Entities”), on the other hand. EIG also amended its petition to add a fraud claim against Kinsel and the Company and also requested exemplary damages. The original petition filed by EIG against Kinsel seeks damages for funds that EIG claims should have been paid to EIG on a wastewater treatment plant built for the City of Pasadena. Kinsel’s third-party petition against the City of Pasadena seeks approximately $1.4 million in damages to the extent EIG’s claims against Kinsel have merit and were appropriately requested. The third-party petition against the Greystar Entities seeks damages based upon fraudulent conveyance, alter ego and single business enterprise (the Greystar Entities are the successors-in-interest to all or substantially all of the assets of EIG, now believed to be defunct). The parties have agreed upon a docket control order setting the matter for trial in February 2009. The Company believes that the factual allegations and legal claims made against it and Kinsel are without merit and intends to vigorously defend them.

amount and the amounts allegedly underreported or misreported by Per Aarsleff) based upon royalty reports prepared and submitted by Per Aarsleff. The Company believes that these receivables are fully collectible at this time. At March 31,June 30, 2008, the Company had not recorded any receivable related to this lawsuit.

In August 2003, the Company began a CIPP process installation in Boston. The $1.0 million project required the Company to line 5,400 feet of a 109-year-old, 36- to 41-inch diameter unusually shaped hand-laid rough brick pipe. Many aspects of this project were atypical of the Company’s normal CIPP process installations. Following installation, the owner rejected approximately 4,500 feet of the liner and all proposed repair methods. All rejected liner was removed and re-installed, and the Company recorded a loss of $5.1 million on this project in the year ended December 31, 2003. During the first quarter of 2005, the Company, in accordance with its agreement with the client, inspected the lines. During the course of such inspection, it was determined that the segment of the liner that was not removed and re-installed in early 2004 was in need of replacement in the same fashion as all of the other segments replaced in 2004. The Company completed its assessment of the necessary remediation and related costs and began work with respect to such segment late in the second quarter of 2005. The Company’s remediation work with respect to this segment was completed during the third quarter of 2005. The Company incurred costs of approximately $2.3 million with respect to the 2005 remediation work, which costs were recorded in the second quarter of 2005.

Under the Company’s “Contractor Rework” special endorsement to its primary comprehensive general liability insurance policy, the Company filed a claim with its primary insurance carrier relative to rework of the Boston project. The carrier paid the Company the primary coverage of $1 million, less a $250,000 deductible, in satisfaction of its obligations under the policy.

The Company’s excess comprehensive general liability insurance coverage is in an amount far greater than the costs associated with the liner removal and re-installation. The Company believes the “Contractor Rework” special endorsement applies to the excess insurance coverage; it incurred costs in excess of the primary coverage and it notified its excess carrier of the claim in 2003. The excess insurance carrier denied coverage in writing without referencing the “Contractor Rework” special endorsement, and subsequently indicated that it did not believe that the “Contractor Rework” special endorsement applied to the excess insurance coverage.

In March 2004, the Company filed a lawsuit in United States District Court in Boston, Massachusetts against its excess insurance carrier for such carrier’s failure to acknowledge coverage and to indemnify the Company for the entire loss in excess of the primary coverage. In March 2005, the Court granted the Company’s partial motion for summary judgment, concluding that the Company’s policy with its excess insurance carrier followed form to the Company’s primary insurance carrier’s policy. On May 25, 2006, the Court entered an order denying a motion for reconsideration previously filed by the excess insurance carrier, thereby reaffirming its earlier opinion. In September 2006, the Company filed a motion for summary judgment as to the issue of whether the primary insurance carrier’s policy provided coverage for the underlying claim and as to the issue of damages. The excess insurance carrier also filed a motion for summary judgment as to the issue of primary coverage. On September 28, 2007, the Court entered an order that granted the Company’s motion for summary judgment as to liability and denied the excess insurance carrier’s motion. The Court found that the excess carrier’s policy followed form to the primary policy and that the claim was covered under both policies. However, the Court found that there were factual questions as to the amount of the Company’s claim. The case was set for a jury trial as to damages on February 4, 2008. The day before trial was to begin, the excess insurance carrier advised the Court that it would stipulate to a damage award equal to the award the Company would ask the jury to award, $6.1 million. On March 31, 2008, the Court entered a final judgment in favor of the Company in the amount of $7.7 million ($6.1 million in actual damages and $1.6 million in prejudgment interest). The excess insurance carrier has appealed the judgment to the United States Court of Appeals for the First Circuit and the Company has filed a notice of appeal on April 25, 2008.cross appeal.

During the second quarter of 2005, the Company, in consultation with outside legal counsel, determined that the likelihood of recovery from the excess insurance carrier was probable and that the amount of such recovery was reliably estimable. An insurance claims expert retained by the Company’s outside legal counsel reviewed the documentation produced with respect to the claim and, based on this review, provided the Company with an estimate of the costs that had been sufficiently documented and substantiated to date. The excess insurance carrier’s financial viability also was investigated during this period and was determined to have a strong rating of A+ with the leading insurance industry rating service. Based on these factors, the favorable court decisions in March 2005 and September 2007, the Company believed that recovery from the excess insurance carrier was both probable and reliably estimable and recorded an insurance claim receivable in connection with this matter.

The total claim receivable was $7.7$7.8 million at March 31,June 30, 2008, and was included in the prepaid and other assets caption on the consolidated balance sheet. The claim receivable is composed of actual remediation costs, pre-judgment interest and pre-judgmentpost-judgment interest as outlined in the table below:

The Company has incurred costs in responding to two United States government subpoenas relating to the investigation of alleged public corruption and bid rigging in the Birmingham, Alabama metropolitan area during the period from 1997 to 2003. The Company has produced hundreds of thousands of documents in an effort to comply fully comply with these subpoenas, which the Company believes were issued to most, if not all, sewer repair contractors and engineering firms that had public sewer projects in the Birmingham area. Indictments of public officials, contractors, engineers and contracting and engineering companies were announced in February, July and August of 2005, including the indictment of a former joint venture partner of the Company. A number of those indicted, including the Company’s former joint venture partner and its principals, have been convicted or pleaded guilty and have now been sentenced and fined. The Company has been advised by the government that it is not considered a target of the investigations at this time. The investigations are ongoing and the Company may have to incur additional legal expenses in complying with its obligations in connection with the investigations. The Company has been fully cooperative throughout the investigations.

The Company is involved in certain other litigation incidental to the conduct of its business and affairs. Management, after consultation with legal counsel, does not believe that the outcome of any such other litigation will have a material adverse effect on the company’sCompany’s consolidated financial condition, results of operations or cash flows.

The Company has entered into several contractual joint ventures in order to develop joint bids on contracts for its installation business and for tunneling operations. In these cases, the Company could be required to complete the joint venture partner’s portion of the contract if the partner were unable to complete its portion. The Company would be liable for any amounts for which the Company itself could not complete the work and for which a third party contractor could not be located to complete the work for the amount awarded in the contract. While the Company would be liable for additional costs, these costs would be offset by any related revenues due under that portion of the contract. The Company has not experienced material adverse results from such arrangements. Based on these facts, while there can be no assurances, the Company currently does not anticipate any future material adverse impact on its consolidated financial position, results of operations or cash flows.

The Company also has many contracts that require the Company to indemnify the other party against loss from claims of patent or trademark infringement. The Company also indemnifies its surety against losses from third party claims of subcontractors. The Company has not experienced material losses under these provisions and, while there can be no assurances, currently does not anticipate any future material adverse impact on its consolidated financial position, results of operations or cash flows.

The Company regularly reviews its exposure under all its engagements, including performance guarantees by contractual joint ventures and indemnification of its surety. As a result of the most recent review, the Company has determined that the risk of material loss is remote under these arrangements and has not recorded a liability for these risks at March 31,June 30, 2008 on its consolidated balance sheet.

From time to time, the Company may enter into foreign currency forward contracts to fix exchange rates for net investments in foreign operations. The Company’s currency forward contracts as of March 31,June 30, 2008, relate only to Canadian Dollar, Euro and Pound Sterling exchange rates. At March 31,June 30, 2008, a net deferred gainloss of $0.1$0.2 million related to these hedges was recorded in prepaid expenses and other assets and other comprehensive income on the consolidated balance sheet. All hedges were effective, and therefore, no gain or loss was recorded in the consolidated statementstatements of operations. There was no financial instrument activity in the first quarter of 2007, nor were there any open positions at March 31, 2007.

The following table summarizes the Company’s derivative instrument positions at March 31,June 30, 2008:

In accordance with SFAS No. 157, the Company determined that the instruments summarized above are derived from significant unobservable inputs (“Level 3 inputs”).

The following table presents a reconciliation of the beginning and ending balances of the Company’s assets and liabilities measured at fair value on a recurring basis using Level 3 inputs at March 31,June 30, 2008 (in thousands):, which consists only of the items summarized above:

The Company has two principal reportable segments: Rehabilitation, the Company’s sewer and water pipe rehabilitation segment; and Tite Liner, the Company’s corrosion and abrasionindustrial pipeline rehabilitation segment. The segments were determined based upon the types of products and services sold by each segment. Each segment is regularly reviewed and evaluated separately.

The following disaggregated financial results have been prepared using a management approach that is consistent with the basis and manner with which management internally disaggregates financial information for the purpose of making internal operating decisions. The Company evaluates performance based on stand-alone operating income (loss).

Financial information by segment was as follows (in thousands):

The following table summarizes revenues, gross profit and operating income (loss) by geographic region (in thousands):