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

FORM 10-Q



Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934



For the Quarterly Period Ended                                                                                  September 30, 2006                                                                                           
For the Quarterly Period EndedMarch 31, 2007

Commission file number0-10786
Commission File Number0-10786                                                                                                    

Insituform Technologies, Inc.
Insituform Technologies, Inc.
(Exact name of registrant as specified in its charter)


Delaware13-3032158
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)

incorporation or organization)17988 Edison Avenue, Chesterfield, Missouri 63005-1195
(Address of Principal Executive Offices)


(636) 530-8000
(Registrant’s telephone number, including area code)
702 Spirit 40 Park Drive, Chesterfield, Missouri 63005
(Address of Principal Executive Offices)


(636) 530-8000
(Registrant’s telephone number including area code)


N/A
(Former name, former address and former fiscal year,
if changed since last report)



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 þ No o¨

Indicate by check mark whether the registrant is a large accelerated filer, andan accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated o¨     Accelerated þ     Non-accelerated o¨

Indicate by check markcheckmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o¨  No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class Outstanding at October 30, 2006April 25, 2007
Class A Common Stock, $.01 par value 27,230,246 Shares27,276,998



1

INDEXINDEX

Page No.
Part IFinancial Information: Page No.
    
 
Item 1.
Financial Statements (unaudited):
 
    
  
Consolidated Statements of IncomeOperations for the Three Months Ended March 31, 2007 and 2006
3
    
  
Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006
4
    
  
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006
5
    
  
Notes to Consolidated Financial Statements as of March 31, 2007
6
    
 
Item 2.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
 1819
    
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 3028
    
 
Item 4.
Controls and Procedures
 3029
 
    
Part IIOther Information: 
    
 
Item 1.
Legal Proceedings
 3130
    
 Item 1A. 
Item 6.Risk Factors
Exhibits
 3130
    
 Item 4.
Submission of Matters to a Vote of Security Holders
31
Item 6.
Exhibits
 32
   
SignaturesSignatures
33 
 32
    
Index to Exhibits
34  33




2

PART I - FINANCIAL INFORMATION
ITEMITEM 1. FINANCIAL STATEMENTS

INSITUFORMINSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
(Unaudited)
(Inin thousands, except per share amounts)


  
For the Three Months
Ended March 31,
 
  
2007
 
2006
 
      
Revenues
 $130,948 $143,564 
Cost of revenues
  110,378  114,899 
Gross profit
  20,570  28,665 
Operating expenses
  25,228  22,887 
Costs of closure of tunneling business
  16,843  ─ 
Operating (loss) income
  (21,501) 5,778 
Other (expense) income:
       
Interest expense  (1,493) (1,809)
Interest income  949  518 
Other  741  133 
Total other income (expense)
  197  (1,158)
(Loss) income before (tax benefit) taxes on income
  (21,304) 4,620 
(Tax benefit) taxes on income
  (6,382) 1,594 
(Loss) income before minority interest and equity in earnings
  
(14,922
)
 
3,026
 
Minority interests
  (48) (27)
Equity in (losses) earnings of affiliated companies
  (306) 35 
Net (loss) income
 $(15,276)$3,034 
        
Basic (loss) earnings per share
 $(0.56)$0.11 
        
Diluted (loss) earnings per share
 $(0.56)$0.11 
  
For the Three Months
 
For the Nine Months
Ended September 30,
 
  
Ended September 30,
 
  
2006
 
2005
 
2006
 
2005
 
Revenues
 $144,076 $155,213 $441,841 $449,331 
Cost of revenues
  112,436  122,363  347,475  362,159 
Gross profit
  31,640  32,850  94,366  87,172 
Operating expenses
  24,293  23,391  73,056  69,588 
Operating income
  7,347  9,459  21,310  17,584 
Other (expense) income:
             
Interest expense  (1,716) (2,167) (5,142) (6,461)
Interest income  762  395  2,542  1,362 
Other  1,507  (247) 1,945  (411)
Total other income (expense)
  553  (2,019) (655) (5,510)
Income before taxes on income
  7,900  7,440  20,655  12,074 
Taxes on income
  2,402  2,000  6,802  3,622 
Income before minority interests, equity in earnings
  5,498  5,440  13,853  8,452 
Minority interests
  (117) (48) (242) (128)
Equity in earnings of affiliated companies
  314  368  632  571 
Net income
 $5,695 $5,760 $14,243 $8,895 
              
Earnings per share of common stock and common
             
stock equivalents:
             
Basic: $0.21 $0.21 $0.53 $0.33 
Diluted:  0.21  0.21  0.52  0.33 





See accompanying notes to consolidated financial statements.

3

INSITUFORMINSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Inin thousands, except share amounts)

 
September 30,
 
December 31,
  
March 31,
2007
 
December 31,
2006
 
 
2006
 
2005
      
Assets
          
Current Assets
          
Cash and cash equivalents $75,125 $77,069  $79,676 $96,393 
Restricted cash  5,289  5,588   1,288 934 
Receivables, net  99,295  85,896   85,090 90,678 
Retainage  36,027  33,138   33,247 37,193 
Costs and estimated earnings in excess of billings  35,966  32,503   48,896 41,512 
Inventories  16,836  15,536   18,108 17,665 
Prepaid expenses and other assets  27,408  24,294   29,388 25,989 
Total Current Assets
  295,946  274,024 
Property, Plant and Equipment, less accumulated depreciation
  92,065  95,657 
Other Assets
       
Total current assets
  295,693 310,364 
Property, plant and equipment, less accumulated depreciation
  90,354 90,453 
Other assets
      
Goodwill  131,544  131,544   122,620 131,540 
Other assets  16,092  17,103   19,137 17,712 
Total Other Assets
  147,636  148,647 
Total other assets
  141,757 149,252 
             
Total Assets
 $535,647 $518,328  $527,804 $550,069 
             
Liabilities and Stockholders’ Equity
             
Current Liabilities
       
Current liabilities
      
Current maturities of long-term debt and notes payable $17,551 $18,264  $5,376 $16,814 
Accounts payable and accrued expenses  102,474  94,560   105,631 107,320 
Billings in excess of costs and estimated earnings  17,001  14,017   14,059 12,371 
Total Current Liabilities
  137,026  126,841 
Long-Term Debt, less current maturities
  65,048  80,768 
Other Liabilities
  3,515  5,497 
Total Liabilities
  205,589  213,106 
Minority Interests
  2,048  1,726 
Total current liabilities
  125,066 136,505 
Long-term debt, less current maturities
  65,043 65,046 
Other liabilities
  8,394 7,726 
Total liabilities
  198,503 209,277 
Minority interests
  2,235 2,181 
             
Commitments and Contingencies (Note 7)
  –  – 
Commitments and contingencies (Note 9)
  - - 
             
Stockholders’ Equity
       
Preferred stock, undesignated, $.10 par - shares authorized       
2,000,000; none outstanding  –  – 
Common stock, $.01 par - shares authorized 60,000,000;       
shares issued 29,587,090 and 29,294,849;       
shares outstanding 27,229,626 and 26,937,385  296  293 
Unearned restricted stock compensation  (1,304) (937)
Stockholders’ equity
      
Preferred stock, undesignated, $.10 par - shares authorized 2,000,000; none outstanding  - - 
Common stock, $.01 par - shares authorized 60,000,000; shares issued 27,276,998 and 29,597,044; shares outstanding 27,276,998 and 27,239,580
   273  296 
Additional paid-in capital  150,311  140,309   100,577 149,802 
Retained earnings  226,328  212,085   221,157 236,763 
Treasury stock - 2,357,464 shares  (51,596) (51,596)
Treasury stock - at cost, shares outstanding 0 and 2,357,464  - (51,596)
Accumulated other comprehensive income  3,975  3,342   5,059 3,346 
Total Stockholders’ Equity
  328,010  303,496 
Total stockholders’ equity
  327,066 338,611 
             
Total Liabilities and Stockholders’ Equity
 $535,647 $518,328  $527,804 $550,069 



See accompanying notes to consolidated financial statements.

4


INSITUFORMINSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Inin thousands)

 
For the Nine Months
  
For the Three Months
Ended March 31,
 
 
Ended September 30,
  
2007
 
2006
 
 
2006
 
2005
      
Cash flows from operating activities:
     
Net income
 $14,243 $8,895 
Adjustments to reconcile to net cash provided by operating activities:
       
Cash flows from operating activities:
     
Net (loss) income
 $(15,276)$3,034 
Adjustments to reconcile to net cash (used in) provided by operating activities:
      
Depreciation  14,962  13,915   4,997 5,059 
Amortization  943  1,220   217 307 
Deferred income taxes  (1,876) 2,909   (5,698) (575)
Equity-based compensation expense  3,677  763   1,664 1,420 
Non-cash charges associated with closure of tunneling business  11,955 ─ 
Tax benefits related to stock option exercises  (45) (625)
Other  (786) 18   (310) 2,277 
Changes in restricted cash related to operating activities  298  (2,555)
Tax benefits related to stock option exercises  (751) – 
Change in restricted cash related to operating activities  (354) (925)
Changes in operating assets and liabilities:
             
Receivables, including costs and estimated earnings in excess of billings  (17,446) (23,059)
Receivables net, retainage and costs and estimated earnings in excess of billings  2,557 (6,030)
Inventories  (965) (2,439)  (391) (3,451)
Prepaid expenses and other assets  (2,683) (10,271)  (1,978) 832 
Accounts payable and accrued expenses  9,808  18,906   (768) 951 
Net cash provided by operating activities
  19,424  8,302 
Net cash (used in) provided by operating activities
  (3,430) 2,274 
             
Cash flows from investing activities:
       
Cash flows from investing activities:
      
Capital expenditures  (14,087) (20,870)  (4,546) (3,383)
Proceeds from sale of fixed assets  3,938  715   179 250 
Liquidation of life insurance cash surrender value  1,423  –   ─ 1,423 
Investment in patents  –  (557)
Net cash used in investing activities
  (8,726) (20,712)  (4,367) (1,710)
             
Cash flows from financing activities:
       
Cash flows from financing activities:
      
Proceeds from issuance of common stock  3,920  1,041   637 3,012 
Additional tax benefit from stock option exercises recorded in       
additional paid in capital  751  – 
Proceeds from notes payable  2,795  6,179 
Additional tax benefit from stock option exercises recorded in additional paid-in capital  45 625 
Principal payments on long-term debt  (15,732) (15,767)  (15,713) (15,726)
Principal payments on notes payable  (3,501) (1,890)  (727) (1,606)
Proceeds on line of credit  5,000 ─ 
Deferred financing charges paid  (106) (260)  ─ (103)
Net cash used in financing activities
  (11,873) (10,697)  (10,758) (13,798)
Effect of exchange rate changes on cash  (769) (474)
Effects of exchange rate changes on cash  1,838 313 
Net decrease in cash and cash equivalents for the period
  (1,944) (23,581)  (16,717) (12,921)
Cash and cash equivalents, beginning of period
  77,069  93,246   96,393 77,069 
Cash and cash equivalents, end of period
 $75,125 $69,665  $79,676 $64,148 
      
Supplemental disclosures of cash flow information:
      
Cash paid for:
      
Interest $698 $1,418 
Income taxes, net  1,800 1,796 


See accompanying notes to consolidated financial statements.

5

INSITUFORMINSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2006March 31, 2007


1.
GENERAL
In the opinion of the Company’s management, the accompanying consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company’s unaudited consolidated balance sheets as of September 30, 2006 and December 31, 2005, the unaudited consolidated statements of income for the three and nine months ended September 30, 2006 and 2005 and the unaudited consolidated statements of cash flows for the nine months ended September 30, 2006 and 2005. The financial statements have been prepared in accordance with the requirements of Form 10-Q and consequently do not include all the disclosures normally contained in an Annual Report on Form 10-K. Accordingly, the consolidated financial statements included herein should be read in conjunction with the financial statements and the footnotes included in the Company’s 2005 Annual Report on Form 10-K.
Certain prior period amounts have been reclassified to conform to current presentation.
The results of operations for the three and nine months ended September 30, 2006 are not necessarily indicative of the results to be expected for the full year.

In the opinion of the Company’s management, the accompanying consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company’s unaudited consolidated balance sheets as of March 31, 2007 and December 31, 2006 and the unaudited consolidated statements of operations and cash flows for the three months ended March 31, 2007 and 2006. The 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 consolidated financial statements included herein should be read in conjunction with the financial statements and the footnotes included in the Company’s 2006 Annual Report on Form 10-K.

The results of operations for the three months ended March 31, 2007 are not necessarily indicative of the results to be expected for the full year.

2.
EQUITY-BASED COMPENSATION
In the second quarter of 2006, the Company registered an aggregate of 2.2 million shares for issuance under the 2006 Employee Equity Incentive Plan and the 2006 Non-Employee Director Equity Incentive Plan. Under these plans, the Company may award equity-based compensation awards, including stock appreciation rights, restricted shares of common stock, performance awards, stock options and stock units. At September 30, 2006, no awards had been issued under these plans, and all registered shares remain available for future issuance under these plans. All existing equity-based compensation awards outstanding were issued under previous employee and non-employee director plans.
On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment. This standard revised the measurement, valuation and recognition of financial accounting and reporting standards for equity-based compensation plans contained in SFAS No. 123, Accounting for Stock Based Compensation. The new standard requires companies to expense the value of employee stock options and similar equity-based compensation awards based on fair value recognition provisions determined on the date of grant.
The Company adopted SFAS No. 123(R) using the modified prospective transition method, which requires the application of the accounting standard on January 1, 2006, the effective date of the standard for the Company. In accordance with the modified prospective transition method, the Company’s consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). The Company will continue to include tabular, pro forma disclosures in accordance with SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, for all periods prior to January 1, 2006.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. Assumptions regarding volatility, expected term, dividend yield and risk-free rate are required for the Black-Scholes model. Volatility and expected term assumptions are based on the Company’s historical experience. The risk-free rate is based on a U.S. treasury note with a maturity similar to the option award’s expected term. The assumptions for volatility, expected term, dividend yield and risk-free rate are presented in the table below:

  2006 
  
 
Range
 
Weighted
Average
 
Volatility  41.7% - 45.5% 41.8%
Expected term (years)  4.8  4.8 
Dividend yield  0.0% 0.0%
Risk-free rate  4.3% - 5.0% 4.3%
At March 31, 2007, 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 were 2.2 million shares authorized for issuance under these plans. At March 31, 2007, 1.8 million shares remained available for future issuance under these plans.
Restricted Stock Shares

Restricted shares of the Company’s common stock are awarded from time to time to the executive officers and certain key employees of the Company subject to a three-year service restriction, and may not be sold or transferred during the restricted period. Restricted stock compensation is recorded based on the fair value of the restricted stock shares on the grant date which is equal to the Company's stock price and charged to expense ratably through the restriction period. Forfeitures cause the reversal of all previous expense recorded as a reduction of current period expense. In the first quarter of 2007, no restricted shares were granted. The following table summarizes information about restricted stock activity during the quarter ended March 31, 2007:

  
Shares
 
Weighted
Average
Grant Date
Fair Value
 
Outstanding at December 31, 2006  131,500 $17.73 
Granted  -    
Vested  -    
Forfeited  -    
Outstanding at March 31, 2007  131,500 $17.73 


6


Restricted Stock
Restricted shares of the Company’s common stock are awarded from time to time to the executive officers and certain key employees of the Company subject to a three-year service restriction, and may not be sold or transferred during the restricted period. Restricted stock compensation is recorded based on the stock price on the grant date and charged to expense ratably through the restriction period. Forfeitures cause the reversal of all previous expense recorded as a reduction of current period expense. The following table summarizes information about restricted stock activity during the nine-month period ended September 30, 2006:
Expense associated with grants of restricted stock shares and the effect of related forfeitures is presented below (in thousands):
  
Three Months
Ended March 31,
 
  
2007
 
2006
 
Restricted stock share expense $194 $211 
Forfeitures  -  - 
Restricted stock share expense  194  211 
Tax benefit  (75) (82)
Net expense 
$
119
 
$
129
 

  
Shares
 
Weighted
Average
Grant Date
Fair Value
 
Outstanding at December 31, 2005  83,900 $16.64 
Granted  50,800  19.41 
Vested  (1,700) 15.72 
Forfeited  (1,500) 15.50 
Outstanding at September 30, 2006  
131,500
 
$
17.73
 
Unrecognized pretax expense of $0.9 million related to restricted stock share awards is expected to be recognized over the weighted average remaining service period of 1.2 years for awards outstanding at March 31, 2007.

Expense (benefit) associated with grants of restricted stock and the effect of related forfeitures are presented below (in thousands):
Restricted Stock Units


On January 11, 2007, restricted stock units were awarded to the executive officers and certain key employees of the Company. The restricted stock units will vest fully on the third anniversary date of the award if the recipient’s employment with the Company has not terminated on or prior to that date. The restricted stock unit awards for executive officers also are subject to the Company’s achievement of a pre-established net income target during the performance period beginning on January 1, 2007 and ending on December 31, 2007. Restricted stock unit compensation is recorded based on the fair value of the restricted stock units on the grant date which is equal to the Company’s stock price and charged to expense ratably through the restriction period. Forfeitures cause the reversal of all previous expense recorded as a reduction of current period expense. The following table summarizes information about restricted stock unit activity during the quarter ended March 31, 2007:
  
Three Months Ended
 
Nine Months Ended
 
  
September 30,
 
September 30,
 
  
2006
 
2005
 
2006
 
2005
 
Restricted stock expense $193 $149 $601 $340 
Forfeitures  
–­
  (12) (15) (116)
Restricted stock expense, net  193  137  586  224 
Tax benefit  (75) (48) (228) (78)
Net expense 
$
118
 
$
89
 
$
358
 
$
146
 
    
Weighted
 
    
Average
 
  
Restricted
 
Award Date
 
  
Stock Units
 
Fair Value
 
Outstanding at December 31, 2006  - $- 
Awarded  50,830  25.60 
Shares distributed  -  - 
Forfeited/Expired  -  - 
Outstanding at March 31, 2007  
50,830
 
$
25.60
 

Unrecognized pretax expense of $1.3 million related to restricted stock awards is expected to be recognized over the weighted average remaining service period of 1.7 years for awards outstanding at September 30, 2006.
Deferred Stock Units
Deferred stock units are generally awarded to directors of the Company and represent the Company’s obligation to transfer one share of the Company’s common stock to the grantee at a future date and generally are fully vested on the date of grant. The expense related to the issuance of deferred stock units is recorded in full on the date of grant.
Deferred stock units awarded and the associated expense for the three- and nine-month periods ended September 30, 2006 and 2005 are presented in the table below (dollars in thousands):
Expense associated with awards of restricted stock units and the effect of related forfeitures are presented below (in thousands):
  
Three Months Ended
 
  
March 31,
 
  
2007
 
2006
 
Restricted stock unit expense $108 $- 
Forfeitures  -  - 
Restricted stock unit expense  108  - 
Tax benefit  ( 42) - 
Net expense 
$
66
 $- 

  
Three Months Ended
 
Nine Months Ended
 
  
September 30,
 
September 30,
 
  
2006
 
2005
 
2006
 
2005
 
Deferred stock units awarded  –­  3,200  24,900  32,282 
              
Deferred stock units expense $–­ $61 $603 $539 
Tax benefit  –­  (21) (234) (189)
Net expense 
$
–­
 
$
40
 
$
369
 
$
350
 

Unrecognized pretax expense of $1.2 million related to restricted stock unit awards is expected to be recognized over the weighted average remaining service period of 1.1 years for awards outstanding at March 31, 2007.

7


The following table summarizes information about deferred stock units activity during the nine-month period ended September 30, 2006:

  
Deferred
Stock Units
 
Weighted
Average
Award Date
Fair Value
 
Outstanding at December 31, 2005  78,432 $16.39 
Granted  24,900  24.20 
Shares distributed  (9,525) 15.75 
Outstanding at September 30, 2006  
93,807
 
$
18.53
 
Deferred Stock Units

Stock Options
Stock options granted generally have a term of seven to ten years and are required to have an exercise price equal to the market value of the underlying common stock on the date of grant. A summary of option activity for the first nine months of 2006 follows:

  
Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term (Yrs)
 
Aggregate
Intrinsic
Value
 
Outstanding at December 31, 2005  1,381,476 $19.53       
Granted  324,000  19.63       
Exercised  (233,416) 16.79       
Forfeited/Expired  (152,794) 21.60       
Outstanding at September 30, 2006
  
1,319,266
 
$
19.80
  
5.0
 
$
6,949,148
 
Exercisable at September 30, 2006
  
890,716
 
$
20.58
  
4.6
 
$
4,301,186
 
  
Options Outstanding
 
Options Exercisable
 
    
Weighted
           
    
Average
 
Weighted
     
Weighted
   
    
Remaining
 
Average
 
Aggregate
   
Average
 
Aggregate
 
Range of
 
Number
 
Contractual
 
Exercise
 
Intrinsic
 
Number
 
Exercise
 
Intrinsic
 
Exercise Price
 
Outstanding
 
Term (Yrs)
 
Price
 
Value
 
Exercisable
 
Price
 
Value
 
$4.00 to $10.00  29,400  1.1 $8.75 $456,582  29,400 $8.75 $456,582 
$10.01 to $20.00  769,896  5.3  16.45  6,032,124  399,346  15.32  3,577,602 
$20.00 and above  519,970  4.8  25.38  460,442  461,970  25.88  267,002 
Total Outstanding
  
1,319,266
  
5.0
 
$
19.80
 
$
6,949,148
  
890,716
 
$
20.58
 
$
4,301,186
 
Deferred stock units are generally awarded to directors of the Company and represent the Company’s obligation to transfer one share of the Company’s common stock to the grantee at a future date and generally are fully vested on the date of grant. The expense related to the issuance of deferred stock units is recorded in full on the date of grant. In the first quarter of 2007 and 2006, there were no deferred stock units awarded. The following table summarizes information about deferred stock unit activity during the quarter ended March 31, 2007:

    
Weighted
 
    
Average
 
  
Deferred
 
Award Date
 
  
Stock Units
 
Fair Value
 
Outstanding at December 31, 2006  93,807 $18.53 
Awarded  -  - 
Shares distributed  -  - 
Forfeited/Expired  -  - 
Outstanding at March 31, 2007  
93,807
 
$
18.53
 

The intrinsic values above are based on the Company’s closing stock price of $24.28 on September 29, 2006. The weighted-average grant-date fair value of options awarded during the first nine months of 2006 was $8.25. In the first nine months of 2006, the Company collected $3.9 million from stock option exercises that had a total intrinsic value of $2.2 million. The Company recorded a tax benefit from stock option exercises of $0.8 million in additional paid-in capital on the consolidated balance sheet and as a cash flow from financing activities on the consolidated statements of cash flows. Under the fair value provisions of SFAS 123(R), the Company recorded pretax expense of $0.4 million and $2.2 million related to stock option awards in the third quarter and first nine months of 2006, respectively. Unrecognized pretax expense of $1.5 million related to stock options is expected to be recognized over the weighted average remaining service period of 1.1 years for awards outstanding at September 30, 2006.
Stock Options

Stock options granted generally have a term of seven to ten years and an exercise price equal to the market value of the underlying common stock on the date of grant. A summary of option activity for the first quarter of 2007 follows:

  
Options Outstanding
 
Options Exercisable
 
    
Weighted
           
    
Average
 
Weighted
     
Weighted
   
    
Remaining
 
Average
 
Aggregate
   
Average
 
Aggregate
 
Range of
 
Number
 
Contractual
 
Exercise
 
Intrinsic
 
Number
 
Exercise
 
Intrinsic
 
Exercise Price
 
Outstanding
 
Term (Yrs)
 
Price
 
Value
 
Exercisable
 
Price
 
Value
 
$4.00 - $10.00  29,400  0.6 $8.75   $353,976  29,400 $8.75  $353,976 
$10.01 - $20.00  718,208  4.8  16.52  3,069,901  436,483  16.05  2,069,863 
$20.00 and above  840,089  5.3     25.45  23,920  532,802  25.58  17,940 
Total Outstanding
  
1,587,697
  
5.0
  $21.10 
 $
3,447,797
  
998,685
 $20.92 
 $
2,441,779
 

      
Weighted
   
    
Weighted
 
Average
   
    
Average
 
Remaining
 
Aggregate
 
    
Exercise
 
Contractual
 
Intrinsic
 
  
Shares
 
Price
 
Term (Yrs)
 
Value
 
Outstanding at December 31, 2006  1,298,392 $19.85       
Granted  338,455  25.60       
Exercised  (37,418) 17.04       
Forfeited/Expired  (11,732) 22.67       
Outstanding at March 31, 2007
  
1,587,697
 
$
21.10
  
5.0
 
$
3,447,797
 
Exercisable at March 31, 2007
  
998,685
 
$
20.92
  
4.4
 
$
2,441,779
 

The intrinsic values above are based on the Company’s closing stock price of $20.79 on March 30, 2007. The weighted-average grant-date fair value of options granted during the first quarter of 2007 was $10.97. There were 316,000 stock options granted in the first quarter of 2006. In the first quarter of 2007, the Company collected $0.6 million for option exercises that had a total intrinsic value of $0.3 million. In the first quarter of 2006, the Company collected $3.0 million for option exercises that had a total intrinsic value of $1.8 million. In the first quarter of 2007 and 2006,
8


the Company recorded a tax benefit from stock option exercises of $0.05 million and $0.6 million, respectively, in additional paid in capital on the consolidated balance sheet and as a cash flow from financing activities on the consolidated statement of cash flow for the three months ended March 31, 2007 and 2006. In the first quarter of 2007 and 2006, the Company recorded pretax expense of $1.4 million ($0.9 million after-tax) and $1.2 million ($0.7 million after-tax), respectively, related to stock option awards. Unrecognized pretax expense of $3.5 million related to stock options is expected to be recognized over the weighted average remaining service period of 1.8 years for awards outstanding at March 31, 2007.
For  2007, the Company changed from using the Black-Scholes option-pricing model to the binomial option-pricing model for valuation purposes to more accurately reflect the features of stock options granted.
The fair value of stock options awarded during the first quarter of 2007 was estimated at the date of grant using the binomial option-pricing model based on the assumptions presented in the table below. Volatility, expected term, and high-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’s expected term.
 
Prior Year Equity Compensation Expense
2007 
Volatility
Prior to January 1, 2006, the Company applied the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for stock options. The following table illustrates the effect on net income and earnings per share in the three- and nine-month periods ended September 30, 2005 had the Company applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock Based Compensation, to equity-based compensation (in thousands, except per-share data):
45.0%
Expected term (years)4.5
Dividend yield0.0%
Risk-free rate4.4%
 
  
Three Months Ended
September 30,
2005
 
Nine Months Ended
September 30,
2005
 
Net income, as reported $5,760 $8,895 
Add: Total equity-based compensation expense
included in net income, net of related tax benefits
  
129
  
496
 
Deduct: Total equity-based compensation expense
determined under fair value method for all awards,
net of related tax effects
  
(654
)
 
(1,944
)
Pro forma net income $5,235 $7,447 
        
Basic earnings per share as reported: $0.21 $0.33 
Basic earnings per share pro forma:  0.20  0.28 
        
Diluted earnings per share as reported: $0.21 $0.33 
Diluted earnings per share pro forma:  0.19  0.28 

During 2006, the fair value of stock options awarded was estimated at the date of grant using the Black-Scholes option-pricing model based on the assumptions presented in the table below. Volatility, dividend yield and expected term 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’s expected term.
 
In accordance with SFAS 148, Accounting for Stock-Based Compensation - Transition and Disclosure, the equity-based compensation expense recorded in the determination of reported net income during the three and nine months ended September 30,
2006 is disclosed in the table above. The pro forma equity-based compensation expense includes the recorded expense and the expense related to stock options that was determined using the fair value method.
 
Volatility
Stock Option Grant Practices
41.7%
Expected term (years)4.8 
Dividend yieldGiven the recent focus by the Securities and Exchange Commission on historical stock option grant procedures, at the request of its Board of Directors, the Company, in conjunction with outside counsel, investigated historical practices in the granting of stock options from January 1, 2000 to the present, regardless of whether the grants were made to directors, officers or non-officer employees of the Company. The results of the investigation revealed that a number of option grants during this period had option grant dates as set forth in the individual stock option agreements that occurred either prior to or after the dates that the Company’s records evidence approval of the options by the appropriate governing body.
  0.0%
Risk-free rateIn each of the cases where there was a mismatch of the option grant date and the approval date, the investigation concluded that the grant date exercise price was less than the fair market value of the Company’s common stock on the approval date. The resulting cumulative expense related to these option grants was not material to any previously reported historical period, nor is it material in the third quarter of 2006. As such, no financial statements for previously reported periods are being revised, and additional non-cash stock-based compensation expense of $0.2 million was recorded in the third quarter of 2006. The compensation expense had no effect on the Company’s cash position.
  
4.3No evidence of intentional or fraudulent misconduct in the granting of these stock options was uncovered during the investigation, but the investigation found incomplete documentation of option grants as well as option grant procedures that did not meet best practice standards.%




9


3.
COMPREHENSIVE (LOSS) INCOME
For the quarters ended September 30,

For the quarters ended March 31, 2007 and 2006, comprehensive (loss) income was $(13.6) million and $3.5 million, respectively. The Company’s adjustment to net (loss) income to calculate comprehensive (loss) income consisted solely of cumulative foreign currency translation adjustments of $1.7 million and $0.5 million for the quarters ended March 31, 2007 and 2006, and 2005, comprehensive income was $3.5 million and $7.0 million, respectively, with comprehensive income of $14.9 million and $7.5 million for the nine months ended September 30, 2006 and 2005, respectively. The Company’s adjustment to net income to calculate comprehensive income consists solely of cumulative foreign currency translation adjustments of $(2.2) million and $1.2 million for the quarters ended September 30, 2006 and 2005, respectively, and $0.6 million and $(1.4) million for the nine months ended September 30, 2006 and 2005, respectively.

4.
SHARE INFORMATION
Earnings per share have been calculated using the following share information:

(Loss) earnings per share have been calculated using the following share information:

  
Three Months Ended
March 31,
 
  
2007
 
2006
 
Weighted average number of common shares used for basic EPS  27,254,380  26,918,383 
Effect of dilutive stock options, restricted stock, restricted stock units and deferred stock units (Note 2)  ─  428,263 
Weighted average number of common shares and dilutive potential common stock used in dilutive EPS  27,254,380  27,346,646 

The effect of stock options, restricted stock, restricted stock units and deferred stock units of 419,088 was not considered in the calculation of loss per share in the first quarter of 2007 as the effect would have been anti-dilutive.

Treasury Stock Retirement

On January 24, 2007, the Company’s Board of Directors approved the retirement of the Company’s treasury stock. Consequently, the Company’s 2,357,464 shares of treasury stock were retired on March 20, 2007, and the number of
 
   
Three Months Ended September 30, 
 
 
 
2006 
 
 
2005 
 
Weighted average number of common shares used for basic EPS  27,091,398  26,793,266 
Effect of dilutive stock options and restricted stock  332,254  251,387 
Weighted average number of common shares       
and dilutive potential common stock used in dilutive EPS  27,423,652  27,044,653 
        
issued shares was reduced accordingly. The effects on stockholders’ equity included a reduction in common stock by the par value of the shares, and a reduction in additional paid-in capital.
  
 Nine Months Ended September 30,
   
2006 
  
2005 
 
Weighted average number of common shares used for basic EPS
  27,024,019  26,764,249 
Effect of dilutive stock options and restricted stock  442,564  178,243 
Weighted average number of common shares       
and dilutive potential common stock used in dilutive EPS  27,466,583  26,942,492 

5.
SEGMENT REPORTING AND GEOGRAPHIC INFORMATIONINCOME TAXES
The Company has three principal operating segments: rehabilitation; tunneling; and Tite Liner®, the Company’s corrosion and abrasion segment. The segments were determined based upon the types of products sold by each segment and each is regularly reviewed and evaluated separately.
The following disaggregated financial results are presented on the same basis that management uses to make internal operating decisions. The Company evaluates performance based on stand-alone operating income.
Financial information by segment was as follows (in thousands):

  
Three Months Ended
 
Nine Months Ended
 
  
September 30,
 
September 30,
 
  
2006
 
2005
 
2006
 
2005
 
Revenues
         
Rehabilitation $118,269 $107,821 $355,147 $336,279 
Tunneling  16,002  35,724  49,843  85,123 
Tite Liner®  9,805  11,668  36,851  27,929 
Total revenues
 $144,076 $155,213 $441,841 $449,331 
              
Gross profit (loss)
             
Rehabilitation $28,927 $26,596 $83,435 $81,172 
Tunneling  (868) 2,767  (1,318) (2,438)
Tite Liner®  3,581  3,487  12,249  8,438 
Total gross profit
 $31,640 $32,850 $94,366 $87,172 
              
Operating income (loss)
             
Rehabilitation $8,225 $8,513 $21,962 $25,320 
Tunneling  (2,963) (1,267) (8,087) (12,375)
Tite Liner®  2,085  2,213  7,435  4,639 
Total operating income
 $7,347 $9,459 $21,310 $17,584 


10


In the first nine months of 2005, the Company recorded a claim receivable from the Company’s excess insurance coverage carrier, which benefited gross profit in the rehabilitation segment by $3.4 million. In the first nine months of 2006, the Company recorded $0.5 million related to additional amounts from the same claim. See Note 7 - “Boston Installation” for further discussion.
Tunneling posted an operating loss in the third quarter of 2006, primarily due to underutilized equipment. Underutilized equipment costs (primarily operating lease expenses) were $2.3 million in the third quarter of 2006 compared to $1.4 million in the third quarter of 2005. Tunneling’s results in the third quarter of 2005 included $2.9 million ($2.0 million after reserves for certain doubtful receivables and claims from counter-parties of $0.9 million) in claims recognition. Claims are recorded to income when realization of the claim is reasonably assured at an estimated recoverable amount.
Tunneling’s gross loss in the first nine months of 2006 was similarly impacted by underutilized equipment costs of $6.8 million during the period, compared to $2.8 million in the first nine months of 2005. In addition, a number of problematic projects in California were nearing completion earlier this year, which also contributed to tunneling’s gross loss. These unfavorable factors were partially offset by $0.7 million in recognized claims and a favorable adjustment of $0.9 million on our large project in Chicago, Illinois, which related to amounts previously reserved for unexpected contingencies, including rain, that did not occur.
In the first nine months of 2005, performance in the tunneling segment was adversely impacted by the continuation of projects that encountered unfavorable gross margin developments beginning in the fourth quarter of 2004. There were further adverse margin developments on certain of these projects, mostly occurring in the first half of 2005, with one large project accounting for $5.0 million of the tunneling operating loss in the first nine months of 2005. During the first nine months of 2005, $3.8 million ($2.9 million after reserves for certain doubtful receivables and claims from counterparties of $0.9 million) were recognized.
On July 13, 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes” and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN 48, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, FIN 48 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 was effective for fiscal years beginning after December 15, 2006.

The following table summarizes revenues, gross profit and operating income by geographic region (in thousands):
The Company adopted the provisions of FIN 48 on January 1, 2007. The total amount of unrecognized tax benefits as of the date of adoption was $4.1 million. As a result of the implementation of FIN 48, the Company recognized a $2.8 million increase in the liability for unrecognized tax benefits, which was accounted for as approximately $0.3 million cumulative charge to the January 1, 2007 balance of retained earnings, approximately $0.4 million additional deferred tax assets and $2.1 million additional non-current receivables.

 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30, 
 
 
 
2006 
 
2005 
 
2006 
 
2005 
 
Revenues:
         
United States $108,738 $122,157 $337,953 $355,684 
Canada  11,989  8,741  31,730  22,570 
Europe  21,206  19,627  59,978  62,295 
Other foreign  2,143  4,688  12,180  8,782 
Total revenues
 $144,076 $155,213 $441,841 $449,331 
              
Gross profit:
             
United States $20,562 $23,276 $64,431 $61,868 
Canada  4,279  3,273  11,226  7,720 
Europe  6,081  5,531  15,473  15,728 
Other foreign  718  770  3,236  1,856 
Total gross profit
 $31,640 $32,850 $94,366 $87,172 
              
Operating income:
             
United States $2,804 $5,427 $10,803 $9,850 
Canada  2,742  2,053  6,876  4,132 
Europe  1,299  1,404  1,524  2,342 
Other foreign  502  575  2,107  1,260 
Total operating income
 $7,347 $9,459 $21,310 $17,584 
Included in the balance of unrecognized tax benefits at January 1, 2007 are $1.5 million of tax benefits that, if recognized, would affect the effective income tax rate. The remaining $2.6 million of tax benefits, if recognized, would result in adjustments to other income tax accounts.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in the tax provision. Upon adoption of FIN 48, the Company accrued $0.6 million for interest and penalties. In addition, during the first quarter of 2007, approximately $0.05 million was accrued for interest and penalties.
The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits will change within twelve months of the date of adoption. The Company has certain tax return years subject to statutes of limitation which will close within twelve months of the date of adoption. Unless challenged by tax authorities, the closure of those statutes of limitation is expected to result in the recognition of uncertain tax positions in the amount of approximately $0.4 million.
The Company is subject to taxation in the United States, various states and foreign jurisdictions. The Company’s tax years for 1999 through 2006 are subject to examination by the tax authorities. With few exceptions, the Company is no longer subject to U.S. federal, state, local or foreign examinations by tax authorities for years before 1999.

11
6.
ACQUIRED INTANGIBLE ASSETSCLOSURE OF TUNNELING BUSINESS
Acquired intangible assets include license agreements, customer relationships, patents and trademarks, and non-compete agreements. Intangible assets at September 30, 2006 and December 31, 2005 were as follows (in thousands):

  
As of September 30, 2006 
 
  
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Amortized intangible assets:       
License agreements $3,894 $(1,772)
$
2,122
 
Customer relationships  1,797  (361) 1,436 
Patents and trademarks  14,953  (13,213) 1,740 
Non-compete agreements  3,247  (2,891) 356 
Total $23,891 $(18,237)$5,654 
On March 29, 2007, the Company announced plans to exit its tunneling business in an effort to improve its overall financial performance and to better align its operations with its long-term strategic initiatives. The tunneling business is reported as a separate segment for financial reporting purposes. See Note 7 for further information regarding segment reporting.

  
 As of December 31, 2005 
 
  
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Amortized intangible assets:       
License agreements $3,894 $(1,644)$2,250 
Customer relationships  1,797  (271) 1,526 
Patents and trademarks  14,500  (13,038) 1,462 
 Non-compete agreements  3,239  (2,400) 839 
Total $23,430 $(17,353)$6,077 
The Company currently expects to substantially complete the exit of its tunneling business by the end of 2007. The Company ceased bidding and accepting new contracts concurrent with the announcement. The Company’s overall disposal strategy involves the sale or completion of all on-going tunneling projects. The Company expects the on-site work related to existing jobs to be substantially completed within the next twelve months and is seeking a buyer or buyers for the business and/or related significant assets. However, there can be no assurances that a suitable buyer or buyers will be identified.

As a result of the exit and disposal activities relating to the closure of its tunneling business, the company anticipates that it will incur pre-tax charges of approximately $21.0 million, of which approximately $8.0 million relate to cash charges which will include approximately $4.5 million relating to property, equipment and vehicle lease terminations and buyouts, approximately $2.5 million relating to employee termination benefits and retention incentives and approximately $1.0 million of other ancillary expenses. During the first quarter of 2007, the Company recorded a
 
Amortization expense for the three and nine months ended September 30, 2006 and 2005 and estimated amortization expense for the next five years are as follows (in thousands):
total of $4.8 million (pre-tax) related to these activities, including accruals for $3.6 million (pre-tax) associated with equipment lease buyouts, $1.1 million (pre-tax) for employee termination benefits 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 operation.
The Company also incurred impairment charges for goodwill and other intangible assets of $9.0 million during the first quarter of 2007. These impairment charges occurred as a result of a thorough review of the fair value of assets and future cash flows to be generated by the business. This review concluded that insufficient fair value existed to support the value of the goodwill and other intangible assets recorded on the balance sheet.

In addition, the Company announced that it would incur impairment charges of up to $4.0 million for equipment and other assets during the first and second quarters of 2007. In the first quarter of 2007, the Company recorded charges totaling $3.0 million (pre-tax). These charges relate to assets that, at March 31, 2007, currently were not being utilized in the business. The impairment was calculated by subtracting current book values from estimated fair values of each of the idle assets. Fair values were determined using data from recent sales of similar assets and other market information. As of March 31, 2007, the fair value of the remaining fixed assets exceeded the carrying value. These assets are currently being utilized on existing projects.
Each of the above charges has been recorded in the consolidated statement of operations as “Costs of closure of tunneling business” as a component of operating income.

Aggregate amortization expense:  
2006
  
2005
 
Three months ended September 30 $311 $383 
Nine months ended September 30  943  1,220 
        
Estimated amortization expense:       
For year ending December 31, 2006 $1,254    
For year ending December 31, 2007  1,079    
For year ending December 31, 2008  382    
For year ending December 31, 2009  272    
For year ending December 31, 2010  272    
On March 26, 2007, the Company was notified of an award of a $65 million tunneling project in Milwaukee, Wisconsin, which the Company had bid in January 2007. Given the decision to close the tunneling operation, the Company has assigned the project to another contractor who acquired the project from the Company at the Company’s bid price. The Company will have no future obligations to complete the project.

7.
COMMITMENTS AND CONTINGENCIESSEGMENT REPORTING
Litigation
In the third quarter of 2002, an accident on an Insituform® cured-in-place-pipe (“CIPP”) process project in Des Moines, Iowa resulted in the death of two workers and the injury of five workers. The Company fully cooperated with Iowa’s state OSHA in the investigation of the accident. Iowa OSHA issued a citation and notification of penalty in connection with the accident, including several willful citations. Iowa OSHA proposed penalties of $808,250. The Company challenged Iowa OSHA’s findings and, in the fourth quarter of 2003, an administrative law judge reduced the penalties to $158,000. In the second quarter of 2004, the Iowa Employment Appeal Board reinstated many of the original penalties, ordering total penalties in the amount of $733,750. The Company appealed the decision of the Employment Appeal Board to the Iowa District Court for Polk County, which, in the first quarter of 2005, reduced the penalties back to $158,000. The Company appealed the decision of the Iowa District Court and, on February 8, 2006, the Company’s appeal was heard by the Iowa Court of Appeals. On March 17, 2006, the Court of Appeals issued its opinion, vacating all citations issued under the general industry standards (all citations except two serious citations) and reducing total penalties against the Company to $4,500. Thereafter, the Employment Appeal Board filed a petition for further review to the Iowa Supreme Court, and the Company filed a resistance to the petition. On September 29, 2006, the Iowa Supreme Court granted the Employment Appeal Board’s petition for further review, and set the case for consideration during the week of December 4, 2006. In a companion action brought by the Employment Appeal Board against the City of Des Moines (events arising out of the Des Moines accident), the Iowa Supreme Court recently reversed the Iowa Court of Appeal’s earlier decision, which previously had affirmed the dismissal of all citations and penalties previously issued/assessed against the City of Des Moines. In so reversing, the Iowa Supreme Court reinstated two serious citations and penalties of $9,000 against the City of Des

The Company has three principal operating segments: rehabilitation; tunneling; and Tite Liner®, the Company’s corrosion and abrasion segment (“Tite Liner”). The segments were determined based upon the types of products and services sold by each segment and each 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.
 

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

  
Three Months Ended
March 31,
 
  
2007
 
2006
 
Revenues:     
Rehabilitation $103,321 $111,658 
Tunneling  15,966  19,384 
Tite Liner®  11,661  12,522 
Total revenues $130,948 $143,564 
        
Gross profit (loss):       
Rehabilitation $15,417 $25,334 
Tunneling  187  (616)
Tite Liner®  4,966  3,947 
Total gross profit $20,570 $28,665 
        
Operating (loss) income:       
Rehabilitation $(6,120)$6,460 
Tunneling  (18,736
)(1)
 (3,029)
Tite Liner®  3,355  2,347 
Total operating (loss) income
 
$(21,501
)(1)
$5,778 

(1)Includes $16.8 million of charges associated with the closure of the tunneling business.

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

  
Three Months Ended
March 31,
 
  
2007
 
2006
 
Revenues:     
United States $96,981
 
$113,331 
Canada  10,831  9,073 
Europe  20,448  17,085 
Other foreign  2,688  4,075 
Total Revenues $130,948
 
$143,564 
        
Gross Profit:       
United States
 
$12,095
 
$20,992 
Canada  3,517  2,993 
Europe  3,684  3,657 
Other foreign  1,274  1,023 
Total Gross Profit
 
$20,570
 
$28,665 
        
Operating (loss) income:       
United States$(22,294
)(1)
$4,235 
Canada  1,524  1,617 
Europe  (1,722) (703)
Other foreign  991  629 
Total Operating (Loss) Income $(21,501
)(1)
$5,778 
Moines. In so reversing,(1)Includes $16.8 million of charges associated with the Iowa Supreme Court reinstated two serious citations and penalties of $9,000 against the City of Des Moines. The Company cannot predict the effect that the Iowa Supreme Court’s ruling in the City of Des Moines case will have on the Company’s pending case before the court.
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 subsidiaryclosure 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). Following the filing of the third-party petitions, the City of Pasadena filed a motion to dismiss based upon lack of jurisdiction claiming the City is protected by sovereign immunity. The trial court denied the City’s motion and the suit was stayed pending appeal of the City’s motion to the Court of Appeals in Corpus Christi, Texas. On March 16, 2006, the Texas Court of Appeals affirmed the trial court’s denial of the City’s motion. The City appealed the matter to the Texas Supreme Court, where the matter is now pending. The Company believes that the factual allegations and legal claims made against it and Kinsel are without merit and intends to vigorously defend them.
tunneling business.
In 1990, the Company initiated proceedings against Cat Contracting, Inc., Michigan Sewer Construction Company, Inc. and Inliner U.S.A., Inc. (subsequently renamed FirstLiner USA, Inc.), along with another party, alleging infringement of certain of the Company’s in-liner patents. In August 1999, the United States District Court in Houston, Texas found that one of the Company’s patents was willfully infringed and awarded $9.5 million in damages. After subsequent appeals, the finding of infringement has been affirmed, but the award of damages and finding of willfulness are subject to rehearing. The Company anticipates that the court will reinstate the award of damages to the Company of at least $9.5 million, plus interest. The Company, after investigation, believes that the defendants may have viable sources to satisfy at least some portion of final judgment received by the Company. The parties engaged in a trial from March 14-16, 2006 and from July 11-14, 2006. The Company currently is awaiting the decision of the court. At September 30, 2006, the Company had not recorded any receivable related to this matter.
On June 3, 2005, the Company filed a lawsuit in the United States District Court in Memphis, Tennessee against Per Aarsleff A/S, a publicly traded Danish company, and certain of its subsidiaries and affiliates. Since approximately 1980, Per Aarsleff and its subsidiaries held licenses for the Insituform CIPP process in various countries in Northern and Eastern Europe, Taiwan, Russia and South Africa. Per Aarsleff also is a 50% partner in the Company’s German joint venture and a 25% partner in the Company’s manufacturing company in Great Britain. The Company’s lawsuit seeks, among other things, monetary damages in an unspecified amount for the breach by Per Aarsleff of its license and implied license agreements with the Company and for royalties owed by Per Aarsleff under the license and implied license agreements. In March 2006, Per Aarsleff’s 50%-owned Taiwanese subsidiary (“PIEC’) filed a motion for summary judgment, claiming that the Company’s patents had expired in Taiwan. PIEC also filed a counterclaim seeking to recover payments paid to the Company on the same grounds. The Company has filed responses to PIEC’s motion and the issues have been submitted to the court. On May 12, 2006, the Company amended its lawsuit in Tennessee to (i) seek damages based upon Per Aarsleff’s continued use of Company-patented technology in Denmark, Sweden and Finland following termination of the license agreements, (ii) seek damages based upon Per Aarsleff’s use of Company trade secrets in connection with the operation of its Danish manufacturing facility and (iii) seek an injunction against Per Aarsleff’s continued operation of its manufacturing facility. Per Aarsleff filed its answer and affirmative defenses to the Company’s amended complaint on May 25, 2006. At September 30, 2006, excluding the effects of the claims specified in the lawsuit, Per Aarsleff owed the Company approximately $0.5 million related to royalties due under the various license and implied license agreements based upon royalty reports prepared and submitted by Per Aarsleff. The Company believes that these receivables are fully collectible at this time. At September 30, 2006, the Company had not recorded any receivable related to this lawsuit. The Company also has filed a separate legal action in Germany against Per Aarsleff relating to its conduct involving the parties’ joint venture company in Germany and is reviewing transactions between Per Aarsleff and the parties’ joint venture companies in Germany and Italy to determine whether all transactions between Per Aarsleff and such companies were fair and at arms’-length prices. The Company estimates its aggregate claims in these matters to be in excess of $10.0 million. Due to the uncertainties of litigation, as well as issues regarding the collectibility of damage awards, there can be


8.
ACQUIRED INTANGIBLE ASSETS

Acquired intangible assets include license agreements, customer relationships, patents and trademarks, and non-compete agreements. Intangible assets at March 31, 2007 and December 31, 2006 were as follows (in thousands):
 
  
As of March 31, 2007
 
  
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Amortized intangible assets:       
License agreements $3,894 $(1,853)$2,041 
Customer relationships  1,797  (421) 1,376 
Patents and trademarks  16,126  (13,365) 2,761 
Non-compete agreements  313  (313) ─ 
Total $22,130 $(15,952)$6,178 

  
As of December 31, 2006
 
  
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Amortized intangible assets:       
License agreements $3,894 $(1,813)$2,081 
Customer relationships  1,797  (391) 1,406 
Patents and trademarks  16,048  (13,283) 2,765 
Non-compete agreements  3,252  (3,056) 196 
Total $24,991 $(18,543)$6,448 

Amortization expense for the three months ended March 31, 2007 and 2006 and estimated amortization expense for the next five years are as follows (in thousands):

  
Quarter Ended March 31,
 
  
2007
 
2006
 
Aggregate amortization expense $217 $307 
        
Estimated amortization expense:       
For year ending December 31, 2007 $733    
For year ending December 31, 2008  578    
For year ending December 31, 2009  283    
For year ending December 31, 2010  283    
For year ending December 31, 2011  283    

no assurance regarding these litigations at this time or as to the amount of money, if any, that the Company may ultimately recover against Per Aarsleff.
9.
Boston InstallationCOMMITMENTS AND CONTINGENCIES
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 $2.4 million with respect to the 2005 remediation work, which were accrued for 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 has 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 estimated costs associated with the liner removal and re-installation. The Company believes the “Contractor Rework” special endorsement applies to the excess insurance coverage; it has already 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,Litigation

In the third quarter of 2002, an accident on an Insituform® cured-in-place-pipe (“CIPP”) process project in Des Moines, Iowa resulted in the death of two workers and the injury of five workers. The Company fully cooperated with Iowa’s state OSHA in the investigation of the accident. Iowa OSHA issued a citation and notification of penalty in connection with the accident, including several willful citations. Iowa OSHA proposed penalties of $808,250. The Company challenged Iowa OSHA’s findings, and in the fourth quarter of 2003, an administrative law judge reduced the penalties to $158,000. In the second quarter of 2004, the Iowa Employment Appeal Board reinstated many of the original penalties, ordering total penalties in the amount of $733,750. The Company appealed the decision of the Employment Appeal Board to the Iowa District Court for Polk County, which, in the first quarter of 2005, reduced the penalties back to $158,000. The Company appealed the decision of the Iowa District Court and, on February 8, 2006, the Company’s appeal was heard by the Iowa Court of Appeals. On March 17, 2006, the Court of Appeals issued its opinion, vacating all citations issued under the general industry standards (all citations except two serious citations) and reducing total penalties against the Company to $4,500. Thereafter, the Employment Appeal Board filed a petition for further review to the Iowa Supreme Court, and the Company filed a resistance to the petition. On September 29, 2006, the Iowa Supreme Court granted the Employment Appeal Board’s petition for further review, and set the case for consideration during the week of December 4, 2006. On February 16, 2007, the Iowa Supreme Court issued its ruling, reversing the prior ruling of the Iowa Court of Appeals 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 ($6.4 millionin actual damages and $1.1million in pre-judgment interest). The excess insurance carrier also filed a motion for summary judgment as to the issue of primary coverage. The court has scheduled a hearing for November 20, 2006 to hear all pending motions.
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 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 decision in March 2005 and the acknowledgement of coverage and payment from the Company’s primary insurance carrier, the Company believes that recovery from the excess insurance carrier is both probable and estimable and recorded a receivable in the amount of $6.1 million in connection with the Boston project in the second quarter of 2005.
 


The total claim receivable was $7.5 million at September 30, 2006 and is composed of documented remediation costs and pre-judgment interest as outlined in the table below:
  
 
Documented
Remediation
Costs
 
 
Pre-judgment
Interest
 
 
 
Total
 
  
(in thousands)
 
Claim recorded June 30, 2005 $5,872 $275 $6,147 
Interest recorded July through December 31, 2005  -  165  165 
Additional documented remediation costs recorded in the second quarter of 2006  
526
  
-
  
526
 
Interest recorded January 1 through June 30, 2006  -  535  535 
Interest recorded in quarter ended September 30, 2006  -  138  138 
Claim receivable balance, September 30, 2006
 
$
6,398
 
$
1,113
 
$
7,511
 
reinstating all citations issued under the general industry standards, including several willful citations, and reinstating penalties in the amount of $733,750. Thereafter, the Company filed a Motion for Reconsideration with the Iowa Supreme Court, which motion was denied on March 29, 2007. The case will now be remanded back to the District Court for entry of judgment consistent with the Iowa Supreme Court’s opinion. The Company currently is reviewing its options regarding further judicial review of this matter. During the first quarter of 2007, the Company recorded $0.5 million related to this matter. The penalties assessed were fully reserved.

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, and Greystar-EIG, LP, Grey General Partner, LLC and Environmental Infrastructure Management, LLC (collectively, the “Greystar Entities”). 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). Following the filing of the third-party petitions, the City of Pasadena filed a motion to dismiss based upon lack of jurisdiction claiming the City is protected by sovereign immunity. The trial court denied the City’s motion and the suit was stayed pending appeal of the City’s motion to the Court of Appeals in Corpus Christi, Texas. On March 16, 2006, the Texas Court of Appeals affirmed the trial court’s denial of the City’s motion. The City appealed the matter to the Texas Supreme Court, where the matter is now pending. The Company believes that the factual allegations and legal claims made against it and Kinsel are without merit and intends to vigorously defend them.

Department of Justice Investigation
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 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. One additional trial is scheduled to begin later this fall. The Company has been advised by the government that it is not considered a target of the investigation at this time. The investigation is ongoing and the Company may have to continue to incur substantial costs in complying with its obligations in connection with the investigation. The Company has been fully cooperative throughout the investigation.
Other Litigation
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 its consolidated financial condition, results of operations or cash flows.
In 1990, the Company initiated proceedings against Cat Contracting, Inc., Michigan Sewer Construction Company, Inc. and Inliner U.S.A., Inc. (subsequently renamed FirstLiner USA, Inc.), along with another party, alleging infringement of certain in-liner Company patents. In August 1999, the United States District Court in Houston, Texas found that one of the Company’s patents was willfully infringed and awarded $9.5 million in damages. After subsequent appeals, the finding of infringement has been affirmed, but the award of damages and finding of willfulness was subject to rehearing. The Company believed that it had a strong position in upholding the original damage award and, after investigation, concluded that the defendants had a viable source to collect all or a portion of the award if confirmed. On the basis of these determinations, the Company decided to aggressively pursue the rehearing on damages. The damages hearing was completed in the third quarter of 2006. The Company currently is awaiting the Court’s decision. At March 31, 2007, the Company had not recorded any receivable related to this matter.

GuaranteesOn June 3, 2005, the Company filed a lawsuit in the United States District Court in Memphis, Tennessee against Per Aarsleff A/S, a publicly traded Danish company, and certain of its subsidiaries and affiliates. Since approximately 1980, Per Aarsleff and its subsidiaries held licenses for the Insituform CIPP process in various countries in Northern and Eastern Europe, Taiwan, Russia and South Africa. Per Aarsleff also is a 50% partner in the Company’s German joint venture and a 25% partner in the Company’s manufacturing company in Great Britain. The Company’s lawsuit seeks, among other things, monetary damages in an unspecified amount for the breach by Per Aarsleff of its license and implied license agreements with the Company and for royalties owed by Per Aarsleff under the license and implied license agreements. On May 12, 2006, the Company amended its lawsuit in Tennessee to (i) seek damages based upon Per Aarsleff’s continued use of Company-patented technology in Denmark, Sweden and Finland following termination of the license agreements, (ii) seek damages based upon Per Aarsleff’s use of Company trade secrets in connection with the operation of its Danish manufacturing facility and (iii) seek an injunction against Per Aarsleff’s continued operation of its manufacturing facility. Per Aarsleff filed its Answer and Affirmative Defenses to the Company’s Amended Complaint on May 25, 2006. On October 25, 2006, Per Aarsleff filed a two count counterclaim against the Company seeking to recover royalties payments paid to the Company. On December 29, 2006, the Company and Per Aarsleff’s 50%-owned Taiwanese subsidiary (“PIEC”) settled their respective claims against each other in exchange for PIEC paying the Company $375,000, which amount was paid on December 29, 2006 (settlement of Taiwanese claims only, remainder of lawsuit continues). At March 31, 2007, excluding the effects of the claims specified in the lawsuit, Per Aarsleff owed the Company approximately $0.5 million related to royalties due under the various license and implied license agreements (over and above the Taiwanese settlement amount) based upon royalty reports prepared and submitted by Per Aarsleff.
The Company has entered into several contractual joint ventures in order to develop joint bids on contracts for its installation business and 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 from these arrangements.
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. The Company has not experienced material losses under these indemnification 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 from these provisions.
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 September 30, 2006.
 

The Company believes that these receivables are fully collectible at this time. At March 31, 2007, the Company had not recorded any receivable related to this lawsuit.

Boston Installation

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 $2.4 million with respect to the 2005 remediation work, which costs were accrued for 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 has 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 ($6.4 million in actual damages and $1.4 million in pre-judgment interest). The excess insurance carrier also filed a motion for summary judgment as to the issue of primary coverage. The Court heard oral arguments on the motions on November 20, 2006. The parties are now awaiting a ruling from the Court.

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 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 decision in March 2005 and the acknowledgement of coverage and payment from the Company’s primary insurance carrier, the Company believes that recovery from the excess insurance carrier is both probable and estimable and has recorded an insurance claim receivable in connection with this matter.


The total claim receivable was $7.8 million at March 31, 2007 and is composed of documented remediation costs and pre-judgment interest as outlined in the table below:
  
Documented
Remediation
Costs
 
Pre-judgment
Interest
 
 
Total
 
  
(in thousands)
 
Claim recorded June 30, 2005 $5,872 $275 $6,147 
Interest recorded July through December 31, 2005  -  165  165 
Additional documented remediation costs recorded in the second quarter of 2006  526  -  526 
Interest recorded in 2006 and 2007  -  949  949 
Claim receivable balance, March 31, 2007
 
$
6,398
 
$
1,389
 
$
7,787
 

Department of Justice Investigation

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 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 continue to incur substantial costs in complying with its obligations in connection with the investigations. The Company has been fully cooperative throughout the investigations.

Other Litigation

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 its consolidated financial condition, results of operations or cash flows.

Guarantees and Indemnification Obligations

The Company has entered into several contractual joint ventures in order to develop joint bids on contracts for its business. 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, 2007 on its consolidated balance sheet.

8.10.
FINANCINGS
In February 2006, the Company entered into a new agreement with Bank of America, N.A. pursuant to which the Company procured a new revolving credit facility, which provides a borrowing capacity of $35 million, any portion of which may be used for the issuance of standby letters of credit. The credit facility requires the Company to pay interest at variable rates based on, among other things, the Company’s consolidated leverage ratio. The Company is also required to pay the bank a quarterly fee on the unused portion of the credit facility. The credit facility is subject to the same restrictive covenants and default provisions as the Company’s Series A Senior Notes and the Series 2003-A Senior Notes. The new facility does not require a minimum cash balance, as was required under the Company’s previous credit facility. The new credit facility matures on April 30, 2008.
At September 30, 2006, the Company was in compliance with its debt covenants, and expects to maintain compliance throughout 2006 and beyond. The table below sets forth the Company’s debt covenants:

Credit Facility

On March 28, 2007, the Company amended its $35 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 below. 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.

In March 2007, the Company borrowed $5.0 million on the credit facility. These amounts were repaid in April 2007. There were no borrowings on the credit facility in the first quarter of 2006.

Senior Notes

On March 28, 2007, the Company amended its $65 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 ending 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 $34,200,000. In connection with the amendment, the Company paid the noteholders an amendment fee of 0.05% of the outstanding principal balance of each series 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.

At March 31, 2007, the Company was in compliance with all debt covenants, and expects to be in compliance for the balance of 2007.

Description of Covenant
Fiscal Quarter
Amended Covenant(2)
Actual Ratio
or Amount(2)
$110 million 8.88% Senior Notes,
Series A, due February 14, 2007
and $65 million 6.54% Senior
Notes, Series 2003-A, due April 24,
2013
Fixed Charge Coverage Ratio(1)
Third quarter 2006No less than 2.25 to 1.02.97
Fourth quarter 2006No less than 2.25 to 1.0n/a
First quarter 2007 and thereafterNo less than 2.50 to 1.0n/a
Ratio of consolidated indebtedness to EBITDA(1)
No greater than 3.00 to 1.01.52
Consolidated net worth(1)
No less than the sum of $260
million plus 50% of net
income after December 31,
2004; $273.7 million
required as of September 30,
2006
$328.0
million at
September 30, 2006
Ratio of consolidated indebtedness to
consolidated capitalization(1)
No greater than 0.45 to 1.0
0.23
at September 30, 2006
__________________________
(1)The ratios are calculated as defined in the Note Purchase Agreements, as amended, which have been incorporated into the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 as exhibits 10.2 and 10.3.
(2)The ratios for each quarter are based on rolling four-quarter calculations of profitability.
9.11.
NEW ACCOUNTING PRONOUNCEMENTS

On January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, and interpretation of FASB Statement No. 109 which describes a comprehensive model for the measurement, recognition, presentation and disclosure of uncertain tax positions in financial statements. Under the interpretation, financial statements are required to reflect expected future tax consequences of such positions presuming the tax authorities’ full knowledge of the position and all relevant facts, but without considering time values. See Note 5 for a discussion of the Company’s adoption of FIN 48.

ITEM 2.
See discussion of SFAS No.123(R), Share-Based Payment in Note 2 to these financial statements.
In July 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, which describes a comprehensive model for the measurement, recognition, presentation and disclosure of uncertain tax positions in the financial statements. Under the interpretation, the financial statements will reflect expected future tax consequences of such positions presuming the tax authorities’ full knowledge of the position and all relevant facts, but without considering time values. The Company is assessing the impact this interpretation may have in its future financial statements.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

16
In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit and Other Postretirement Plans, under which companies must recognize a net liability or asset to report the funded status of defined benefit and other postretirement benefit plans on their balance sheets. This standard is not expected to have a significant effect on the Company’s balance sheet as the Company does not sponsor defined benefit retirement plans.

17
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is management’s discussion and analysis of certain significant factors that have affected our financial condition, and results of operations and cash flows during the periods included in the accompanying unaudited consolidated financial statements. This discussion should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 20052006 (“20052006 Annual Report”). See the discussion of our critical accounting policies and risk factors in our 20052006 Annual Report. There have been no material changesOn January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, which is discussed in Note 5 to our risk factors during the third quarter and nine months ended September 30, 2006. A change to our critical accounting policies related to equity-based compensation is described herein.consolidated financial statements contained in this report.

FORWARD -LOOKINGFORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q contains various forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) that are based on information currently available to the management of Insituform Technologies, Inc. and on management’s beliefs and assumptions. When used in this document, the words “anticipate,” “estimate,” “believe,” “plan,” and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. Such statements are subject to risks and uncertainties and include among others, our belief with respect to estimated and anticipated costs to complete ongoing projects, our belief that our documentation will substantiate contract claim conditions, our expectation with respect to the completion dates of ongoing projects and the amount of backlog we will perform, our belief of the amounts we may recover for pending tunneling claims, our intention to obtain work that is comparable with our tunneling operation’s core competency, our belief with respect to anticipated levels of operating expenses, our belief that we have adequate resources and liquidity to fund future cash requirements and debt repayments, and our expectation with respect to the anticipated growth of our businesses.businesses and our belief with respect to the strength of our trademark and degree of market penetration. Our actual results may vary materially from those anticipated, estimated or projected due to a number of factors, such as the competitive environment for our products and services, the availability and pricing of raw materials and transportation used in our operations, increased competition upon expiration of our patents or the inadequacy of one or more of our patents to protect our operations, our ability to reduce the level of underutilized tunneling equipment, our ability to implement steam-inversion process equipment and other logistics cost reduction initiatives, the geographical distribution and mix of our work, our ability to attract business at acceptable margins, the strength of our marketing and sales skills, foreseeable and unforeseeable issues in projects that make it difficult or impossible to meet projected margins, the timely award cancellation or change in scopecancellation of projects, our ability to maintain adequate insurance coverage for our business activities, political circumstances impeding the progress of our work, our ability to remain in compliance with the financial covenants included in our financing documents, the regulatory environment, weather conditions, the outcome of our pending litigation, our ability to enter new markets and implement our global growth initiatives, the accuracy of our current estimates of aggregate fair value of the tunneling segment’s fixed assets that will be realizable in sales transactions, the accuracy of our current projections of the cash costs of lease termination or buyout payments, employee retention incentives and severance benefits and other shutdown expenses, our ability to complete the tunneling segment’s existing contracts on a timely and profitable basis, our ability to redeploy net value of the tunneling segment’s fixed assets into our rehabilitation and Tite Liner® business segments on an efficient and profitable basis and other factors set forth in reports and other documents filed by us with the Securities and Exchange Commission from time to time. We do not assume a duty to update forward-looking statements. Please use caution and do not place reliance on forward-looking statements.

EXECUTIVE SUMMARY

Insituform Technologies, Inc. is a worldwide company specializing in trenchless technologies to rehabilitate, replace, maintain and install underground pipes. We have three principal operating segments: rehabilitation; tunneling;rehabilitation, tunneling, and Tite Liner®. These segments have been determined based on the types of products sold, and each is reviewed and evaluated separately. While we use a variety of trenchless technologies, our CIPPthe Insituform® cured-in-place-pipe (“CIPP”) process contributed 72.0%76.0% of our revenues in the first nine monthsquarter of 2006 and 67.2% of our revenues in the first nine months of 2005.2007.

Revenues are generated principally in the United States, Canada, the United Kingdom, the Netherlands, France, Belgium, Spain, Switzerland, Chile, Mexico and Poland and include product sales and royalties from our joint ventures in Europe and Asia, and fromour unaffiliated licensees and sub-licensees throughout the world. The United States remains our single largest market, representing approximately 76.5%74.1% of total revenue in the first nine monthsquarter of 2006 and 79.2% of total revenue in the first nine months of 2005.2007. See Note 57 to the consolidated financial statements contained in this report for additional segment and geographic information and disclosures.


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RESULTS OF OPERATIONS - Three and Nine Months Ended September 30,March 31, 2007 and 2006 and 2005

The following table highlightsKey financial data for the results for eachfirst quarter of 2007 compared to the segments and periods presentedfirst quarter of 2006 is as follows (dollars in thousands):


Three Months Ended September 30, 2006

 
Quarter Ended March 31, 2007
 
Segment
 
 
 
Revenues
 
 
Gross
Profit (Loss)
 
Gross
Profit (Loss)
Margin
 
 
Operating
Expenses
 
 
Operating
Income (Loss)
 
Operating
Income (Loss)
Margin
  
Revenues
 
Gross Profit
 
Gross Profit Margin
 
Operating Expense (1)
 
Operating Income (Loss)(1)
 
Operating Income (Loss) Percentage
 
Rehabilitation $118,269 $28,927  24.5%$20,702 $8,225  7.0% $103,321 $15,417  14.9%  $21,537 $(6,120) -5.9%
Tunneling  16,002  (868) -5.4  2,095  (2,963) -18.5   15,966  187  1.2  18,923  (18,736) -117.3 
Tite Liner®  9,805  3,581  36.5  1,496  2,085  21.3   11,661  4,966  42.6  1,611  3,355  28.8 
Total $144,076 $31,640  22.0%$24,293 $7,347  5.1%
TOTAL $130,948 $20,570  15.7%$42,071 $(21,501) -16.4%


Three Months Ended September 30, 2005
  
Quarter Ended March 31, 2006
 
Segment
 
Revenues
 
Gross Profit (Loss)
 
Gross Profit (Loss) Margin
 
Operating Expense
 
Operating Income (Loss)
 
Operating Income (Loss) Percentage
 
Rehabilitation $111,658 $25,334  22.7%  $18,874 $6,460  5.8%
Tunneling  19,384  (616) -3.2  2,413  (3,029) -15.6 
Tite Liner®  12,522  3,947  31.5  1,600  2,347  18.7 
TOTAL $143,564 $28,665  20.0%$22,887 $5,778  4.0%

 
 
Segment
 
 
 
Revenues
 
 
Gross
Profit
 
Gross
Profit
Margin
 
 
Operating
Expenses
 
 
Operating
Income (Loss)
 
Operating
Income (Loss)
Margin
 
Rehabilitation $107,821 $26,596  24.7%$18,083 $8,513  7.9%
Tunneling  35,724  2,767  7.7  4,034  (1,267) - 3.5 
Tite Liner®  11,668  3,487  29.9  1,274  2,213  19.0 
Total $155,213 $32,850  21.2%$23,391 $9,459  6.1%


Nine Months Ended September 30, 2006

 
 
Segment
 
 
 
Revenues
 
 
Gross
Profit (Loss)
 
Gross
Profit (Loss)
Margin
 
 
Operating
Expenses
 
 
Operating
Income (Loss)
 
Operating
Income (Loss)
Margin
 
Rehabilitation $355,147 $83,435  23.5%$61,473 $21,962  6.2%
Tunneling  49,843  (1,318) -2.6  6,769  (8,087) -16.2 
Tite Liner®  36,851  12,249  33.2  4,814  7,435  20.2 
Total $441,841 $94,366  21.4%$73,056 $21,310  4.8%


Nine Months Ended September 30, 2005

 
 
Segment
 
 
 
Revenues
 
 
Gross
Profit (Loss)
 
Gross
Profit (Loss)
Margin
 
 
Operating
Expenses
 
 
Operating
Income (Loss)
 
Operating
Income (Loss)
Margin
 
Rehabilitation $336,279 $81,172  24.1%$55,852 $25,320  7.5%
Tunneling  85,123  (2,438) -2.9  9,937  (12,375) -14.5 
Tite Liner®  27,929  8,438  30.2  3,799  4,639  16.6 
Total $449,331 $87,172  19.4%$69,588 $17,584  3.9%

(1)Consolidated and tunneling operating expenses for the quarter ended March 31, 2007 include $16.8 million in charges associated with the closure of our tunneling business.

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The following table summarizes the increases (decreases) in key financial data for the three and nine monthsquarter ended September 30, 2006March 31, 2007 as compared with the same periodsperiod in 20052006 (dollars in thousands):

 
 Three Months Ended
September 30, 2006 vs. 2005
 
 Nine Months Ended
September 30, 2006 vs. 2005
  
Quarter Ended
 
 
Total
Increase
(Decrease)
 
Percentage
Increase
(Decrease)
 
Total
Increase
(Decrease)
 
Percentage
Increase
(Decrease)
  
March 31, 2007 vs. 2006
 
Consolidated
 
  
       
 
Total
 
Percentage
 
 
Increase
 
Increase
 
 
(Decrease)
 
(Decrease)
 
All Segments
     
Revenues $(11,137) -7.2%$(7,490) -1.7% $(12,616) -8.8%
Gross profit  (1,210) -3.7  7,194  8.3   (8,095) -28.2 
Operating expenses  902  3.9  3,468  5.0 
Operating income  (2,112) -22.3  3,726  21.2 
Operating expenses (1)
  19,184 83.8 
Operating income (1)
  (27,279) -472.1 
                   
Rehabilitation
                   
Revenues  10,448  9.7  18,868  5.6   (8,337) -7.5 
Gross profit  2,331  8.8  2,263  2.8   (9,917) -39.1 
Operating expenses  2,619  14.5  5,621  10.1   2,663 14.1 
Operating income  (288) -3.4  (3,358) -13.3   (12,580) -194.7 
                   
Tunneling
                   
Revenues  (19,722) -55.2  (35,280) -41.4   (3,418) -17.6 
Gross profit  (3,635) -131.4  1,120  45.9   803    130.4 
Operating expenses  (1,939) -48.1  (3,168) -31.9   (333) -13.8 
Operating income  (1,696) -133.9  4,288  34.7 
Costs of closure of tunneling business  16,843 N/A 
Operating income (1)
  (15,707) -518.5 
                   
Tite Liner®
                   
Revenues  (1,863) -16.0  8,922  31.9   (861) -6.9 
Gross profit  94  2.7  3,811  45.2   1,019 25.8 
Operating expenses  222  17.4  1,015  26.7   11 0.6 
Operating income  (128) -5.8  2,796  60.3   1,008 42.9 
                   
Interest Expense
  (451) -20.8  (1,319) -20.4 
Taxes  402  20.1  3,180  87.8 
Interest Expense and Taxes
      
Interest expense  (316) (17.5)
Taxes on income  (7,976) (500.5)

(1)Consolidated and tunneling operating expenses for the quarter ended March 31, 2007 include $16.8 million in charges associated with the closure of our tunneling business.

Overview

Consolidated net earnings were essentially unchanged$18.3 million lower in the thirdfirst quarter of 20062007 compared to the thirdfirst quarter of 2005. Rehabilitation revenues increased by 9.7% in2006. During the thirdfirst quarter of 2006 compared2007, charges of $16.8 million (pre-tax) related to the thirdtunneling closure were recorded. The combined after-tax loss from the tunneling closure charges and operating loss from the tunneling segment during the first quarter of 2005 due to improvements in crew productivity, while gross profit increased due to the higher revenues.was $13.1 million, or $(0.48) per diluted share. The first nine months of 2006 saw rehabilitation revenue growth of only 5.6%, due to slow market conditions in late 2005, while gross profit increased by 2.8%. Rehabilitation resultsafter-tax charges recognized in the first nine months of 2005 include the benefit of an insurance claim receivable. See Note 7 - “Boston Installation” for further discussion. The tunneling business continued to struggle with underutilized equipment in the third quarter of 20062007 for the tunneling closure were $11.8 million, or $(0.43) per diluted share, and experienced larger gross profit andthe tunneling business’s after-tax operating losses inloss for the thirdfirst quarter of 2006 compared to the third quarter of 2005. Sales of tunneling property and equipment resulted in gains of $1.4 million in the third quarter of 2006 and $1.6 million in the first nine months of 2006. We continue to investigate alternatives to reduce the level of equipment in the tunneling business. Tite Liner® saw lower revenues, but flat gross profit in the third quarter of 2006 compared to the third quarter of 2005. Tite Liner®’s third quarter of 2006, while very strong,2007 was compared to an exceptionally strong third quarter for Tite Liner®’s South American operations in the third quarter of 2005. However, Tite Liner®’s gross profit margin was stronger in the third quarter of 2006 at 36.5% compared to 29.9% in the third quarter of 2005 due to efficiencies gained from sustained volume throughout 2006. Tite Liner®’s stronger gross margins prevented a steeper decrease in operating income in the third quarter of 2006 compared to the third quarter of 2005.

20
Consolidated operating expenses increased by $0.9$1.3 million or 3.9%,$(0.05) per diluted share. The decision to close this business, and the impact of these charges are more fully described in the third quarter of 2006 and $3.5 million, or 5.0%, in the first nine months of 2006 compared to the same periods in 2005 due primarily to the following:

 
Three Months Ended
September 30, 2006 vs. 2005  
Nine Months Ended
September 30, 2006 vs. 2005  
 
Increase
(Decrease) 
Increase
(Decrease)
 (dollars in thousands)
Incentive compensation expense$1,155 $2,461 
Stock option expense690 2,488 
Other equity compensation expense(12)423 
Legal expenses166 1,292 
Other(1,097)(3,196)
Total increase
$902
 
$3,468
 
Incentive compensation expense increased in the third quarter and first nine months of 2006 due to our results approximating our incentive compensation targets, whereas such targets were not met in the same periods in 2005. Equity compensation expense was higher in the third quarter and first nine months of 2006 compared to the same periods in 2005 due to the implementation of new accounting rules which require the recording of expense for stock options issued from our equity incentive plans. Pretax stock option expense, which was not recorded in the prior-year periods, was $0.7 and $2.5 million in the third quarter and first nine months of 2006, respectively. See Note 26 to the consolidated financial statements contained herein.

Aside from the tunneling closure charges, the decrease in this reportconsolidated net income was principally due to lower revenues in all segments, along with weaker gross profit margins in our rehabilitation business caused by weakness in the U.S. rehabilitation market. This weakness resulted not only in serious shortfalls in backlog available, but also in the compression of margins due to increased competitive pricing pressure. Gross profit margin for further discussionour Tite Liner® business increased to 42.6% in the first quarter of equity-based compensation. All other2007, as compared to 31.5% in the first quarter of 2006, despite slightly lower revenues for the quarter. This increase was due to favorable project closeouts experienced during the quarter, along with improved operational efficiencies in Canada and the United States. The tunneling business also experienced lower revenues due to delayed start-up on new projects. Gross profit margins in tunneling continued to be weak due to the impact of underutilized equipment expenses.

Consolidated operating expenses, which includes employee, facilities, consulting and other expenses, decreasedexcluding the tunneling closure charges, were $2.3 million higher in the thirdfirst quarter and first nine months of 20062007 compared to the same periods in 2005first quarter of 2006 primarily due to lowered operating expensesinvestments we made in ongoing growth initiatives on a global basis, including increasing the sales force in the tunnelingUnited States rehabilitation business to stimulate growth, increasing international business development efforts, accelerating the growth of Insituform Blue™, our potable water rehabilitation division, and North American rehabilitation businesses whichincreasing marketing and technology development spending. In addition we recorded $0.5 million related to recent restructuring efforts.penalties assessed by Iowa OSHA in connection with an accident which occurred in 2002 in Des Moines, Iowa. See Note 9 for more information regarding this matter.

Intellectual Property and Other Legal Matters

In the past few years, we have increased our emphasis on protecting the intellectual property that is at the core of our business. As part of this effort, we have actively prosecutedpursued a number of legal proceedings seeking to collect damages and to enforce other remedies against third parties based upon patent infringement, breach of license and implied license agreements, and unauthorized use of trade secrets involving our proprietary intellectual property.

In one such case filed against Cat Contracting, Inc., Michigan Sewer Company and FirstLiner USA, Inc. in the United States District Court in Houston, Texas, we had received a judgment of $9.5 million in 1999 based upon the infringement of certain in-liner patents we owned. Upon subsequent appeal, the finding of infringement was upheld, but the award of damages, including the finding of willfulness, was subject to rehearing. We believed that we had a strong position in upholding the original damage award and, after investigation, we also concluded that the defendants had a viable source to collect all or a portion of the award, if confirmed. On the basis of these determinations, we decided to aggressively pursue the rehearing on damages. The damages rehearing was completed in the third quarter of 2006, and we currently are awaiting the court’s decision. No receivable related to this matter has been recorded in the consolidated financial statements as of March 31, 2007.

In June 2005, after investigation, we commenced a lawsuit in the United States District Court in Memphis, Tennessee against our long-time international partner, Per Aarsleff A/S, a Danish public company, and certain of its subsidiaries and

affiliates. The suit alleges breach by these entities of license agreements and implied license agreements with us involving our proprietary intellectual property relating to the InsituformInsituform® CIPP process. We seek monetary damages for breach of our license agreements and implied license agreements between the Per Aarsleff entities and our company and for royalties owed by the Per Aarsleff entities to us under these agreements. We recentlyIn 2006, we amended our complaint against the Per Aarsleff entities to include additional damage claims based upon Per Aarsleff’s continued use of our patented technology in Denmark, Sweden and Finland following the termination of the license agreements and Per Aarsleff’s use of our trade secrets in its Danish tube manufacturing facility. Our amended complaint also seeks an injunction against Per Aarsleff’s continued operation of the tube manufacturing facility. In April 2006, we filed a separate patent infringement action in Denmark against Per Aarsleff seeking to enjoin its continued use of an inversion device covered by one of our European patents. We also have filed a separate legal actionactions in Germany against Per Aarsleff relating to its conduct involving our joint venture company in Germany and are reviewingwith respect to transactions between Per Aarsleff and our German joint venture companies in Germany and Italy to determine whether all transactions between Per Aarsleff and such companiescompany, which we believe were fair and at prices other than arms’-length prices.-length. We estimate the aggregate claims in these matters to be in excess of $10.0 million.million; however, no claims receivable has been recorded in our consolidated financial statements. Due to the uncertainties of litigation, as well as issues regarding the collectibility of damage awards, there can be no assurance regarding these litigations at this time or as to the amount of money, if any, that we may ultimately recover against Per Aarsleff. This case currently is set for trial in the second quarter of 2008.

In June 2005, we filed a petition in State Court in St. Louis County, Missouri against Reynolds, Inc., certain of its subsidiaries and affiliates and an officer of Reynolds, Inc. This suit recentlyThe case subsequently was movedremoved to the United States District Court in St. Louis.

21

The suit alleges that Reynolds, among other things, (i) tortiously interfered with a non-competition and confidentiality agreement we had with a former employee and (ii) misappropriated our trade secrets. In April 2005, the St. Louis County Court had entered a temporary injunction against our former employee, finding that he had violated the terms of his non-competition and confidentiality agreement with us and had retained, misappropriated and disseminated to Reynolds, Inc. property of our company for the benefit of Reynolds. In light of the court’s April 2005 findings, we amended our petition to add Reynolds as a defendant in the action. This case currently is set for trial in the second quarter of 2007.

As discussed in previous reports, we also are vigorously pursuing a number of tunneling claims, and continue to incur significant legal costs and expenses in prosecuting such actions. As of September 30, 2006,March 31, 2007, we had approximately $17.0$18.4 million in tunneling claims, of which approximately $6.5$7.5 million has been recognized.

We have recorded significant expenses, including attorneys’ fees and other litigation costs, in connection with the prosecution of these intellectual property lawsuits, tunneling claims and other legal matters. For the ninethree months ended September 30,March 31, 2007 and 2006, and 2005, we incurred attorneys’ fees and litigation costs of approximately $4.5$1.5 million and $3.2$1.4 million, respectively, with respect to these lawsuits and other legal matters. Other than $6.5$7.5 million and $7.5$7.8 million in receivables at March 31, 2007 related to tunneling claims and our claim against our excess insurance carrier (see Note 79 “Boston Installation”), respectively,, respectively, we have not recorded any receivable related to these lawsuits. We have vigorously pursued these lawsuits based upon our business judgment that the possibility of recovery of substantial damages, the granting of the requested injunctive relief and other ancillary benefits arising from our proactive protection of our intellectual property, justifies the expenses previously incurred and currently projected. Because of the substantial uncertainty at this time with respect to the liability and/or damages outcomes, including the collectibility of any damages awarded, we cannot estimate a dollar amount or range of recovery from these lawsuits at this time.

Rehabilitation Segment

Revenues
Revenues decreased by 7.5% in the first quarter of 2007 compared to the first quarter of 2006 due primarily to lower workable backlog caused by persistent, weak market conditions in the United States. In recent quarters, there has been a larger percentage of smaller-diameter installation projects in the U.S. marketplace. This trend also has contributed to lower revenue. Rehabilitation contract backlog was $11.6 million lower at the beginning of the first quarter of 2007 compared to the beginning of the first quarter of 2006, and it was $23.5 million lower in the United States at the beginning of the first quarter of 2007 compared to the beginning of the first quarter of 2006. Increased revenues were generated year over year in Europe and Canada, where the market conditions remain strong.

As previously announced, based on our market visibility along with various market surveys, the U.S. sewer rehabilitation market has been flat to declining in the last year. Current projections for 2007 call for spending growth in this market to be between negative 1% and positive 3%. We also have announced that we are taking several actions to restore profitability and to stimulate growth going forward, including the expansion of sewer rehabilitation work outside of the United States, acceleration of the growth of Insituform Blue™ by expanding crew capabilities and the sales force to pursue worldwide opportunities, and proactively challenging the complacency among U.S. infrastructure policy-makers. In the meantime, to ensure that we continue to achieve the productivity gains that we experienced in 2006, we have

slightly reduced the level of U.S. sewer rehabilitation crew resources to better reflect current demand. This should enable us to redirect certain resources to international operations, Insituform Blue™ and other potential growth segments.

Gross Profit and Margin
Rehabilitation gross profit decreased by 39.1% in the first quarter of 2007 compared to the first quarter of 2006, primarily due to the low backlog described above. The weak market conditions also have resulted in heightened competitive pricing pressure that has compressed gross profit margins. The gross profit margin percentage decreased by 7.8 margin points to 14.9% in the first quarter of 2007 from 22.7% in the first quarter of 2006. In 2006, gross profit included the benefit of a $1.2 million claim relating to unanticipated job costs incurred in the first quarter of 2006. During the first quarter of 2007, we recorded a negative adjustment to this claim in the amount of $0.3 million upon final settlement.
Operating Expenses
Rehabilitation operating expenses increased 14.1% in the first quarter of 2007 compared to the first quarter of 2006. This increase was due primarily to an increase in our U.S. sales force in an effort to stimulate growth in the market. In addition, we incurred increased expenses related to our increased focus on Insituform Blue™, increased business development efforts in international markets and increased investments in marketing research and technology research and development.

Operating Loss and Margin
Decreased gross profit margins and increased operating expenses resulted in a sharp decrease of 194.7% in operating income for the first quarter of 2007 compared to the first quarter of 2006. The operating margin, which is operating (loss) income as a percentage of revenue, decreased to (5.9)% in the first quarter of 2007 compared to 5.8% in the first quarter of 2006.

Insituform Blue™

During 2006, we launched a new potable water infrastructure division under the name Insituform Blue™. Under Insituform Blue™, we operate with a variety of technologies geared to the global drinking water market. In the first quarter of 2007, Insituform Blue™ did not have a material effect on our consolidated results of operations. Insituform Blue™ is expected to generate modest operating losses for the next few years as we establish this business.
Tite Liner® Segment

Revenues
Tite Liner® revenues decreased 6.9% or $0.9 million in the first quarter of 2007 compared to the first quarter of 2006, due primarily to a reduction in work in South America. Contract Backlogbacklog in the Tite Liner® segment was $7.4 million lower at the beginning of the first quarter of 2007 compared to the beginning of the first quarter of 2006 with $3.4 million of the decrease in South America. Tite Liner®’s revenues from North American (U.S. and Canada) and Latin American operations were $0.4 million and $0.8 million, respectively, higher during the first quarter of 2007 compared to the first quarter of 2006, while revenues from South American operations were $2.1 million lower during the first quarter of 2007 compared to the first quarter of 2006.

Gross Profit and Margin
Tite Liner®’s gross profit increased by 25.8% in the first quarter of 2007 compared to the first quarter of 2006 due primarily to favorable closeouts of projects during the quarter. Tite Liner®’s gross profit margin percentages were 42.6% and 31.5% in the first quarter of 2007 and 2006, respectively. The higher gross profit margin in the first quarter of 2007 was due principally to improved margins worldwide resulting from the aforementioned project closeouts and improved operational efficiencies.

Operating Expenses
Operating expenses in the Tite Liner® business were basically unchanged in the first quarter of 2007 compared to the first quarter of 2006. Operating expenses as a percentage of revenue had a slight increase to 13.8% in the first quarter of 2007 compared to 12.8% in the first quarter of 2006, primarily as a result of slightly lower revenues.

Operating Income and Margins
Operating income increased by 42.9% in the first quarter of 2007 compared to the first quarter of 2006 due to the factors described above. The operating margin increased to 28.8% in the first quarter of 2007 compared to 18.7% in the first quarter of 2006.

Tunneling Segment

See Note 6 regarding our decision to close the tunneling business and the impact on the first quarter of 2007.

Revenues
Tunneling’s revenues were down by 17.6% in the first quarter of 2007 compared to the first quarter of 2006 due to the slower start of new projects during the period. In addition, during the first quarter of 2006, there were a number of larger projects that were coming to a close. Excluding the Milwaukee project, discussed below, there remained approximately $60 million in projects to be completed as of March 31, 2007. We anticipate that these projects will be substantially completed during 2007, with all projects completed by mid-year 2008.

On March 26, 2007, we were awarded a $65 million tunneling project in Milwaukee, Wisconsin, which had been bid in January 2007. Given the decision to close the tunneling operation, we have assigned the project to another contractor who acquired the project from us at our bid price. We will have no future obligations to complete the project.

Gross Profit and Margin
Tunneling posted a gross profit in the first quarter of 2007 of $0.2 million compared to a gross loss of $0.6 million in the first quarter of 2006. During the first quarter of 2006, there were a number of problematic, low margin projects that were in the final stages of completion, which contributed to the gross loss. Underutilized equipment costs (primarily equipment lease expenses) were $2.1 million in the first quarter of 2007 as compared to $1.9 million in the first quarter of 2006.

At March 31, 2007, there were approximately $18.0 million in outstanding claims against third parties relating to, among other things, differing site conditions and defective specifications. Of this amount, $7.5 million had been recorded to income through March 31, 2007. Claims in the amount of $0.2 million were recognized in gross profit in the first quarter of 2007. There were no claims recoveries recorded in the first quarter of 2006. In accordance with our accounting policies, we record a claim to income when the realization of the claim is reasonably assured, and we can estimate a recoverable amount.

During 2006, and into 2007, we continued our increased efforts regarding tunneling claims and aggressive pursuit of all outstanding claims, either through discussions and/or negotiations with our clients, alternative dispute resolution proceedings or, if necessary, litigation.

Operating Expenses
Operating expenses, excluding tunneling closure charges, decreased 13.8% in the first quarter of 2007 compared to the first quarter of 2006, due to continued reductions in administrative staffing and related costs to adjust to a lower operating base. Operating expenses as a percentage of revenue were 13.0% in the first quarter of 2007 compared to 12.4% in the first quarter of 2006, due primarily to the drop in revenue in the first quarter of 2007.

Tunneling Closure Charges
In the first quarter of 2007, we recorded $16.8 million (pre-tax) of charges associated with the closure of the tunneling business, which was announced on March 29, 2007. See Note 6 for a discussion regarding these charges. We anticipate that further charges will be recorded in 2007 as the business progresses toward liquidation/sale and assets are sold or disposed.

Operating Loss and Margin
Tunneling’s operating loss increased by $15.7 million in the first quarter of 2007 compared to the first quarter of 2006 due primarily to the charges recorded in the first quarter of 2007 related to the closure of the tunneling business. Tunneling closure charges were $16.8 million during the first quarter of 2007. Tunneling’s operating loss without these charges was $1.9 million, or $1.1 million less than last year’s first quarter, as projects were more profitable in 2007 and operating expenses were lowered. A tabular presentation of the costs of closure and the effect on the tunneling segment’s operating loss is set forth below (in thousands):

  
Quarter Ended
 
Quarter Ended
 
  
March 31, 2007
 
March 31, 2006
 
      
Operating loss, as reported  ($18,736) ($ 3,029)
Costs of closure of tunneling business  16,843  ─ 
Operating loss, less tunneling closure costs
  ($ 1,893) ($ 3,029)
INTEREST AND OTHER INCOME (EXPENSE)

Interest Expense
Interest expense declined approximately $0.3 million in the first quarter of 2007, compared to the same period in 2006 due to the following factors (in thousands):

  
Three Months Ended
March 31, 2007 vs. 2006
 
  
Total
Increase
(Decrease)
 
Debt principal amortization - Series A Notes $(349)
Interest on short-term borrowings and other  33 
Total decrease in interest expense
 
$
(316
)

Interest Income
Interest income was $0.9 million in the first quarter of 2007 compared to $0.5 million in the first quarter of 2006. Interest income in the first quarter of 2007 includes $0.1 million related to pre-judgment interest on an insurance claim receivable from our excess insurance coverage carrier. In addition to the insurance claim, interest income increased due to higher interest rates on deposits due to better market conditions.

Other Income
Other income was $0.7 million in the first quarter of 2007 compared to $0.1 million in the first quarter of 2006. The principal drivers of the increase in other income were related to foreign currency transaction gains from the repatriation of foreign cash, along with gains on disposals of fixed assets.

TAXES ON INCOME

(Tax benefit) taxes on (loss) income decreased in the first quarter of 2007 compared to the first quarter of 2006 due primarily to decreased taxable income in the quarter. Our effective tax rate for the first quarter of 2007 was 30.0% compared to 34.5% in the first quarter of 2006. This decrease was due primarily to lower income in the United States where tax rates generally are higher than other tax jurisdictions in which we operate.

CONTRACT BACKLOG

Contract backlog is management’sour expectation of revenues to be generated from received, signed and uncompleted contracts, whosethe cancellation of which is not anticipated at the time of reporting. Contract backlog excludes any term contract amounts for which there is not specific and determinable work released and projects where we have been advised that we are the low bidder, but have not formally been awarded the contract. The following table sets forth our consolidated backlog by segment:

Backlog 
 September 30, 2006 
 
 June 30,
2006 
 
 March 31,
2006
 
 December 31,
2005
 
 September 30, 2005
  
March 31,  
2007
 
December 31, 
2006
 
September 30, 
2006
 
June 30, 
2006
 
March 31,  
2006
 
  
(in millions)
  
  (in millions)
 
Rehabilitation $201.2 $186.8 $216.2 $213.3 $207.8  $187.2 $201.7 $201.2 $186.8 $216.2 
Tunneling  80.7 70.1 50.2 66.3 83.6   60.6  75.7  80.7  70.1  50.2 
Tite Liner®  13.2 15.6 20.1 20.2 10.7   14.5  12.8  13.2  15.6  20.1 
Total $295.1 $272.5 $286.5 $299.8 $302.1  $262.3 $290.2 $295.1 $272.5 $286.5 

The dollar amount of the backlog is not necessarily indicative of future earningsrevenues relative to the performance of such work. Although backlog represents only those contracts that are considered to be firm, there can be no assurance that cancellation or scope adjustments will not occur with respect to such contracts.

Rehabilitation Segment

Revenues
Revenues increased by 9.7% in the rehabilitation segment in the third quarter of 2006 compared to the third quarter of 2005 due to increased crew productivity and the strengthening of the rehabilitation market in the United States. With crew productivity improvements, we have been able to generate more revenue with fewer crews in the third quarter and first nine months of 2006 compared to the same periods in 2005. With the rehabilitation market in the United States rebounding after a slow period in late 2005, we have been able to obtain sufficient workable backlog to keep our crews deployed on profitable work.

Revenues increased only 5.6% in the first nine months of 2006 compared to the first nine months of 2005. This growth is lower than recent trends due to a significant market softening, to the point of contraction, in the United States in late 2005. During this slow period, there was heightened competition for fewer projects, resulting in low-margin pricing, and a decrease in our workable backlog during the first half of 2006. Rather than obtain work at low margins, we were able to take advantage of better margins when the slow period was followed by modest growth in the first quarter of 2006, and even stronger growth in the second and third quarters of 2006.

22

Backlog in the rehabilitation segment increased $14.4 million, or 7.7%, to $201.2 million at September 30, 2006 compared to $186.8 million at June 30, 2006. The increase is due to much stronger market activity in the second and third quarters of 2006, following a period of slow bidding activity in late 2005 lasting into the first quarter of 2006. However, due to changing market behavior, the incubation period between contract awards and release of workable backlog has grown longer. Consequently, there are a significant number of apparent low-bid (ALB) projects that are not included in our reported backlog amounts above.
Due to stronger market activity in the second and third quarters of 2006 in rehabilitation, ALB projects increased by 22% from the end of 2005.

Gross Profit and Margin
Rehabilitation gross profit increased by 8.8% in the third quarter of 2006 compared to the third quarter of 2005 due primarily to higher revenues and increased crew efficiencies, partially offset by higher material costs. Crew efficiencies enabled us to generate higher revenue on essentially flat labor costs. In contrast, material costs increased significantly, driven primarily by resin costs. Resin, a petroleum based product, is subject to pricing volatility, and is a significant raw material in our CIPP process. In many cases, we have the ability to pass price increases to our customers. However, to the extent we may have longer-term contracts with fixed pricing, our ability to pass through such price increases may be limited. In the third quarter of 2006, our ability to pass through such raw material price increases, along with increased crew efficiencies, has enabled us to maintain a gross profit margin of 24.5% compared to 24.7% in the third quarter of 2005.

Rehabilitation gross profit in the first nine months of 2006 increased by 2.8%, largely due to similar factors as described above. In addition, gross profit in the first nine months of 2005 included a $3.4 million benefit from a claim recognized against our excess liability insurance carrier. In the first nine months of 2006, we recorded an additional $0.5 million related to additional amounts from the same claim. We record claims only when the realization of the claim is reasonably assured at an estimated recoverable amount. Excluding the effect of the claims recognized, gross profit would have increased by $5.2 million to $82.9 million in the first nine months of 2006 compared to $77.7 million in the first nine months of 2005. Likewise, gross profit margin would have been 23.3% in the first nine months of 2006 compared to 23.1% in the first nine months of 2005.

A table reconciling gross profit, excluding the effect of insurance claims, to gross profit, as reported, is provided in the table below for the first nine months of 2006 compared to the same period in 2005 (dollars in thousands):

  
Nine Months Ended
September 30,
 
  
2006
 
2005
 
Gross profit, excluding insurance claims $82,909 $77,725 
Gross profit margin, excluding insurance claims  23.3% 23.1%
Effect of insurance claims recognition  526  3,447 
Gross profit, as reported $83,435 $81,172 
Gross profit margin, as reported  23.5% 24.1%

Operating Expenses
Operating expenses increased 14.5% in the third quarter of 2006 compared to the third quarter of 2005 due to higher corporate expenses, including incentive compensation, equity compensation and legal expenses. Operating expenses, as a percentage of revenue, were 17.5% in the third quarter of 2006 compared to 16.8% in the third quarter of 2005.

Likewise, operating expenses increased by 10.1% in the first nine months of 2006 compared to the first nine months of 2005. Operating expenses, as a percentage of revenue, were 17.3% in the first nine months of 2006 compared to 16.6% in the first nine months of 2005.

Operating Income and Margin
Higher revenues and gross profit, offset by higher operating expenses, combined to cause operating income to be relatively flat in the third quarter of 2006 compared to the third quarter of 2005. However, rehabilitation operating margin, which is operating income as a percentage of revenue, declined to 7.0% in the third quarter of 2006 compared to 7.9% in the third quarter of 2005.

The factors described above caused operating income to decrease by 13.3% in the first nine months of 2006 compared to the first nine months of 2005. The operating margin also decreased to 6.2% in the first nine months of 2006, compared to 7.5% in the first nine months of 2005.

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Tunneling Segment

Revenues
Tunneling’s revenues were 55.2% lower in the third quarter of 2006 compared to the third quarter of 2005 due to fewer active projects and lower backlog. The combination of management’s focus on completing existing jobs and a more selective bidding strategy caused tunneling’s backlog to decline sharply over the last several quarters through the second quarter of 2006. The same factors have similarly impacted tunneling’s revenues in the first nine months of 2006 compared to the first nine months of 2005.

In consideration of the time lag between winning a bid and the commencement of a project, revenue is expected to remain below year-ago levels through the end of 2006. However, with the completion of several problem tunneling jobs, management has been able to renew its efforts to obtain profitable work that is compatible with tunneling’s core mining competency. Consequently, backlog has increased from $70.1 million at June 30, 2006 to $80.7 million at September 30, 2006. This represents an increase of $14.4 million compared to December 31, 2005 and a decrease of $2.9 million compared to September 30, 2005.

Gross Profit and Margin
Tunneling’s gross loss was $0.9 million in the third quarter of 2006 compared to gross profit of $2.8 million in the third quarter of 2005. The gross loss in the third quarter of 2006 was primarily due to underutilized equipment costs. Underutilized equipment costs (primarily depreciation and operating lease expenses) were $2.3 million in the third quarter of 2006 compared to $1.4 million in the third quarter of 2005. As a result of the completion of several problematic low-margin or loss jobs and the slow addition of new work, there is considerable tunneling equipment that is idle, resulting in underutilized equipment costs. Excluding underutilized equipment costs, tunneling would have posted a gross profit of $1.5 million, or 9.1%, in the third quarter of 2006. Tunneling’s gross profit in the third quarter of 2005 included the recognition of two claims totaling $2.9 million. Excluding the effects of underutilized equipment and claims recognition tunneling would have posted a gross profit of $1.2 million, or 3.5%, in the third quarter of 2005.

Tunneling’s gross loss was $1.3 million in the first nine months of 2006 comparedCompany’s decision to $2.4 million in the first nine months of 2005. Tunneling’s gross loss in the first nine months of 2006 also included underutilized equipment costs of $6.8 million offset by claims revenue of $0.7 million. Tunneling’s gross loss in the first nine months of 2005 included underutilized equipment costs of $2.8 million and claims revenue of $3.8 million. Excluding the effects of underutilized equipment and claims, tunneling’s gross profit would have been $4.8 million, or 9.6%, in the first nine months of 2006 compared to a gross loss of $3.4 million, or a negative 4.0%, in the first nine months of 2005.

Gross profit (loss), excluding the effect of underutilized equipment and recognized claims, is presented in the table below and reconciled to reported gross profit (dollars in thousands):

  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
  
2006
 
2005
 
2006
 
2005
 
Gross profit (loss), excluding underutilized equipment and claims 
$
1,463
 
$
1,248
 
$
4,784
 
$
(3,422
)
Gross profit margin, excluding underutilized equipment and claims  9.1% 3.5% 9.6% -4.0%
Underutilized equipment costs  (2,331) (1,412) (6,777) (2,845)
Claims recognized  -  2,931  675  3,829 
Gross profit (loss), as reported
 
$
(868
)
$
2,767
 
$
(1,318
)
$
(2,438
)
Gross profit margin, as reported
  
-5.4
%
 
7.7
%
 
-2.6
%
 
-2.9
%


The table above demonstrates tunneling performance as if the level of equipment were reduced to an appropriate level for its operations and excludes the effects of claims recognized. The low margins and loss in the three- and nine-month periods ended September 30, 2005 are due to the adverse effects of low-margin and loss jobs that were ongoing in those periods.

As underutilized equipment costs represented a significant factor in tunneling’s gross loss in the third quarter and first nine months of 2006, we continue to explore alternatives to reduce the level of equipment to fitclose the tunneling operation’s ongoing business model. Sales of tunneling property and equipment resulted in gains of $1.4 million and $1.6 million in the third quarter and first nine months of 2006, respectively. However, there can be no assurances that further opportunities for property and equipment reduction in the tunneling business will be available to us.

24

Some of the problems experienced on a number of completed tunneling projects may have related claims that could benefit gross profit in future periods. At September 30, 2006, our tunneling operation, had approximately $17.0 million in outstanding claims against third parties relating to, among other things, differing site conditions and defective customer specifications. Of this amount, $6.5 million had been recorded in the financial statements through September 30, 2006, none of which occurred in the third quarter. Claims of $0.7 million were recognized in the first nine months of 2006. In accordance with our accounting policies, we record a claim to income when realization of the claim is reasonably assured, and we can estimate a recoverable amount.

During 2005 and 2006, we redoubled our efforts regarding tunneling claims and have aggressively pursued all outstanding claims, either through discussions and/or negotiations with our clients, alternative dispute resolution proceedings or, if necessary, litigation.

While we believe our tunneling operation will return to profitability, to the extent additional losses persist, we may have exposure to the recovery of our goodwill of $8.9 million associated with the tunneling segment.

Operating Expenses
Operating expensesdiscussed above, backlog in the tunneling segment decreasedwill decline throughout the remainder of 2007 as current projects are completed and new projects are not being bid or accepted. We currently anticipate that all projects will be completed by 48.1% inmid-2008, with the third quartermajority of 2006 and by 31.9% in the first nine months of 2006 compared to the same periods in 2005. Operating expenses were lower in the third quarter and first nine months of 2006 due to reductions in administrative staffing and related costs to adjust to a lower operating base, partially offset by higher corporate expenses allocated to tunneling for increased management efforts to run the business. Operating expenses as a percentage of revenue were 13.1% and 13.6% in the third quarter and first nine months of 2006, respectively, compared to 11.3% and 11.7% in the same periods of 2005, respectively.

Operating Loss and Margin
Tunneling’s operating loss widened by $1.7 million in the third quarter of 2006 compared to the third quarter of 2005 due primarily to the effects of claims recognized in 2005. Tunneling’s operating margin was a negative 18.5% in the third quarter of 2006 compared to a negative 3.5% in the third quarter of 2005.

Tunneling’s operating loss narrowed by $4.3 million in the first nine months of 2006 compared to the first nine months of 2005 due to the completion of several problem projects earlier this year. Tunneling’s operating margin was a negative 16.2% in the first nine months of 2006 compared to a negative 14.5% in the first nine months of 2005.

Tite Liner® Segment

Revenues
Tite Liner® revenues decreased by 16.0% in the third quarter of 2006 compared to the third quarter of 2005 as the third quarter of last year was an exceptionally strong quarter, particularly for our South American operations. Revenues from our South American operations were $2.6 million lower in the third quarter of 2006 compared to the third quarter of 2005, while revenues from our North American (U.S. and Canada) operations increased by $0.7 million in the third quarter of 2006 compared to the third quarter of 2005.

Tite Liner® revenues were 31.9% higher in the first nine months of 2006 compared to the same period last year due to very strong revenue in the first half of 2006. Backlog, which can be an indicator of future revenues, was $11.6 million, or 134.0% higher at the beginning of 2006 compared to the backlog at the beginning of 2005.

Tite Liner® normally experiences increased demand during periods of high prices for oil and other mined commodities. At September 30, 2006, Tite Liner® backlog was $13.2 million, which was $2.6 million, or 24.5%, higher than the backlog level at September 30, 2005. As such, it is expected that revenues will remain strong through the end of 2006. However, revenues may not necessarily be above year-ago levels in the fourth quarter of 2006.

Gross Profit and Margin
Despite a decrease in third quarter 2006 revenues, gross profit was slightly higher in the third quarter of 2006 compared to the third quarter of 2005 due to stronger gross profit margins in the U.S. and South America. Stronger margins resulted from efficiencies gained through sustained volume throughout 2006. Gross profit margins were 36.5% in the third quarter of 2006 compared to 29.9% in the third quarter of 2005.

Gross profit was 45.2% higher in the first nine months of 2006 compared to the first nine months of 2005 due to higher revenues and efficiencies gained from higher volume. Gross profit margins were also higher at 33.2% in the first nine months of 2006 compared to 30.2% in the first nine months of 2005.

25
Operating Expenses
Operating expenses were 17.4% higher in the third quarter of 2006 compared to the third quarter of 2005 due primarily to additional staffing and additional corporate expenses to support anticipated growth in the Tite Liner® business. As a percentage of revenue, operating expenses were 15.3% in the third quarter of 2006 compared to 10.9% in the third quarter of 2005. Operating expenses were higher as a percentage of revenue due to lower revenues in the third quarter of 2006 compared to the third quarter of 2005.

Similar factors caused operating expenseswork to be 26.7% highercompleted in the first nine months of 2006 compared to the first nine months of 2005. However, due to higher revenues in 2006 compared to 2005, operating expenses as a percentage of revenue decreased to 13.1% compared to 13.6% in the first nine months of 2005.

Operating Income and Margin
Operating income was only 5.8% lower in the third quarter of 2006 compared to the third quarter of 2005 despite the decrease in revenues. Our slightly higher gross profit on stronger gross margins prevented a steeper decrease in operating income. Operating margin, which is operating income as a percentage of revenue, strengthened to 21.3% in the third quarter of 2006 compared to 19.0% in the third quarter of 2005.

Higher revenues through the first nine months of 2006 caused operating income to increase by 60.3% during the period compared to the first nine months of 2005. Due to our strengthening gross profit margin, the operating margin likewise increased to 20.2% in the first nine months of 2006 compared to 16.6% the first nine months of 2005.

INTEREST AND OTHER INCOME (EXPENSE)

Interest Expense
Interest expense declined approximately $0.5 million and $1.3 million in the third quarter and first nine months of 2006, respectively, compared to the same periods in 2005 due to the following factors (dollars in thousands):

 
Three Months Ended
September 30, 2006 vs. 2005
 
Nine Months Ended
September 30, 2006 vs. 2005
 
Total
Increase
(Decrease)
 
Total
Increase
(Decrease)
Debt principal amortization - Series A Notes$ (349) $ (1,047)
Increased rates due to debt amendments on March 16, 2005       -         84
Interest on short-term borrowings and other  (102)       (356)
Total decrease in interest expense
$(451)
 
$ (1,319)

Interest Income
Interest income was $0.8 million and $2.5 million in the third quarter and first nine months of 2006, respectively, compared to $0.4 million and $1.4 million in the third quarter and first nine months of 2005, respectively. Interest income in the third quarter of 2006 includes $0.1 million related to pre-judgment interest on an insurance claim receivable from our excess insurance coverage carrier. For the first nine months of 2006, we recorded $0.7 million in interest income related to this insurance claim, which is $0.4 million more than what was recorded in the first nine months of 2005. The claim amount was adjusted in the second quarter of 2006 for additional amounts determined to be included in the claim, and additional interest was also recorded to recognize a higher pre-judgment interest rate. In addition to the insurance claim, interest is higher due to improved cash balances and higher interest rates on deposits due to better market conditions and improved treasury practices.

Other Income
Other income was $1.5 million and $1.9 million in the third quarter and first nine months of 2006, respectively, compared to other expense of $0.2 million and $0.4 million in the same periods in 2005. The primary components of other income in the third quarter of 2006 included gains of $1.4 million on the disposition of tunneling property and equipment. Likewise, gains of $1.6 million were recorded on dispositions of tunneling property and equipment in the first nine months of 2006.

Taxes on Income
Taxes on income increased in the third quarter and first nine months of 2006 compared to the same periods in 2005 due primarily to higher pre-tax income and a higher effective tax rate. Our effective tax rate was 30.4% and 32.9% in the third quarter and first nine months of 2006, respectively, compared to 26.9% and 30.0% in the same periods in 2005.2007.

26

CRITICAL ACCOUNTING POLICIES

Discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the financial statement dates. Actual results may differ from these estimates under different assumptions or conditions.

Our critical accounting policies are disclosed in our 2005 Annual Report on Form 10-K. However, with the January 1, 2006 adoption of Statement of Financial Accounting Standards No. 123(R), Share Based Payment, we have included a description of our accounting for equity-based compensation below.

Accounting for Equity-Based Compensation
We record expense for equity-based compensation awards, including stock appreciation rights, restricted shares of common stock, performance awards, stock options and stock units based on the fair value recognition provisions contained in SFAS 123(R), Share Based Payment. Fair value is determined using either the Black-Scholes option pricing model for stock option awards, or our closing stock price on the grant date for restricted shares of our common stock or deferred stock units. Assumptions regarding volatility, expected term, dividend yield and risk-free rate are required for the Black-Scholes model. Volatility and expected term assumptions are based on our historical experience. The risk-free rate is based on a U.S. treasury note with a maturity similar to the option award’s expected term. Discussion of our implementation of SFAS 123(R) is described in Note 2 to the consolidated financial statements contained in this report.

LIQUIDITY AND CAPITAL RESOURCES

Cash and Equivalents

 
September 30,
2006
 
December 31,
2005
  
March 31, 2007
 
December 31, 2006
 
 
(in thousands)
  
(in thousands)
 
Cash and cash equivalents $75,125 $77,069  $79,676 $96,393 
Cash restricted - in escrow  5,289  5,588   1,288 934 
Total $80,414 $82,657 

Restricted cash is cash held in escrow related to deposits made in lieu of retention on specific projects performed for municipalities and state agencies.
Sources and Uses of Cash
We expect the principal use of funds for the foreseeable future will be for capital expenditures, working capital, debt servicing and investments. Our primary source of cash is operating activities. Besides operating activities, we occasionally borrow under our line of credit to fund operating activities, including working capital investments. In 2007, we anticipate developing a plan to create a new capital structure that is aligned with our long-term growth opportunities. Information regarding our cash flows for the first ninethree months ofended March 31, 2007 and 2006 and 2005 is further discussed below and is presented in our consolidated statements of cash flows contained in this report.

Cash Flows from Operating ActivitiesOperations
Operating activities provided $19.4used $3.4 million in the first nine monthsquarter of 20062007 compared to $8.3$2.3 million in the first nine monthsquarter of 2005, with improvements related to the $5.3 million increase in net income in the current year period and changes2006. Changes in operating assets and liabilities which used $11.3$0.6 million in the first nine monthsquarter of 20062007 compared to $16.9$7.7 million in the first nine monthssame period last year. Compared to December 31, 2006, net accounts receivable, including retainage and costs and estimated earnings in excess of 2005. In the first nine months of 2006, changes in receivables,billings (unbilled receivables), decreased by $2.6 million, inventories and prepaid expenses used $21.1increased by $0.4 million but were partially offset by changes inand accounts payable and accrued expenses which provided $9.8decreased by $0.8 million. Equity-based compensation, a non-cash expense, increased significantly to $3.7 millionDepreciation was slightly lower in the first nine monthsquarter of 2007 compared to the first quarter of 2006 compared to $0.8 millionas a result of a lower level of fixed assets in 2007. During the first nine monthsquarter of 2005 due2007, pre-tax charges related to the implementationtunneling closure were recorded totaling $16.8 million, of new accounting rules that requirewhich $12.0 million related to non-cash or accrued but unpaid impairment charges and expenses recorded during the recording of expense for equity-based compensation awards.quarter. See Note 26 to the consolidated financial statements contained in this report for a discussion of our implementation of these accounting rules.charges.

Cash Flows from Investing Activities
Investing activities used $8.7 million in the first nine months of 2006 compared to $20.7 million in the first nine months of 2005. In the first nine monthsquarter of 2006,2007, cash used by investing activities included $4.5 million in capital expenditures were $14.1 million and were partially offset by $3.9$0.2 million of proceeds received from the sale of property and assets and $1.4 million received from the conversion of permanent life insurance policies on current and former employees.fixed assets. Capital expenditures arewere primarily for equipment used infor our steam-inversion process and replacement of older equipment, primarily in the United States. Investing activitiesIn addition, $1.4 million was invested in the first nine monthsremodeling of 2005 included capital expenditures of $20.9 million, investments in patents of $0.6 million and $0.7 million received from asset dispositions. Capital expenditures are expectedan existing facility to be higherthe new headquarters in Chesterfield, Missouri. In the fourthfirst quarter of 2006, due to continued investment in and implementation of steam-inversion process equipment and other logistics cost reduction initiatives. Fourth quarter 2006$3.4 million was spent on capital expenditures, may be partially offset by sales of real estate and tunneling equipment.

which primarily related to equipment used for our steam-inversion process.
27

Cash Flows from Financing Activities
Financing activities used $11.9 million in the first nine months of 2006 compared to $10.7 million in the first nine months of 2005. In the first nine monthsquarter of 2006,2007, cash used in financing activities primarily included our regularly scheduled Senior Note amortization payment of $15.7 million. In addition,

During the first quarter of 2007, we repaid $3.5$0.7 million on notes payable and $0.1 million in financing fees related to our credit facility obtained in February 2006. In the first nine months of 2006, we received $3.9 million from option exercisesas compared to $1.0$1.6 million in the first nine monthsquarter of 2005. Most of this year’s cash from option exercises was received in2006. During the first quarter when our stock price rose to its highest level in several years. In addition,of 2007, we recorded $0.8received $0.6 million for additional tax benefit from the exercise of stock options as compared to $3.0 million in the first nine monthsquarter of 2006. Proceeds from notes payable

In March 2007, we borrowed an aggregate of $2.8$5.0 million is relatedon our Credit Facility to fund U.S. operating activities. These amounts were repaid in April 2007. There were no outstanding borrowings on the financingCredit Facility at the end of certain annual insurance premiums.the first quarter of 2006.

Financings

See discussion in Note 810 to the consolidated financial statements contained in this report for a discussion regarding our financings and debt covenant compliance.

We believe we have adequate resources and liquidity to fund future cash requirements and debt repayments with cash generated from operations, existing cash balances, additional short- and long-term borrowingsborrowing and the sale of assets, for the next twelve months.
27

DISCLOSURE OF FINANCIAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

We have entered into various financial obligations and commitments in the course of our ongoing operations and financing strategies. Financial obligations are considered to represent known future cash payments that we are required to make under existing contractual arrangements, such as debt and lease agreements. These obligations may result from both general financing activities or from commercial arrangements that are directly supported by related revenue-producing activities. Commercial commitments represent our contingent obligations, which become payable only if certain pre-defined events were to occur, such as funding financial guarantees. See Note 79 to the consolidated financial statements contained in this report for further discussion.

The following table provides a summary of our financial obligations and commercial commitments as of September 30, 2006March 31, 2007 (in thousands). This table includes cash obligations related to principal outstanding under existing debt agreements and operating leases.

Payments Due by Period
 
  
Cash Obligations(1) (2)
 
    Total   
 
2006  
 
   2007  
 
   2008  
 
   2009  
 
   2010  
 
Thereafter
 
Long-term debt$80,758 $3 $15,723 $13 $13 $6 $65,000 
Notes payable 1,823  724  1,099  -  -  -  - 
Interest on debt and notes 30,499  2,152  4,966  4,251  4,251  4,251  10,628 
Line of credit facility(3)
 -  -  -  -  -  -  - 
Operating leases 32,815  3,677  11,071  9,320  5,225  1,401  2,121 
Total contractual cash
obligations
$
145,895
 
$
6,556
 
$
32,859
 
$
13,584
 
$
9,489
 
$
5,658
 
$
77,749
 
Payments Due by Period
 
Cash Obligations(1)(3)
 
   Total   
 
2007  
 
   2008  
 
   2009  
 
   2010   
 
   2011  
 
Thereafter
 
Long-term debt $65,056  12  15  
16
  
13
  - $65,000 
Interest on long-term debt  26,579  3,193  4,254  4,253  4,251  4,251  6,377 
Line of credit facility(2)
  5,000  5,000  -  -  -  -  - 
Operating leases  34,618  10,153  10,790  7,992  2,855  1,235  1,593 
Total contractual cash obligations $131,253 $18,358 $15,059 $12,261 $7,119 $5,486 $72,970 
                       

(1)Cash obligations are not discounted. See Notes 79 and 810 to the consolidated financial statements contained in this report regarding commitments and contingencies and financings, respectively.
(2)A resin supply contract with one of our vendors is excluded from this table. See “Market Risk - Commodity Risk” under Item 3 of Part I of this report for further discussion.
(3)As of September 30, 2006, thereMarch 31, 2007, $5.0 million was no borrowing balanceborrowed on the $35.0 million credit facility and, therefore, there was no applicablewith an interest rate as the rates are determined on the borrowing date.of 8.25%. The available balance was $19.5$14.1 million, and the commitment fee was 0.2%.175%. The remaining $15.5$15.9 million was reservedused for non-interest bearing letters of credit, $14.5 million of which waswere collateral for insurance, and $1.0 million was collateral for work performance and $0.4 million for import of work and prepayment of billings related to a project overseas. We generally use the credit facility from time to time for short-term borrowings and disclose amounts outstanding as a current liability.raw materials.

OFF-BALANCE SHEET ARRANGEMENTS

We use various structures for the financing of operating equipment, including borrowings,borrowing, operating and capital leases, and sale-leaseback arrangements. All debt, including the discounted value of future minimum lease payments under capital lease
28

arrangements, is presented in our consolidatedthe balance sheet. Our future commitments under operating lease arrangements, which extend beyond 2010, were $32.8$131.3 million at September 30, 2006.March 31, 2007. We also have exposure under performance guarantees by contractual joint ventures and indemnification of ourthe surety. However, we have never experienced any material adverse effect oneffects to our consolidated financial position, results of operations or cash flows relative to these arrangements. All foreign joint ventures are accounted for using the equity method. We have no other off-balance sheet financing arrangements or commitments. See Note 79 to the consolidated financial statements contained in this report regarding commitments and contingencies.

NEW ACCOUNTING PRONOUNCEMENTS

For a discussion of new accounting pronouncements see Note 911 to the consolidated financial statements contained in this report.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market RiskMARKET RISK

We are exposed to the effect of interest rate changes and of foreign currency and commodity price fluctuations. We currently do not use derivative contracts to manage these risks.

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Interest Rate Risk

The fair value of our cash and short-term investment portfolio at September 30, 2006March 31, 2007 approximated carrying value. Given the short-term nature of these instruments, market risk, as measured by the change in fair value resulting from a hypothetical 10% change in interest rates, iswould not be material.

Our objectives in managing exposure to interest rate changes are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, we maintain fixed rate debt whenever possible.debt. The fair value of our long-term debt, including current maturities was approximately $75.5 millionand the amount outstanding on the line of credit facility, approximated its carrying value at September 30, 2006.March 31, 2007. Market risk was estimated to be $2.9$0.3 million as the potential increase in fair value resulting from a hypothetical 10%1.0% decrease in our debt-specificdebt specific borrowing rates at September 30, 2006.March 31, 2007.

Foreign Exchange Risk

We operate subsidiaries and are associated with licensees and affiliates operating solely in countries outside of the United States, and in currencies other than the U.S. dollar.foreign currencies. Consequently, these operationswe are inherently exposed to risks associated with the fluctuation in the value of the local currencies of these countries compared to the U.S. dollar. At September 30, 2006,March 31, 2007, a substantial portion of our holdings in financial instruments, not including cash and cash equivalents were denominated in foreign currencies, were immaterial.and a hypothetical 1% change in currency exchange rates could result in an approximate $0.6 million impact to our equity through accumulated other comprehensive income. We continue to evaluate the use of instruments, such as forward contracts, to hedge our foreign exchange exposure.

Commodity Risk

We have exposure to the effect of limitations on supply and changes in commodity pricing relative to a variety of raw materials that we purchase and use in our operating activities, most notably, resin, fuel, pipe, fiber and concrete. We manage this risk by entering into agreements with our suppliers, as well as purchasing in bulk, when possible. We also manage this risk by continuously updating our estimation systems for bidding contracts so that we are able to price our products and services appropriately to our customers. However, we face exposure on contracts in process that have already been priced and are not subject to any cost adjustments in the contract. This exposure is potentially more significant on our longer term projects, particularly in the tunneling segment. We do not currently hold or issue derivative financial instruments for hedging purposes.

We entered into a resin supply contract effective March 29, 2005, for the purchase and sale of certain proprietary resins we use in our North American operations. The contract provides for the exclusive sale of our proprietary resins by the vendor to us or to third parties that we designate. The contract has an initial term from March 29, 2005 until December 31, 2007, and shall renew for successive 12-month periods until the contract is terminated by either party upon 180-days’ prior written notice to the other party with an effective termination date of the end of the contract term.

ITEM 4. CONTROLS AND PROCEDURES
ITEM 4.
CONTROLS AND PROCEDURES

Our company’s management, with the participation of ourthe chief executive officer and controller (our principal financial officer), has conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2006.March 31, 2007. Based on this evaluation, the chief executive officer and controller have concluded that our disclosure controls were effective at September 30, 2006.March 31, 2007.

We maintain internal controls and procedures designed to ensure that we are able to collect the information subject to required disclosure in reports we file with the United States Securities and Exchange Commission, and to process, summarize and disclose this information within the time specified by the rules set forth by the Securities and Exchange Commission.

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2006March 31, 2007 that materially affected, or are reasonably likely to affect, our internal control over financial reporting.



3029


PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
ITEM 1.
LEGAL PROCEEDINGS

In the third quarter of 2002, an accident on an Insituform CIPP Process project in Des Moines, Iowa resulted in the death of two workers and the injury of five workers. We fully cooperated with Iowa’s state OSHA in the investigation of the accident. Iowa OSHA issued a Citation and Notification of Penalty in connection with the accident, including several willful citations. Iowa OSHA proposed penalties of $808,250. We challenged Iowa OSHA’s findings, and in the fourth quarter of 2003, an administrative law judge reduced the penalties to $158,000. In the second quarter of 2004, the Iowa Employment Appeal Board reinstated many of the original penalties, ordering total penalties in the amount of $733,750. We appealed the decision of the Employment Appeal Board to the Iowa District Court for Polk County, which, in the first quarter of 2005, reduced the penalties back to $158,000. We appealed the decision of the Iowa District Court and, on February 8, 2006, our appeal was heard by the Iowa Court of Appeals. On March 17, 2006, the Court of Appeals issued its opinion, vacating all citations issued under the general industry standards (all citations except two serious citations) and reducing total penalties to $4,500. Thereafter, the Employment Appeal Board filed a petition for further review with the Iowa Supreme Court, and we filed a resistance to the petition. On September 29, 2006, the Iowa Supreme Court granted the Employment Appeal Board’s petition for further review, and set the case for consideration during the week of December 4, 2006. In a companion action brought by the Employment Appeal Board against the City of Des Moines (events arising out of the Des Moines accident),On February 16, 2007, the Iowa Supreme Court recently reversedissued its ruling, reversing the prior ruling of the Iowa Court of Appeal’s earlier decision, which previously had affirmed the dismissal ofAppeals and reinstating all citations issued under the general industry standards, including several willful citations, and reinstating penalties previously issued againstin the Cityamount of Des Moines. In so reversing,$733,750. Thereafter, we filed a Motion for Reconsideration with the Iowa Supreme Court, reinstated two serious citations and penaltieswhich motion was denied on March 29, 2007. The case will now be remanded back to the District Court for entry of $9,000 againstjudgment consistent with the City of Des Moines. We cannot predict the effect that the recent Iowa Supreme Court ruling will have onCourt’s opinion. We currently are reviewing our pending case before the court.options regarding further judicial review of this matter.

We are involved in certain other actions incidental to the conduct of our 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 our consolidated financial condition, results of operations or cash flows.

ITEM 1A.
RISK FACTORS

Since the filing of our Annual Report on Form 10-K for the year ended December 31, 2006, we have announced our decision to exit the tunneling business in an effort to improve our overall financial performance and to better align our operations with our long-term strategic initiatives. In connection with this decision, we intend to complete all of our current tunneling projects and to seek a buyer or buyers for the business or its related assets.
In our 2006 Annual Report, we had included as a risk factor in Part I, Item 1A that continued under-performance by our tunneling segment may result in goodwill and fixed asset impairment. As a result of the announced exit and disposal activities, we announced that we anticipate incurring a pre-tax charge of up to approximately $21 million, of which approximately $8 million is expected to relate to cash charges relating to property, equipment and vehicle lease terminations and buyouts, employee termination benefits and retention incentives and other ancillary expenses, approximately $9 million is expected to relate to impairment of goodwill and other intangible assets, and approximately $4 million is expected to relate to impairment charges for fixed assets and equipment.
Our above risk factor has materially changed in that the goodwill and fixed asset impairment has now been incurred. We belive that there are other risk factors associated with the exiting of the tunneling business, the completion of existing tunneling projects, the sale of the fixed assets used in the tunneling segment and the redeployment of the net proceeds resulting from the exiting of the tunneling business and the sale of the tunneling assets:
ITEM 6. EXHIBITSOur current estimates as to the aggregate fair market value of the fixed assets of the tunneling segment may not be accurate.
We have made an estimate as to the aggregate fair market value of the fixed assets of the tunneling business that could be realizable upon sale and compared this value to the book value of the assets on our consolidated balance sheet in order to determine the estimate of the impairment charge for the fixed assets. This estimate may not be accurate as to the net proceeds that we will actually obtain in a sale. If the net proceeds are less than our current estimate, we may incur further impairment charges related to the disposition of the fixed assets of the tunneling segment.
Our current estimates of the cash expenses required to exit the tunneling business may not be accurate.
We have made a current estimate of the cash charges which we anticipate incurring in connection with property, equipment and vehicle lease terminations and buyouts, employee termination benefits and retention incentives and other ancillary costs associated with the exiting of the tunneling business. This estimate may not be accurate as to the total costs that we may actually incur in the exiting of the tunneling segment. If the estimate is too low, we may incur further cash charges related to the exiting of the tunneling business.
Our current projections on the timing for completion of our existing tunneling projects may not be accurate.
We have made certain projections with respect to the timing for completion of our current tunneling projects. These projections may not be accurate as to the time that it will take for us to complete these tunneling projects. If some or all of the tunneling projects take longer than we have projected, these delays may increase costs and decrease the net revenues we expect to realize on these projects, may lower the amounts realizable on the fixed assets used in the tunneling segment and may increase cash charges in the exiting of the tunneling business. This may, in turn, affect the amount of additional financial resources that we may redeploy into our rehabilitation and Tite Liner® segments, as well as the timing of the redeployment of these resources.

ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At our Annual Meeting of Stockholders held on Wednesday, April 25, 2007, the following matters were voted upon:

1.Election of eight directors, each to serve a one-year term or until his or her successor has been elected and qualified:

Name
 
For
 
Withheld
Stephen P. Cortinovis 21,015,148 101,130
Stephanie A. Cuskley 21,013,898 102,380
John P. Dubinsky 19,213,233 1,903,045   
Juanita H. Hinshaw 20,435,800 680,478
Alfred T. McNeill 21,014,248 102,030
Thomas S. Rooney, Jr. 21,013,816 102,462
Sheldon Weinig 20,778,780 337,498
Alfred L. Woods 21,014,447 101,831

2.Approval of the Insituform Technologies, Inc. Employee Stock Purchase Plan.

For
 
Against
 
Abstain
 
Broker Non-Votes
16,174,069 101,894 22,643 4,817,672

3.Ratification of the appointment of PricewaterhouseCoopers LLP as independent auditors for the fiscal year ending December 31, 2007:

For
 
Against
 
Abstain
 
Broker Non-Votes
21,034,254 64,596 17,428 0
31

ITEM 6.
EXHIBITS

The exhibits required to be filed as part of this Quarterly Report on Form 10-Q are listed on the Index to Exhibits attached hereto.

3132

SIGNATURESSIGNATURES


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.


 INSITUFORM TECHNOLOGIES, INC.
  
  
May 1, 2007/s/ David A. Martin 
  
October 31, 2006
By: /s/ David A. Martin
  David A. MartinVice President and Controller
  Vice President and Controller
Principal Financial and Accounting Officer

3233

INDEXINDEX TO EXHIBITS

These exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K.

3.1Restated Certificate of Incorporation of the Company, as amended through April 27, 2005, filed herewith.
3.2
Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001).

3.3Amended and Restated By-Laws of the Company, as amended through July 25, 2006 (incorporated by reference to Exhibit 3.1 to the current report on Form 8-K dated and filed July 27, 2006).
31.1Certification of Thomas S. Rooney, Jr. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

31.2Certification of David A. Martin pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

32.1Certification of Thomas S. Rooney, Jr. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

32.2Certification of David A. Martin pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

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