Insituform Form 10K

General

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 and Tite Liner®. These segments have been determined primarily based on the types of products sold by each segment, and each is regularly reviewed and evaluated separately. While we use a variety of trenchless technologies, the Insituformâ CIPP (“Insituform CIPP process”) process contributed 66.7% and 69.2% of our revenues in 2005 and 2004, respectively.

Revenues are generated by our company and our subsidiaries operating principally in the United States, Canada, the United Kingdom, the Netherlands, France, Belgium, Spain, Switzerland and Chile, and include product sales and royalties from several joint ventures in Europe, and unaffiliated licensees and sub-licensees throughout the world. The United States remains our single largest market, representing 77.7% of total revenue in 2005. See Note 14 to our Consolidated Financial Statements contained in this report for additional segment information and disclosures.

We were incorporated in Delaware in 1980, under the name Insituform of North America, Inc. We were originally formed to act as the exclusive licensee of the Insituform CIPP Process in most of the United States. When we acquired our licensor in 1992, our name changed to Insituform Technologies, Inc. As a result of our successive licensee acquisitions, our business model has evolved from licensing

technology and manufacturing materials to performing the entire Insituform CIPP Process and other trenchless technologies.

As used in this Annual Report on Form 10-K, the terms “Company” and “Insituform Technologies” refer to the Company and, unless the context otherwise requires, its direct and indirect wholly-owned subsidiaries. For certain information concerning our industry segments and geographic areas, see Note 14 to our Consolidated Financial Statements contained in this report.

Available Information

Our company’s website is www.insituform.com. We make available on this website under “Investor Relations – SEC,” free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K (and amendments to those reports) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. In addition, our Code of Ethics for our Chief Executive Officer, Chief Financial Officer and senior financial employees, our Business Code of Conduct applicable to our officers, directors and employees, our Corporate Governance Guidelines, and our Board committee charters are available, free of charge, on this website under “Investor Relations – Corporate Governance.” These documents will be made available, free of charge, to any stockholder requesting them.

Technologies

Pipeline System Rehabilitation

The Insituform CIPP Process for the rehabilitation of sewers, pipelines and other conduits utilizes a custom-manufactured tube, or liner, made of a synthetic fiber. After the tube is saturated (impregnated) with a thermosetting resin mixture, it is installed in the host pipe by various processes and the resin is then hardened, usually by heating it using various means, including steam, forming a new rigid pipe within a pipe.

Pipebursting is a trenchless method for replacing deteriorated or undersized pipelines. A bursting head is propelled through the existing pipeline, fracturing the host pipe and displacing the fragments outward, allowing a new pipe to be pulled in to replace the old line. Pipes can be replaced size-for-size or upsized.

Microtunneling is a trenchless method of drilling a new tunnel from surface operated equipment. Microtunneling is typically used for gravity sewers at depths greater than 15 feet, in congested areas, where unstable ground conditions exist, where construction is below the water table, or where contamination zones are present.

Sliplining is a method used to push or pull a new pipeline into an old one. With segmented sliplining, short segments of pipe are joined to form the new pipe. For gravity sewer rehabilitation, these short segments can often be joined in a manhole or access structure, eliminating the need for a large pulling pit.

See “Patents and Licenses” below for information concerning these technologies and our Thermopipe process.

Tunneling

Tunneling typically encompasses the construction of man-entry sized pipelines with access through vertical shafts. From the vertical shaft, a tunnel is constructed using a steerable, locally controlled tunnel boring machine. Pipe is typically installed after the tunnel is constructed.

Tite Liner Process

Our Tite Liner® (“Tite Liner”) process is a method of lining new and existing pipe with a corrosion and abrasion resistant polyethylene pipe.

Operations

Most of our installation operations are project-oriented contracts for municipal entities. The contracts are usually obtained through competitive bidding or negotiations and require performance at a fixed price. The profitability of these contracts depends heavily upon the competitive bidding environment, our ability to estimate costs accurately and our ability to effectively manage and execute project performance. Project estimates may prove to be inaccurate due to unforeseen conditions or events. A substantial portion of the work on any given project may be subcontracted to third parties at a significantly lower profitability level to us than work directly performed by us. Also, proper trenchless installation requires expertise that is acquired on the job and through training. Therefore, we provide ongoing training and appropriate equipment to our field installation crews.

The overall profitability of our installation operations is influenced not only by the profitability of specific project contracts, but also by the volume and timing of projects so that the installation operations are able to operate at, or near, capacity.

We are required to carry insurance and provide bonding in connection with certain installation projects and, accordingly, maintain comprehensive insurance policies, including workers’ compensation, general and automobile liability, and property coverage. We believe that we presently maintain adequate insurance coverage for all installation activities. We have also arranged bonding capacity for bid, performance and payment bonds. Typically, the cost of a performance bond is less than 1% of the contract value. We are required to indemnify the surety companies against losses from third-party claims of customers and subcontractors. The indemnification obligations are secured by unperfected liens on our assets and the assets of those subsidiaries that are parties to the applicable indemnification agreement.

We generally invoice our customers as work is completed. Under ordinary circumstances, collection from municipalities in the United States is made within 60 to 90 days of billing. In most cases, 5% to 15% of the contract value is withheld by the owner pending satisfactory completion of the project.

Rehabilitation Activities

Our rehabilitation activities are conducted principally through installation and other construction operations performed directly by us or our subsidiaries. In those areas of the world in which we believe it would not be desirable for our company to capitalize on our trenchless processes directly, we have granted licenses to unaffiliated companies. As described under “Ownership Interests in Operating Licensees and Project Joint Ventures” below, we also have entered into joint ventures from time to time to capitalize on our trenchless rehabilitation processes. Under these contractual joint venture relationships, work is bid by the joint venture entity and subcontracted to the joint venture partners or to third parties. The joint venture partners are primarily responsible for their subcontracted work, but both joint venture partners are liable to the customer for all of the work. Revenue and associated costs are recorded using percentage-of-completion accounting for our subcontracted portion of the total contract only.

Our principal rehabilitation activities are conducted in North America directly by us or through our subsidiaries. We have performed significant pipebursting rehabilitation activities in the southeastern and southwestern regions of the United States.

North American rehabilitation operations, including research and development, engineering, training and financial support systems, are headquartered in Chesterfield, Missouri. During 2005, tube manufacturing and processing facilities for North America were maintained in seven locations, geographically dispersed throughout the United States and Canada.

Outside North America, we conduct Insituform CIPP Process rehabilitation operations through our subsidiaries in the United Kingdom, France, the Netherlands, Spain, Switzerland and Belgium. Through one of our French subsidiaries, Video Injection S.A., acquired in 1998, we utilize multifunctional robotic devices, developed by Video Injection, in connection with the inspection and repair of pipelines. We also maintain a manufacturing facility in Wellingborough, England to support European operations.

European operations are headquartered in Paris, France with principal regional facilities located in the United Kingdom, France, The Netherlands, Spain, Switzerland and Belgium.

Tunneling Activities

We conduct tunneling, microtunneling and a range of pipe system rehabilitation services throughout the United States directly and through our wholly-owned subsidiary, Affholder, Inc. Our principal administrative functions for tunneling are headquartered in Chesterfield, Missouri.

Tite Liner Activities

Tite Liner Process operations are conducted in the United States through our United Pipeline Systems division. Worldwide Tite Liner Process operations are headquartered in the United States. Outside the United States, Tite Liner Process installation activities are conducted through operating subsidiaries in Chile and Canada.

Licensees

We have granted licenses for the Insituform CIPP Process, covering exclusive and non-exclusive territories, to licensees who provide pipe repair and rehabilitation services throughout their respective licensed territories. At December 31, 2005, the Insituform CIPP Process was licensed to five unaffiliated licensees. There were no unafilliated domestic licensees. The licenses generally grant to the licensee the right to utilize our know-how and the patent rights (where they exist) relating to the subject process, and to use our copyrights and trademarks.

Our licensees generally are obligated to pay a royalty at a specified rate, which in many cases is subject to a minimum royalty payment. Any improvements or modifications a licensee may make in the subject process during the term of the license agreement becomes our property or is licensed to us. Should a licensee fail to meet its royalty obligations or other material obligations, we may terminate the license. Licensees, upon prior notice to us, may generally terminate the license for specific reasons. We may vary the agreement used with new licensees according to prevailing conditions.

We act as licensor under arrangements with approved installers relating to the use of our Thermopipe® (“Thermopipe”) Process in the United Kingdom and elsewhere on a non-exclusive basis.

Ownership Interests in Operating Licensees and Project Joint Ventures

Through our subsidiary, Insituform Holdings (UK) Limited, we hold one-half of the equity interest in Insituform Rohrsanierungstechniken GmbH, our licensee of the Insituform CIPP Process in Germany. Insituform Rohrsanierungstechniken also conducts Insituform CIPP Process operations in Austria, the Czech Republic, Slovakia, Hungary, Slovania and Croatia. The remaining interest in Insituform Rohrsanierungstechniken is held by Per Aarsleff A/S, a Danish contractor. The joint venture partners have rights-of-first-refusal in the event either party determines to divest its interest.

Through our subsidiary, Insituform Technologies Limited, we hold one-half of the equity interest in Insituform Environmental Techniques Limited, our licensee of the Insituform CIPP Process in Ireland. The remaining interest is held by Environmental Techniques Limited, an Irish contractor. The joint venture partners have rights-of-first-refusal in the event the other party determines to divest its interest.

Through our subsidiary, INA Acquisition Corp., we hold one-half of the equity interest in Insituform Italia Srl, our licensee of the Insituform CIPP Process in Italy. The remaining interest is held by Per Aarsleff A/S. On January 18, 2005, the quotaholders (stockholders) of Insituform Italia approved the liquidation of the Italian joint venture, as the joint venture was no longer financially viable. During the life of the joint venture, we incurred losses of $2.8 million and contributed cash of $2.5 million to the joint venture. There were no losses recorded in the most recent fiscal year and we do not expect to incur any material losses going forward as the joint venture is in liquidation.

We have entered into several contractual joint ventures in order to develop joint bids on contracts for our pipeline rehabilitation business and for our tunneling operations. Typically, the joint venture entity holds the contract with the owner and subcontracts portions of the work to the joint venture partners. As part of the subcontracts, the partners usually provide bonds to the joint venture. We could be required to complete our joint venture partner’s portion of the contract if the partner were unable to complete its portion and a bond is not available. We continue to investigate opportunities for expanding our business through such arrangements.

Marketing

The marketing of rehabilitation technologies is focused primarily on the municipal wastewater markets worldwide, which we expect to remain the largest part of our business for the foreseeable future. To help shape decision-making at every step, we use a multi-level sales force structured around target markets and key accounts, focusing on engineers, consultants, administrators, technical staff and public officials. We also produce sales literature and presentations, participate in trade shows, conduct national advertising and execute other marketing programs for our own sales force and those of unaffiliated licensees. Our unaffiliated licensees are responsible for marketing and sales activities in their respective territories. See “Licensees” and “Ownership Interests in Operating Licensees and Project Joint Ventures” above for a description of our licensing operations and for a description of investments in licensees.

We offer our Tite Liner Process worldwide to industrial customers to line new and existing pipelines.

We bid on tunneling projects in selected geographical markets in the United States. Our current bidding strategy is designed to obtain profitable work that fits tunneling’s core mining competency. Large, more complex tunneling projects are not part of our current strategy for our tunneling operation.

No customer accounted for more than 10% of our consolidated revenues during the years ended December 31, 2005, 2004 or 2003.

Contract Backlog

Contract backlog is our expectation of revenues to be generated from received, signed, and uncompleted contracts whose cancellation 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, as of December 31, 2005, 2004 and 2003, respectively.

	December 31,
Backlog	2005		2004		2003
	(In millions)

Rehabilitation		$213.3		$190.4		$111.8
Tunneling		66.3		129.3		89.3
Tite Liner		20.2		8.6		7.0
Total		$299.8		$328.3		$208.1

The dollar amount of the backlog is not necessarily indicative of our future earnings relative to our 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 and we expect to perform approximately 67% of the backlog in the tunneling segment during 2006; we expect to perform all of the backlog in the rehabilitation and Tite Liner segments during 2006. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Tunneling Segment” for discussion of the 2005 decline in tunneling contract backlog. Also see “Risk Factors” in Item 1A of this report for further discussion.

Product Development

By using our own laboratories and test facilities, as well as outside consulting organizations and academic institutions, we continue to develop improvements to our proprietary processes, including the materials used and the methods of manufacturing and installing pipe. During the years ended December 31, 2005, 2004 and 2003, we spent $2.9 million, $2.9 million and $2.0 million, respectively, on research and development related activities, including engineering.

Manufacturing and Suppliers

We maintain our North American Insituform CIPP Process liner manufacturing facility in Batesville, Mississippi. In Europe, Insituform Linings Plc., a majority-owned subsidiary, manufactures and sells Insituform CIPP Process liners from its plant located in Wellingborough, United Kingdom. We hold a 75% interest in Insituform Linings, and Per Aarsleff A/S holds the remainder. These interests are subject to rights-of-first-refusal that we and Per Aarsleff A/S hold in the event of proposed divestiture.

Although raw materials used in Insituform CIPP Process products are typically available from multiple sources, our historical practice has been to purchase materials from a limited number of suppliers. We maintain our own felt manufacturing facility at our Insitutube® manufacturing facility in Batesville. Substantially all of our fiber requirements are purchased from one source, but there are alternate vendors readily available.

We believe that the sources of supply for our Insituform CIPP Process operations in both North America and Europe are adequate for our needs. Our pricing of raw materials is subject to fluctuations in the underlying commodity prices.

We have a third party contractual commitment for the manufacture and supply of Thermopipe® (“Thermopipe”) Process products through 2007.

We sell Insituform CIPP Process liners and related products to certain licensees pursuant to fixed-term supply contracts. Under the arrangements assumed in connection with the acquisition of the Thermopipe Process and under subsequent arrangements, we also furnish Thermopipe Process products to approved installers.

We manufacture certain equipment used in our Tite Liner® business.

Patents and Licenses

As of December 31, 2005, we held 77 patents in the United States relating to the Insituform CIPP Process, the last of which will expire in 2022. As of December 31, 2005, we had 17 patents pending in the United States that relate to the Insituform CIPP Process.

We have obtained patent protection in our principal overseas markets covering various aspects of the Insituform CIPP Process. The specifications and/or rights granted in relation to each patent will vary from jurisdiction to jurisdiction. In addition, as a result of differences in the nature of the work performed and in the climate of the countries in which the work is carried out, not every licensee uses each patent, and we do not necessarily seek patent protection for all of our inventions in every jurisdiction in which we do business.

There can be no assurance that the validity of our patents will not be successfully challenged. Our business could be adversely affected by increased competition upon expiration of the patents or if one or more of our Insituform CIPP Process patents were adjudicated to be invalid or inadequate in scope to protect our operations. We believe in either case that our long experience with the Insituform CIPP Process, our continued commitment to support and develop the Insituform CIPP Process, the strength of our trademark, and our degree of market penetration, should enable us to continue to compete effectively in the pipeline rehabilitation market.

We hold two patents issued in the United States and eleven patents outside of the United States relating to the Thermopipe Process for rehabilitating pressurized potable water and other aqueous fluid pipes.

We hold a small number of patents relating to our corrosion and abrasion protection business. We believe that the success of our Tite Liner Process business, operated through our United Pipeline Systems division, depends primarily upon our proprietary know-how and our marketing and sales skills.

Our pipebursting operations were performed under a royalty-bearing, non-exclusive license from Advantica, Inc. The license terminated when the underlying patent expired on April 19, 2005. In 2005, the Company paid $0.4 million to Advantica under the license.

See “Risk Factors” in Item 1A of this report for further discussion.

Competition

The markets in which we operate are highly competitive, primarily on the basis of price, quality of service and capacity to perform. Most of our products, including the Insituform CIPP Process, face direct competition from competitors offering similar or equivalent products or services. In addition, customers can select a variety of methods to meet their pipe installation and rehabilitation needs, including a number of methods that we do not offer.

Most of our installation operations are either project-oriented or term contracts for municipal entities that are obtained through competitive bidding or negotiations. Most competitors are local or regional companies, and may be either specialty trenchless contractors or general contractors. There can be no assurance as to the success of our trenchless processes in competition with these companies and alternative technologies for pipeline rehabilitation.

Seasonality

Our operations can be affected by seasonal variations. Seasonal variations over the past five years have been minimal; however, our results tend to be stronger in the second or third quarters of each year due to milder weather. We are more likely to be impacted by weather extremes, such as excessive rain or hurricanes, which may cause temporary, short-term anomalies in our operational performance in certain localized geographic regions. However, these impacts are usually not material to our operations as a whole. See “Risk Factors” in Item 1A of this report for further discussion.

Employees

As of December 31, 2005, we had 2,281 employees. Certain of our subsidiaries and divisions are parties to collective bargaining agreements covering an aggregate of 440 employees. We generally consider our relations with our employees to be good.

Government Regulation

We are required to comply with all applicable United States federal, state and local, and all applicable foreign statutes, regulations and ordinances. In addition, our installation and other operations have to comply with various relevant occupational safety and health regulations, transportation regulations, code specifications, permit requirements, and bonding and insurance requirements, as well as with fire regulations relating to the storage, handling and transporting of flammable materials. Our manufacturing facilities, as well as our installation operations, are subject to state and national environmental protection regulations, none of which presently have any material effect on our capital expenditures, earnings or competitive position in connection with our present business. However, although our installation operations have established monitoring programs and safety procedures relating to our installation activities and to the use of solvents, further restrictions could be imposed on the manner in which installation activities are conducted, on equipment used in installation activities and on the use of solvents or the thermosetting resins used in the Insituform CIPP Process.

The use of both thermoplastics and thermosetting resin materials in contact with drinking water is strictly regulated in most countries. In the United States, a consortium led by NSF International, under arrangements with the United States Environmental Protection Agency, establishes minimum requirements for the control of potential human health effects from substances added indirectly to water via contact with treatment, storage, transmission and distribution system components, by defining the maximum permissible concentration of materials that may be leached from such components into drinking water, and methods for testing them. In April 1997, the Insituform PPL® liner was certified by NSF for use in drinking water systems, followed in April 1999 by NSF certification of the Insituform RPP® liner for such use. The Thermopipe product also has NSF approval. NSF assumes no liability for use of any products, and NSF’s arrangements with the EPA do not constitute the EPA’s endorsement of NSF, NSF’s policies or its standards. Dedicated equipment is needed in connection with use of these products in drinking water applications. We do not expect material revenues from our proprietary products for drinking water pipe rehabilitation at least through 2006.

Item 1A. Risk Factors

The following are some of the risks that we face in our business. The list of risk factors is not exhaustive. There can be no assurance that we have correctly identified and appropriately assessed all factors affecting our business or that publicly available and other information with respect to these matters is complete and correct. Additional risks not presently known to us or that we currently believe to be immaterial also may adversely impact us. Should any risks or uncertainties develop into actual events, these developments could have material adverse effects on our business, financial condition, cash flows and results of operations.

Continued losses by our tunneling business segment may result in goodwill and fixed asset impairment.

Late in 2004 and 2005, our tunneling business experienced a number of margin write-downs on its larger projects. In addition, underutilized equipment was a significant adverse factor in the results of our tunneling business in 2005. There were significant losses in our tunneling business in both 2004 and 2005. During 2005, it was determined, based on forecasted results for the next five years, that there was no impairment of our tunneling goodwill or fixed assets. However, if our tunneling business continues to post losses, we may have exposure to the impairment of our goodwill and certain of our fixed assets in the tunneling segment, along with potential difficulty meeting our debt covenants.

Our business is dependent on obtaining work through a competitive bidding process.

The markets in which we operate are highly competitive. Most of our products and services, including the Insituform CIPP Process, face direct competition from companies offering similar or equivalent products or services. In addition, customers can select a variety of methods to meet their pipe installation and rehabilitation needs, including a number of methods that we do not offer. Competition also places downward pressure on our contract prices and profit margins. Intense competition is expected to continue in these markets, and we face challenges in our ability to maintain strong growth rates. If we are unable to meet these competitive challenges, we could lose market share to our competitors and experience an overall reduction in our profits.

We may experience cost overruns on our projects.

We typically conduct our business under guaranteed maximum price or fixed price contracts, where we bear a significant portion of the risk for cost overruns. Under such contracts, prices are established in part on cost and scheduling estimates, which are based on a number of assumptions, including assumptions about future economic conditions, prices and availability of materials and other exigencies. Our profitability depends heavily on our ability to make accurate estimates. Inaccurate estimates, or changes in other circumstances, such as unanticipated technical problems, difficulties obtaining permits or approvals, changes in local laws or labor conditions, weather delays, cost of raw

materials, or our suppliers or subcontractors’ inability to perform, could result in substantial losses, as such changes adversely affect the revenue and gross profit recognized on each project.

Our use of the percentage-of-completion method of accounting could result in a reduction or reversal of previously recorded results.

We employ the percentage-of-completion method of accounting for many of our construction projects. This methodology recognizes revenues and profits over the life of a project based on costs incurred to date compared to total estimated project costs. Revisions to revenues and profits are made once amounts are known and/or can be reasonably estimated. On a historical basis, we believe that we have made reasonably reliable estimates of the progress towards completion in our long-term contracts.

However, given the uncertainties associated with some of our contracts, it is possible for actual costs to vary from estimated amounts previously made. The effect of revisions to estimates could result in the reversal of revenue and gross profit previously recognized.

Our success depends on attracting and retaining qualified personnel.

We use a multi-level sales force structured around target markets and key accounts, focusing on engineers, consultants, administrators, technical staff and elected officials to market our products and services. We are also dependent on our personnel to continue to develop improvements to our proprietary processes, including materials used and the methods of manufacturing and installation. Our ability to attract, develop and retain qualified personnel has a significant effect on our ability to profitably execute our work. Our success in attracting such qualified personnel is dependent on the resources available in individual geographic areas and the impact on the labor supply of general economic conditions, as well as our ability to provide a competitive compensation package and work environment.

Our recognition of revenues from insurance claims and from change orders, extra work or variations in the scope of work could result in a reduction or reversal of previously recorded revenues.

We recognize revenues from insurance claims and from change orders, extra work or variations in the scope of work as set forth in our written contracts with our client when management believes that realization of these revenues are reasonably assured and the recoverable amounts can be reasonably estimated. Prior to our decision to recognize these revenues, we consult with outside legal counsel to determine the likelihood of recovery and the amount of the recovery that can be estimated. We also factor in all other information that we have at our disposal with respect to the claim to determine whether the claim should be recognized at all and, if recognition is appropriate, what dollar amount of the claim should be recognized. On this basis, we believe that we have historically made reasonably reliable estimates of amount of revenue to be recognized. Due to factors that we did not anticipate at the time of recognition, however, revenues ultimately received on these claims could be less than revenues recognized by us in a prior reporting period or periods, resulting in the need to reduce or reverse revenues and gross profit previously recognized in subsequent reporting periods.

Extreme weather conditions may adversely affect our operations.

We are likely to be impacted by weather extremes, such as excessive rain or hurricanes, which may cause temporary, short-term anomalies in our operational performance in certain localized geographic regions. Historically, these impacts have not been material to our operations as a whole. However, delays and other weather impacts can adversely impact our ability to meet project deadlines and may increase a project’s cost and decrease its profitability, and there is no assurance that future extreme weather conditions will not have a material adverse effect on our operations.

We may be liable to complete work under our joint venture arrangements.

We enter into contractual joint ventures in order to develop joint bids on contracts for our pipeline rehabilitation business and for our tunneling operations. The success of these joint ventures depends largely on the satisfactory performance of our joint venture partners of their obligations under the joint venture. Under these joint venture arrangements, we may be required to complete our joint venture partner’s portion of the contract if the partner is unable to complete its portion and a bond is not available. In such case, the additional obligations could result in reduced profits or, in some cases, significant losses for us with respect to the joint venture.

A substantial portion of our raw materials is from a limited number of vendors and we are subject to market fluctuations of certain commodities.

Substantially all of our fiber requirements for tube manufacturing are from one source. However, we believe other sources are readily available. The manufacture of the tubes used in our rehabilitation business is dependent upon the availability of resin, a petroleum-based product. In certain markets, such as North America and Europe, we currently obtain substantially all of our resin requirements from single suppliers, although we believe that other sources of supply are available. We have a supply agreement with our supplier of resin that requires the supplier to provide substantially all of our resin requirements but the agreement does not set a fixed purchase price for the product. Resin prices have fluctuated on the basis of the prevailing prices of oil and we anticipate that prices will continue to be heavily influenced by the events affecting the oil market. In addition, we purchase a significant volume of fuel to operate our trucks and equipment. At present, we do not engage in any type of hedging activities to mitigate the risks of fluctuating market prices for oil or fuel and increases in the price of oil may cause an adverse effect on our cost structure which we may not be able to recover from our customers.

Our patents may be successfully challenged.

We are subject to a number of restrictive debt covenants.

Our Senior Notes (Series A and Series 2003-A) and our line of credit facility contain certain restrictive debt covenants. Our ability to meet these restrictive covenants may be affected by factors described above and others outside our control. Failure to meet one or more of these restrictive covenants may hinder our ability to take advantage of attractive business opportunities and may result in an event of default. Upon an event of default, our lender(s) may declare all amounts outstanding as due and payable and we may not have sufficient capital available at that time to pay the amounts due to our lenders.

Our revenues are substantially dependent on municipal government spending.

Many of our customers are municipal governmental agencies, and as such, we are dependent on municipal spending. Spending by our municipal customers can be affected by local political circumstances, budgetary constraints, and other factors.

We have international operations that are subject to foreign economic and political uncertainties.

Through our subsidiaries and joint ventures, our business is subject to fluctuations in demand and changing international economic and political conditions that are beyond our control. As of December 31, 2005, 22.3% of our revenues were derived from international operations. We expect a significant portion of our revenues and profits to come from international operations and joint ventures for the foreseeable future. Operating in the international marketplace exposes us to a number of risks, including abrupt changes in foreign government policies and regulations and, in some cases, international hostilities. To the extent that our international operations are affected by unexpected and adverse foreign economic and political conditions, we may experience project disruptions and losses which could significantly reduce our revenues and profits.

From time to time, our contracts may be denominated in foreign currencies, which will result in additional risk of fluctuating currency values and exchange rates, hard currency shortages and controls on currency exchange. Changes in the value of foreign currencies could increase our U.S. dollar costs for, or reduce our U.S. dollar revenues from, our foreign operations. Any increased costs or reduced revenues as a result of foreign currency fluctuations could affect our profits.

Our backlog is an uncertain indicator of our future earnings.

Our backlog, which at December 31, 2005 was approximately $299.8 million, is subject to unexpected adjustments and cancellation. We cannot guarantee that the revenues projected in this backlog will be realized or, if realized, will result in profits. We may be unable to complete some projects included in our backlog in the estimated time and, as a result, such projects could remain in the backlog for extended periods of time. To the extent that we experience project cancellation or scope adjustments, we could face a reduction in the dollar amount of our backlog and the revenues that we actually receive from such backlog.

Our bonding capacity may be limited in certain circumstances.

A significant portion of our projects requires us to procure a bond to secure performance. From time to time, it may be difficult to find sureties who will provide the contract required bonding at acceptable rates for reasons beyond our control (for example, as a result of changing political or economic conditions in a foreign country). With respect to our joint ventures, our ability to obtain a bond may also depend on the credit and performance risks of our joint venture partners, some of whom may not be as financially strong as we are. Our inability to obtain bonding on favorable terms would have a material adverse effect on our business.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our executive offices are located in Chesterfield, Missouri, a suburb of St. Louis, at 702 Spirit 40 Park Drive. The executive offices are leased from an unaffiliated party through May 31, 2007. We own our tunneling offices, research and development and training facilities in Chesterfield.

We own a liner fabrication facility and a contiguous felt manufacturing facility in Batesville, Mississippi. Our idle manufacturing facility in Memphis, Tennessee, which was closed in January 2004, is located on land sub-leased from an unaffiliated entity for an initial term of 40 years expiring on December 31, 2020. We are evaluating our options with respect to this property. Insituform Linings, a majority-owned subsidiary, owns certain premises in Wellingborough, United Kingdom, where its liner manufacturing facility is located.

We own or lease various operational facilities in the United States, Canada, Europe and Latin America.

The foregoing facilities are regarded by management as adequate for the current requirements of our business.

Item 3. 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. We currently are awaiting the decision of the Iowa Court of Appeals.

In July 2004, three separate civil actions were filed in the Iowa District Court of Polk County with respect to the Des Moines accident. The first complaint, filed by family members and the Estate of Brian Burford on July 7, 2004, named our company, Insituform Technologies USA, Inc. (a wholly owned subsidiary of our company), the City of Des Moines and 15 of our current or former employees as defendants. The two other actions, filed on July 6, 2004 by (1) family members and the Estate of Daniel Grasshoff and (2) Michael Walkenhorst, James E. Johnson and Linda Johnson, named the City of Des Moines and the 15 current or former employees of our company as defendants, but did not name us or Insituform Technologies USA, Inc. as defendants. The complaints filed with respect to Messrs. Burford and Grasshoff alleged wrongful death, negligence, gross negligence and civil conspiracy. The complaint filed with respect to Messrs. Walkenhorst and Johnson alleged gross negligence and civil conspiracy. We believe that the allegations in each of the complaints are without merit and that the workers’ compensation statutes provide the exclusive remedy to the plaintiffs for the deaths and injuries that occurred as a result of the Des Moines accident. Each complaint sought unspecified damages, including punitive damages. During May 2005 and August 2005, Insituform Technologies USA, Inc. and our company, respectively, were dismissed from the Burford case (the only case in which they were a party). In addition, between May 2005 and August 2005, four individual defendants were dismissed from the Grasshoff, Walkenhorst and Johnson cases and eight individual defendants were dismissed from the Burford case. The initial depositions in these cases occurred during the week of January 23, 2006.

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 4. Submission of Matters to a Vote of Security Holders

There were no matters submitted during the quarter ended December 31, 2005 to a vote of our stockholders, through the solicitation of proxies or otherwise.

Item 4A. Executive Officers of the Registrant

Our executive officers, and their respective ages and positions with us, are as follows:

Name	Age at February 1, 2006	Position with the Company

Thomas S. Rooney, Jr.	46	President and Chief Executive Officer
Thomas E. Vossman	43	Senior Vice President and Chief Operating Officer
David F. Morris	44	Vice President, General Counsel and Secretary

Thomas S. Rooney, Jr. has been our President since April 2003, and our Chief Executive Officer since July 2003. From April 2003 to July 2003, Mr. Rooney was our Chief Operating Officer. From 2000 until he joined our company, Mr. Rooney was Senior Vice President and Regional Manager for Gilbane Building Company.

Thomas E. Vossman joined Insituform in January 2005 as Vice President for the Southwest region of our sewer pipeline rehabilitation business and assumed the role of Senior Vice President and Chief Operating Officer in May 2005. From March 2004 to December 2004, Mr. Vossman served as a consultant to the contracting industry. Prior thereto, Mr. Vossman served as Senior Vice President of the American Residential Services, managing 19 contracting operations, and in various positions of increasing authority at Encompass Services Corporation, a consolidator of commercial/industrial/residential mechanical contracting companies, most recently as Regional President, residential division, managing 12 operating locations across the Eastern United States.

David F. Morris has been our Vice President, General Counsel and Secretary since January 2005. From March 1993 until January 2005, Mr. Morris was with the law firm of Thompson Coburn LLP, St. Louis, Missouri, most recently as a partner in its corporate and securities practice areas. Mr. Morris also served as Senior Vice President, Associate General Counsel and Secretary of Unified Financial Services, Inc., a diversified financial services company, from December 1999 to March 2004.

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

(a) The Company’s class A common shares, $.01 par value, are traded on The Nasdaq Stock Market under the symbol “INSU.” The following table sets forth the range of quarterly high and low sales prices for the years ended December 31, 2005 and 2004, as reported on The Nasdaq Stock Market. Quotations represent prices between dealers and do not include retail mark-ups, mark-downs or commissions.

Period	High	Low

2005
First Quarter	$22.98	$13.24
Second Quarter	17.50	13.86
Third Quarter	21.17	15.86
Fourth Quarter	20.99	14.90

2004
First Quarter	$19.40	$15.00
Second Quarter	18.08	14.50
Third Quarter	19.70	15.72
Fourth Quarter	24.72	18.53

During the quarter ended December 31, 2005, we did not make any repurchases of our common stock, nor offer any equity securities that were not registered under the Securities Act of 1933, as amended. As of February 1, 2006, the number of holders of record of our common stock was 799.

Holders of common stock are entitled to receive dividends as and when they may be declared by our board of directors. We have never paid a cash dividend on the common stock. Our present policy is to retain earnings to provide for the operation and expansion of our business. However, our board of directors will review our dividend policy from time to time and will consider our earnings, financial condition, cash flows, financing agreements and other relevant factors in making determinations regarding future dividends, if any. Under the terms of certain debt arrangements to which we are a party, we are subject to certain limitations on paying dividends. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Financings.”

Equity Compensation Plan Information
Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights⁽¹⁾ (a)		Weighted-average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)

Equity compensation plans approved by security holders		1,459,908		$19.53		863,328

Equity compensation plans not approved by security holders		—		n/a		—

Total		1,459,908		$19.53		863,328

(1)	The number of securities to be issued upon exercise of outstanding options, warrants and rights includes 1,381,476 stock options and 74,250 deferred stock units outstanding at December 31, 2005.

Item 6. Selected Financial Data

The selected financial data set forth below has been derived from our consolidated financial statements contained in “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K, and previously published historical financial statements not included in this Annual Report on Form 10-K. The selected financial data set forth below should be read in connection with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, including the footnotes, contained in this report.

	Year Ended December 31,
		2005		2004		2003⁽¹⁾		2002^(1,2,3)			2001^(1,2,3)
		(In thousands, except per share amounts)(Unaudited)
INCOME STATEMENT DATA:
Revenues	$	595,282	$	542,598	$	487,272		$	480,358		$	445,310
Operating income		23,743		8,178		21,591			50,183			46,765
Income from continuing operations		13,160		597		4,628			28,560			24,940
Loss from discontinued operations		-		-		(1,103	)		(5,869	)		(72	)
Net income		13,160		597		3,525			22,691			24,868
Basic earnings per share:
Income from continuing operations		0.49		0.02		0.17			1.08			0.94
Loss from discontinued operations		-		-		(0.04	)		(0.22	)		-
Net income		0.49		0.02		0.13			0.86			0.94
Dilutive earnings per share:
Income from continuing operations		0.49		0.02		0.17			1.07			0.93
Loss from discontinued operations		-		-		(0.04	)		(0.22	)		-
Net income		0.49		0.02		0.13			0.85			0.92

BALANCE SHEET DATA:
Unrestricted cash and cash equivalents	$	77,069	$	93,246	$	93,865		$	71,401		$	70,387
Working capital, net of unrestricted cash		70,114		61,637		73,535			52,829			68,332
Current assets		274,024		273,201		277,273			252,651			259,767
Property, plant and equipment		95,657		90,846		75,667			71,579			68,547
Total assets		518,328		513,154		508,360			473,013			463,622
Current maturities of long-term debt and line of credit		18,264		15,778		16,938			49,360			35,218
Long-term debt, less current maturities		80,768		96,505		114,323			67,014			88,853
Total liabilities		213,106		221,671		227,726			198,965			211,940
Total stockholders’ equity		303,496		289,836		279,169			272,618			250,127

_________________________

(1)

We have completed various acquisitions that have been accounted for under the purchase method of accounting, including Kinsel Industries, Inc. in 2001, Elmore Pipe Jacking, Inc. in 2002, Sewer Services, Ltd. in 2003, Video Injection (remaining third party interest) in 2003, Insituform East in 2003, and Ka-Te Insituform (remaining interest) in 2003.

(2)	Results include a pre-tax intangible asset impairment charge of $3.5 million in 2002 and pre-tax restructuring charges of $2.5 million and $4.1 million in 2002 and 2001, respectively.

(3)	Effective January 1, 2002, we adopted SFAS 142, “Goodwill and Other Intangible Assets,” and ceased amortizing purchased goodwill.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Consolidated

	Years Ended December 31,
	2005			2004			2003
	(Dollars in thousands)

Revenues		$595,282			$542,598			$487,272
Gross profit		116,841			99,499			102,658
Gross profit margin		19.6	%		18.3	%		21.1	%
Operating expenses		93,098			91,321			81,067
Operating income		23,743			8,178			21,591
Operating income percentage		4.0	%		1.5	%		4.4	%

2005 Compared to 2004

Consolidated revenues from continuing operations increased 9.7% in 2005 compared to 2004. We experienced significant revenue growth in our rehabilitation and Tite Liner segments, while tunneling revenues increased only slightly. Greater revenues were achieved through successful sales efforts, greater crew capacity and higher backlog in the rehabilitation and Tite Liner segments, while a more selective bidding strategy, and the continuation of a few larger low-margin/loss projects led to the small increase in our tunneling revenue.

Consolidated gross profit margins increased from 18.3% to 19.6% due to margin gains in the rehabilitation business. In our rehabilitation business, we achieved certain manufacturing and logistical efficiencies and we experienced improved productivity in the second half of this year. However, these favorable developments were tempered by the effect of increased fuel and commodity prices, particularly resin. In the rehabilitation segment, a claim receivable (as discussed under “Rehabilitation Segment – Gross Profit and Margin”) was recorded which provided a net $3.4 million benefit to gross profit. Excluding the effect of the claim receivable, margins increased by three-quarters of a percent in the rehabilitation business despite significantly higher commodity and fuel prices. Tite Liner margins were somewhat lower in 2005 compared to 2004 due to higher volume of work performed in South America, which includes installing steel pipe (a commodity) and our Tite Liner product at a lower gross profit margin. Tunneling gross margins continued to suffer in 2005 from the continuation of large projects that experienced downward gross margin revisions during the last fifteen months. The problematic projects in the Tunneling segment should be completed in the first quarter of 2006.

Operating expenses increased by only 1.9% in 2005 compared to 2004 due principally to controlled expenses in rehabilitation. There were increases in compensation and benefits for additional staffing required to support our business growth, as well as increased legal expenses relating to various matters described more fully in Note 13 to the consolidated financial statements contained in this report. These costs were offset by a decrease in incentive compensation, as our results were below expectations for the year. As a percentage of revenue, operating expenses were 15.6% of revenue in 2005 compared to 16.8% in 2004.

As a result, operating income increased by $15.6 million, or over 190%, to $23.7 million in 2005 compared to $8.2 million in 2004.

2004 Compared to 2003

Consolidated revenues from continuing operations increased 11.4% in 2004 compared to 2003. We experienced revenue growth in each of our three principal operating segments, reflecting increased market penetration through successful sales efforts and acquisitions. Increased gross profit in both our rehabilitation and Tite Liner segments resulted from higher revenues, but was offset by decreased margins in our tunneling segment as explained further below. While most of our North American rehabilitation regions experienced improved revenues and gross profit, two of the regions fell short of the prior year as a result of competitive pressures and project delays. Adverse effects of changes in the performance of tunneling are discussed below.

Operating expenses increased $10.3 million in 2004 compared to 2003, and increased to 16.8% as a percentage of revenue in 2004 compared to 16.6% in 2003. The full year impact of acquisitions completed in 2003 increased operating expenses by $3.9 million, including amortization of intangibles of $0.6 million. We also added personnel for the redevelopment of our sales force and project management of approximately $2.0 million. We experienced increased professional fees of $1.7 million, along with approximate costs of $1.0 million associated with the implementation of regulations pursuant to the Sarbanes-Oxley Act of 2002. We also incurred costs related to the implementation of certain strategic initiatives, most notably, logistics improvements and sales and business development training of $1.4 million.

Rehabilitation Segment

	Years Ended December 31,
	2005			2004			2003
	(Dollars in thousands)

Revenues		$445,072			$409,408			$366,690
Gross profit		109,585			94,305			84,215
Gross profit margin		24.6	%		23.0	%		23.0	%
Operating expenses		75,275			77,173			69,750
Operating income		34,310			17,132			14,465
Operating income percentage		7.7	%		4.2	%		3.9	%

Revenues

Rehabilitation revenues increased $35.7 million, or 8.7%, in 2005 as compared to 2004 due to a number of factors, including successful sales efforts through an expanded sales force, higher backlog and expanded crew capacity. Backlog at the beginning of 2005 was $78.6 million higher than at the beginning of 2004. During 2005, we experienced a full year of larger CIPP process crew capacity, which was expanded from 80 crews at the beginning of 2004 to 95 crews by the end of 2004 to accommodate our growing backlog. At the end of 2005, we employed 89 CIPP process crews across North America and Europe. Revenues were higher in 2005 compared to 2004 across nearly all geographic regions in both North America and Europe. Revenue from our European contracting operations increased by 11.5% during 2005 as compared to 2004 and revenue from our North American contracting operations increased by 7.7% during 2005 as compared to 2004. European revenues were principally impacted by growth and improved markets in the United Kingdom, the Netherlands and France.

Rehabilitation revenues increased $42.7 million, or 11.6%, in 2004 compared to 2003. Full-year impact of acquisitions completed in 2003 represented $20.3 million of this increase. Revenue growth in certain North American CIPP regions added $34.7 million for the year. This growth was attributable to strong backlog at the end of 2003, strong order levels in 2004, crew growth to support sales levels and increased large-diameter work. Excluding acquisitions, European rehabilitation revenue increased $5.4

million as a result of stronger performance in the Netherlands and France as well as positive currency translation impacts. Offsetting these increases were decreases in two North American CIPP regions and manufacturing totaling $17.7 million resulting from lower order levels, client work-release delays and, to a lesser extent, the effect of four hurricanes, which occurred during the year.

We expect growth in our rehabilitation business to continue into 2006. Rehabilitation backlog grew by approximately 12.0% to $213.3 million at December 31, 2005 compared to $190.4 million at December 31, 2004. In addition, due to improved crew productivity and technological advances, particularly in our steam inversion process, we expect to achieve this growth without further significant crew expansion.

Gross Profit and Margin

Rehabilitation gross profit increased by $15.3 million, or 16.2%, in 2005 as compared to 2004. Gross profit margins in the rehabilitation segment were 24.6% in 2005 compared to 23.0% in 2004. During 2005, a claim receivable (as discussed in the following paragraph) was recorded which provided a net $3.4 million benefit to rehabilitation gross profit. Excluding the effect of this claim receivable, rehabilitation gross margins would have increased by just over three-quarters of a percentage point due to a decrease in low-margin pipebursting work, advances in crew productivity and efficiencies in manufacturing and logistics. These results were achieved despite significant increases in raw material costs, particularly resin, during late 2004 and into 2005. In addition, transportation costs (fuel) increased significantly during the same period. We have the ability to pass such raw material and fuel increases through to our customers to the extent that we have short-term contracts. However, on some longer-term contracts that contain fixed pricing, we may not have the ability to pass through such costs.

In 2003 we sought coverage under our general liability insurance policy for costs and expenses sustained in removing and reinstalling a CIPP process liner in Boston, Massachusetts. Primary coverage of $1.0 million (less a $250,000 deductible) was paid to us by our primary insurance carrier. Upon refusal of the excess carrier to acknowledge coverage under the policy, we filed suit against the excess carrier. In March 2005, the United States District Court in Boston ruled that the excess policy covered our costs and expenses in excess of the primary coverage. Although the excess carrier has filed a motion for reconsideration of this decision, we anticipate ultimate recovery of at least $6.3 million including interest. As such, we recorded a claim receivable for $6.3 million ($6.1 million in the second quarter and $0.2 million in the fourth quarter) which provided a benefit of $3.9 million to our 2005 results with a $3.4 million benefit to gross profit and $0.4 million in pre-judgment interest income. The remaining $2.4 million of the claim receivable covered estimated costs for the remaining rework, which was completed in the third quarter of 2005. See also Note 13 to the consolidated financial statements contained in this report.

Gross profit in our rehabilitation segment increased $10.1 million, or 12.0%, in 2004 compared to 2003 while gross margin percentages remained stable. The full-year effect of acquisitions completed in 2003 accounted for a $3.7 million increase to gross profit. Certain North American CIPP regions and manufacturing added $13.4 million in gross profit through higher revenue and improved field productivity. The results in 2003 were adversely impacted by the loss related to the initial removal and reinstallation costs associated with the Boston project described earlier. Excluding acquisitions, European gross profit increased $1.9 million attributable to currency translation and increased margins in France. Offsetting these increases, certain North American rehabilitation regions realized $8.9 million lower gross profit in 2004 compared to 2003. Significant margin erosion was experienced in pipebursting work due to competition and lower pricing, while related pipebursting revenue decreased only marginally in 2004 compared to 2003, which contributed to the decline in gross profits. Gross profit on pipebursting decreased $4.1 million in 2004 compared to 2003. We also experienced a continued trend of higher healthcare costs in 2004 compared to 2003. Other factors contributing to the decline included weather-related effects, work-release delays and, in certain regions, price competition. In addition, our rehabilitation segment experienced increases in raw material costs, particularly resin, fuel and fiber costs, related to commodity pricing fluctuations. These unfavorable incremental costs were offset by manufacturing and logistics savings as a result of the implementation of strategic operational initiatives.

Operating Expenses

Operating expenses decreased $1.9 million, or 2.5%, in 2005 as compared to 2004, due primarily to lower incentive compensation expense and lower amortization expense. Incentive compensation expense was lower as our overall results were below expectations. Amortization expense was lower due to the full amortization during 2004 of certain intangibles acquired with Insituform East, Inc. These reductions in operating expenses were partially offset by increased compensation and legal costs necessary to support growth and our strategic initiatives. As a percentage of revenues, operating expenses were 16.9% in 2005 compared to 18.8% in 2004. We anticipate that operating expenses will increase during 2006 as a result of increased incentive compensation, along with compensation expense from the implementation of SFAS 123(R), “Share-Based Payment” relating to accounting for stock options (See Note 2 to the consolidated financial statements contained in this report for further discussion) to support business growth. However, operating expenses expressed as a percentage of revenue are expected to decrease in 2006.

Operating expenses increased 10.6%, or $7.4 million, in 2004 compared to 2003. The full-year effect of acquisitions completed in 2003 added $3.3 million of operating expenses. In addition to acquisitions, we continued to experience increasing healthcare costs in 2004 compared to 2003. In the first quarter of 2005, we modified our employee benefits structure in an effort to reduce the impact of increasing healthcare costs. All rehabilitation regions experienced increased operating expenses due to the implementation of certain strategic initiatives including, but not limited to, the redevelopment of a sales and business development force, improved logistics, product innovation and operational excellence. The implementation of these initiatives required additional personnel as well as significant consulting costs. Operating expenses as a percentage of revenues remained relatively stable at 18.8% in 2004 compared to 19.0% in 2003.

Operating Income and Margin

Higher revenues along with lower operating expenses resulted in significantly higher operating income in the rehabilitation segment during 2005 as compared to 2004. Rehabilitation operating income increased by $17.2 million, or over 100%, in 2005 as compared to 2004. Operating margin, which is operating income as a percentage of revenue, increased to 7.7% in 2005 compared to 4.2% in 2004.

Tunneling Segment

	Years Ended December 31,
	2005			2004			2003
	(Dollars in thousands)

Revenues		$111,687			$108,729			$100,020
Gross profit (loss)		(4,184	)		(3,128	)		11,946
Gross profit/ loss margin		-3.7	%		-2.9	%		11.9	%
Operating expenses		12,723			10,080			7,990
Operating income (loss)		(16,907	)		(13,208	)		3,956
Operating income/ loss percentage		-15.1	%		-12.1	%		4.0	%

Summary

During 2005, our tunneling operation experienced further margin deterioration on its project in Chicago, Illinois. The project is expected to finish with a loss, with the entire estimated loss being recorded during 2005. The adverse impact of this project was $5.7 million during 2005 and $11.0 million during 2004. We expect to substantially complete this project in the first quarter of 2006.

In addition, we experienced negative gross margin adjustments of $6.9 million (net of estimated claims recovery of $2.7 million) on two other significant projects during 2005. We expect to complete these two projects in the first half of 2006.

The projects described above included activities that are atypical of our tunneling operation’s core mining activities. Going forward, management will focus on obtaining work that is compatible with the tunneling operation’s core competency, mining, and at acceptable margins. In addition, we continue our efforts to return the tunneling operation to profitability by completing projects with ongoing issues as expeditiously as possible.

At December 31, 2005, our tunneling operation had approximately $16.0 million in outstanding claims against third parties relating to, among other things, differing site conditions and defective specifications. Of this amount, $6.4 million had been recorded to income through the end of 2005. 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 2005, we increased our efforts regarding tunneling claims and are aggressively pursuing all outstanding claims, either through discussions and/or negotiations with our clients, alternative dispute resolution proceedings or, if necessary, litigation. During 2005, we recognized $4.6 million in tunneling claims ($5.5 million net of reserves for certain doubtful receivables and claims from counterparties of $0.9 million) compared to $1.7 million during 2004.

Revenues

Tunneling revenues increased by only $3.0 million, or 2.7%, in 2005 as compared to 2004 due to the implementation of a more selective bidding strategy in response to difficulties encountered on certain large jobs in 2004 and 2005. Revenue also was impacted by claims recorded in 2005 and 2004 as described above and write-downs on the aforementioned projects in 2005 partially offset by $4.6 million in claims receivable during 2005. Our bidding strategy in the tunneling business is designed to obtain profitable work that fits tunneling’s core mining competency. The combination of management’s focus on completing existing jobs and the more selective bidding strategy has caused backlog to decrease sharply during 2005, by $63.0 million, or 48.7%, to $66.3 million at the end of 2005 compared to $129.3 million a year ago. With the projects with ongoing issues nearing completion, we are focused on securing new work to boost our backlog up to normalized historical levels.

Tunneling revenues increased $8.7 million, or 8.7%, in 2004 compared to 2003 due to an increased level of backlog that was acquired during the second half of 2003 and the early part of 2004. Large projects in Chicago, Sacramento, Oxnard and Charleston generated a significant portion of revenue in 2004.

Gross Profit/Loss and Margin

Tunneling’s loss at the gross profit line widened by $1.1 million, or 33.8%, in 2005 as compared to 2004. The gross profit margin also fell, to a negative 3.7% in 2005 compared to a negative 2.9% in 2004. Performance in the tunneling segment was adversely impacted by the continuation of projects with ongoing issues and further margin deterioration on certain of those projects. The project in Chicago accounted for $5.7 million of 2005’s gross loss. As mentioned earlier, during 2005, $4.6 million in claims were recognized ($5.5 million net of reserves for certain doubtful receivables and claims from counterparties of $0.9 million), which partially offset the losses incurred during 2005.

Due to the decreasing backlog during 2005, gross profit also was significantly impacted by underutilized equipment. Underutilized equipment costs (primarily operating lease expenses) were $4.8 million

in 2005 compared to $2.4 million in 2004. We are currently exploring a number of alternatives to reduce the level of equipment to fit the tunneling operation’s ongoing business model.

During 2004, there were significant negative gross margin adjustments on one large tunneling project in Chicago, primarily in the fourth quarter. The impact of the margin adjustments on this project was $11.0 million in 2004, with $7.3 million recorded in the fourth quarter and $3.7 million in the third quarter. These negative adjustments were the primary factors in the tunneling segment’s gross loss of $3.1 million in 2004 compared to gross profit of $11.9 million in 2003. The gross profit margin similarly fell to a negative 2.9% in 2004 compared to 11.9% in 2003.

Operating Expense

Tunneling’s operating expenses increased $2.6 million, or 26.2%, in 2005 as compared to 2004 due to higher compensation expenses for additional staffing hired to improve cost control and project management and $0.9 million in bad debt expense on certain doubtful receivables and claims from counterparties. Corporate expenses allocated to tunneling were also higher due to additional senior management time spent on tunneling matters, additional technology costs related to systems initiatives and legal costs related to claims. These factors were partially offset by lower incentive compensation expense as tunneling’s performance was well below expectations in 2005. Operating expenses as a percentage of revenue rose to 11.4% in 2005 compared to 9.3% in 2004. We anticipate that operating expenses will decrease in 2006 as we reduce the operation’s overall headcount and related supported costs to fit a lower operating base going forward.

Operating expenses increased 26.2% in 2004 compared to 2003 as a result of adding project management and other support staff. Operating expenses as a percentage of revenue were 9.3% in 2004 compared to 8.0% in 2003.

Operating Income (Loss) and Margin

Tunneling’s operating loss widened by $3.7 million, or 28.0%, in 2005 compared to 2004 due to the factors described in the preceding paragraphs. Operating loss percentage was a negative 15.1% in 2005 compared to a negative 12.1% in 2004.

During 2005, it was determined that there was no impairment of our tunneling goodwill ($8.9 million at December 31, 2005) or fixed assets. However, if our tunneling business continues to post losses, we may have exposure to the impairment of our goodwill and certain of our fixed assets in the tunneling segment.

Tunneling generated an operating loss percentage in 2004 of negative 12.1% compared to an operating gain percentage of 4.0% in 2003. The issues described in the preceding paragraphs caused this earnings’ deterioration in 2004.

Tite Liner® Segment

	Years Ended December 31,
	2005			2004			2003
	(Dollars in thousands)

Revenues		$38,523			$24,461			$20,562
Gross profit		11,440			8,322			6,497
Gross profit margin		29.7	%		34.0	%		31.6	%
Operating expenses		5,100			4,068			3,327
Operating income		6,340			4,254			3,170
Operating income percentage		16.5	%		17.4	%		15.4	%

Revenues

Tite Liner® revenues increased $14.1 million, or 57.5%, in 2005 compared to 2004 due primarily to an increased volume of business in South America and other international markets. Tite Liner’s revenues from South American operations were $10.3 million higher during 2005 compared to 2004. Operations in the United States and Canada increased by approximately $3.7 million during 2005 compared to the prior year due to a market driven by high oil and other commodity prices.

Tite Liner® revenues increased $3.9 million, or 19.0%, in 2004 compared to 2003. A solid workload in the United States and Canada fueled much of the revenue growth. In addition, a favorable closeout of a foreign project boosted revenue in 2004 compared to 2003.

As oil and other commodity prices remain high from a historical perspective, the business for Tite Liner should remain strong. We are also pursuing new markets for business worldwide, including potable water.

Gross Profit

Tite Liner’s gross profit increased by $3.1 million, or 37.5%, in 2005 as compared to 2004, due to higher revenues. Gross profit margin was 29.7% in 2005 compared to 34.0% in 2004 due to the volume of business in South America. The work in South America includes installing steel pipes (a commodity), which contributes a lower gross margin, as well as our Tite Liner product. Gross margins in South America were 17.1% in 2005 compared to 19.0% in 2004. In contrast, North American operations generated gross margins of 35.1% in 2005 compared to 34.8% in 2004.

Gross profit rose by $1.8 million, or 28.1%, in 2004 compared to 2003 while the gross profit margin increased to 34.0% in 2004 compared to 31.6% in 2003. The previously mentioned completion of certain projects as well as favorable results in the United States and Canada combined to positively impact gross profit and gross profit margin in the Tite Liner segment during 2004.

Operating Expenses

Operating expenses in our Tite Liner business were $1.0 million, or 25.4%, higher in 2005 as compared to 2004, due primarily to additional staffing hired and additional corporate expenses allocated to accommodate business growth. However, as a percentage of revenue, operating expenses were 13.2% of revenues in 2005 compared to 16.6% of revenues in 2004. We anticipate that operating expenses will increase in 2006 due to additional costs to support continued business growth. Operating expenses as a percentage of revenues should be approximately at the same levels as 2005.

Operating expenses increased 22.3% in 2004 compared to 2003, but remained relatively stable as a percentage of revenue.

Operating Income and Margin

Operating income increased by $2.1 million, or 49.0%, during 2005 as compared to 2004. However, due to the volume of business in South America and the related lower margins, operating margin was lower in 2005, at 16.5%, compared to 17.4% in 2004.

Restructuring and Asset Impairment Charges

During the third quarter of 2003, we reversed $0.3 million in reserves, which were recorded in prior years.

Other Income/Expense

Interest expense and fluctuation of interest expense for the years ended December 31, 2005, 2004 and 2003 were as follows (in thousands):

	Years Ended December 31,
	2005			2004		2003

Interest expense	$	8,465		$	9,305	$	8,235
Increase (decrease) from prior year		(840	)		1,070		324

Interest expense decreased $0.8 million during 2005 compared to 2004 and increased $1.1 million during 2004 compared to 2003 due to the following factors (in thousands):

	Years Ended December 31,
	2005 vs. 2004			2004 vs. 2003
Debt principal amortization	$	(1,238	)	$	(1,032	)
Increased rates due to debt amendments		487			675
Deferred fee write-offs due to debt amendments		(226	)		226
Euro note interest (Note repaid in 2004)		(114	)		—
Full year of Series 2003-A Notes (placed April 24, 2003)		—			1,073
Additional fees amortization		—			128
Interest on short-term borrowings and other		251			—
Total	$	(840	)	$	1,070

See “ – Liquidity and Capital Resources – Financings” under this Item 7 for further discussion of debt instruments and related amendments.

Other income was $1.2 million in 2004 compared to other expense of $1.3 million in 2003. Interest income, a component of other income, was $1.4 million in 2004 compared to $1.5 million in 2003. Other expense in 2003 included $1.4 million in losses on disposals of assets and a $1.1 million reserve for notes receivable, relating primarily to the former discontinued operations.

Income Taxes

Our effective tax rate in 2005 was 25.1% and was lower than the federal statutory rate due to the benefit of amortization of intangibles, utilization of operating losses in certain foreign countries that had prior valuation allowances, higher income in jurisdictions with rates lower than the U.S. rate, and the benefit of a federal motor fuels excise tax credit.

Our deferred tax assets in excess of deferred tax liabilities were $1.4 million, net of a $4.5 million valuation allowance primarily related to foreign net operating losses. Deferred tax assets include $0.6 million of foreign tax credit carryforwards, which begin expiring in 2011, and $2.9 million in federal, state and foreign net operating loss carryforwards, net of applicable valuation allowances.

The 2004 income tax benefit of $0.8 million relates primarily to the benefit of state net operating losses generated in 2004, the benefit of federal motor fuels excise tax credits and the increased benefit of patent amortization in relation to pre-tax income.

Our company’s deferred tax assets in excess of deferred tax liabilities were $3.9 million, net of a $5.0 million valuation allowance, at December 31, 2004. Deferred tax assets include $3.2 million in foreign tax credit carryforwards that begin expiring in 2011 and $2.7 million in federal, state and foreign NOLs, net of applicable valuation allowances.

We provide for U.S. income taxes, net of available foreign tax credits, on earnings of consolidated international subsidiaries that we plan to remit to the U.S. We do not provide for U.S. income taxes on the remaining earnings of these subsidiaries, as we expect to reinvest these earnings overseas or we expect the taxes to be minimal based upon available foreign tax credits.

See Note 11 to the consolidated financial statements contained in this report for additional information regarding taxes on income.

Minority Interest and Equity in Earnings (Losses) of Affiliated Companies

Minority interest in net income principally relates to the 25% interest in the net income of Insituform Linings Plc held by Per Aarsleff A/S, a Danish contractor.

Equity in earnings of affiliated companies increased to $0.9 million during 2005 compared to equity losses of $0.2 million during 2004. During 2005, our 50%-owned German joint venture, Insituform Rohrsanierungstechniken GmbH, experienced increased profitability due primarily to higher revenues and improved crew productivity. In the prior year, our German joint venture earned $0.3 million, but such earnings were offset by losses of $0.5 million at Insituform Italia Srl, our former Italian joint venture. The Italian joint venture ceased operations in the first quarter of 2005.

Discontinued Operations

During the fourth quarter of 2001, we decided to sell certain operations that were not consistent with our strategy of providing trenchless rehabilitation and tunneling services. We completed the sale of these operations during 2002. Revenues from discontinued operations were $0 in 2005, $0 in 2004 and $2.6 million in 2003. Loss from discontinued operations was $0 in 2005, $0 in 2004 and $1.1 million in 2003.

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 amount 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.

Some accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. We believe that our critical accounting policies are those described below. For a detailed discussion on the application of these and other accounting policies, see Note 2 to the consolidated financial statements contained in this report.

Revenue Recognition – Percentage-of-Completion Method

We recognize revenue and costs as construction and installation contracts progress using the percentage-of-completion method of accounting, which relies on total expected contract revenues and estimated total costs. Under this method, estimated contract revenues and resulting gross profit margin are recognized based on actual costs i

Delaware		13-3032158
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

702 Spirit 40 Park Drive Chesterfield, Missouri		63005
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code:		636-530-8000

Securities registered pursuant to Section 12(b) of the Act:		None

Title of each class		Name of each exchange on which reported
Class A Common Shares, $.01 par value		The Nasdaq Stock Market
Preferred Stock Purchase Rights		The Nasdaq Stock Market

Document	Part – Form 10-K

Registrant’s Proxy Statement	Part III
for the 2006 Annual Meeting of
Stockholders

PART I	3
Item 1. Business	3
Item 1A. Risk Factors	11
Item 1B. Unresolved Staff Comments	14
Item 2. Properties	14
Item 3. Legal Proceedings	15
Item 4. Submission of Matters to a Vote of Security Holders	15
Item 4A. Executive Officers of the Registrant	15
PART II	17
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters	17
Item 6. Selected Financial Data	18
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk	34
Item 8. Financial Statements and Supplementary Data	36
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS	36
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	69
Item 9A. Controls and Procedures	69
Item 9B. Other Information	69
PART III	70
Item 10. Directors and Executive Officers of the Registrant	70
Item 11. Executive Compensation	70
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	70
Item 13. Certain Relationships and Related Transactions	70
Item 14. Principal Accountant Fees and Services	70
PART IV	70
Item 15. Exhibits and Financial Statement Schedules	70
SIGNATURES	71