United States Securities and Exchange Commission

Washington, D.C. 20549

Form 10-K

(Mark One)

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

For the Fiscal Year Ended January 31, 2006

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

For the transition period from ___ to ___.

Layne Christensen Company

(Exact name of registrant as specified in its charter)

Delaware		48-0920712
(State or other jurisdiction		(I.R.S. Employer Identification No.)
of incorporation or organization)

1900 Shawnee Mission Parkway, Mission Woods, Kansas 66205
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (913) 362-0510

Securities Registered Pursuant to Section 12(b) of the Act:

None

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value
(Title of Class)

     Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

     Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

     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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

     Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o       Accelerated filer þ       Non-accelerated filer o

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

     The aggregate market value of the 10,215,881 shares of Common Stock of the registrant held by non-affiliates of the registrant on July 29, 2005, the last business day of the registrant’s second fiscal quarter, computed by reference to the closing sale price of such stock on the NASDAQ National Market System on that date was $238,642,980.

     At March 31, 2006, there were 15,244,066 shares of the Registrant’s Common Stock outstanding.

Documents Incorporated by Reference

     Portions of the following document are incorporated by reference into the indicated parts of this report: Definitive Proxy Statement for the 2006 Annual Meeting of Stockholders to be filed with the Commission pursuant to Regulation 14A Part III.

 

 

PART I

Item 1. Business

General

Layne Christensen Company (the “Company”) provides drilling and construction services and related products in three principal markets: water resources, mineral exploration and geoconstruction, as well as being a producer of unconventional natural gas for the energy market. Layne Christensen’s customers include municipalities, investor-owned water utilities, industrial companies, global mining companies, consulting and engineering firms, heavy civil construction companies and oil and gas companies located principally in the United States, Canada, Mexico, Australia, Africa and South America.

     The Company maintains its executive offices at 1900 Shawnee Mission Parkway, Mission Woods, Kansas 66205. The Company’s telephone number is (913) 362-0510. The Company’s web site address is www.laynechristensen.com. The Company’s periodic and current reports are available, free of charge, on its website as soon as reasonably practicable after such material is filed with or furnished to the Securities and Exchange Commission.

Market Overview

The characteristics of each of the four industries in which the Company operates are described below. See Note 16 to the Consolidated Financial Statements for certain financial information about the Company’s operating segments and its foreign operations.

Water Resources

Demand for water well drilling services is driven by the need to access groundwater, which is affected by many factors including shifting demographics and regional expansions, new housing developments, deteriorating water quality and limited availability of surface water. Groundwater is a vital natural resource that is withdrawn from the earth for drinking water, irrigation and industrial use. In many areas of the United States and other parts of the world, groundwater is the only reliable source of potable water. Groundwater is located in saturated geological zones at varying depths beneath the surface and is stored in subsurface strata (aquifers). Surface water, the other major source of potable water, comes principally from large lakes and rivers. The water well drilling industry is highly fragmented, consisting of several thousand water well drilling contractors in the United States. However, the Company believes that a majority of these contractors are regionally and locally based and are primarily involved in drilling low volume water wells for agricultural and residential customers, markets in which we do not generally compete.

     The demand for well and pump repair and maintenance depends upon the age and application of the well and pump, the quality of material and workmanship applied in the original well construction and changes in depth and quality of the groundwater. Repair and maintenance work is often required on an emergency basis or within a relatively short period of time after a performance decline is recognized. Scheduling flexibility, combined with technical expertise and equipment, are critical for a repair and maintenance service provider. Like the water well drilling market, the market for repair and maintenance is highly fragmented.

     Demand for water and wastewater treatment services continues to grow, as states adopt increasingly stringent water quality and treatment regulations. In addition to traditional water contaminants and impurities, such as iron, manganese, hardness, nitrate, organics and solids, environmental agencies now regulate the allowable concentrations of arsenic, radionuclides, percholate, total dissolved solids and radon in groundwater. New categories of contaminants and impurities continue to evolve in the water treatment industry. Water treatment technologies include air stripping towers, aerators, vertical and horizontal filters, arsenic absorption medias, radium adsorption/removal systems, ion exchange systems for nitrates, radium, arsenic and hardness, gravity filters and adsorptive resins. As demographics shift to more water challenged areas combined with an increasing amount of regulated contaminants and impurities, the demand for water recycling and conservation services, as well as new proprietary treatment media and filtration methods, is expected to remain strong.

     With the acquisition of Reynolds, Inc. (“Reynolds”) in September 2005, the Company further expanded its capabilities to include the construction of wastewater and surface water treatment plants, water and wastewater pipelines and sewer rehabilitation, including trenchless cured-in-place pipe technologies. Demand for wastewater treatment and pipeline construction is driven by many of the same factors that affect demand for water well drilling services including population growth, regional expansion and new housing developments. Demand for sewer rehabilitation is largely a function of deteriorating urban infrastructures, as well as pressures put on that infrastructure by population growth. Infiltration of damaged or leaking lines can overload treatment facilities and cause pollution. Lack of sufficient treatment capacity can also stifle housing growth. The Environmental Protection Agency and state health boards are forcing municipalities and industry to correct these problems.

Mineral Exploration

Demand for mineral exploration drilling is driven by the need for identifying, defining and developing underground mineral deposits. Factors influencing the demand for mineral-related drilling services include growth in the economies of developing countries, international political conditions, inflation and foreign exchange levels, commodity prices, the economic feasibility of mineral exploration and production, the discovery rate of new mineral reserves and the ability of mining companies to access capital for their activities.

     Important changes in the international mining industry have led to the development and growth of mineral exploration in developing regions of the world, including Africa, Asia and South America. At the same time, stricter environmental permit requirements in the United States and Canada have delayed or blocked the development of certain projects, forcing mining

companies to look overseas for growth. In addition, technological advancements now allow development of mineral resources previously regarded as uneconomical. The mining industry has also increased its focus on these areas due to their early stage of mining development relative to the more mature mining regions of the world such as the United States and South Africa.

     Factors that have contributed to the recent robust international markets for gold and base metals include the rapid economic growth of China and in the case of gold, uncertain economic and political conditions.

Energy

The “unconventional gas” business is generally categorized as a subset of the natural gas market and includes gas from sources such as coalbeds, shale and tight sands. Large amounts of methane-rich gas are generated and stored in coalbeds and surrounding shales during the coalification process, when plant material is progressively converted to coal. Production of unconventional gas is sometimes accompanied by significant environmental challenges, including disposal of large quantities of water, sometimes saline, that are unavoidably produced with the gas. As demand for natural gas has increased, the exploration and extraction of unconventional gas has become increasingly important to augment conventional resources. Factors influencing the demand for unconventional gas include increasing consumption levels for natural gas, commodity prices, the economic feasibility of gas exploration and production and the discovery rate of new gas reserves.

Geoconstruction

Geoconstruction services are used to modify weak and unstable soils and provide support and groundwater control for excavation. Methods used include cement and chemical grouting and vibratory ground improvement, techniques for stabilizing soils; jet grouting, a high-pressure method for providing subsurface support; and dewatering, a method for lowering the water table. Geoconstruction services are important during the construction of dams, tunnels, shafts, water lines, subways and other civil construction projects. Demand for geoconstruction services is driven primarily by the demand for these infrastructure improvements. The customers for these services are primarily heavy civil construction contractors, governmental agencies, mining companies and the industrial sector. The geoconstruction services industry is highly fragmented.

Business Strategy

The Company’s growth strategy is to expand its current product and service offerings and build attractive extensions of its current business lines based on the Company’s core competencies. Key elements of this strategy are as follows:

Expand “turnkey” service capabilities for water and wastewater treatment facilities, provide ancillary water treatment products and services and expand the Reynolds’ pipeline construction and sewer rehabilitation techniques into Layne’s water markets

The Company expects to continue to grow in the water well drilling, pump repair and well maintenance markets by executing its proven operating strategies that have made it the leader in each of these areas. The Company believes growth in these traditional areas and in the water and wastewater treatment sectors will be generated from bundling traditional products and service offerings and marketing the combination to users of treatment and distribution facilities such as municipalities, investor-owned water utilities, industrial companies and developers. The Company believes that by offering these services on a turnkey basis, it can enable its customers to expedite the typical design and build project and achieve economies and efficiencies over traditional unbundled services. The Company is well positioned to be a significant provider of treatment services, as continued population growth in water-challenged regions leads to increasing requirements to conserve water resources and control contaminants and impurities in areas with strict regulatory requirements. The Company believes its proprietary technology, expertise and reputation in the industry will differentiate it from its competitors in this market. The Company continually strives to enhance its reputation as water treatment experts, evaluating existing technologies on an ongoing basis and participating in new technology development. The Company also actively seeks additional treatment technologies through acquisitions, partnerships and strategic alliances. The Company closely tracks proposed and pending regulations and legislation that could impact discharge parameters, constrain water source availability and set quality and treatment standards.

     The Company intends to expand the pipeline construction and sewer rehabilitation businesses of Reynolds into the broader national market served through the Company’s existing sales and operations offices.

Continue to take advantage of robust market conditions in mineral exploration

The Company believes that it is positioned in strategic geographic locations of the world, especially in Africa and South America, to take advantage of the robust market conditions in mineral exploration created by increased prices of gold and base metals. Its ability to maximize this opportunity is created in part by leveraging its local market expertise and technical competence, combined with access to transferable drilling equipment and employee training and safety programs. The Company intends to focus on maintenance, efficiency and support, as well as increased scale of our operations, to improve profitability. The Company plans to add new rigs and replace existing rigs with more efficient equipment. Its improved efficiency should help improve margins for its services and enable it to compete effectively to increase its market share. The Company may also seek to increase its market share through strategic acquisitions, although it is not currently in any material discussions regarding such acquisitions.

Develop existing unconventional gas opportunities and expand presence in the resource market

The Company is aggressively developing and expanding its existing properties in the Cherokee Basin of Kansas and Okla-

homa as well as seeking opportunities in other areas. In addition to developing its unconventional gas properties, the Company is also continuing to build pipeline and gas gathering system infrastructure to enhance its ability to get gas to market. The Company will continue to advance major unconventional gas projects by leveraging internal resources, engineering and geological expertise and experience in large scale developmental drilling, well completion, exploratory drilling and infrastructure engineering and operations. The Company anticipates significant growth in gas consumption during the next five years because the average life span of conventional wells in North America is declining, while consumption is increasing. The Company’s strategy is to leverage its current skills and assets to benefit from this expected demand growth.

Seek out and secure attractive new projects in geoconstruction

The Company intends to leverage its drilling capabilities, industry contacts, reputation and project management skills to expand our geoconstruction business. In particular, its strategy is to focus on relatively larger, technically demanding projects using grouting, jet grouting and vibratory ground improvement capabilities.

Services and Products

Overview of the Company’s Drilling Techniques

The types of drilling techniques employed by the Company in its drilling activities have different applications:

•		Conventional and reverse circulation rotary rigs are used primarily in water well applications for drilling large diameter wells and employ air or drilling fluid circulation for removal of cuttings and borehole stabilization.
•		Dual tube drilling, an innovation advanced by the Company primarily for mineral exploration and environmental drilling, conveys the drill cuttings to the surface inside the drill pipe. This drilling method is critical in mineral exploration drilling and environmental sampling because it provides immediate representative samples and because the drill cuttings do not contact the surrounding formation thus avoiding contamination of the borehole while providing reliable, uncontaminated samples. Because this method involves circulation of the drilling fluid inside the casing, it is highly suitable for penetration of underground voids or faults where traditional drilling methods would result in the loss of circulation of the drilling fluid, thereby preventing further penetration.
•		Diamond core drilling is used in mineral exploration drilling to core solid rock, thereby providing geologists and engineers with solid rock samples for evaluation.
•		Cable tool drilling, which requires no drilling fluid, is used primarily in water well drilling for larger diameter wells. While slower than other drilling methods, it is well suited for penetrating boulders, cobble and rock.
•		Auger drilling is used principally in environmental drilling applications for efficient completion of relatively small diameter, shallow borings or monitoring wells. Auger rigs are equipped with a variety of auger sizes and soil sampling equipment.

Water Resources

The Company is a leading provider of ground water systems and potable water treatment facilities. It offers, on a turnkey basis, a comprehensive range of services required to provide designed, constructed and maintained municipal, industrial and agricultural water well pumping systems. The Company believes its water resources division is the market leader in the water well drilling industry and provides a full line of water-related products and services. Water resources is the Company’s largest business segment.

Water Systems The Company offers its customers every feature of a water system, including test hole drilling, well construction, well development and testing, pump selection, equipment sales and installation and pipeline construction. In fiscal 2006, these services and products generated approximately 60% of the revenues in the water resources division. After the inclusion of a full year of Reynolds’ other product lines in fiscal 2007, these services and products are expected to represent approximately 30% of division revenues. The division provides water well drilling services in most regions of the United States. The Company’s target groundwater drilling market consists of high-volume water wells drilled principally for municipal and industrial customers. These wells have more stringent design specifications and are typically deeper and larger in diameter than low-volume residential and agricultural wells. The Company has strong technical expertise, an in-depth knowledge of local geology and hydrology, a well-maintained modern fleet of appropriately sized drilling equipment and a demonstrated ability to procure sizable performance bonds often required for water related projects.

     Water supply development mainly requires the integration of hydrogeology and engineering with proven knowledge of drilling techniques. The drilling methods and size and type of equipment depend upon the depth of the wells and the geological formations encountered at the project site. The Company has extensive well archives in addition to technical personnel to determine geological conditions and aquifer characteristics. It provides feasibility studies using complex geophysical survey methods and has the expertise to analyze the survey results and define the source, depth and magnitude of an aquifer. The Company can then estimate recharge rates, specify required well design features, plan well field design and develop water management plans. To conduct these services, the Company maintains a staff of professional employees, including geological engineers, geologists, hydrogeologists and geophysicists. These attributes enable it to locate suitable water-bearing formations to meet a wide variety of customer requirements.

Pump Repair and Well Maintenance The Company believes it is the leader in the repair and maintenance of wells and well equipment. Its involvement in the initial drilling of a well positions the Company to win follow-up maintenance business, which is generally a higher margin business than well drilling. Such repair and maintenance is required periodically during the

life of a well. For instance, in locations where the groundwater contains bacteria, iron, or high mineral content, screen openings may become blocked, reducing the capacity and productivity of the well.

     The Company offers complete diagnostic repair and maintenance services for existing wells, pumps and related equipment through a network of local offices throughout our geographic markets in the United States. In addition to its well service rigs, the Company has equipment capable of conducting downhole closed circuit televideo inspections, one of the most effective methods for investigating water well problems, enabling it to effectively diagnose and respond quickly to well and maintenance problems. The Company’s trained and experienced personnel can perform a variety of well rehabilitation techniques, both chemical and mechanical methods, and can perform bacteriological well evaluation and water chemistry analyses. The Company also has the capability and inventory to repair, in its own machine shops, most water well pumps, regardless of manufacturer, as well as to repair well screens, casings and related equipment such as chlorinators, aerators and filtration systems.

Water Treatment Products and Plant Construction The Company believes it is well positioned to be an important provider of municipal water treatment services, as continued population growth in water-challenged regions and more stringent regulatory requirements lead to increasing needs to conserve water resources and control contaminants and impurities. For the design and construction of integrated water treatment facilities and the sale of products, the Company focuses on its traditional customer base served in its water well service businesses. The Company offers complete water treatment solutions for various groundwater contaminants and impurities, such as volatile organics, nitrates, iron, manganese, arsenic, radium and radon. These design and construction solutions typically involve proprietary treatment media and filtration methods, as well as treatment equipment installed at or near the wellhead, including chlorinators, aerators, filters and controls. These services are provided in connection with surface water intakes, pumping stations and well houses. In addition, to its traditional products, the Company is actively expanding its offerings and expertise in membrane filtration technologies. The Company believes its proprietary technology, expertise and reputation in the industry will set it apart from competitors in this market.

Sewer Rehabilitation The Company has the capability to provide a full range of rehabilitation services through traditional pipeline replacement or trenchless, cured-in-place pipe (“CIPP”) technologies through its Inliner product line. CIPP is a rehabilitation method that allows existing sewer pipelines to be repaired without the need for extensive excavation and the resultant disruption of traffic flow and other services.

Environmental Assessment Drilling Customers use the Company’s environmental drilling services to assess, investigate, monitor and characterize water quality and aquifer parameters. The customers are typically national and regional consulting firms engaged by federal and state agencies, as well as industrial companies that need to assess, define or clean up groundwater contamination sources. The Company offers a wide range of environmental drilling services including: investigative drilling, installation and testing of monitoring wells to determine the extent of groundwater contamination, installation of recovery wells that extract contaminated groundwater for treatment, which is known as pump and treat remediation, and specialized site safety programs associated with drilling at contaminated sites. In its environmental health sciences department, the Company employs a full-time staff qualified to prepare site specific health and safety plans for customers who have workers employed on hazardous waste cleanup sites as required by the Occupational Safety and Health Administration, or “OSHA”, and the Mine Safety and Health Administration of the Department of Labor, or “MSHA”.

Mineral Exploration

Together with its Latin American affiliates, the Company is one of the three largest providers of drilling services for the global mineral exploration industry. Global mining companies hire the Company to extract samples from a site that the mining companies analyze for mineral content before investing heavily in development. The Company’s drilling services require a high level of expertise and technical competence because the samples extracted must be free of contamination and accurately reflect the underlying mineral deposit. The mineral exploration division is the Company’s second largest business segment.

     The division conducts above ground and underground drilling activities, including all phases of core drilling, diamond, reverse circulation, dual tube, hammer and rotary air-blast methods. Its service offerings include both exploratory and definitional drilling. Exploratory drilling is conducted to determine if there is a minable mineral deposit, which is known as an orebody, on the site. Definitional drilling is typically conducted at a site to assess whether it would be economical to mine and to assist in mapping the mine layout. The demand for the Company’s definitional drilling services has increased in recent years as new and less expensive mining techniques have made it feasible to mine previously uneconomical orebodies.

     The Company’s services are used primarily by major gold, silver, and copper producers and to a lesser extent, iron ore producers. Work for gold mining customers generates approximately half of the Company’s mineral exploration business. The success of the Company’s mineral exploration operations is closely tied to global commodity prices and demand for the Company’s global mining customers’ products, and it benefits significantly from the currently strong precious and base metals markets. The Company’s primary markets are in the western United States, Alaska, Mexico, Australia and Africa. It also has ownership interests in foreign affiliates operating in Latin America that form its primary presence in this market.

Energy

In 2002, the Company entered the energy business in the Midwestern United States. The Company expects to continue to substantially grow this business. Its main energy operations

include the acquisition, development, and production of unconventional gas.

     The life span of conventional natural gas wells is declining, while consumption of natural gas and other cleaner-burning fuels is increasing. The Company therefore expects the fundamentals for unconventional natural gas to be positive over the coming years. Unconventional gas burns with essentially the same efficiency as natural gas, and the Company believes it is an attractive substitute fuel source in the marketplace for conventional resources. Because unconventional gas wells in the Company’s operating market generally take 18-24 months to reach full capacity, the Company anticipates significant growth, for at least the next five years, in revenues and operating income from its exploration and development activities as previously drilled wells achieve maximum production and new wells are brought online.

     The Company has developed expertise in the complex geology and engineering techniques needed to effectively develop multi-zone wells in the Cherokee Basin in Kansas and Oklahoma, where it has approximately 179,000 gross acres under lease and currently has 199 net producing wells. The Company has utilized to date approximately one-quarter of its acreage under lease. Production from these wells increases more slowly than conventional natural gas wells, but their life span is significantly longer than conventional natural gas wells. The Company estimates that the average life span of its current wells is approximately 15-20 years. Additionally, it continues to lease acreage for purposes of expanding our development potential. The Company believes the increasing demand for cleaner-burning fuels and increasingly stringent regulatory limitations to ensure air quality will have a favorable impact on the price for such fuels. The Company generally enters into fixed-price physical delivery contracts for a portion of its production to cushion against declines in market prices. The energy division became profitable in fiscal 2006 as production continued to increase. Energy is currently the Company’s smallest segment; however, assuming no significant decline in market prices for natural gas, the Company expects this to be its fastest growing business.

Geoconstruction

The Company provides geoconstruction services to the heavy civil construction market that are focused primarily on ground modification during the construction of highways, dams, tunnels, shafts, water lines, subways and other civil construction projects. Geoconstruction services are used to modify weak and unstable soils and provide support and groundwater control for excavation.

     Services offered include cement and chemical grouting, jet grouting, vibratory ground improvement, drain hole drilling, installation of ground anchors, tiebacks, rock bolts and instrumentation. The Company has expertise in selecting the appropriate support techniques to be applied in various geological conditions. In addition, it has extensive experience in the placement of measuring devices capable of monitoring water levels and ground movement. The division also manufactures a line of high-pressure pumping equipment used in grouting operations and geotechnical drilling rigs used for directional drilling.

Operations

The Company operates on a decentralized basis, with approximately 89 sales and operations offices located in most regions of the United States as well as in Australia, Africa, Mexico and Italy. In addition, the Company’s foreign affiliates operate out of locations in South America and Mexico.

     The Company is primarily organized around division presidents responsible for water resources, mineral exploration, geoconstruction and energy. Division vice presidents are responsible for geographic regions within each division and district managers are in charge of individual district office profit centers. The district managers report to their respective divisional vice president on a regular basis. Our primary marketing activities for our water resources and mineral exploration divisions are through the Company’s sales engineers and project managers who cultivate and maintain contacts with existing and potential customers. In this way, the Company learns of and is in a position to compete for proposed projects. In addition, water resources personnel monitor industry publications for upcoming bid opportunities.

     In its foreign affiliates, where the Company does not have majority ownership or operating control, day-to-day operating decisions are made by local management. The Company manages its interests in its foreign affiliates through regular management meetings and analysis of comprehensive operating and financial information. For its significant foreign affiliates, the Company has entered into shareholder agreements that give it limited board representation rights and require super-majority votes in certain circumstances.

Customers and Contracts

Each of the Company’s service and product lines has major customers; however, no single customer accounted for 10% or more of the Company’s revenues in any of the past three fiscal years.

     Generally, the Company negotiates its service contracts with industrial and mining companies and other private entities, while its service contracts with municipalities are generally awarded on a bid basis. The Company’s contracts vary in length depending upon the size and scope of the project. The majority of such contracts are awarded on a fixed price basis, subject to change of circumstance and force majeure adjustments, while a smaller portion are awarded on a cost plus basis. Substantially all of the contracts are cancelable for, among other reasons, the convenience of the customer.

     In the water resources division, the Company’s customers are typically municipalities and local operations of industrial businesses. Of the Company’s water resources revenues in fiscal 2006, approximately 66% were derived from municipalities and approximately 12% were derived from industrial customers while the balance was derived from other customer groups. The term “municipalities” includes local water districts, water utilities, cities, counties and other local governmental entities and

agencies that have the responsibility to provide water supplies to residential and commercial users. In the drilling of new water wells, the Company targets customers that require compliance with detailed and demanding specifications and regulations and that often require bonding and insurance, areas in which the Company believes it has competitive advantages due to its drilling expertise and financial resources.

     Customers for the Company’s mineral exploration services in the United States, Mexico, Australia, Africa and South America are primarily gold and copper producers. The Company’s largest customers in its mineral exploration drilling business are multi-national corporations headquartered primarily in the United States, Europe and Canada.

     In geoconstruction, the Company’s customers are primarily heavy civil construction contractors, governmental agencies, mining companies and industrial companies. The Company often acts as a specialty subcontractor when it provides geoconstruction services.

     The Company is marketing its unconventional gas production to large energy pipeline companies and local industrial customers.

Backlog

The Company’s backlog consists of executed service contracts, or portions thereof, not yet performed by the Company. The Company believes that its backlog does not have any significance other than as a short-term business indicator because substantially all of the contracts comprising the backlog are cancelable for, among other reasons, the convenience of the customer. The Company’s backlog for its continuing operations was approximately $237,890,000 at January 31, 2006, compared to approximately $60,559,000 at January 31, 2005. The substantial increase is primarily due to the acquisition of Reynolds, whose contracts are generally larger and of a longer duration than the Company has historically experienced. The Company’s backlog as of year-end is generally completed within the following twelve to eighteen months.

Competition

The Company’s competition for its water resource division’s turnkey construction services are primarily local and national specialty general contractors. The Company’s competition in the water well drilling business consists primarily of small, local water well drilling operations and some regional competitors. Oil and natural gas well drillers generally do not compete in the water well drilling business because the typical well depths are greater for oil and gas and, to a lesser extent, the technology and equipment utilized in these businesses are different. Only a small percentage of all companies that perform water well drilling services have the technical competence and drilling expertise to compete effectively for high-volume municipal and industrial projects, which typically are more demanding than projects in the agricultural or residential well markets. In addition, smaller companies often do not have the financial resources or bonding capacity to compete for large projects. However, there are no proprietary technologies or other significant factors which prevent other firms from entering these local or regional markets or from consolidating together into larger companies more comparable in size to the Company. Water well drilling work is usually obtained on a competitive bid basis for municipalities, while work for industrial customers is obtained on a negotiated or informal bid basis.

     As is the case in the water well drilling business, the well repair and maintenance business is characterized by a large number of relatively small competitors. The Company believes only a small percentage of the companies performing these services have the technical expertise necessary to diagnose complex problems, perform many of the sophisticated rehabilitation techniques offered by the Company or repair a wide range of pumps in their own facilities. In addition, many of these companies have only a small number of pump service rigs. Repair and maintenance projects are typically negotiated at the time of repair or contracted for in advance depending upon the lead time available for the repair work. Since pump repair and rehabilitation work is typically negotiated on an emergency basis or within a relatively short period of time, those companies with available rigs and the requisite expertise have a competitive advantage by being able to respond quickly to repair requests.

     In its mineral exploration division, the Company competes with a number of drilling companies as well as vertically integrated mining companies that conduct their own exploration drilling activities; some of these competitors have greater capital and other resources than the Company. In the mineral exploration drilling market, the Company competes based on price, technical expertise and reputation. The Company believes it has a well-recognized reputation for expertise and performance in this market. Mineral exploration drilling work is typically performed on a negotiated basis.

     The geoconstruction market is highly fragmented as a result of the large area served, the wide range of techniques offered and the large number and variety of contractors. In this market, the Company competes based upon a combination of reputation, innovation and price.

     In the energy production market, principally unconventional gas, the Company competes with numerous energy production companies, many of which have greater capital and other resources than the Company. In its current operations, the Company is not constrained by the availability of a market for its production, but does compete with other exploration and production companies for mineral leases and rights-of-way in its areas of interest.

Employees and Training

At January 31, 2006, the Company had 3,551 employees, 436 of whom were members of collective bargaining units represented by locals affiliated with major labor unions in the United States. The Company believes that its relationship with its employees is satisfactory.

     In all of the Company’s service lines, an important competitive factor is technical expertise. As a result, the Company emphasizes the training and development of its personnel. Periodic technical training is provided for senior field employees covering such areas as pump installation, drilling technology and

electrical troubleshooting. In addition, the Company emphasizes strict adherence to all health and safety requirements and offers incentive pay based upon achievement of specified safety goals. This emphasis encompasses developing site-specific safety plans, ensuring regulatory compliance and training employees in regulatory compliance and good safety practices. Training includes an OSHA-mandated 40-hour hazardous waste and emergency response training course as well as the required annual eight-hour updates. The Company has an environmental health sciences staff which allows it to offer such training in-house. This staff also prepares health and safety plans for specific sites and provides input and analysis for the health and safety plans prepared by others.

     On average, the Company’s field supervisors and drillers have 14 and 19 years, respectively, of experience with the Company. Many of the Company’s professional employees have advanced academic backgrounds in agricultural, chemical, civil, industrial, geological and mechanical engineering, geology, geophysics and metallurgy. The Company believes that its size and reputation allow it to compete effectively for highly qualified professionals.

Regulatory and Environmental Matters

The services provided by the Company are subject to various licensing, permitting, approval and reporting requirements imposed by federal, state, local and foreign laws. Its operations are subject to inspection and regulation by various governmental agencies, including the Department of Transportation, OSHA and MSHA in the United States as well as their counterparts in foreign countries. In addition, the Company’s activities are subject to regulation under various environmental laws regarding emissions to air, discharges to water and management of wastes and hazardous substances. To the extent the Company fails to comply with these various regulations, it could be subject to monetary fines, suspension of operations and other penalties. In addition, these and other laws and regulations affect the Company’s mineral exploration customers and influence their determination whether to conduct mineral exploration and development.

     Many localities require well operating licenses which typically specify that wells be constructed in accordance with applicable regulations. Various state, local and foreign laws require that water wells and monitoring wells be installed by licensed well drillers. The Company maintains well drilling and contractor’s licenses in those jurisdictions in which it operates and in which such licenses are required. In addition, the Company employs licensed engineers, geologists and other professionals necessary to the conduct of its business. In those circumstances in which the Company does not have a required professional license, it subcontracts that portion of the work to a firm employing the necessary professionals.

Potential Liability and Insurance

The Company’s activities involve certain operating hazards that can result in personal injury or loss of life, damage and destruction of property and equipment, damage to the surrounding areas, release of hazardous substances or wastes and other damage to the environment, interruption or suspension of site operations and loss of revenues and future business. The magnitude of these operating risks is amplified when the Company, as is frequently the case, conducts a project on a fixed-price, “turnkey” basis where the Company delegates certain functions to subcontractors but remains responsible to the customer for the subcontracted work. In addition, the Company is exposed to potential liability under foreign, federal, state and local laws and regulations, contractual indemnification agreements or otherwise in connection with its services and products. For example, the Company could be held responsible for contamination caused by an accident which occurs as a result of the Company drilling through a contaminated water source and creating a channel through which the contaminants migrate to an uncontaminated water source. Litigation arising from any such occurrences may result in the Company’s being named as a defendant in lawsuits asserting large claims. Although the Company maintains insurance protection that it considers economically prudent, there can be no assurance that any such insurance will be sufficient or effective under all circumstances or against all claims or hazards to which the Company may be subject or that the Company will be able to continue to obtain such insurance protection. A successful claim or damage resulting from a hazard for which the Company is not fully insured could have a material adverse effect on the Company. In addition, the Company does not maintain political risk insurance with respect to its foreign operations.

Applicable Legislation

There are a number of complex foreign, federal, state and local environmental laws which impact the demand for the Company’s environmental drilling services. For example, the Company currently provides a variety of services for individuals and entities that have either been ordered by the Environmental Protection Agency or a comparable state agency to clean up certain contaminated property, or are investigating whether a particular piece of property contains any contaminants. These services include soil and groundwater testing done in connection with environmental audits, investigative drilling to determine the presence of hazardous substances, monitoring wells to detect the extent of contamination present in the groundwater and recovery wells to recover certain contaminants from the groundwater. A change in these laws, or changes in governmental policies regarding the funding, implementation or enforcement of the laws, could have a material effect on the Company.

Item 1A. Risk Factors

You should carefully consider the risks described below before making an investment decision. The risks and uncertainties described below are not the only ones facing our company.

     If any of the following risks actually occurs, our business, financial condition or results of operations could be materially adversely affected. In that case, the trading price of our common stock could decline substantially.

Risks Relating To Our Business And Industry

A significant portion of our water resources business is dependant on municipalities and a decline in municipal spending could adversely impact our business.

For the fiscal year ended January 31, 2006, approximately 66% of water resources division revenues were derived from water and wastewater infrastructure contracts with governmental entities or agencies. Reduced tax revenues in certain regions have limited spending and new development by local municipalities which in turn has affected the demand for our services in these regions. Material reductions in spending by a significant number of municipalities or local governmental agencies could have a material adverse effect on our business, results of operations, liquidity and financial position.

We depend on continued mineral exploration and development

Demand for our mineral exploration drilling services and products depends in significant part upon the level of mineral exploration and development activities conducted by mining companies, particularly with respect to gold and copper. Mineral exploration is highly speculative and is influenced by a variety of factors, including the prevailing prices for various metals, which often fluctuate widely. In addition, the price of gold is affected by numerous factors, including international economic trends, currency exchange fluctuations, expectations for inflation, speculative activities, consumption patterns, purchases and sales of gold bullion holdings by central banks and others, world production levels and political events. In addition to prevailing prices for minerals, mineral exploration activity is influenced by the following factors:

•		global and domestic economic considerations;
•		the economic feasibility of mineral exploration and production;
•		the discovery rate of new mineral reserves;
•		national and international political conditions; and
•		the ability of mining companies to access or generate sufficient funds to finance capital expenditures for their activities.

     A material decrease in the rate of mineral exploration and development would reduce the revenues generated by our mineral exploration business.

Our businesses are cyclical, and therefore our results can fluctuate significantly.

We historically have experienced fluctuations in our quarterly results arising from a number of factors, including the following:

•		the timing of the award and completion of contracts;
•		the recording of related revenues; and
•		unanticipated additional costs incurred on projects.

     In addition, adverse weather conditions, natural disasters, force majeure and other similar events can curtail our operations in various regions of the world throughout the year, resulting in performance delays and increased costs. Moreover, our domestic activities and related revenues and earnings tend to decrease in the winter months when adverse weather conditions interfere with access to drilling or other construction sites. As a result, our revenues and earnings in the second and third quarters tend to be higher than revenues and earnings in the first and fourth quarters. Accordingly, as a result of the foregoing as well as other factors, our quarterly results should not be considered indicative of results to be expected for any other quarter or for any full fiscal year.

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

Our revenues on large water and wastewater infrastructure contracts are recognized on a percentage of completion basis for individual contracts based upon the ratio of costs incurred to total estimated costs at completion. Contract price and cost estimates are reviewed periodically as work progresses and adjustments proportionate to the percentage of completion are reflected in contract revenues and gross profit in the reporting period when such estimates are revised. Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined.

We may experience cost overruns on our fixed-price contracts, which could negatively affect our profitability

A significant number of our contracts contain fixed prices and generally assign responsibility to us for cost overruns for the subject projects. 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 requirements. 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 a result, revenues and gross margin may vary from those originally estimated and, depending upon the size of the project, variations from estimated contract performance could affect our operating results for a particular quarter. Many of our contracts are also subject to cancellation by the customer upon short notice with limited damages payable to us.

We have a substantial amount of debt and other contractual commitments, and the cost of servicing those obligations could adversely affect our business and hinder our ability to make payments on the obligations, and such risk could increase if we incur more debt

We have a substantial amount of indebtedness. As of January 31, 2006, our total liabilities were approximately $278 million and our total assets were approximately $449 million. The level of our indebtedness could have important consequences to shareholders, including the following:

•		our ability to obtain any necessary financing in the future for working capital, capital expenditures, debt service requirements or other purposes may be limited or financing may be unavailable;
•		a substantial portion of our cash flows must be dedicated to the payment of principal and interest on our indebtedness and other obligations and will not be available for use in our business;
•		our level of indebtedness could limit our flexibility in planning for, or reacting to, changes in our business and the markets in which we operate; and
•		our high degree of indebtedness will make us more vulnerable to changes in general economic conditions and/or a downturn in our business, thereby making it more difficult for us to satisfy our obligations.

     If we fail to make required debt payments, or if we fail to comply with other covenants in our debt service agreements, we would be in default under the terms of these and other indebtedness agreements. This may result in the holders of the indebtedness accelerating repayment of this debt.

A significant portion of our revenues are generated from our operations in foreign countries, and we face unique risks related to these operations

Our earnings are significantly impacted by the results of our operations in foreign countries, including, among others, Chile, Mexico, Peru, Italy, Australia and several countries in Africa. In fiscal 2006, approximately 18% of our revenues were generated from international operations. Our foreign operations are subject to certain risks beyond our control, including the following:

•		political, social and economic instability;
•		war and civil disturbances;
•		the taking of property by nationalization or expropriation without fair compensation;
•		changes in government policies and regulations;
•		tariffs, taxes and other trade barriers;
•		exchange controls and limitations on remittance of dividends or other payments to us by our foreign subsidiaries and affiliates; and
•		devaluations and fluctuations in currency exchange rates.

     Some of our contracts are not denominated in dollars, and, other than on a selected basis, we do not engage in foreign currency hedging transactions. Therefore as exchange rates between the U.S. dollar and other currencies fluctuate, the translation effect of such fluctuations may have an adverse effect on our results of operations and financial condition.

     We have mining operations in countries such as Tanzania, Guinea, Chile, Peru and Mexico, which have experienced instability in the past, or may experience instability in the future. The mining industry has in the past been subject to regulation by governments around the world, including the regions in which we have operations, relating to matters such as environmental protection, controls and restrictions on production, and, potentially, nationalization, expropriation or cancellation of contract rights, as well as restrictions on conducting business in such countries. In addition, in our foreign operations, we face operating difficulties, including, but not limited to, political instability, workforce instability, harsh environmental conditions and remote locations. We do not maintain political risk insurance. If adverse events that are beyond our control occur in the areas of our foreign operations, contractual provisions and bilateral agreements between countries may not be sufficient to guard our interests, and our foreign operations may be adversely affected.

The volatility of natural gas prices could have a material adverse effect on our business

Our revenues, profitability and future growth and the carrying value of our gas properties depend to a large degree on prevailing gas prices. Prices for natural gas are subject to large fluctuations in response to relatively minor changes in the supply and demand for natural gas, uncertainties within the market and a variety of other factors beyond our control. These factors include weather conditions in the United States, the condition of the United States economy, governmental regulation and the availability of alternative fuel sources.

     A sharp decline in the price of natural gas would result in a commensurate reduction in our revenues, income and cash flows from the production of methane gas and could have a material adverse effect on the carrying value of our oil and gas properties. In the event prices fall substantially, we may not be able to realize a profit from our production. In recent decades, there have been periods of both worldwide overproduction and underproduction of hydrocarbons and periods of both increased and relaxed energy conservation efforts. Such conditions have resulted in periods of excess supply of, and reduced demand for, crude oil on a worldwide basis and for natural gas on a domestic basis. These periods have been followed by periods of short supply of, and increased demand for, natural gas. The excess or

short supply of crude oil has placed pressures on prices and has resulted in dramatic price fluctuations even during relatively short periods of seasonal market demand.

     Our profitability can vary significantly with fluctuations in the market price of gold as a substantial portion of our mineral exploration business is comprised of drilling for gold

World gold prices have historically fluctuated widely and are affected by numerous factors beyond our control, including:

•		the strength of the United States economy and the economies of other industrialized and developing nations;
•		global or regional political or economic crises;
•		the relative strength of the United States dollar and other currencies;
•		expectations with respect to the rate of inflation;
•		interest rates;
•		sales of gold by central banks and other holders;
•		demand for jewelry containing gold; and
•		speculation.

     Any material decrease in the market price of gold would materially and adversely affect our results of operations and financial condition.

The development of unconventional gas properties is capital intensive and involves numerous risks that may result in a total loss of investment

The business of exploring for and, to a lesser extent, developing and operating unconventional natural gas properties involves a high degree of business and financial risk that even a combination of experience, knowledge and careful evaluation may not be able to overcome. We intend to make substantial additional investments in our unconventional gas business and intend to aggressively develop our existing properties and seek opportunities to lease additional areas in the Cherokee basin and other areas. Such expansion will require significant capital expenditure. We may drill wells that are unproductive or, although productive, do not produce gas in economic quantities. Acquisition and completion decisions generally are based on subjective judgments and assumptions that are speculative. It is impossible to predict with certainty the production potential of a particular property or well. Furthermore, a successful completion of a well does not ensure a profitable return on the investment. A variety of geological, operational, or market-related factors, including, but not limited to, unusual or unexpected geological formations, pressures, equipment failures or accidents, fires, explosions, blowouts, cratering, pollution and other environmental risks, shortages or delays in the availability of drilling rigs and the delivery of equipment, inability to renew leases relating to producing properties, loss of circulation of drilling fluids or other conditions may substantially delay or prevent completion of any well, or otherwise prevent a property or well from being profitable.

Our future success depends upon our ability to find, develop and acquire additional unconventional gas reserves that will be commercially viable for production.

The rate of production from unconventional gas properties declines as reserves are depleted. As a result, we must locate and develop or acquire new reserves to replace those being depleted by production. Without successful exploration or acquisition activities, our reserves and revenues from our energy segment will decline. Some of our competitors in the energy business are larger, more established companies with substantially greater resources, and in many instances they have been engaged in the unconventional gas extraction business for longer than we have. These companies may have acquisition and development strategies that are more aggressive than ours and may be able to acquire more unconventional natural gas properties or develop their existing properties much faster than we can. We endeavor to discover new economically feasible gas reserves at least commensurate with the depletion of our existing reserves through production. Our inability to acquire larger reserves of unconventional gas and potential delays in the expansion of our unconventional gas business may prevent us from gaining market share and adversely affect our results of operations and profitability. We may not be able to find and develop or acquire additional reserves at an acceptable cost or have necessary financing for these activities in the future. In addition, drilling activity within a particular area that we lease may be unsuccessful and exploration activities may not lead to commercial discoveries of unconventional natural gas. Further, we may also have to venture into more hostile environments, both politically and geographically, where exploration, development and production of unconventional gas will be more technologically challenging and expensive.

Our bonding capacity may be limited in certain circumstances

A significant portion of our projects requires us to procure a bond to secure performance. With a decreasing number of insurance participants in that market, it may be difficult to find sureties who will continue to provide contract required bonding at acceptable rates. 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 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.

We are subject to market fluctuations of certain commodities in connection with the operation of our business

The manufacture of products used in our rehabilitation business is dependent upon the availability of resin, a petroleum-based 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. We also purchase a significant amount of steel for use in connection with our water resources, mineral and geoconstruction businesses. 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, steel or fuel and increases in the price of oil or steel may cause an adverse effect on our cost structure which we may not be able to recover from our customers.

The dollar amount of our backlog, as stated at any given time, is not necessarily indicative of our future earnings

As of January 31, 2006, our backlog was approximately $237.9 million. There can be no assurance that the revenues projected in our backlog will be realized or, if realized, will result in profits. Further, project terminations, suspensions or adjustments in scope may occur with respect to contracts reflected in our backlog. Reductions in backlog due to cancellation by a customer or scope adjustments adversely affect, potentially to a material extent, the revenue and profit we actually receive from such backlog. 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. Estimates are reviewed periodically and appropriate adjustments are made to the amounts included in backlog. Our backlog does not include any awards for work expected to be performed more than three years after the date of our financial statements. The amount of future actual awards may be more or less than our estimates.

Our failure to meet the schedule or performance requirements of our contracts could adversely affect us

In certain circumstances, we guarantee contract completion by a scheduled acceptance date. Failure to meet any such schedule could result in additional costs, and the amount of such additional costs could exceed projected profit margins. These additional costs include liquidated damages paid under contractual penalty provisions, which can be substantial and can accrue on a daily basis. In addition, our actual costs could exceed our projections. Performance problems for existing and future contracts could cause actual results of operations to differ materially from those anticipated by us and could cause us to suffer damage to our reputation within our industry and our client base.

Our dependence on subcontractors could adversely affect us

We rely on third-party subcontractors to complete our projects. To the extent that we cannot engage subcontractors, our ability to complete a project in a timely fashion or at a profit may be impaired. If the amount we are required to pay for subcontracted services exceeds the amount we have estimated in bidding for fixed-price work, we could experience losses in the performance of these contracts. In addition, if a subcontractor is unable to deliver its services according to the negotiated terms for any reason, including the deterioration of its financial condition, we may be required to purchase the services from another source at a higher price. This may reduce the profit to be realized or result in a loss on a project for which the services were needed.

Our projects expose us to potential professional liability, product liability, warranty and other claims

Any accidents or system failures in excess of insurance limits at locations engineered or constructed by us or where our products are installed or services performed could result in significant professional liability, product liability, warranty and other claims against us. Further, the construction projects we perform expose us to additional risks including cost overruns, equipment failures, personal injuries, property damage, shortages of materials and labor, work stoppages, labor disputes, weather problems and unforeseen engineering, architectural, environmental and geological problems. In addition, once our construction is complete, we may face claims with respect to the work performed.

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. 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.

Our drilling and other construction activities are subject to various risks and natural disasters, and resulting losses could have a material adverse effect on us

Our drilling and other construction activities involve operating hazards that can result in personal injury or loss of life, damage and destruction of property and equipment, damage to the surrounding areas, release of hazardous substances or wastes and other damage to the environment, interruption or suspension of drill site operations and loss of revenues and future business. The magnitude of these operating risks is amplified when we, as is frequently the case, conduct a project on a fixed-price, “turnkey” basis in which we delegate specified functions to subcontractors but remain responsible to the customer for the subcontracted work. Whether or not we or our subcontractor causes an accident, we could be named as a defendant in lawsuits asserting large claims arising from such occurrences. Although we maintain insurance protection that we consider economically prudent, we do not know whether this insurance will be sufficient or effective under all circumstances or against all claims or hazards to which we may be subject or whether we will be able to continue to obtain this insurance protection in the future at rates that we consider reasonable. A successful claim or damage resulting from a hazard for which we are not fully insured could have a material adverse effect on our business, results of operations, liquidity and financial position. In addition, our business is subject to curtailed or suspended operations as a result of the following:

•

adverse weather conditions;

•		natural disasters;
•		work stoppages;
•		mine closings; and
•		force majeure and other similar events.

     A majority of our projects have fixed prices and assign responsibility to us for project overruns and, as a result, delays in completion of a project due to any of the above mentioned factors could affect our operating results. In addition, the costs of drilling, completing and operating wells could be subject to shortages of or delays in obtaining equipment, supplies, mobilization of rigs and the inadequacy or unavailability of, or other problems with, transportation facilities. This in particular, is a risk related to our foreign rigs that are often located in remote locations with limited infrastructure support. The occurrence of any of these events could have a material adverse impact on our business, results of operations, liquidity and financial position.

We require skilled workers to conduct our operations

Our ability to remain productive, profitable and competitive depends substantially on our ability to retain and attract skilled workers with expert geological and other engineering knowledge and capabilities. The demand for these workers is high and the supply is limited. As of January 31, 2006, approximately 12% of our workforce is unionized and 6 of our 28 collective bargaining agreements will expire within the next 12 months. An inability to attract and retain trained drillers and other skilled employees in the United States and overseas could have a material adverse effect on our business, results of operations, liquidity and financial position.

We will lose business to our competitors if we are not able to demonstrate our technical competence, competitive pricing and reliable performance to potential customers

We face significant competition and a large part of our business is dependent upon obtaining work through a competitive bidding process. In our water resources drilling business and our geoconstruction services business, we compete with many smaller firms on a local or regional level. There are no proprietary technologies or other significant factors which prevent other firms from entering these local or regional markets or from consolidating together into larger companies more comparable in size to our company. Our competitors for our turnkey construction services are primarily local and national specialty general contractors. In our mineral exploration business, we compete with a number of drilling companies, the largest being Boart Longyear Group, a private company, and Major Drilling, a Canadian public company. 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. Additional competition could adversely affect our business, results of operations, liquidity and financial position.

Our businesses are subject to complex governmental regulations which could have a material adverse affect on our results of operations and financial condition

Our drilling and other construction services are subject to various licensing, permitting, approval and reporting requirements imposed by federal, state, local and foreign laws. Our operations are subject to inspection and regulation by various governmental agencies, including the Department of Transportation, Occupational and Safety Health Administration and the Mine Safety and Health Administration of the Department of Labor in the United States, as well as their counterparts in foreign countries. A major risk inherent in drilling and other construction is the need to obtain permits from local authorities. Delays in obtaining permits, the failure to obtain a permit for a project or a permit with unreasonable conditions or costs could have a material adverse effect on our ability to effectively provide our services.

     In addition, these regulations also affect our mining customers and may influence their determination to conduct mineral exploration and development. Future changes in these laws and regulations, domestically or in foreign countries, could cause our customers to incur additional expenses or result in significant restrictions to their operations and possible expansion plans, which in turn could have a material adverse impact on us.

     Our water treatment business is impacted by legislation and municipal requirements that set forth discharge parameters, constrain water source availability and set quality and treatment standards. The success of our groundwater treatment services business depends on our ability to comply with the stringent standards set forth by the regulations governing the industry and our ability to provide adequate design and construction solutions in a cost-effective manner.

     Presently, the exploration, development and production of unconventional natural gas is subject to various types of regulation by local, state, foreign and federal agencies, including laws relating to the environment and pollution. We incur certain capital costs to comply with such regulations and expect to continue to make capital expenditures to comply with these regulatory requirements. In addition, these requirements may prevent or delay the commencement or continuance of a given operation and have a substantial impact on the growth of our coalbed methane business. Legislation affecting the gas industry is under constant review for amendment and expansion of scope and future changes to legislation may impose significant burdens on our business, financial or otherwise. Also, numerous departments and agencies, both federal and state, are authorized by statute to issue and have issued rules and regulations binding on the gas industry and its individual members, some of which carry substantial penalties and other sanctions for failure to comply. Any increases in the regulatory burden on the gas industry created by new legislation would increase our cost of doing business and, consequently, adversely affect our profitability.

Our business is subject to environmental regulation that could result in substantial costs or liabilities

We are required to comply with foreign, federal, state and local laws and regulations regarding health and safety and the protection

of the environment, including those governing the storage, use, handling, transportation, discharge and disposal of hazardous substances in the ordinary course of our operations. We are also required to obtain and comply with various permits under current environmental laws and regulations, and new laws and regulations may require us to obtain and comply with additional permits. We may be unable to obtain or comply with, and could be subject to revocation of, permits necessary to conduct our business. Costs to comply with environmental laws, regulations and permits may be substantial and any failure to comply could result in fines, penalties or other sanctions.

     Various foreign, federal, state and local environmental laws and regulations may impose liability on us with respect to conditions at our current or former facilities, sites at which we conduct or have conducted operations or activities or any third party waste disposal site that we, directly or indirectly, sent hazardous wastes. The costs of investigation or remediation at these sites may be substantial. Environmental laws are complex, change frequently and have tended to become more stringent over time. Compliance with, and liability under, current and future environmental laws, as well as more vigorous enforcement policies or discovery of previously unknown conditions requiring remediation, could have a material adverse effect on our business, results of operations, liquidity and financial position.

We have high deductibles for our health insurance, workers’ compensation insurance and liability insurance

Although we maintain insurance protection that we consider economically prudent for major losses, we have high deductible amounts for each claim under our health insurance, workers’ compensation insurance and liability insurance. Our deductible amount for each health insurance claim, liability insurance and workers’ compensation claim is currently $200,000, $1,000,000 and $1,000,000, respectively. There can be no assurance that we will have adequate funds to cover our deductible obligations or that our insurance will be sufficient or effective under all circumstances or against all claims or hazards to which we may be subject or that we will be able to continue to obtain such insurance protection. A successful claim or damage resulting from a hazard for which we are not fully insured could have a material adverse effect on us.

Our actual results could differ from the estimates and assumptions that we use to prepare our financial statements

To prepare financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions, as of the date of the financial statements, which affect the reported values of assets and liabilities and revenues and expenses and disclosures of contingent assets and liabilities. Areas requiring significant estimates by our management include:

•		contract costs and profits and application of percentage-of-completion accounting and revenue recognition of contract claims;
•		recoverability of inventory and application of lower of cost or market accounting;
•		provisions for uncollectible receivables and customer claims and recoveries of costs from subcontractors, vendors and others;
•		provisions for income taxes and related valuation allowances;
•		recoverability of goodwill;
•		recoverability of other intangibles and related estimated lives;
•		valuation of assets acquired and liabilities assumed in connection with business combinations; and
•		accruals for estimated liabilities, including litigation and insurance reserves.

Our actual results could differ from those estimates.

We are and will continue to be involved in litigation

We have been and may from time to time be named as a defendant in legal actions claiming damages in connection with drilling or other construction projects and other matters. These are typically actions that arise in the normal course of business, including employment-related claims and contractual disputes or claims for personal injury or property damage which occurs in connection with services performed relating to drilling or construction sites. Our contractual disputes normally involve claims relating to the drilling or other construction services we have provided. To date, we have been able to obtain liability insurance for the operation of our business. However, if we sustain damages that materially exceed our insurance coverage or that are not insured, there could be a material adverse effect on our liquidity, which could impair our operations.

If we must write off a significant amount of intangible assets or long-lived assets, our earnings will be negatively impacted

Because we have grown in part through acquisitions, goodwill and other acquired intangible assets represent a substantial portion of our assets. Goodwill was approximately $57.9 million as of January 31, 2006. If we make additional acquisitions, it is likely that we will record additional intangible assets on our books. We also have long-lived assets consisting of property and equipment and other identifiable intangible assets of $175.1 million as of January 31, 2006 which are reviewed for impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable. If a determination that a significant impairment in value of our unamortized intangible assets or long-lived assets occurs, such determination would require us to write off a substantial portion of our assets. Such a write-off would negatively affect our earnings.

Difficulties integrating our acquisitions could adversely affect us

From time to time, we have made acquisitions to pursue market opportunities, increase our existing capabilities and expand into new areas of operation. We plan to pursue select acquisitions in the future. If we are unable to complete acquisitions we have

identified, our business could be materially adversely affected. In addition, we may encounter difficulties integrating our acquisitions and in successfully managing the growth we expect from the acquisitions. Furthermore, our expansion into new businesses, such as with our Reynolds, Inc. acquisition, may expose us to additional business risks that are different from those we have traditionally experienced. To the extent we encounter problems in identifying acquisition risks or integrating our acquisitions, we could be materially adversely affected. Because we may pursue acquisitions around the world and may actively pursue a number of opportunities simultaneously, we may encounter unforeseen expenses, complications and delays, including difficulties in employing sufficient staff and maintaining operational and management oversight.

Risks Related To Our Common Stock

Provisions in our organizational documents could prevent or frustrate attempts by shareholders to replace our current management.

Our certificate of incorporation and bylaws contain provisions that could make it more difficult for a third party to acquire us without consent of our board of directors. Our certificate of incorporation provides for a staggered board. Accordingly, shareholders may elect only a minority of our board at any annual meeting, which may have the effect of delaying or preventing changes in management. Our certificate of incorporation requires the affirmative vote of shareholders holding at least 80% of our capital stock to amend the provision in our certificate of incorporation providing for the classification of our directors. In addition, under our certificate of incorporation, our board of directors may issue shares of preferred stock and determine the terms of those shares of stock without any further action by our shareholders. Our issuance of preferred stock could make it more difficult for a third party to acquire a majority of our outstanding voting stock and thereby effect a change in the composition of our board of directors. Our certificate of incorporation also provides that our shareholders may not take action by written consent. Our bylaws require advance notice of shareholder proposals and nominations, and permit only our board of directors, or authorized committee designated by our board of directors, to call a special shareholder meeting. These provisions may have the effect of preventing or hindering attempts by our shareholders to replace our current management. In addition, Delaware law prohibits a corporation from engaging in a business combination with any holder of 15% or more of its capital stock until the holder has held the stock for three years unless, among other possibilities, the board of directors approves the transaction. The board may use this provision to prevent changes in our management. Also, under applicable Delaware law, our board of directors may adopt additional anti-takeover measures in the future.

     We have also approved a shareholders’ rights agreement (the “Rights Agreement”) between us and National City Bank, as rights agent. Pursuant to the Rights Agreement, holders of our common stock are entitled to purchase one one-hundredth (1/100) of a share (a “Unit”) of Series A Junior Participating Preferred Stock at a price of $45 per Unit upon certain events. The purchase price is subject to appropriate adjustment for stock splits and other similar events. Generally, in the event a person or entity acquires, or initiates a tender offer to acquire, at least 25% of our then outstanding common stock, the rights will become exercisable for common stock having a value equal to two times the purchase price of the right. The existence of the Rights Agreement may discourage, delay or prevent a change of control or takeover attempt of our company by a third party that is opposed to by our management and board of directors.

Because we are a relatively small company, we are disproportionately negatively impacted by changes in the securities laws and regulations, which are likely to increase our costs and require additional management resources

The Sarbanes-Oxley Act of 2002, which became law in July 2002, has required changes in some of our corporate governance, securities disclosure and compliance practices. In response to the requirements of that Act, the SEC and the Nasdaq have promulgated new rules and listing standards covering a variety of subjects. Compliance with these new rules and listing standards has significantly increased our legal and financial and accounting costs, and we expect these increased costs to continue. In addition, the requirements have taxed a significant amount of management’s and the Board of Directors’ time and resources. Likewise, these developments may make it more difficult for us to attract and retain qualified members of our board of directors, particularly independent directors, or qualified executive officers. Because we are a relatively small company, we expect to be disproportionately negatively impacted by these changes in securities laws and regulations which will increase our costs, require additional management resources and may, in the event that we receive anything other than an unqualified report on our internal controls over financial reporting, result in greater difficulty in raising funding for our operations and negatively impact our stock price.

     As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report of management on the company’s internal controls over financial reporting in their annual reports on Form 10-K that contains an assessment by management of the effectiveness of the company’s internal controls over financial reporting. In addition, the public accounting firm auditing the company’s financial statements must attest to and report on management’s assessment of the effectiveness of the company’s internal controls over financial reporting. These reports currently exclude any assessment of the financial controls at the Reynolds, Inc. business, which was acquired on September 28, 2005. We will include Reynolds, Inc. in our evaluation of the design and effectiveness of internal control over financial reporting as of January 31, 2007. If we are unable to conclude that we have effective internal controls over financial reporting or, if our independent auditors are unable to provide us with an unqualified report as to the effectiveness of our internal controls over financial reporting as of each fiscal year-end as required by Section 404 of the Sarbanes-Oxley Act of 2002, investors could lose confidence in the reliability of our financial statements,

which could result in a decrease in the value of our securities. We are a small company with limited resources. The number and qualifications of our finance and accounting staff are limited, and we have limited monetary resources. We experience difficulties in attracting qualified staff with requisite expertise due to the profile of our company and a generally tight market for staff with expertise in these areas. A key risk is that as we complete our evaluation of internal controls each year a material weakness could be identified.

A small number of shareholders own a significant amount of our common stock and have influence over our business regardless of the opposition of other shareholders

A small number of shareholders own in excess of a majority of our outstanding common stock. As of January 31, 2006, approximately 36.5% of our common stock was held by five investors. The interests of these shareholders may not always coincide with our interests or those of our other shareholders. These shareholders, acting together, have significant influence over all matters submitted to our shareholders, including the election of our directors and approval of business combinations, and could accelerate, delay, deter or prevent a change of control of us. These shareholders are able to exercise significant control over our business, policies and affairs.

We are restricted from paying dividends

We have not paid any cash dividends on our common stock since our initial public offering in August 1992, and we do not anticipate paying any cash dividends in the foreseeable future. In addition, our current credit arrangements restrict our ability to pay cash dividends.

Item 1B. Unresolved Staff Comments

The Company has no unresolved comments from the Securities and Exchange Commission staff.

Item 2. Properties and Equipment

The Company’s corporate headquarters are located in Mission Woods, Kansas (a suburb of Kansas City, Missouri), in approximately 41,000 square feet of office space leased by the Company pursuant to a written lease agreement which expires December 31, 2008.

     As of January 31, 2006, the Company (excluding foreign affiliates) owned or leased approximately 497 drill and well service rigs throughout the world, a substantial majority of which were located in the United States. This includes rigs used primarily in each of its service lines as well as multi-purpose rigs. In addition, as of January 31, 2006, the Company’s foreign affiliates owned or leased approximately 76 drill rigs.

     The Company’s coalbed methane projects consist of working interests in developed and undeveloped properties located in the Cherokee Basin in Kansas and Oklahoma. The Company also owns the gas transportation facilities and equipment that transport the gas produced from its wells.

Natural Gas Reserves

The estimate of natural gas reserves is complex and requires significant judgment in the evaluation of geological, engineering and economic data. The reserve estimates may change substantially over time as a result of additional development activity, market price, production history and viability of production under varying economic conditions. Consequently, significant changes in estimates of existing reserves could occur. The following estimates of reserves and future net revenues as of January 31, 2006 and 2005, were prepared by the independent petroleum engineers, Cawley, Gillespie & Associates, Inc (in MMcf and thousands of dollars):

		2006				2005
Proved developed (MMcf)			19,402				11,888
Proved undeveloped (MMcf)			25,718				14,701
Total proved reserves (MMcf)			45,120				26,589
Estimated future net revenues — pre-tax		$	192,235			$	74,021
Present value of future net revenues — pre-tax		$	120,116			$	45,356

Estimated future net revenues represents estimated future revenues to be generated from production of proved reserves, net of estimated production and development costs. The amounts do not include non-property related expenses such as debt service and future income tax expense or depreciation, depletion or amortization. The weighted average year-end spot price used in estimating future net revenues was $7.31 per Mcf. The present value of future net revenues was calculated using the industry standard discount factor of 10%. The pre-tax measure of net revenues is a useful measure for comparison from company to company given the unique tax situation of each individual company. On an after-tax basis the measure would be $79,611,000.

     See the supplementary oil and gas disclosures included in the Consolidated Financial Statements for additional information pertaining to the Company’s natural gas reserves and related information. During fiscal 2006, the Company did not file any reports that included estimates of total proved oil and gas reserves with any federal agency.

Productive Wells, Production and Acreage

As of January 31, 2006, the Company had 207 gross producing wells and 197 net producing wells. The following table sets forth revenues from sales of gas and production costs per Mcf. Revenues are presented net of third party interests.

Fiscal Years Ended January 31,		2006				2005
Revenues		$	8.52			$	5.74
Lease operating expenses			1.94				2.50
Transportation costs			2.57				1.46
Production and property taxes			0.24				0.20

Gross and net developed and undeveloped acreage were as follows as of January 31, 2006 and 2005:

		Acres
Fiscal Years Ended January 31,		2006				2005
Gross developed			23,187				20,310
Net developed			20,883				15,029
Gross undeveloped			155,716				84,710
Net undeveloped			144,164				64,124

     The gross and net acreage on leases expiring in each of the following five years and thereafter were as follows:

		Gross				Net
		Acres				Acres
2007			32,633				23,346
2008			68,528				66,896
2009			26,953				26,953
2010			1,969				1,969
Thereafter			—				—

Drilling Activity

In connection with the Company’s efforts to develop its unconventional gas activities, 58 gross and net development wells and no exploratory wells were drilled during 2006. As of January 31, 2006, 60 gross and net wells were awaiting completion.

Delivery Commitments

The Company, through its gas pipeline operations, sells its gas production primarily to gas marketing firms at the spot market and under fixed-price delivery contracts. The Company expects current production will be sufficient to meet the requirements under the contracts. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for further discussion of the contracts.

Item 3. Legal Proceedings

The Company is involved in various matters of litigation, claims and disputes which have arisen in the ordinary course of the Company’s business. The Company believes that the ultimate disposition of these matters will not, individually and in the aggregate, have a material adverse effect upon its business or consolidated financial position, results of operations or cash flows.

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

No matters were submitted to a vote of the stockholders of the Company during the last quarter of the fiscal year ended January 31, 2006.

Item 4A. Executive Officers of the Registrant

Executive officers of the Company are appointed by the Board of Directors or the President for such terms as shall be determined from time to time by the Board or the President, and serve until their respective successors are selected and qualified or until their respective earlier death, retirement, resignation or removal.

     Set forth below are the name, age and position of each executive officer of the Company.

Name		Age				Position
Andrew B. Schmitt			57			President, Chief Executive Officer and Director
Jeffrey J. Reynolds			39			Executive Vice President and Director
Gregory F. Aluce			50			Senior Vice President and Division President — Water Resources
Eric R. Despain			57			Senior Vice President and Division President — Mineral Exploration
Steven F. Crooke			49			Senior Vice President, Secretary and General Counsel
Jerry W. Fanska			57			Senior Vice President-Finance and Treasurer

Set forth below are the name, age and position of other significant employees of the Company.

Name		Age				Position
Pier L. Iovino			60			Division President — Geoconstruction
Colin B. Kinley			46			Division President — Energy

The business experience of each of the executive officers and significant employees of the Company is as follows:

     Andrew B. Schmitt has served as President and Chief Executive Officer since October 1993. For approximately two years prior to joining the Company, Mr. Schmitt managed two privately-owned hydrostatic pump and motor manufacturing companies and an oil and gas service company. He served as President of the Tri-State Oil Tools Division of Baker Hughes Incorporated from February 1988 to October 1991.

     Jeffrey J. Reynolds became a director and Senior Vice President on September 28, 2005, in connection with the acquisition of Reynolds, Inc. (“Reynolds”) by Layne Christensen. Mr. Reynolds has served as the President of Reynolds, a company which provides products and services to the water and wastewater industries, since 2001, and he continues to serve in this capacity with Reynolds as a subsidiary of the Company. On March 30, 2006, Mr. Reynolds was promoted to an Executive Vice President of the Company.

     Gregory F. Aluce has served as Senior Vice President since April 14, 1998. Since September 1, 2001, Mr. Aluce has also served as President of the Company’s water resource division and is responsible for the Company’s water-related services and products. Mr. Aluce has over 23 years experience in various areas of the Company’s operations.

     Eric R. Despain has served as Senior Vice President since February 1996. Since September 1, 2001, Mr. Despain has also served as President of the Company’s mineral exploration division and is responsible for the Company’s mineral exploration operations. Prior to joining the Company in December 1995, Mr. Despain was President, Chief Executive Officer and a member of the Board of Directors of Christensen Boyles Corporation since 1986.

     Steven F. Crooke has served as Vice President, Secretary and General Counsel since May 2001. For the period of June 2000 through April 2001, Mr. Crooke served as Corporate Legal Affairs Manager of Huhtamaki Van Leer. Prior to that, he served as Assistant General Counsel of the Company from 1995 to May 2000. On February 1, 2006, Mr. Crooke was promoted to Senior Vice President, Secretary and General Counsel.

     Jerry W. Fanska has served as Vice President Finance and Treasurer since April 1994. Prior to joining Layne Christensen, Mr. Fanska served as corporate controller of The Marley Company since October 1992 and as its Internal Audit Manager since April 1984. On February 1, 2006, Mr. Fanska was promoted to Senior Vice President Finance and Treasurer.

     Pier L. Iovino has served as President of the Company’s geoconstruction division since September 1, 2001, and is responsi-

ble for the Company’s geoconstruction services. Prior to becoming President of the Company’s geoconstruction division, Mr. Iovino was district manager of the Company’s Boston district, which is included the Company’s geoconstruction operations.

     Colin B. Kinley has served as President of the Company’s energy division since September 1, 2001, and is responsible for the Company’s energy operations. Prior to becoming President of the Company’s energy division, Mr. Kinley also served as President of Layne Christensen Canada, a wholly-owned subsidiary of the Company, from 1990 until January 30, 2004 when substantially all of the assets of Layne Christensen Canada were sold.

PART II

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

The Company’s common stock is traded in the over-the-counter market through the NASDAQ National Market System under the symbol LAYN. The stock has been traded in this market since the Company became a publicly-held company on August 20, 1992. The Company has not repurchased any of its common stock during fiscal 2006. The following table sets forth the range of high and low sales prices of the Company’s stock by quarter for fiscal 2006 and 2005, as reported by the NASDAQ National Market System. These quotations represent prices between dealers and do not include retail mark-up, mark-down or commissions.

Fiscal Year 2006		High				Low
First Quarter		$	19.17			$	14.72
Second Quarter			23.60				14.41
Third Quarter			26.58				20.20
Fourth Quarter			30.25				19.95

Fiscal Year 2005		High				Low
First Quarter		$	15.38			$	12.50
Second Quarter			17.10				13.31
Third Quarter			17.92				13.27
Fourth Quarter			20.30				15.71

At March 31, 2006, there were 121 owners of record of the Company’s common stock.

     The Company has not paid any cash dividends on its common stock. Moreover, the Board of Directors of the Company does not anticipate paying any cash dividends in the foreseeable future. The Company’s future dividend policy will depend on a number of factors including future earnings, capital requirements, financial condition and prospects of the Company and such other factors as the Board of Directors may deem relevant, as well as restrictions under the Credit Agreement between the Company and LaSalle Bank National Association, as administrative agent for a group of banks, the Master Shelf Agreement between the Company and Prudential Investment Management, Inc., The Prudential Insurance Company of America, Pruco Life Insurance Company and Security Life of Denver Insurance Company, and other restrictions which may exist under other credit arrangements existing from time to time. The Credit Agreement and the Master Shelf Agreement limit the cash dividends payable by the Company.

Item 6. Selected Financial Data

The following selected historical financial information as of and for each of the five fiscal years ended January 31, 2006, has been derived from the Company’s audited Consolidated Financial Statements. The Company completed various acquisitions in each of the fiscal years, which are more fully described in Note 2 of the Notes to Consolidated Financial Statements or in previously filed Forms 10-K. The acquisitions have been accounted for under the purchase method of accounting and, accordingly, the Company’s consolidated results include the effects of the acquisitions from the date of each acquisition.

During fiscal year 2003, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” and recorded a non-cash charge of $14,429,000, net of income taxes, as a cumulative effect of a change in accounting principle. The Company also sold various operating companies during 2003 and 2004 and classified their results as discontinued operations for all years presented (see Note 4 of the Notes to Consolidated Financial Statements). The information below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 and the Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-K.

Fiscal Years Ended January 31,		2006				2005				2004				2003				2002
Income Statement Data (in thousands, except per share data):
Revenues		$	463,015			$	343,462			$	272,053			$	255,523			$	266,614
Cost of revenues (exclusive of depreciation shown below)			344,628				250,244				196,462				180,351				190,942
Gross profit			118,387				93,218				75,591				75,172				75,672
Selling, general and administrative expense			69,979				60,214				53,920				52,425				53,069
Depreciation, depletion and amortization			20,024				14,441				11,877				13,204				16,711
Other income (expense):
Equity in earnings of affiliates			4,345				2,637				1,398				842				925
Interest			(5,773	)			(3,221	)			(2,604	)			(2,490	)			(3,934	)
Debt extinguishment costs			—				—				(2,320	)			(1,135	)			—
Other, net			900				1,220				358				1,694				71
Income from continuing operations before income taxes and minority interest			27,856				19,199				6,626				8,454				2,954
Income tax expense			13,121				9,215				4,265				5,084				1,837
Minority interest			(50	)			(17	)			—				(188	)			(70	)
Net income from continuing operations before discontinued operations and cumulative effect of accounting change			14,685				9,967				2,361				3,182				1,047
Gain (loss) from discontinued operations, net of income taxes			(4	)			(213	)			(1,456	)			(2,225	)			31
Gain (loss) on sale of discontinued operations, net of income taxes			—				—				1,746				(23	)			—
Net income before cumulative effect of accounting change			14,681				9,754				2,651				934				1,078
Cumulative effect of accounting change, net of income taxes			—				—				—				(14,429	)			—
Net income (loss)		$	14,681			$	9,754			$	2,651			$	(13,495	)		$	1,078
Basic income (loss) per share:
Net income from continuing operations before discontinued operations and cumulative effect of accounting change		$	1.08			$	0.79			$	0.20			$	0.27			$	0.09
Income (loss) from discontinued operations, net of income taxes			—				(0.01	)			0.02				(0.19	)			—
Net income before cumulative effect of accounting change			1.08				0.78				0.22				0.08				0.09
Cumulative effect of accounting change, net of income taxes			—				—				—				(1.22	)			—
Net income (loss) per share		$	1.08			$	0.78			$	0.22			$	(1.14	)		$	0.09
Diluted income (loss) per share:
Net income from continuing operations before discontinued operations and cumulative effect of accounting change		$	1.05			$	0.77			$	0.19			$	0.26			$	0.09
Income (loss) from discontinued operations, net of income taxes			—				(0.02	)			0.02				(0.18	)			—
Net income before cumulative effect of accounting change			1.05				0.75				0.21				0.08				0.09
Cumulative effect of accounting change, net of income taxes			—				—				—				(1.19	)			—
Net income (loss) per share		$	1.05			$	0.75			$	0.21			$	(1.11	)		$	0.09
Balance Sheet Data (in thousands):
Working capital, excluding debt		$	69,996			$	54,455			$	52,406			$	37,613			$	35,584
Total assets			449,335				245,380				217,327				178,100				202,342
Total debt			128,900				60,000				42,000				32,370				34,357
Total stockholders’ equity			171,626				104,697				93,685				83,373				95,892

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

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto under Item 8.

Cautionary Language Regarding Forward-Looking Statements

This Form 10-K may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. Such statements may include, but are not limited to, statements of plans and objectives, statements of future economic performance and statements of assumptions underlying such statements, and statements of management’s intentions, hopes, beliefs, expectations or predictions of the future. Forward looking statements can often be identified by the use of forward-looking terminology, such as “should,” “intended,” “continue,” “believe,” “may,” “hope,” “anticipate,” “will,” “will be,” “goal,” “forecast,” “plan,” “estimate” and similar words or phrases. Such statements are based on current expectations and are subject to certain risks, uncertainties and assumptions, including but not limited to prevailing prices for various commodities, unanticipated slowdowns in the Company’s major markets, the risks and uncertainties normally incident to the exploration for and development and production of oil and gas, the impact of competition, the effectiveness of operational changes expected to increase efficiency and productivity, worldwide economic and political conditions and foreign currency fluctuations that may affect worldwide results of operations. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially and adversely from those anticipated, estimated or projected. These forward-looking statements are made as of the date of this filing, and the Company assumes no obligation to update such forward-looking statements or to update the reasons why actual results could differ materially from those anticipated in such forward-looking statements.

Management Overview of Reportable Operating Segments

The Company is a multinational company that provides sophisticated drilling and construction services and related products to a variety of markets, as well as being a producer of unconventional natural gas for the energy market. Management defines the Company’s operational organizational structure into discrete divisions based on its primary product lines. Each division comprises a combination of individual district offices, which primarily offer similar types of services and serve similar types of markets. Although individual offices within a division may periodically perform services normally provided by another division, the results of those services are recorded in the office’s own division. For example, if a water resources division office performed geoconstruction services, the revenues would be recorded in the water resources division rather than the geoconstruction division. Should an office’s primary responsibility move from one division president to another, that office’s results going forward would be reclassified between divisions at that time. The Company’s reportable segments are defined as follows:

Water Resources Division

This division provides a full line of water-related services and products including hydrological studies, site selection, well design, drilling and well development, pump installation, and repair and maintenance. The division’s offerings include the design and construction of water treatment facilities and the manufacture and sale of products to treat volatile organics and other contaminants such as nitrates, iron, manganese, arsenic, radium and radon in groundwater. The division also offers environmental services to assess and monitor groundwater contaminants.

     With the acquisition of Reynolds in September 2005, the division expanded its capabilities in the areas of the design and build of water and wastewater treatment plants, Ranney collector wells, sewer rehabilitation and water and wastewater transmission lines.

     The division’s operations rely heavily on the municipal sector as approximately 66% of the division’s fiscal 2006 revenues were derived from the municipal market. The municipal sector has been adversely impacted by economic slowdowns in certain regions of the country. Reduced tax revenues can limit spending and new development by local municipalities. Generally, spending levels in the municipal sector lag an economic recovery.

     In certain markets, the Company has experienced reduced spending levels in the municipal market and reduced demand for its services in the industrial markets. The soft markets have increased the competitive challenges for the division as competitors have been very aggressive on pricing. The Company expects activity levels within the water markets to improve. The division is also expanding its water treatment product offerings and expects to see continued growth in water treatment sales in fiscal 2007.

Mineral Exploration Division

This division provides a complete range of drilling services for the mineral exploration industry. Its aboveground and underground drilling activities include all phases of core drilling, diamond, reverse circulation, dual tube, hammer and rotary air-blast methods.

     Demand for the Company’s mineral exploration drilling services depends upon the level of mineral exploration and development activities conducted by mining companies, particularly with respect to gold and copper. Mineral exploration is highly speculative and is influenced by a variety of factors, including the prevailing prices for various metals that often fluctuate widely. In this connection, the level of mineral exploration and development activities conducted by mining companies could have a material adverse effect on the Company.

     In fiscal 2004, the mineral exploration division experienced the first increase in worldwide exploration spending since 1997, driven primarily by increased gold and base metal prices. The division relies heavily on mining activity in Africa where 45% of total division revenues were generated for fiscal 2006. The Company believes this concentration of risk is mitigated by working for larger international mining companies and the establishment of permanent operating facilities in Africa. Operating difficulties, including but not limited to, political instability, workforce instability, harsh environment, disease and remote locations, all create natural barriers to entry in this market by competitors. The Company believes it has positioned itself as the market leader in Africa and has established the infrastructure to operate effectively. The division expects to experience continued growth next year as mining activity remains strong.

Geoconstruction Division

This division focuses on services that improve soil stability, primarily jet grouting, grouting, vibratory ground improvement, drilled micropiles, stone columns, anchors and tiebacks. The division also manufactures a line of high-pressure pumping equipment used in grouting operations and geotechnical drilling rigs used for directional drilling.

     The geoconstruction division frequently acts as a subcontractor to heavy civil construction contractors and governmental agencies. In many cases, circumstances outside of the Company’s control are inherent in a subcontractor relationship. Consequently, the division could experience delays on projects that could have a material adverse effect on the division.

Energy Division

This division focuses entirely on exploration and production of unconventional gas properties in the United States. To date this division has been concentrated on projects in the mid-continent region of the United States. Historically, the division also included service businesses in shallow gas and tar sands exploration drilling, conventional oilfield fishing services and coil tubing fishing services. During fiscal 2004, the division’s strategy shifted to focus mainly on resource development rather than providing services to external customers. Accordingly, in January 2004, the division sold its shallow gas and tar sands exploration business and oilfield fishing services. The results of operations for these units have been reclassified to discontinued operations for all years presented (see Note 4 of the Notes to Consolidated Financial Statements). In fiscal 2006, the division completed its shift in focus to unconventional gas development activities and has reclassified the results of its two small, specialty energy service companies to the “Other” division.

     The expansion of the Company’s energy segment is contingent upon significant cash investments to develop the Company’s unproved acreage. As of January 31, 2006, the Company has invested $55,264,000 in oil and gas related assets and expects to spend approximately $25,000,000 in development activities in fiscal 2007. The production curve for a typical unconventional gas well in the Company’s operating market is generally 15-20 years. Accordingly, the Company expects to earn a return on its investment through proceeds from gas production over the next 15-20 years. However, future revenues and profits will be dependent upon a number of factors including consumption levels for natural gas, commodity prices, the economic feasibility of gas exploration and production and the discovery rate of new gas reserves. The Company has 210 gross producing wells on-line as of January 31, 2006.

Other

Other includes two small specialty energy service companies previously classified in the energy division and any other specialty operations not included in one of the other divisions.

     The following table, which is derived from the Company’s Consolidated Financial Statements as discussed in Item 6, presents, for the periods indicated, the percentage relationship which certain items reflected in the Company’s Statements of Income bear to revenues and the percentage increase or decrease in the dollar amount of such items period-to-period.

		Fiscal Years Ended January 31,												Period-to-Period Change
														2006				2005
		2006				2005				2004				vs. 2005				vs. 2004
Revenues:
Water resources			61.2	%			57.8	%			62.3	%			42.8	%			17.0	%
Mineral exploration			26.8				30.3				25.1				19.1				52.9
Geoconstruction			8.1				10.1				11.5				8.7				10.7
Energy			2.7				1.2				0.1				228.1				*
Other			1.2				0.6				1.0				136.5				(21.6	)
Total revenues			100.0	%			100.0	%			100.0	%			34.8				26.2
Cost of revenues (exclusive of depreciation shown below)			74.4	%			72.9	%			72.2	%			37.7				27.4
Gross profit			25.6				27.1				27.8				27.0				23.3
Selling, general and administrative expense			15.1				17.5				19.8				16.2				11.7
Depreciation, depletion and amortization			4.3				4.2				4.4				38.7				21.6
Other income (expense):
Equity in earnings of affiliates			0.9				0.8				0.5				64.8				88.6
Interest			(1.3	)			(0.9	)			(1.0	)			79.2				23.7
Debt extinguishment costs			—				—				(0.8	)			*				*
Other, net			0.2				0.3				0.1				(26.2	)			240.8
Income from continuing operations before income taxes			6.0				5.6				2.4				45.1				189.8
Income tax expense			2.8				2.7				1.5				42.4				116.1
Minority interest			—				—				—				*				*
Net income from continuing operations			3.2				2.9				0.9				47.3				322.2
Loss from discontinued operations, net of income taxes			—				(0.1	)			(0.5	)			*				*
Gain (loss) from sale of discontinued operations, net of income taxes			—				—				0.6				*				*
Net income			3.2	%			2.8	%			1.0	%			50.5	%			267.9	%

* Not meaningful

     Revenues, equity in earnings of affiliates and income from continuing operations before income taxes pertaining to the Company’s operating segments are presented below. Intersegment revenues are accounted for based on the fair market value of the services provided. Unallocated corporate expenses primarily consist of general and administrative functions performed on a company-wide basis and benefiting all operating segments. These costs include accounting, financial reporting, internal audit, safety, treasury, corporate and securities law, tax compliance, certain executive management (chief executive officer, chief financial officer and general counsel) and board of directors. All periods presented have been reclassified to conform to the current presentation. Operating segment revenues and income from continuing operations before income taxes are summarized as follows:

(in thousands)
Fiscal Years Ended January 31,		2006				2005				2004
Revenues
Water resources		$	283,337			$	198,475			$	169,631
Mineral exploration			124,206				104,299				68,218
Geoconstruction			37,659				34,636				31,285
Energy			12,536				3,821				73
Other			5,277				2,231				2,846
Total revenues		$	463,015			$	343,462			$	272,053
Equity in earnings of affiliates
Water resources		$	—			$	—			$	(44	)
Mineral exploration			3,506				2,764				1,442
Geoconstruction			839				(127	)			—
Total equity in earnings of affiliates		$	4,345			$	2,637			$	1,398
Income (loss) from continuing operations before income taxes and minority interest
Water resources		$	22,992			$	23,905			$	19,271
Mineral exploration			13,947				11,791				2,778
Geoconstruction			5,263				2,488				2,261
Energy			2,891				(1,993	)			(1,691	)
Other			1,307				(43	)			212
Unallocated corporate expenses			(12,771	)			(13,728	)			(11,281	)
Debt extinguishment costs			—				—				(2,320	)
Interest			(5,773	)			(3,221	)			(2,604	)
Total income from continuing operations before income taxes and minority interest		$	27,856			$	19,199			$	6,626

Comparison of Fiscal 2006 to Fiscal 2005

Revenues for fiscal 2006 increased $119,553,000, or 34.8%, to $463,015,000 compared to $343,462,000 for fiscal 2005. Revenues were up across all divisions with the main increases in the mineral exploration and water resources divisions including the impact of the acquisition of Reynolds, Inc. (”Reynolds”) that closed on September 28, 2005. A further discussion of results of operations by division is presented below.

     Gross profit as a percentage of revenues was 25.6% for fiscal 2006 compared to 27.1% for fiscal 2005. The decreases in gross profit percentage were primarily the result of reduced margins in the water resources division arising from a change in product mix with the acquisition of Reynolds, higher than expected costs on certain water supply contracts especially in the California market and competitive pricing pressures in Texas. These decreases were partially offset by improved margins in the energy division due to the increased sales of natural gas as a result of increased production and pricing.

     Selling, general and administrative expenses increased to $69,979,000 for fiscal 2006 compared to $60,214,000 for fiscal 2005 (15.1% and 17.5% of revenues, respectively). The increase was primarily related to the acquisition of Reynolds in September 2005, the acquisition of Beylik Drilling and Pump Service, Inc. (“Beylik”) in October 2004, expansion of the Company’s water treatment capabilities and additional accrued incentive compensation expense as a result of improved profitability of the Company.

     Depreciation, depletion and amortization increased to $20,024,000 for fiscal 2006 compared to $14,441,000 for fiscal 2005. The increase was primarily attributable to the increased depreciation associated with the property and equipment purchased in the Reynolds and Beylik acquisitions and increased depletion expense resulting from the increase in production of unconventional gas from the Company’s energy operations.

     Equity in earnings of affiliates increased to $4,345,000 for fiscal 2006 compared to $2,637,000 for fiscal 2005, reflecting increased activity by the Company’s Latin American affiliates and a joint venture in the Geoconstruction division.

     Interest expense increased to $5,773,000 for fiscal 2006 compared to $3,221,000 for fiscal 2005. The increase was a result of an increase in the Company’s average borrowings during the year in conjunction with the financing of Reynolds.

     Other, net was $900,000 for fiscal 2006 and $1,220,000 for fiscal 2005, which primarily related to gains on sales of property and equipment resulting from the Company’s efforts to monetize non-strategic assets.

     The Company’s effective tax rate was 47.1% for the year ended January 31, 2006, compared to 48.0% for the year ended January 31, 2005. The effective rate in excess of the statutory federal rate for the periods was due primarily to the impact of nondeductible expenses and the tax treatment of certain foreign operations.

Water Resources Division

(in thousands)
Fiscal Years Ended January 31,		2006				2005
Revenues		$	283,337			$	198,475
Income from continuing operations before income taxes			22,992				23,905

     Water resources revenues increased 42.8% to $283,337,000 for the year ended January 31, 2006, from $198,475,000 for the year ended January 31, 2005. The increase was primarily attributable to the Reynolds and Beylik acquisitions and the division’s water treatment initiatives.

     Income from continuing operations for the water resources division decreased 3.8% to $22,992,000 for the year ended

January 31, 2006, compared to $23,905,000 for the year ended January 31, 2005. The decrease in income from continuing operations was primarily the result of higher than expected costs on certain water supply contracts especially in the California market, competitive pricing pressures in the Texas market and additional costs of approximately $1,100,000 associated with the introduction of membrane technology to the division’s water treatment initiatives.

Mineral Exploration Division

(in thousands)
Fiscal Years Ended January 31,		2006				2005
Revenues		$	124,206			$	104,299
Income from continuing operations before income taxes			13,947				11,791

Mineral exploration revenues increased 19.1% to $124,206,000 for the year ended January 31, 2006, compared to revenues of $104,299,000 for the year ended January 31, 2005. The increase in revenues was primarily the result of increased exploration activity in the Company’s markets due to higher gold and base metal prices.

     Income from continuing operations for the mineral exploration division increased 18.3% to $13,947,000 for the year ended January 31, 2006, compared to income from continuing operations of $11,791,000 for the year ended January 31, 2005. The improved earnings in the division were primarily due to the increased activity levels noted above and increased earnings by the Company’s Latin American affiliates partially offset by difficult operating conditions in Africa. Equity earnings from the Latin American affiliates were $3,506,000 for fiscal 2006 and $2,764,000 for fiscal 2005. The improvements in earnings for the division were partially offset by increased incentive compensation costs.

Geoconstruction Division

(in thousands)
Fiscal Years Ended January 31,		2006				2005
Revenues		$	37,659			$	34,636
Income from continuing operations before income taxes			5,263				2,488

Geoconstruction revenues increased 8.7% to $37,659,000 for the year ended January 31, 2006, compared to $34,636,000 for the year ended January 31, 2005. The increase in revenues was primarily attributable to strong sales in the fourth quarter from the Company’s manufacturing operations in Italy.

     The geoconstruction division’s income from continuing operations increased 111.5% to $5,263,000 in fiscal 2006 compared to $2,488,000 in fiscal 2005. The increase in income from continuing operations was attributable to an increase of $966,000 in equity in earnings from a joint venture substantially completed in fiscal 2006, additional earnings from the manufacturing products described above and the settlement of several contract change orders.

Energy Division

(in thousands)
Fiscal Years Ended January 31,		2006				2005
Revenues		$	12,536			$	3,821
Income (loss) from continuing operations before income taxes			2,891				(1,993	)

Energy division revenues increased 228.1% to $12,536,000 for the year ended January 31, 2006 compared to revenues of $3,821,000 for the year ended January 31, 2005. The increase in revenues was primarily attributable to increased production from the Company’s unconventional gas properties and higher natural gas prices.

     The division had income from continuing operations of $2,891,000 for the year ended January 31, 2006, compared to a loss from continuing operations of $1,993,000 for the year ended January 31, 2005. The increase in income was due to the increase in production of unconventional gas and certain overhead cost reductions.

Unallocated Corporate Expenses

Corporate expenses not allocated to individual divisions, primarily included in selling, general and administrative expenses, were $12,771,000 and $13,728,000 for the years ended January 31, 2006 and 2005, respectively. The decrease for the year was primarily due to lower professional fees for Sarbanes-Oxley requirements, a decrease in incentive related expenses for corporate personnel and charges in the second quarter of the prior year related to the write-down of non-strategic assets of $300,000.

Comparison of Fiscal 2005 to Fiscal 2004

Revenues for fiscal 2005 increased $71,409,000, or 26.2%, to $343,462,000 compared to $272,053,000 for fiscal 2004. The increase in revenues primarily resulted from increased activity in the mineral exploration and water resource divisions. A further discussion of results of operations by division is presented below.

     Gross profit as a percentage of revenues was 27.1% for fiscal 2005 compared to 27.8% for fiscal 2004. The decrease in gross profit percentage for the year was primarily attributable to pricing pressures in the water resources division along with reduced margins associated with the promotion of certain new water treatment products. The decrease in the water resources division margins was partially offset by increased margins in the mineral exploration division due to increased drilling activity because of higher gold and base metal prices.

     Selling, general and administrative expenses increased to $60,214,000 for fiscal 2005 compared to $53,920,000 for fiscal 2004 (17.5% and 19.8% of revenues, respectively). The dollar increase for the year was primarily related to incremental costs of approximately $2,200,000 associated with the implementation of Sarbanes-Oxley requirements, increased incentive compensation costs as a result of the Company’s increased profitability and increased expenses associated with the Company’s unconventional gas development efforts.

     Depreciation, depletion and amortization increased to $14,441,000 for fiscal 2005 compared to $11,877,000 for fiscal 2004. The increase was the result of increased depletion associated with the expansion of the Company’s energy operations, increased depreciation from new asset additions in the mineral exploration division due to increased demand and in the water resources division primarily from assets purchased in the previously announced Beylik acquisition.

     Interest expense increased to $3,221,000 for fiscal 2005 compared to $2,604,000 for fiscal 2004. The increase was a result of an increase in the Company’s average borrowings during the year.

     The Company recorded a loss on extinguishment of debt of $2,320,000 for fiscal 2004. The loss represents prepayment penalties and the write-off of associated deferred fees in connection with refinancing of the Company’s debts.

     Other income included $1,220,000 for fiscal 2005 and $358,000 for fiscal 2004 which primarily related to gains on sales of property and equipment resulting from the Company’s efforts to monetize non-strategic assets.

     Income tax expense of $9,215,000 related to continuing operations was recorded for fiscal 2005 (an effective rate of 48.0%), compared to $4,265,000 for the same period last year (an effective rate of 64.4%). The improvement in the effective rate is primarily attributable to improved earnings in international operations. The remaining difference in the effective rate versus the statutory federal rate was due primarily to the impact of nondeductible expenses and the tax treatment of certain foreign operations.

     Net income for fiscal 2005 included a loss from discontinued operations of $213,000, net of income tax benefit of $127,000, primarily due to residual costs and foreign exchange losses from the Company’s subsidiary, Layne Christensen Canada, which was sold in the fourth quarter of fiscal 2004. The Company also sold its subsidiary Toledo Oil and Gas in fiscal 2004. Both entities were historically reported as part of the Company’s energy segment. In connection with the sales, the Company recorded a gain in fiscal 2004 of $1,746,000, net of income taxes of $1,034,000. The gain related to the sale of these operations was offset by operating losses of $1,456,000, net of income taxes of $215,000 (see Note 4 of the Notes to Consolidated Financial Statements).

Water Resources Division

(in thousands)
Fiscal Years Ended January 31,		2005				2004
Revenues		$	198,475			$	169,631
Income from continuing operations before income taxes			23,905				19,271

Water resources revenues increased 17.0% to $198,475,000 for the year ended January 31, 2005, from $169,631,000 for the year ended January 31, 2004. The increase in revenues was attributable to the increased infrastructure needs as a result of population expansion in metropolitan areas, primarily the western United States, improvements in municipal spending in certain regions and the results of the Company’s water treatment initiatives.

     Income from continuing operations for the water resources division increased 24.0% to $23,905,000 for the year ended January 31, 2005, compared to $19,271,000 last year. The increase in income from continuing operations was primarily the combination of increased gross profit associated with the volume increase in revenues and essentially flat selling, general and administrative expenses.

Mineral Exploration Division

(in thousands)
Fiscal Years Ended January 31,		2005				2004
Revenues		$	104,299			$	68,218
Income from continuing operations before income taxes			11,791				2,778

Mineral exploration revenues increased 52.9% to $104,299,000 for the year ended January 31, 2005, compared to revenues of $68,218,000 for the year ended January 31, 2004. The increase in revenues was primarily the result of increased exploration activity in the Company’s markets due to higher gold and base metal prices.

     Income from continuing operations for the mineral exploration division was $11,791,000 for the year ended January 31, 2005, compared to income from continuing operations of $2,778,000 for the year ended January 31, 2004. The improved earnings in the division were primarily due to the increased activity levels noted above and increased earnings by the Company’s Latin American affiliates. Equity earnings from the Latin American affiliates were $2,764,000 for fiscal 2005 and $1,442,000 for fiscal 2004. The improvements in earnings for the division were partially offset by increased incentive compensation costs and additional depreciation on new asset additions.

Geoconstruction Division

(in thousands)
Fiscal Years Ended January 31,		2005				2004
Revenues		$	34,636			$	31,285
Income from continuing operations before income taxes			2,488				2,261

Geoconstruction revenues increased 10.7% to $34,636,000 for the year ended January 31, 2005, compared to $31,285,000 for the year ended January 31, 2004. The increase in revenues was primarily attributable to certain larger than normal private sector projects.

     The geoconstruction division’s income from continuing operations increased 10.0% to $2,488,000 in 2005 compared to $2,261,000 in the prior year. The increase in income from continuing operations was attributable to improved profit margins from the larger private sector projects noted above.

Energy Division

(in thousands)
Fiscal Years Ended January 31,		2005				2004
Revenues		$	3,821			$	73
Income from continuing operations before income taxes			(1,993	)			(1,691	)

Energy division revenues increased to $3,821,000 for the year ended January 31, 2005, compared to revenues of $73,000 for the year ended January 31, 2004. The increase in revenue resulted from increased production from the Company’s unconventional gas projects in the mid-continent region of the United States.

     The division had a loss from continuing operations of $1,993,000 for the year ended January 31, 2005, compared to a loss from continuing operations of $1,691,000 for the year

ended January 31, 2004. The increased loss for the division was the result of increased expenses related to the Company’s development of unconventional gas properties.

Unallocated Corporate Expenses

Corporate expenses not allocated to individual divisions, primarily included in selling, general and administrative expenses, were $13,728,000 and $11,281,000 for the years ended January 31, 2005 and 2004, respectively. The increase in unallocated corporate expenses was primarily the result of increased costs associated with the Sarbanes-Oxley implementation requirements and higher travel expenses.

Fluctuation in Quarterly Results

The Company historically has experienced fluctuations in its quarterly results arising from the timing of the award and completion of contracts, the recording of related revenues and unanticipated additional costs incurred on projects. The Company’s revenues on large, long-term contracts are recognized on a percentage of completion basis for individual contracts based upon the ratio of costs incurred to total estimated costs at completion. Contract price and cost estimates are reviewed periodically as work progresses and adjustments proportionate to the percentage of completion are reflected in contract revenues and gross profit in the reporting period when such estimates are revised. Changes in job performance, job conditions and estimated profitability (including those arising from contract penalty provisions) and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. A significant number of the Company’s contracts contain fixed prices and assign responsibility to the Company for cost overruns for the subject projects; as a result, revenues and gross margin may vary from those originally estimated and, depending upon the size of the project, variations from estimated contract performance could affect the Company’s operating results for a particular quarter. Many of the Company’s contracts are also subject to cancellation by the customer upon short notice with limited damages payable to the Company. In addition, adverse weather conditions, natural disasters, force majeure and other similar events can curtail Company operations in various regions of the world throughout the year, resulting in performance delays and increased costs. Moreover, the Company’s domestic drilling and construction activities and related revenues and earnings tend to decrease in the winter months when adverse weather conditions interfere with access to project sites; as a result, the Company’s revenues and earnings in its second and third quarters tend to be higher than revenues and earnings in its first and fourth quarters. Accordingly, as a result of the foregoing as well as other factors, quarterly results should not be considered indicative of results to be expected for any other quarter or for any full fiscal year. See the Company’s Consolidated Financial Statements and Notes thereto.

Inflation

Management believes that the Company’s operations for the periods discussed have not been adversely affected by inflation or changing prices from its suppliers.

Liquidity and Capital Resources

Management exercises discretion regarding the liquidity and capital resource needs of its business segments. This includes the ability to prioritize the use of capital and debt capacity, to determine cash management policies and to make decisions regarding capital expenditures. The Company’s primary sources of liquidity have historically been cash from operations, supplemented by borrowings under its credit facilities.

     The Company maintains an agreement (the “Master Shelf Agreement”) whereby it has $100,000,000 of unsecured notes available to be issued before September 15, 2007. In September 2005, the Company amended the Master Shelf Agreement to increase the notes available to be issued from $60,000,000 to the $100,000,000. At January 31, 2006, the Company has $60,000,000 in notes outstanding under the Master Shelf Agreement. Additionally, the Company holds an unsecured $130,000,000 revolving credit facility (the “Credit Agreement”). The Credit Agreement was amended in September 2005 to increase the revolving loan commitment from $40,000,000 to $130,000,000. At January 31, 2006, the Company had $68,900,000 outstanding under the Credit Agreement. The Company was in compliance with its financial covenants at January 31, 2006 and expects to remain in compliance through the foreseeable future.

     The Company’s working capital as of January 31, 2006, 2005 and 2004, was $69,996,000, $54,455,000 and $52,406,000, respectively. The increase in working capital at January 31, 2006 was primarily attributable to the acquisition of Reynolds, which incrementally increased working capital by approximately $26,000,000. This increase was partially offset by approximately $6,100,000 in accrued purchase price adjustments, an increase in accounts payable due to the timing of payments and higher incentive compensation accruals due to the increased profitability of the Company. As of January 31, 2006, the Company had no material commitments outstanding for capital assets.

     The Company believes it will have sufficient cash from operations and access to credit facilities to meet the Company’s operating cash requirements and to fund its budgeted capital expenditures for fiscal 2007.

Operating Activities

Cash from operating activities were $40,869,000, $16,954,000 and $4,770,000 for fiscal 2006, 2005 and 2004, respectively. The growth was primarily due to increased earnings and improved management of working capital levels.

Investing Activities

The Company’s capital expenditures of $49,066,000 for fiscal 2006 were directed primarily toward the Company’s expansion into unconventional gas exploration and production. Expenditures related to the Company’s unconventional gas efforts totaled $24,639,000 during fiscal 2006 including the construction of gas pipeline infrastructure near the Company’s development projects. As a part of these expenditures, the Company acquired two unconventional gas projects totaling $4,704,000 and acquired the remaining 25% interest in a gas transportation facility for $1,445,000. The Company’s remaining capital expenditures were directed towards expansion and upgrading of equipment and facilities primarily in the water resources and mineral exploration divisions.

     In September 2005, the Company acquired all of the outstanding stock of Reynolds for total consideration of $60,000,000 in cash and approximately 2.2 million shares of common stock of the Company. Reynolds is a major supplier of products and services to the water and wastewater industries including the design/build of water and wastewater treatment plants, water supply wells, Ranney collector wells, water intakes and water and wastewater transmission lines.

     Investing activities for fiscal 2005 include the expansion of the Company’s water resources business through the acquisition of the assets of Beylik for total consideration of $14,743,000 (see Note 2 of the Notes to Consolidated Financial Statements for a discussion of these acquisitions). Additionally, expenditures related to the Company’s unconventional gas efforts totaled $12,089,000 during fiscal 2005 including the construction of gas pipeline infrastructure near the Company’s development projects.

Financing Activities

For the year ended January 31, 2006, the Company borrowed $75,500,000 under its credit facilities primarily for the Reynolds’ acquisition, working capital requirements and to fund capital expenditures. Additionally, proceeds were received from issuance of common stock related to the exercise of stock options. The increase in the exercise of stock options was due to increases in the Company’s stock price and a number of options with impending expiration dates. Financing activities also include payments of $1,080,000 related to the DrillCorp promissory note, which was paid in full in fiscal 2006.

     In fiscal 2005, the Company’s financing activities primarily related to the issuance of $20,000,000 in notes under the Master Shelf Agreement to fund the acquisitions of Beylik and unconventional gas related assets totaling $18,125,000. In addition, the borrowings were used for working capital requirements, capital expenditures and the payment of $1,740,000 for the DrillCorp promissory note.

     In fiscal 2004, proceeds from option exercises were unusually high due to increases in the Company’s stock price and a large number of options with impending expiration dates. The proceeds from issuance of the notes under the Master Shelf Agreement in 2004 were used to pay the outstanding borrowings under the Company’s previous credit facilities, a prepayment penalty related to the previous loan facilities and issuance costs related to the Master Shelf Agreement and the Company’s new revolving credit facility. Financing activities in 2004 also include payments of $680,000 related to the DrillCorp promissory note.

Contractual Obligations and Commercial Commitments

     The Company’s contractual obligations and commercial commitments are as of January 31, 2006, summarized as follows:

(in thousands)						Payments/Expiration by Period
						Less than												More than
		Total				1 year				1-3 years				4-5 years				5 years
Contractual Obligations and Other Commercial Commitments
Credit Agreement		$	68,900			$	—			$	—			$	68,900			$	—
Senior notes			60,000				—				18,833				34,500				6,667
Operating leases			12,360				4,964				6,757				639				—
Mineral interest obligations			504				108				280				93				23
Total cash contractual obligations			141,764				5,072				25,870				104,132				6,690
Standby letters of credit			8,926				8,926				—				—				—
Asset retirement obligations			526				—				—				—				526
Total contractual obligations and commercial commitments		$	151,216			$	13,998			$	25,870			$	104,132			$	7,216

The Company expects to meet its contractual cash obligation in the ordinary course of operations, and that the standby letters of credit will be renewed in connection with its annual insurance renewal process. Payments related to the Credit Agreement and senior notes do not include interest payments. Interest is payable on the Credit Agreement at variable interest rates equal to, at the Company’s option, a LIBOR rate plus 1.00% to 2.00%, or a base rate, as defined in the Credit Agreement plus up to 0.50%, depending on the Company’s leverage ratio. Interest is payable on the senior notes at fixed interest rates of 6.05% and 5.40% (see Note 12 of the Notes to Consolidated Financial Statements).

     The Company incurs additional obligations in the ordinary course of operations. These obligations, including but not limited to, interest payments on debt, income tax payments and pension fundings are expected to be met in the normal course of operations.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, which are based on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

     Our accounting policies are more fully described in Note 1 of the Notes to Consolidated Financial Statements, located in Item 8 of this Form 10-K. We believe that the following represent our more critical estimates and assumptions used in the preparation of our consolidated financial statements, although not all inclusive.

Revenue Recognition – Revenue is recognized on large, long-term contracts using the percentage of completion method based upon the ratio of costs incurred to total estimated costs at completion. Contract price and cost estimates are reviewed periodically as work progresses and adjustments proportionate to the percentage of completion are reflected in contract revenues and gross profit in the reporting period when such estimates are revised. Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions, change orders and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Revenue is recognized on smaller, short-term contracts using the completed contract method. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.

Goodwill and Other Intangibles – The Company accounts for goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Other intangible assets primarily consist of trademarks, customer-related intangible assets and patents obtained through business acquisitions. Amortizable intangible assets are being amortized over their estimated useful lives, which range from two to 40 years.

     The impairment evaluation for goodwill is conducted annually, or more frequently, if events or changes in circumstances indicate that an asset might be impaired. The evaluation is performed by using a two-step process. In the first step, the fair value of each reporting unit is compared with the carrying amount of the reporting unit, including goodwill. The estimated fair value of the reporting unit is generally determined on the basis of discounted future cash flows. If the estimated fair value of the reporting unit is less than the carrying amount of the reporting unit, then a second step must be completed in order to determine the amount of the goodwill impairment that should be recorded. In the second step, the implied fair value of the reporting unit’s goodwill is determined by allocating the reporting unit’s fair value to all of its assets and liabilities other than goodwill (including any unrecognized intangible assets) in a manner similar to a purchase price allocation. The resulting implied fair value of the goodwill that results from the application of this second step is then compared to the carrying amount

of the goodwill and an impairment charge is recorded for the difference.

     The impairment evaluation of the carrying amount of intangible assets with indefinite lives is conducted annually or more frequently if events or changes in circumstances indicate that an asset might be impaired. The evaluation is performed by comparing the carrying amount of these assets to their estimated fair value. If the estimated fair value is less than the carrying amount of the intangible assets with indefinite lives, then an impairment charge is recorded to reduce the asset to its estimated fair value. The estimated fair value is generally determined on the basis of discounted future cash flows.

     The assumptions used in the estimate of fair value are generally consistent with the past performance of each reporting unit and are also consistent with the projections and assumptions that are used in current operating plans. Such assumptions are subject to change as a result of changing economic and competitive conditions.

Other Long-lived Assets – In evaluating the fair value and future benefits of long-lived assets, including the Company’s gas transportation facilities and equipment, the Company performs an analysis of the anticipated future net cash flows of the related long-lived assets and reduces their carrying value by the excess, if any, of the result of such calculation. The Company believes at this time that the carrying values and useful lives of its long-lived assets continues to be appropriate.

Accrued Insurance Expense – The Company maintains insurance programs where it is responsible for a certain amount of each claim up to a self-insured limit. Estimates are recorded for health and welfare, property and casualty insurance costs that are associated with these programs. These costs are estimated based on actuarially determined projections of future payments under these programs. Should a greater amount of claims occur compared to what was estimated or medical costs increase beyond what was anticipated, reserves recorded may not be sufficient and additional costs to the consolidated financial statements could be required.

     Costs estimated to be incurred in the future for employee medical benefits, property, workers’ compensation and casualty insurance programs resulting from claims which have occurred are accrued currently. Under the terms of the Company’s agreement with the various insurance carriers administering these claims, the Company is not required to remit the total premium until the claims are actually paid by the insurance companies. These costs are not expected to significantly impact liquidity in future periods.

Income Taxes – Income taxes are provided using the asset/liability method, in which deferred taxes are recognized for the tax consequences of temporary differences between the financial statement carrying amounts and tax bases of existing assets and liabilities. Deferred tax assets are reviewed for recoverability and valuation allowances are provided as necessary. Provision for U.S. income taxes on undistributed earnings of foreign subsidiaries and affiliates is made only on those amounts in excess of funds considered to be invested indefinitely.

Oil and gas properties and mineral interests – The Company follows the full-cost method of accounting for oil and gas properties. Under this method, all productive and nonproductive costs incurred in connection with the exploration for and development of oil and gas reserves are capitalized. Such capitalized costs include lease acquisition, geological and geophysical work, delay rentals, drilling, completing and equipping oil and gas wells, and salaries, benefits and other internal salary-related costs directly attributable to these activities. Costs associated with production and general corporate activities are expensed in the period incurred. Normal dispositions of oil and gas properties are accounted for as adjustments of capitalized costs, with no gain or loss recognized.

     The Company is required to review the carrying value of its oil and gas properties each quarter under the full cost accounting rules of the SEC. Under these rules, capitalized costs of proved oil and gas properties, as adjusted for asset retirement obligations, may not exceed the present value of estimated future net revenues from proved reserves, discounted at 10%. Application of the ceiling test generally requires pricing future revenues at the unescalated prices in effect as of the last day of the period, with effect given to the Company’s fixed-price physical delivery contracts, and requires a write-down for accounting purposes if the ceiling is exceeded. Unproved oil and gas properties are not amortized, but are assessed for impairment either individually or on an aggregated basis using a comparison of the carrying values of the unproved properties to net future cash flows.

Reserve Estimates – The Company’s estimates of natural gas reserves, by necessity, are projections based on geologic and engineering data, and there are uncertainties inherent in the interpretation of such data as well as the projection of future rates of production and the timing of development expenditures. Reserve engineering is a subjective process of estimating underground accumulations of gas that are difficult to measure. The accuracy of any reserve estimate is a function of the quality of available data, engineering and geological interpretation and judgment. Estimates of economically recoverable gas reserves and future net cash flows necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, the assumed effects of regulations by governmental agencies and assumptions governing natural gas prices, future operating costs, severance, ad valorem and excise taxes, development costs and workover and remedial costs, all of which may in fact vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities of gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery, and estimates of the future net cash flows expected there from may vary substantially. Any significant variance in the assumptions could materially affect the estimated quantity and value of the reserves, which could affect the carrying value of the Company’s oil and gas properties and the rate of depletion of the oil and gas properties. Actual production, revenues and expenditures with respect to the Company’s reserves will likely vary from estimates, and such variances may be material.

Litigation and Other Contingencies – The Company is involved in litigation incidental to its business, the disposition of which is not expected to have a material effect on the Company’s financial position or results of operations. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in the Company’s assumptions related to these proceedings. The Company accrues its best estimate of the probable cost for the resolution of legal claims. Such estimates are developed in consultation with outside counsel handling these matters and are based upon a combination of litigation and settlement strategies. To the extent additional information arises or the Company’s strategies change, it is possible that the Company’s estimate of its probable liability in these matters may change.

     See Note 17 of the Notes to Consolidated Financial Statements for a discussion of new accounting pronouncements and their impact on the Company.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The principal market risks to which the Company is exposed are interest rate risk on variable rate debt, foreign exchange rate risk that could give rise to translation and transaction gains and losses and fluctuations in the price of natural gas.

     The Company centrally manages its debt portfolio considering overall financing strategies and tax consequences. A description of the Company’s debt is included in Note 12 of the Notes to Consolidated Financial Statements of this Form 10-K. As of January 31, 2006, an instantaneous change in interest rates of one percentage point would change the Company’s annual interest expense by $689,000.

     Operating in international markets involves exposure to possible volatile movements in currency exchange rates. Currently, the Company’s primary international operations are in Australia, Africa, Mexico and Italy. The operations are described in Notes 1 and 16 to the Consolidated Financial Statements. The Company’s affiliates also operate in South America and Mexico (see Note 3 of the Notes to Consolidated Financial Statements). The majority of the Company’s contracts in Africa and Mexico are U.S. dollar-based, providing a natural reduction in exposure to currency fluctuations. The Company also may utilize various hedge instruments, primarily foreign currency option contracts, to manage the exposures associated with fluctuating currency exchange rates (see Note 13 of the Notes to Consolidated Financial Statements). As of January 31, 2006, the Company held no hedge instruments.

As currency exchange rates change, translation of the income statements of the Company’s international operations into U.S. dollars may affect year-to-year comparability of operating results. We estimate that a 10% change in foreign exchange rates would impact income from continuing operations before income taxes by approximately $270,000, $59,000 and $240,000 for the years ended January 31, 2006, 2005 and 2004, respectively. This represents approximately ten percent of the income from continuing operations of international businesses after adjusting for primarily U.S. dollar-based operations. This quantitative measure has inherent limitations, as it does not take into account any governmental actions, changes in customer purchasing patterns or changes in the Company’s financing and operating strategies.

     Foreign exchange gains and losses in the Company’s Consolidated Statements of Income reflect transaction gains and losses and translation gains and losses from the Company’s Mexican and African operations which use the U.S. dollar as their functional currency. Net foreign exchange losses for the years ended January 31, 2006, 2005 and 2004, were $290,000, $342,000 and $232,000, respectively.

     The Company is also exposed to fluctuations in the price of natural gas, which affect the sale of the energy division’s unconventional gas production. The price of natural gas is volatile and the Company has entered into fixed-price physical delivery contracts covering a portion of its production to manage price fluctuations and to achieve a more predictable cash flow. As of January 31, 2006, the Company held contracts for physical delivery of 1,836,000 million British Thermal Units (“MMBtu”) of natural gas at prices ranging from $7.72 to $9.65 per MMBtu through March 2007. The estimated fair value of such contracts at January 31, 2006 was $2,337,000. The Company generally targets having contracts in place to cover up to 50% of its production.

     We estimate that a 10% change in the price of natural gas would have impacted income from continuing operations before taxes by approximately $336,000 for the year ended January 31, 2006.

Item 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements and Financial Statement Schedules

		Page
Layne Christensen Company and Subsidiaries
Statement of Management Responsibility			33
Report of Independent Registered Public Accounting Firm			34
Financial Statements:
Consolidated Balance Sheets as of January 31, 2006 and 2005			35
Consolidated Statements of Income for the Years Ended January 31, 2006, 2005 and 2004			36
Consolidated Statements of Stockholders’ Equity for the Years Ended January 31, 2006, 2005 and 2004			37
Consolidated Statements of Cash Flows for the Years Ended January 31, 2006, 2005 and 2004			38
Notes to Consolidated Financial Statements			39
Financial Statement Schedule II			59

All other schedules have been omitted because they are not applicable or not required as the required information is included in the Consolidated Financial Statements of the Company or the Notes thereto.

Statement of Management Responsibility

The Consolidated Financial Statements of Layne Christensen Company and subsidiaries (the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States. The integrity and objectivity of the data in these financial statements are the responsibility of management, as is all other information included in the Annual Report on Form 10-K. Management believes the information presented in the Annual Report is consistent with the financial statements, and the financial statements do not contain material misstatements due to fraud or error. Where appropriate, the financial statements reflect management’s best estimates and judgments.

     Management is also responsible for maintaining a system of internal accounting controls with the objectives of providing reasonable assurance that the Company’s assets are safeguarded against material loss from unauthorized use or disposition, and that authorized transactions are properly recorded to permit the preparation of accurate financial data. However, limitations exist in any system of internal controls based on a recognition that the cost of the system should not exceed its benefits. The Company believes its system of accounting controls, of which its internal auditing function is an integral part, accomplishes the stated objectives.

     The Audit Committee of the Board of Directors, composed of outside directors, meets periodically with management, the Company’s independent accountants and internal auditors to review matters related to the Company’s financial statements, internal audit activities, internal accounting controls and nonaudit services provided by the independent accountants. The independent accountants and internal auditors have full access to the Audit Committee and meet with it, both with and without management present, to discuss the scope and results of their audits, including internal controls, audit and financial matters.

/s/Andrew B. Schmitt				/s/Jerry W. Fanska
Andrew B. Schmitt				Jerry W. Fanska
President and Chief				Senior Vice President and Chief
Executive Officer				Financial Officer

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Layne Christensen Company
Mission Woods, Kansas

We have audited the accompanying consolidated balance sheets of Layne Christensen Company and subsidiaries (the “Company”) as of January 31, 2006 and 2005, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended January 31, 2006. Our audits also included the financial statement schedule listed in the Index at Item 8. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Layne Christensen Company and subsidiaries at January 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of January 31, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 14, 2006, expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/Deloitte & Touche LLP

Deloitte & Touche LLP

Kansas City, Missouri
April 14, 2006

Layne Christensen Company and Subsidiaries

Consolidated Balance Sheets

(in thousands)
ASSETS
January 31,		2006				2005
Current assets:
Cash and cash equivalents		$	17,983			$	14,408
Customer receivables, less allowance of $5,573 and $4,106, respectively			91,159				54,280
Costs and estimated earnings in excess of billings on uncompleted contracts			36,538				17,143
Inventories			16,663				18,098
Deferred income taxes			11,976				11,664
Income taxes receivable			1,284				1,186
Other			5,975				4,704
Total current assets			181,578				121,483
Property and equipment:
Land			9,486				6,842
Buildings			19,595				14,342
Machinery and equipment			222,531				176,141
Gas transportation facilities and equipment			12,526				6,413
Oil and gas properties			34,308				20,573
Mineral interests in oil and gas properties			8,430				3,671
			306,876				227,982
Less — accumulated depreciation and depletion			(148,751	)			(138,526	)
Net property and equipment			158,125				89,456
Other assets:
Investment in affiliates			21,741				20,558
Goodwill			57,857				8,025
Other intangible assets			16,948				256
Restricted cash			9,143				—
Deferred income taxes			—				2,931
Other			3,943				2,671
Total other assets			109,632				34,441
		$	449,335			$	245,380
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	43,695			$	25,758
Accrued compensation			20,025				14,397
Cash purchase price adjustments			6,120				—
Accrued insurance expense			5,562				5,781
Other accrued expenses			12,212				9,930
Income taxes payable			2,606				3,476
Billings in excess of costs and estimated earnings on uncompleted contracts			21,362				7,686
Total current liabilities			111,582				67,028
Noncurrent and deferred liabilities:
Long-term debt			128,900				60,000
Acquisition escrow obligation			9,143				—
Accrued insurance expense			6,228				8,247
Deferred income taxes			19,555				—
Other			2,301				4,945
Total noncurrent and deferred liabilities			166,127				73,192
Minority interest			—				463
Contingencies
Common stock, par value $.01 per share, 30,000,000 shares authorized, 15,233,472 and 12,618,641 shares issued and outstanding, respectively			152				126
Capital in excess of par value			141,067				90,707
Retained earnings			37,893				23,212
Accumulated other comprehensive loss			(7,442	)			(9,067	)
Unearned compensation			(44	)			(281	)
Total stockholders’ equity			171,626				104,697
		$	449,335			$	245,380

See Notes to Consolidated Financial Statements.

Layne Christensen Company and Subsidiaries

Consolidated Statements of Income

(in thousands, except per share data)
Years Ended January 31,		2006				2005				2004
Revenues		$	463,015			$	343,462			$	272,053
Cost of revenues (exclusive of depreciation shown below)			344,628				250,244				196,462
Gross profit			118,387				93,218				75,591
Selling, general and administrative expense			69,979				60,214				53,920
Depreciation, depletion and amortization			20,024				14,441				11,877
Other income (expense):
Equity in earnings of affiliates			4,345				2,637				1,398
Interest			(5,773	)			(3,221	)			(2,604	)
Debt extinguishment costs			—				—				(2,320	)
Other, net			900				1,220				358
Income from continuing operations before income taxes and minority interest			27,856				19,199				6,626
Income tax expense			13,121				9,215				4,265
Minority interest			(50	)			(17	)			—
Net income from continuing operations before discontinued operations			14,685				9,967				2,361
Loss from discontinued operations, net of income tax benefit (expense) of $(2), $127, and $215			(4	)			(213	)			(1,456	)
Gain on sale of discontinued operations, net of income taxes of $1,034			—				—				1,746
Net income		$	14,681			$	9,754			$	2,651
Basic income (loss) per share:
Net income from continuing operations		$	1.08			$	0.79			$	0.20
Gain (loss) from discontinued operations, net of income taxes			—				(0.01	)			0.02
Net income per share		$	1.08			$	0.78			$	0.22
Diluted income (loss) per share:
Net income from continuing operations		$	1.05			$	0.77			$	0.19
Gain (loss) from discontinued operations, net of income taxes			—				(0.02	)			0.02
Net income per share		$	1.05			$	0.75			$	0.21
Weighted average shares outstanding — basic			13,550				12,563				12,202
Dilutive stock options			477				368				211
Weighted average shares outstanding — diluted			14,027				12,931				12,413

See Notes to Consolidated Financial Statements.

Layne Christensen Company and Subsidiaries

Consolidated Statements of Stockholders’ Equity

																										Notes
																		Accumulated								Receivable
										Capital In								Other								From
		Common Stock								Excess of				Retained				Comprehensive				Unearned				Management
(in thousands, except share data)		Shares				Amount				Par Value				Earnings				Income (Loss)				Compensation				Stockholders				Total
Balance, February 1, 2003			11,852,650			$	119			$	84,414			$	10,807			$	(11,922	)		$	—			$	(45	)		$	83,373
Comprehensive income:
Net income			—				—				—				2,651				—				—				—				2,651
Other comprehensive income:
Change in unrecognized pension liability, net of income taxes of $71			—				—				—				—				112				—				—				112
Foreign currency translation adjustments, net of income taxes of $1,330			—				—				—				—				1,093				—				—				1,093
Change in unrealized loss on available-for- sale investments, net of income taxes of $62			—				—				—				—				98				—				—				98
Change in unrealized loss on swap, net of income taxes of $84			—				—				—				—				134				—				—				134
Change in unrealized gain on exchange contracts, net of income taxes of $539			—				—				—				—				856				—				—				856
Comprehensive income																															4,944
Issuance of stock for incentive compensation program			217,504				2				1,701				—				—				—				—				1,703
Issuance of acquisition escrow shares			50,761				—				500				—				—				—				—				500
Issuance of stock upon exercise of options			412,903				4				2,742				—				—				—				—				2,746
Income tax benefit on exercise of options			—				—				402				—				—				—				—				402
Payment of notes receivable			—				—				—				—				—				—				17				17
Balance, January 31, 2004			12,533,818				125				89,759				13,458				(9,629	)			—				(28	)			93,685
Comprehensive income:
Net income			—				—				—				9,754				—				—				—				9,754
Other comprehensive income:
Change in unrecognized pension liability, net of income tax benefit of $75			—				—				—				—				(118	)			—				—				(118	)
Foreign currency translation adjustments, net of income tax benefit of $328			—				—				—				—				1,536				—				—				1,536
Change in unrealized gain on exchange contracts, net of income tax benefit of $539			—				—				—				—				(856	)			—				—				(856	)
Comprehensive income																															10,316
Issuance of restricted stock			24,576				—				375				—				—				(375	)			—				—
Amortization of unearned compensation			—				—				—				—				—				94				—				94
Issuance of stock upon exercise of options			60,247				1				346				—				—				—				—				347
Income tax benefit on exercise of options			—				—				227				—				—				—				—				227
Payment of notes receivable			—				—				—				—				—				—				28				28
Balance, January 31, 2005			12,618,641				126				90,707				23,212				(9,067	)			(281	)			—				104,697
Comprehensive income:
Net income			—				—				—				14,681				—				—				—				14,681
Other comprehensive income:
Change in unrecognized pension liability, net of income tax benefit of $1,198			—				—				—				—				1,902				—				—				1,902
Foreign currency translation adjustments, net of income tax expense of $155			—				—				—				—				(277	)			—				—				(277	)
Comprehensive income																															16,306
Cancellation of restricted stock			(5,734	)			—				(87	)			—				—				67				—				(20	)
Amortization of unearned compensation			—				—				—				—				—				170				—				170
Issuance of stock upon acquisition of business			2,222,216				22				45,031				—				—				—				—				45,053
Issuance of stock upon exercise of options			398,349				4				3,320				—				—				—				—				3,324
Income tax benefit on exercise of options			—				—				2,096				—				—				—				—				2,096
Balance, January 31, 2006			15,233,472			$	152			$	141,067			$	37,893			$	(7,442	)		$	(44	)		$	—			$	171,626

See Notes to Consolidated Financial Statements.

Layne Christensen Company and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)
Years Ended January 31,		2006				2005				2004
Cash flow from operating activities:
Net income		$	14,681			$	9,754			$	2,651
Adjustments to reconcile net income to cash from operations:
Gain on sale of discontinued operations, net of income taxes			—				—				(1,746	)
Loss from discontinued operations, net of income taxes			4				213				1,456
Loss on extinguishment of debt			—				—				2,320
Depreciation, depletion and amortization			20,024				14,441				11,877
Deferred income taxes			6,540				2,806				2,431
Equity in earnings of affiliates			(4,345	)			(2,637	)			(1,398	)
Dividends received from affiliates			1,693				1,386				843
Minority interest			50				17				—
(Gain) loss on disposal of property and equipment			295				(1,744	)			(146	)
Gain on sale of domestic affiliate			(1,289	)			—				—
Gain on sale of investments			—				—				(8	)
Changes in current assets and liabilities, (exclusive of effects of acquisitions and disposals):
Increase in customer receivables			(3,139	)			(7,983	)			(11,352	)
Increase in costs and estimated earnings in excess of billings on uncompleted contracts			(432	)			(3,240	)			(6,654	)
(Increase) decrease in inventories			3,682				(3,428	)			(1,909	)
(Increase) decrease in other current assets			(866	)			939				(377	)
Increase in accounts payable and accrued expenses			1,594				11,336				3,481
Increase (decrease) in billings in excess of costs and estimated earnings on uncompleted contracts			3,534				(1,215	)			1,109
Other, net			(1,185	)			(722	)			1,896
Cash from continuing operations			40,841				19,923				4,474
Cash from (used in) discontinued operations			28				(2,969	)			296
Cash from operating activities			40,869				16,954				4,770
Cash flow used in investing activities:
Additions to property and equipment			(24,427	)			(15,603	)			(10,089	)
Additions to gas transportation facilities and equipment			(5,125	)			(2,360	)			(2,259	)
Additions to oil and gas properties			(11,084	)			(8,608	)			(7,208	)
Additions to mineral interests in oil and gas properties			(2,281	)			(1,121	)			(1,072	)
Proceeds from disposal of property and equipment			892				3,214				349
Proceeds from sale of businesses			—				300				18,114
Proceeds from sale of domestic affiliate			2,355				—				—
Acquisition of businesses			(61,542	)			(14,743	)			(1,150	)
Acquisition of gas transportation facilities and equipment			(1,445	)			(654	)			—
Acquisition of oil and gas properties and mineral interests			(4,704	)			(2,728	)			—
Proceeds from sale of investment			—				—				167
Investment in joint venture			(69	)			(98	)			(111	)
Cash used in continuing operations			(107,430	)			(42,401	)			(3,259	)
Cash used in discontinued operations			—				—				(2,976	)
Cash used in investing activities			(107,430	)			(42,401	)			(6,235	)
Cash flow from financing activities:
Borrowings under revolving credit facilities			335,155				46,900				41,100
Repayments under revolving credit facilities			(266,255	)			(48,900	)			(39,100	)
Issuance of long-term debt			—				20,000				40,000
Repayments of long-term debt			—				—				(32,370	)
Prepayment penalty on early extinguishment of debt			—				—				(671	)
Debt issuance costs			(605	)			—				(160	)
Payments on promissory note			(1,080	)			(1,740	)			(680	)
Issuance of common stock			3,324				347				2,746
Payments on notes receivable from management stockholders			—				28				17
Cash from financing activities			70,539				16,635				10,882
Effects of exchange rate changes on cash			(403	)			1,618				1,415
Net increase (decrease) in cash and cash equivalents			3,575				(7,194	)			10,832
Cash and cash equivalents at beginning of year			14,408				21,602				10,770
Cash and cash equivalents at end of year		$	17,983			$	14,408			$	21,602