United States
Securities and Exchange Commission

Form 10-K

(Mark One)

Commission file number: 0-20578

Layne Christensen Company

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 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 an accelerated filer (as defined in Rule 12b-2 of the Act. Yes þ No o

     The aggregate market value of the 9,825,697 shares of Common Stock of the registrant held by non-affiliates of the registrant on July 30, 2004, 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 $137,559,758.

     At March 31, 2005, there were 12,619,678 shares of the Registrant’s Common Stock outstanding.

Documents Incorporated by Reference

1.	Portions of the following document are incorporated by reference into the indicated parts of this report: Definitive Proxy Statement for the 2005 Annual Meeting of Stockholders to be filed with the Commission pursuant to Regulation 14A Part III.

Table of Contents

PART I

Item 1. Business

General

     Layne Christensen Company (the “Company”) provides drilling services and related products and services in four principal markets: water resources, mineral exploration, geoconstruction and energy. Layne Christensen’s customers include municipalities, investor-owned water utilities, industrial companies, global mining companies, consulting and engineering firms 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 population movements and expansions, new housing developments, deteriorating water quality and limited availability of surface water. Groundwater is a vital natural resource that is pumped from the earth for drinking water, irrigation and industrial use. In many parts of the United States and other parts of the world, groundwater is the only reliable source of water. Groundwater is located in saturated geological zones at varying depths beneath the surface and accumulates 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 substantial 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 use of the well and pump, the quality of material and workmanship applied in the original well installation and changes in depth and quality of the aquifer. Repair and rehabilitation work is often required on an emergency basis or within a relatively short period of time after a performance decline is recognized and is often awarded to the firm that initially drilled the well. Scheduling flexibility, together with appropriate expertise and equipment, are critical for a repair and maintenance service provider. Like the water well drilling market,

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the market for repair and maintenance is highly fragmented. It consists of most well drilling companies, as well as firms that provide solely repair and maintenance services.

     Demand for water 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 levels of arsenic, radionuclides, percholate, total dissolved solids and radon in groundwater. New categories of contaminants and impurities continue to emerge in the water treatment industry. Water treatment technologies include air stripping towers, aerators, vertical and horizontal filters, arsenic adsorption systems (adsorbents are special solids used to remove substances from liquids such as water), radium adsorption systems, ion exchange systems for nitrates, radium, arsenic and hardness, gravity filters and adsorptive resins. As population demographics change and more people move to areas with water shortages, 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.

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, the continued weakness in the U.S. dollar and, in the case of gold, uncertain economic conditions.

Energy

     The coalbed methane business is generally categorized as the “unconventional natural gas” subset of the natural gas market. Large amounts of methane-rich gas are generated and stored in coalbeds during the coalification process, when plant material is progressively converted to coal. Production of coalbed methane is accompanied by significant environmental challenges,

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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 coalbed methane has become increasingly important to augment the domestic sources of natural gas. Factors influencing the demand for coalbed methane 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. Demand for oil and gas services is driven by the demand for identifying, defining and developing underground oil and 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 design and build services for water treatment facilities as well as provide ancillary water treatment products and services.

     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 areas and in water treatment will be generated from bundling its traditional products and service offerings and marketing the combination to users of water 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 an important provider of water treatment services, as continued population growth in water-challenged regions leads to increasing needs to conserve water resources and control contaminants and impurities in states 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 works to enhance its reputation as water treatment experts, evaluating existing technologies on an ongoing basis and participating in new technologies. The Company also actively seeks additional water treatment technologies through acquisitions, partnerships and strategic alliances. The Company closely tracks

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proposed and pending regulations and legislation that could impact discharge parameters, constrain water source availability and set quality and treatment standards, among other things.

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 coalbed methane opportunities and expand presence in coalbed methane markets.

     The Company intends to aggressively develop and expand its existing properties in the Cherokee basin of Oklahoma and Kansas as well as to seek opportunities in other areas. In addition to developing its coalbed methane properties, the Company is also building pipeline and gas gathering system infrastructure to enhance its ability to get gas to market. The Company believes that it has the ability to advance major coalbed methane development projects by leveraging internal resources, technical expertise and experience in water well drilling, exploratory drilling and recent coalbed methane projects. The Company anticipates significant growth in coalbed methane consumption during the next five years because the average life span of conventional natural gas wells is declining, while consumption of natural gas and other clean-burning fuels 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, project management skills and growing geographic presence 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:

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	•	Conventional and reverse circulation rotary rigs are used in water well and mineral exploration drilling primarily 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 water well and environmental drilling for efficient completion of relatively small diameter, shallow wells. Auger rigs are equipped with a variety of auger sizes and soil sampling equipment.

Water Resources

     The Company is a leading provider of water well systems and treatment facilities. It offers, on a turnkey basis, a comprehensive range of services required to provide professionally designed, constructed and maintained municipal, industrial and, to a lesser extent, agricultural water wells. The Company believes its water resources division is the market leader in the water well drilling industry and it provides a full line of water-related services and products. In addition, it offers environmental services to assess and monitor groundwater contaminants, as well as artificial ground freezing. Water resources is the Company’s largest business segment.

     Water Well Systems. The Company offers its customers every feature of a water well system, including test hole drilling, well construction, well development and testing, pump selection, and equipment sales and installation. These services and products generate approximately 60% of the revenues in the water resources division. 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 deeper and larger in diameter than low-volume residential and agricultural

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wells. The Company has strong technical expertise, in-depth knowledge of local geology, large drilling equipment and demonstrated ability to procure sizable performance bonds often required for high-volume well drilling.

     Water well drilling 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 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 diagnose effectively and respond quickly to well and maintenance problems. The Company’s trained and experienced personnel can perform a variety of well rehabilitation techniques, including 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.

     Groundwater Treatment Products and Groundwater 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 targets the same customer base served in its traditional water 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

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wellhead, including chlorinators, aerators, filters and controls. These services are provided in connection with surface water intakes, pumping stations and well houses. The Company believes its proprietary technology, expertise and reputation in the industry will set it apart from competitors in this market.

     Environmental Assessment Drilling. Customers use the Company’s environmental drilling services to assess, investigate, monitor and improve water quality and pumping capacity. The customers are typically national and regional consulting firms engaged by federal and state agencies, as well as industrial companies that need to assess or clean up groundwater contamination sources. The Company offers a wide range of environmental drilling services including: investigative drilling, installation and testing of wells that monitor 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 the second largest provider 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. Historically, the Company has conducted most of its operations in North America. However, in response to a shift by many of its mining customers to foreign markets in search of economically minable orebodies, the Company has established mineral

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exploration drilling operations in 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 coalbed methane business in the Midwestern United States. The Company expects to substantially grow this business. Its main energy operations include the acquisition, development, and production of coalbed methane. The energy division also includes an oil and gas services sector primarily focusing on resonance technology solutions for stuck casing and drill pipe. Energy is currently the Company’s smallest segment, but it expects this to be its fastest growing business.

     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, such as coalbed methane, to be positive over the coming years. Coalbed methane burns with essentially the same efficiency as natural gas, and the Company believes it is an attractive substitute fuel source in the marketplace for coal, oil and conventional natural gas. Because coalbed methane wells take 18-24 months to produce at full capacity, the Company anticipates significant growth, for at least the next five years, in revenues and operating income from its coalbed methane activities as previously drilled wells achieve maximum production and new wells are brought online.

     The Company has developed expertise in the complex geology and drilling techniques needed to effectively develop wells in the Cherokee Basin in Kansas and Oklahoma, where it has 105,000 gross acres under lease and currently has 106 net producing wells. The Company generally spaces its wells approximately every 160 acres and 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 our current wells is approximately 15-20 years. Additionally, it continues to lease acreage for purposes of expanding our coalbed methane activities. 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. Assuming prices for gas remain at least at current levels, the Company expects its coalbed methane business to become profitable in fiscal 2006 as production in its wells continues to increase.

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

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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 80 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 drilling projects in the region.

     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’s interests in its foreign affiliates are overseen by the mineral division president. 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 2005, approximately 66% were derived from municipalities and approximately 11% were derived from industrial customers

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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 coalbed methane production to large energy pipeline companies and local industrial customers. In its oil and gas services sector, the Company’s customers are primarily oil and gas companies that conduct exploration and production activities in the Gulf of Mexico region.

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 $60,559,000 at January 31, 2005, compared to approximately $51,143,000 at January 31, 2004. The Company’s backlog as of year-end is generally completed within the following fiscal year.

Competition

     The Company’s competition for its water resource division’s design and build services are primarily local and national engineering and consulting firms which have traditionally performed engineering services and, in some cases, construction oversight for these activities.

     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

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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 coalbed methane gas, the Company competes with many 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. In the oil and gas services market, the Company believes it has proprietary resonance technology for removing stuck tubulars for oil and gas customers. The Company also believes that it is the only company pursuing this type of technology.

Employees and Training

     At January 31, 2005, the Company had 2,577 employees, 212 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.

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     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 21 and 14 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 drilling activities involve certain operating hazards that can result in personal injury or loss of life, damage and destruction of

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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 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 mining and 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 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, 2005, the Company (excluding foreign affiliates) owned or leased approximately 560 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, 2005, the Company’s foreign affiliates owned or leased approximately 123 drill rigs.

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     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, 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, 2005, were prepared by the independent petroleum engineers, Cawley, Gillespie & Associates, Inc (in MMcf and thousands of dollars):

     Estimated future net revenue represents estimated future revenue 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 $5.28 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 $29,929,000.

     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 2005, 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, 2005, the Company had 134 gross producing wells and 106 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.

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

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

     Drilling Activity

     In connection with Energy’s efforts to develop its coalbed methane activities, 38 gross (32 net) development wells and no exploratory wells were drilled during 2005. As of January 31, 2005, 21 gross (16 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-physical 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. While the resolution of any of these matters may have an impact on the financial results for the period in which the matter is resolved, the Company believes that the ultimate disposition of these matters will not, in the aggregate, have a material adverse effect on the Company’s business or consolidated financial position, results of operations or cash flows.

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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, 2005.

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.

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

     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.

     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 22 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,

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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.

     Jerry W. Fanska has served as Vice President-Finance and Treasurer since April 1994 and as Controller since December 1993. 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.

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

     There is no arrangement or understanding between any executive officer and any other person pursuant to which such executive officer was selected as an executive officer of the Company.

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 2005. The following table sets forth the range of high and low sales prices of the Company’s stock by quarter for fiscal 2005 and 2004, 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.

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     At March 31, 2005, there were 151 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 agent, 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, 2005, has been derived from the Company’s audited Consolidated Financial Statements. The Company completed various acquisitions in each of the fiscal years, except for 2001, 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 (see Note 5 of the Notes to Consolidated Financial Statements). 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.

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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,” “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 services and related products to a variety of markets. 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

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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. Effective February 1, 2003, the Company’s ground freezing services were included in the division on a prospective basis due to a change in reporting responsibility.

     The division’s operations rely heavily on the municipal sector as approximately 66% of the division’s fiscal 2005 revenues were derived from the municipal market. The municipal sector has been adversely impacted by economic slowdowns in certain region of the country. Reduced tax revenues have limited spending and new development by local municipalities. Generally, spending levels in the municipal sector lag an economic recovery and are expected in certain regions of the country to remain at reduced levels for the first half of next year.

     In addition to the reduced spending levels in the municipal market, the Company has also experienced 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 division’s margins have been adversely affected as the result of efforts to maintain market share in a difficult environment. As the U.S. economy continues to recover, 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 2006.

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

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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 54% of total division revenues were generated for fiscal 2005. 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. Since February 1, 2003, the division no longer includes the Company’s ground freezing services due to a change in reporting responsibility.

     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. The Company expects the volume of large, construction-type projects utilizing the Company’s services to improve next year in conjunction with the U.S. economic recovery.

Energy Division

     This division primarily focuses on exploration and production of coalbed methane (“CBM”) 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 has 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 Company sold its Canadian drilling unit to Ensign Drilling and its oilfield fishing services to Smith International. 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). The division is now composed of the Company’s CBM development activities and two small, specialty energy service companies.

     Following the sale of the two businesses in fiscal 2004, the Company has re-positioned the division to focus mainly on exploration and production activities associated with its CBM properties. The expansion of the Company’s

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energy segment is contingent upon significant cash investments to develop the Company’s unproved acreage. As of January 31, 2005, the Company has invested $30,657,000 in oil and gas related assets and expects to spend approximately $15,000,000 in development activities associated with its CBM efforts in fiscal 2006. The production curve for a typical CBM well 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 134 gross producing wells on-line as of January 31, 2005. The division is expected to be profitable in fiscal 2006 with sufficient production volumes generated to offset the division’s level of fixed costs if the demand for clear burning fuels continues to have a favorable impact on our pricing.

Products and Other

     This grouping has historically included the Company’s supply operation which distributed drilling equipment, parts and supplies; a manufacturing operation producing diamond drilling rigs, diamond bits, core barrels and drill rods (“Christensen Products”) and other miscellaneous operations which do not fall into the above divisions. On January 23, 2003, the Company sold its supply operation to Boart Longyear. Upon the sale, the results of operations were reclassified to discontinued operations for all years presented (see Note 4 of the Notes to Consolidated Financial Statements).

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     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.

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     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. Previously, the unallocated corporate expenses included incentive compensation expenses for division-level personnel; however, beginning in the second quarter of fiscal 2005, the incentive compensation has been allocated to the segments to reflect a change in the evaluation of divisional performance. 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):

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

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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 CBM 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 CBM 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).

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Water Resources Division
(in thousands)

     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 23.2% to $23,311,000 for the year ended January 31, 2005, compared to $18,927,000 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)

     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 $11,741,000 for the year ended January 31, 2005, compared to income from continuing operations of $2,753,000 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)

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     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 11.8% to $2,324,000 in 2005 compared to $2,079,000 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)

     Energy division revenues increased 107.3% to $6,052,000 for the year ended January 31, 2005, compared to revenues of $2,919,000 for the year ended January 31, 2004. The increase in revenue resulted from increased production from the Company’s CBM projects in the mid-continent region of the United States.

     The division had a loss from continuing operations of $2,072,000 for the year ended January 31, 2005, compared to a loss from continuing operations of $1,528,000 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 CBM properties. The loss for the current year was partially offset by a gain on the sale of well fracturing equipment of approximately $906,000.

Unallocated Corporate Expenses

     Corporate expenses not allocated to individual divisions, primarily included in selling, general and administrative expenses, were $12,884,000 and $10,681,000 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.

Comparison of Fiscal 2004 to Fiscal 2003

     Revenues for fiscal 2004 increased $16,530,000, or 6.5%, to $272,053,000 compared to $255,523,000 for fiscal 2003. The increase was primarily the result of increases in the Company’s mineral exploration division. See further discussion of results of operations by division presented below.

     Gross profit as a percentage of revenues was 27.8% for fiscal 2004 compared to 29.4% for fiscal 2003. The decrease in gross profit percentage for the year was primarily related to the negative impact of competitive pricing pressures on the Company’s water resources division. The municipal, industrial, energy and agricultural market segments were weak throughout the year. Decreases in gross profit in the water resources division were partially offset

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by improved margins in the Company’s mineral exploration division due to increased activity levels associated with higher gold and base metal prices.

     Selling, general and administrative expenses increased to $53,920,000 for fiscal 2004 compared to $52,425,000 for fiscal 2003 (19.8% and 20.5% of revenues, respectively). The increase for the year was primarily the result of severance-related benefits of $1,244,000 accrued during the second quarter (see Note 7 of the Notes to Consolidated Financial Statements), start-up expenses related to the Company’s groundwater transfer project in Texas and increased insurance costs. These expenses were partially offset by lower incentive compensation expense and cost savings associated with the workforce reductions completed during the second quarter.

     Depreciation and amortization decreased to $11,877,000 for fiscal 2004 compared to $13,204,000 for fiscal 2003. The decrease in depreciation and amortization was the result of assets becoming fully depreciated in prior periods primarily in the geoconstruction and mineral exploration divisions.

     Interest expense increased to $2,604,000 for fiscal 2004 compared to $2,490,000 for fiscal 2003. The increase was a result of an increase in the Company’s average borrowings during the year.

     The Company recorded debt extinguishment costs of $2,320,000 for fiscal 2004 and $1,135,000 for fiscal 2003. The losses for the periods represent prepayment penalties and the write-off of associated deferred fees in connection with refinancing of the Company’s credit facilities.

     Other, net was income of $358,000 for fiscal 2004 compared to income of $1,694,000 for fiscal 2003. The variance in income from last year was primarily due to gains from insurance proceeds, fixed asset sales, and investment sales that have not recurred at the same levels in the current year.

     Income tax expense related to continuing operations of $4,265,000 was recorded for fiscal 2004 (an effective rate of 64.4%), compared to $5,084,000 for the same period last year (an effective rate of 60.1%). Exclusive of the impact of the debt extinguishment costs, the effective rate would have been 57.7% compared to 57.6% for the twelve months ended January 31, 2004 and 2003, respectively. 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 2004 included income related to discontinued operations of $290,000. During the fourth quarter of fiscal 2004, the Company sold its Layne Christensen Canada and Toledo Oil and Gas subsidiaries. Both entities were historically reported as part of the Company’s energy segment. In connection with the sales, the Company recorded a gain of $1,746,000, net of income taxes of $1,034,000. The gains related to the sale of these operations were 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).

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Water Resources Division
(in thousands)

     Water resources revenues increased 1.5% to $169,631,000 for the year ended January 31, 2004, from $167,080,000 for the year ended January 31, 2003. The increase in revenues was primarily the result of a concerted effort to maintain market share in the division’s markets, especially the soft municipal market where activity has been impacted by competitive pressures and reduced spending. The increase is also attributable to increased infrastructure needs as a result of population expansion in certain areas of the United States, especially metropolitan areas in California and Illinois.

     Income from continuing operations for the water resources division decreased 22.8% to $18,927,000 for the year ended January 31, 2004, compared to $24,524,000 last year. The decrease in income from continuing operations for the twelve months ended January 31, 2004, was primarily attributable to competitive pricing pressures in the municipal, industrial, energy and agricultural market segments, reduced margins due to a difficult winter drilling season and earnings from a large, multi-divisional project in the prior year which was not replaced in fiscal 2004.

Mineral Exploration Division
(in thousands)

     Mineral exploration revenues increased 22.3% to $68,218,000 for the year ended January 31, 2004, compared to revenues of $55,769,000 for the year ended January 31, 2003. The increase in revenues was attributable to increased exploration activity in the Company’s markets as a result of higher gold and base metals prices. The increased activity levels had the greatest impact at the Company’s locations in Africa.

     Income from continuing operations for the mineral exploration division was $2,753,000 for the year ended January 31, 2004, compared to a loss from continuing operations of $1,138,000 for the year ended January 31, 2003. The improved profitability in the division was primarily due to the increased activity levels noted above. The division also benefited from improved earnings by its Latin American affiliates and lower depreciation from assets that were fully depreciated in prior periods. These items were partially offset by increased expenses in Australia to bring equipment into compliance with changes in transportation regulations.

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Geoconstruction Division
(in thousands)

     Geoconstruction revenues increased 5.6% to $31,285,000 for the year ended January 31, 2004, compared to $29,621,000 for the year ended January 31, 2003. The increase in revenues was primarily a result of a large project in the northwest United States for the Department of Energy and increased sales at the Company’s manufacturing unit in Italy. The increased sales in Italy were primarily the result of the weakened value of the U.S. dollar against the euro, the functional currency of the subsidiary. The movement of the euro versus the dollar resulted in an increase of approximately $1,000,000 upon conversion to the Company’s reporting currency.

     The geoconstruction division had income from continuing operations of $2,079,000 for the year ended January 31, 2004, compared to $2,573,000 for the year ended January 31, 2003. The decrease in income from continuing operations was attributable to delays and work suspensions on certain public sector projects partially offset by reduced depreciation expense from assets that were fully depreciated in prior periods.

Energy Division
(in thousands)

     Energy division revenues increased 11.5% to $2,919,000 for the year ended January 31, 2004, compared to revenues of $2,617,000 for the year ended January 31, 2003. The increase in revenues for the division was primarily attributable to increased market penetration of the Company’s resonance technology process. Revenues for the division in fiscal 2004 include approximately $73,000 related to the Company’s coalbed methane projects in the mid-continent region of the United States.

     The division had a loss from continuing operations of $1,528,000 for the year ended January 31, 2004, compared to a loss from continuing operations of $1,340,000 for the year ended January 31, 2003. The increased loss for the division is the result of increased expenses related to the Company’s coalbed methane development activities.

Unallocated Corporate Expenses

     Corporate expenses not allocated to individual divisions, primarily included in selling, general and administrative expenses, were $10,681,000 and $10,398,000 for the years ended January 31, 2004 and 2003, respectively. The increase in unallocated corporate expenses for the year ended January 31, 2004,

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was primarily the result of severance-related costs (see Note 7 of the Notes to Consolidated Financial Statements) of approximately $800,000 incurred during the second quarter offset by cost reduction measures implemented late in fiscal 2003.

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 drilling 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 activities and related revenues and earnings tend to decrease in the winter months when adverse weather conditions interfere with access to drilling sites and the ability to drill; 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.

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     The Company maintains an agreement (the “Master Shelf Agreement”) whereby it can issue up to $60,000,000 in unsecured notes. The Company also holds a revolving credit facility (the “Credit Agreement”) composed of an unsecured $30,000,000 revolving facility. Borrowings under the Master Shelf and Credit Agreements were used to refinance borrowings outstanding under the Company’s previous credit facilities. At January 31, 2005, the Company had outstanding notes of $60,000,000 under the Master Shelf Agreement (see Note 12 of the Notes to Consolidated Financial Statements). The Company was in compliance with its financial covenants at January 31, 2005 and expects to remain in compliance through the foreseeable future.

     The Company’s working capital as of January 31, 2005, 2004 and 2003, was $54,455,000, $52,406,000 and $33,675,000, respectively. The increase in working capital at January 31, 2005 was primarily attributable to the increased investment in inventory necessary to support the Company’s expanded operations, and the payment of certain lease termination costs related to the sale of Layne Christensen Canada. Additionally, working capital at January 31, 2004 and 2003 includes the receipt of proceeds from the sale of businesses near the end of January in each year. Excluding cash and cash equivalents, working capital as of January 31, 2005, 2004 and 2003 would have been $40,047,000, $30,804,000 and $22,905,000, respectively. As of January 31, 2005, 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 2006.

Operating Activities

     Cash from operating activities, including discontinued operations, increased $12,184,000 to $16,954,000 for the year ended January 31, 2005. The cash from operating activities include $2,969,000 used in discontinued operations, which was primarily attributable to the payment of lease termination liabilities and closing costs related to the sale of Layne Canada, partially offset by the collection of receivables also related to Layne Canada. Cash from continuing operations increased to $19,923,000 from $4,474,000 in the prior year primarily due to the increased net income from continuing operations and less significant working capital increases as compared to 2004.

Investing Activities

     The Company’s capital expenditures of $27,692,000 for fiscal 2005 were directed primarily toward the Company’s expansion into coalbed methane (“CBM”) exploration and production. Expenditures related to the Company’s CBM efforts totaled $12,089,000 during fiscal 2005 including the construction of gas pipeline infrastructure near the Company’s development projects. Additionally, the Company acquired two CBM oil and gas projects totaling $2,728,000 and acquired a 75% interest in gas transportation facilities and equipment for $654,000. The Company also expanded its water resources business through the acquisition of the assets of Beylik Drilling and Pump Service, Inc. (“Beylik”) for total proceeds of $14,743,000 (see Note 2 of the Notes to Consolidated Financial Statements for a discussion of these acquisitions). The remaining capital expenditures were directed towards expansion and upgrading of the Company’s equipment and facilities primarily in the water resources and mineral

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exploration divisions.

     Investing activities for fiscal 2004 include the proceeds from the sale of businesses of $18,114,000 and business acquisitions of $1,150,000. The Company sold Layne Canada on January 30, 2004, and received $15,914,000 upon closing. On January 6, 2004, the Company sold Toledo Oil and Gas (“Toledo”) and received $2,200,000 upon closing. An additional payment of $300,000 related to the sale of Toledo was received in February 2004. During fiscal 2004, the Company acquired Mohajir Engineering Group for $1,150,000 (see Note 2 of the Notes to Consolidated Financial Statements). The acquisition positioned the Company to take advantage of growth opportunities in the CBM development market.

Financing Activities

     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 CBM-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 summarized as follows (in thousands):

     The Company expects to meet its contractual cash obligations 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 facilities do not include interest payments. The credit

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facilities bear fixed interest rate 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.

     Accounting policies are more fully described in Note 1 of the Notes to the Consolidated Financial Statements, located elsewhere in this Annual Report on Form 10-K. The Company believes that the following represents the more critical estimates and assumptions used in the preparation of its consolidated financial statements.

     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, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.

     Goodwill and Other Intangibles - In June 2001, the Financial Accounting Standards Board issued SFAS No. 142, which was effective for the Company as of February 1, 2002. SFAS No. 142 substantially changed the accounting for goodwill, requiring that goodwill and other intangible assets with indefinite useful lives cease to be amortized, and instead periodically tested for impairment. The Company performs its annual impairment test as of December 31 each year. The process of evaluating goodwill for impairment involves the determination of the fair value of the Company’s reporting units. Inherent in such fair value determinations are certain judgments and estimates, including the interpretation of current economic indicators and market valuations, and assumptions about the Company’s strategic plans with regard to its operations.

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The Company believes at this time that the carrying value of the remaining goodwill is appropriate, although to the extent additional information arises or the Company’s strategies change, it is possible that the Company’s conclusions regarding impairment of the remaining goodwill could change and result in a material effect on its financial position or results of operations.

     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 long-lived assets’ carrying values and useful lives continue 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 deductible or 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 costs of the medical profession 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 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 (see Note 15 of the Notes to Consolidated Financial Statements).

     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 those funds considered to be invested indefinitely (see Note 9 of the Notes to Consolidated Financial Statements).

     Reserve Estimates - The Company’s estimates of coalbed methane gas reserves, by necessity, are projections base 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

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of regulations by governmental agencies and assumptions governing 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.

     The Company’s estimated proved reserves at January 31, 2005 were prepared by independent petroleum engineering consultants Cawley, Gillespie & Associates, Inc. Due to the early stages of completion of the Company’s projects, the Company did not have sufficient production information with which reserves could be established for earlier periods.

     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 revenue at the unescalated prices in effect as of the last day of the quarter, with effect given to the Company’s cash flow hedge positions, 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.

     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

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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, 2005, the Company’s long-term debt outstanding carries a fixed-rate. Accordingly, an instantaneous change in interest rates of one percentage point would not significantly impact the Company’s annual interest expense.

     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, 2005, the Company held no option contracts.

     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 $59,000, $240,000 and $45,000 for the years ended January 31, 2005, 2004 and 2003, 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, 2005, 2004 and 2003, were $342,000 $232,000 and $52,000, respectively.

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     The Company is also exposed to fluctuations in the price of natural gas, which result from the sale of the energy division’s natural gas production. The price of natural gas is volatile and the Company has entered into fixed-price physical contracts covering a portion of its production to manage price fluctuations and to achieve a more predictable cash flow. As of January 31, 2005, the Company held contracts for physical delivery of 439,000 million British Thermal Units (“MMBtu”) of natural gas at prices ranging from $6.30 to $9.65 per MMBtu. The estimated fair value of such contracts at January 31, 2005 was $213,000.

     We estimate that a 10% change in the price of natural gas would impact income from continuing operations before taxes by approximately $382,000 for the year ended January 31, 2005.

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Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES

     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.

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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 systems 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 audit 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 audit 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.

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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, 2005 and 2004, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended January 31, 2005. Our audits also included the financial statement schedule listed in the Index at Item 8. These financial statements 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 as of January 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2005, 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, present 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, 2005, 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, 2005 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.

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Layne Christensen Company and Subsidiaries
Consolidated Balance Sheets
As of January 31, 2005 and 2004
(in thousands)

See Notes to Consolidated Financial Statements.

- Continued -

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Layne Christensen Company and Subsidiaries
Consolidated Balance Sheets (Continued)
As of January 31, 2005 and 2004
(in thousands, except share data)

See Notes to Consolidated Financial Statements.

- Concluded -

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Layne Christensen Company and Subsidiaries
Consolidated Statements of Income
For the Years Ended January 31, 2005, 2004 and 2003
(in thousands, except per share data)

 -  Continued -

See Notes to Consolidated Financial Statements.

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Layne Christensen Company and Subsidiaries
Consolidated Statements of Income (Continued)
For the Years Ended January 31, 2005, 2004 and 2003
(in thousands, except per share data)

 -  Concluded -

See Notes to Consolidated Financial Statements.

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Layne Christensen Company and Subsidiaries
Consolidated Statements of Stockholders’ Equity
For the Years Ended January 31, 2005, 2004 and 2003
(in thousands, except share data)

 - Continued -

See Notes to Consolidated Financial Statements.

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Layne Christensen Company and Subsidiaries
Consolidated Statements of Stockholders’ Equity
For the Years Ended January 31, 2005, 2004 and 2003
(in thousands, except share data)