The Company has four reportable operating segments, which include the Asphalt Group, the Aggregate and Mining Group, the Mobile Asphalt Paving Group and the Underground Group. The business units in the Asphalt Group design, manufacture and market a complete line of asphalt plants and related components, heating and heat transfer processing equipment and storage tanks for the asphalt paving and other non-related industries. The business units in the Aggregate and Mining Group design, manufacture and market equipment for the aggregate, metallic mining and recycling industries. The business units in the Mobile Asphalt Paving Group design, manufacture and market asphalt pavers, material transfer vehicles, milling machines, and screeds. The business units in the Underground Group design, manufacture and market a complete line of trenching equipment and directional drills for the underground construction market. The Company also has one other category that contains the business units that do not meet the requirements for separate disclosure as an operating segment. The business units in the Other category include Astec Insurance Company and Astec Industries, Inc., the parent company.

These forward-looking statements are based largely on management's expectations which are subject to a number of known and unknown risks, uncertainties and other factors discussed in this Report and in other documents filed by the Company with the Securities and Exchange Commission, which may cause actual results, financial or otherwise, to be materially different from those anticipated, expressed or implied by the forward-looking statements. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements to reflect future events or circumstances.

In addition to the risks and uncertainties identified elsewhere herein and in other documents filed by the Company with the Securities and Exchange Commission, most recently in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2005, the risk factors described in the section under the caption "Risk Factors" should be carefully considered when evaluating the Company's business and future prospects.

The Company is a leading manufacturer and marketer of construction equipment. The Company's businesses:

• design, engineer, manufacture and market equipment that is used in road building, from quarrying and crushing the aggregate, to the road surface;
• manufacture certain equipment and components unrelated to road construction, including trenching, auger boring, directional drilling, industrial heat transfer; and
• manufacture and sell replacement parts for equipment in each of its product lines.

The Company has four reportable operating segments, which include the Asphalt Group, the Aggregate and Mining Group, the Mobile Asphalt Paving Group and the Underground Group. The business units in the Asphalt Group design, manufacture and market a complete line of asphalt plants and related components, heating and heat transfer processing equipment and storage tanks for the asphalt paving and other non-related industries. The business units in the Aggregate and Mining Group design, manufacture and market equipment for the aggregate, metallic mining and recycling industries. The business units in the Mobile Asphalt Paving Group design, manufacture and market asphalt pavers, material transfer vehicles, milling machines, and screeds. The business units in the Underground Group design, manufacture and market a complete line of trenching equipment and directional drills and auger boring machines for the underground construction market. The Company also has one other category that contains the business units that do not meet the requirements for separate disclosure as an operating segment. The business units in the Other category include Astec Insurance Company and Astec Industries, Inc., the parent company.

The Company's financial performance is affected by a number of factors, including the cyclical nature and varying conditions of the markets it serves. Demand in these markets fluctuates in response to overall economic conditions and is particularly sensitive to the amount of public sector spending on infrastructure development, privately funded infrastructure development, changes in the price of crude oil (fuel costs and liquid asphalt) and changes in the price of steel.

Public sector spending at the federal, state and local levels has been driven in large part by federal spending under the six-year federal-aid highway program, the Transportation Equity Act for the 21^st Century ("TEA-21"), enacted in June 1998. TEA-21 authorized the appropriation of $217 billion in federal aid for road, highway and bridge construction, repair and improvement and other federal highway and transit projects for federal fiscal years October 1, 1998 through September 30, 2004. In August 2005, President Bush signed into law the Safe, Accountable, Flexible and Efficient Transportation Equity Act - A Legacy for Users ("SAFETEA-LU"), which authorizes appropriation of $286.5 billion in guaranteed federal funding for road, highway and bridge construction, repair and improvement of the federal highway and transit projects for federal fiscal years October 1, 2004 through September 30, 2009. The Company believes that the federal highway funding significantly influences the purchasing decisions of the Company's customers who are more likely to make purchasing decisions with the six-year legislation in place. The Federal funding provides for approximately 25% of highway, street and roadway construction funding in the United States.

The public sector spending described above is needed to fund road, bridge and mass transit improvements. Unquestionably, the Company believes that increased funding is needed to restore the nation's highways to a quality level required for safety, fuel efficiency and mitigation of congestion. In the Company's opinion, amounts needed are significantly above amounts proposed, and funding mechanisms such as the federal usage fee per gallon, which has not been increased in twelve years, should be increased along with other measures to generate the funds needed.

In addition to public sector funding, the economies in the markets the Company serves, the price of oil and its impact on customers' purchase decisions and the price of steel may each affect the Company's financial performance. Economic downturns, like the one experienced from 2001 through 2003, generally result in decreased purchasing by the Company's customers, which, in turn, causes reductions in sales and increased pricing pressure on the Company's products. Rising interest rates also typically have the effect of negatively impacting customers' attitudes toward purchasing equipment. The Company expects interest rates to rise during the year, but it does not expect such increases to have a material impact on the financial results of the Company. In addition, significant portions of the Company's revenues are related to the sale of equipment that produces asphalt mix. A major component of asphalt is oil. A rise in the price of oil increases the cost of providing asphalt, which could likely decrease demand for asphalt, and therefore decrease demand for certain Company products. Steel is a major component in the Company's equipment. As steel prices increased during 2004, the cost of manufactured parts, as well as the costs of purchased parts and components, also increased. Steel prices abated somewhat during 2005 but remained at historically high levels. The Company has instituted price increases in response to rising steel prices, purchased parts and component prices. If the Company is not able to raise the prices of its products enough to cover the increased costs of goods, the Company's financial results will be negatively affected. The Company believes that steel prices will be relatively flat during the remainder of 2006 and expects oil prices to remain volatile during 2006. The Company's customers appear to be adapting their prices in response to the fluctuating oil prices and the fluctuations do not appear to be significantly impairing the equipment purchases by them at this time. In addition to the factors stated above, many of the Company's markets are highly competitive, and its products compete worldwide with a number of other manufacturers and distributors that produce and sell similar products.

The price of oil could have a significant impact on liquid asphalt prices as well as domestic and foreign economies which could result in increased volatility and a lack of economic visibility. The Company believes that, based on its backlog and customer activity, the economic environment as it impacts the Company will continue to improve. The Company also believes that SAFETEA-LU, will result in sustained or increased federal availability of highway funds and such funding should have a positive impact on customers' attitudes toward purchasing new equipment. The 2007 federal funding proposals recently approved by the Senate Appropriation Committee and the House each provide for the largest funding level in history. In addition, the Company believes that an improving economy should increase state highway funding revenues and private commercial projects.

For the three months ended June 30, 2006, net sales increased $20,448,000, or 12.0%, to $191,262,000 from $170,814,000 for the three months ended June 30, 2005. Sales are generated primarily from new equipment purchases made by customers for use in construction for privately funded infrastructure development and public sector spending on infrastructure development. For the quarter ended June 30, 2006 compared to the quarter ended June 30, 2005, (1) net sales for the Asphalt Group increased approximately $429,000 or 0.9%; (2) net sales for the Aggregate and Mining Group increased approximately $12,428,000 or 19.1%; (3) net sales for the Underground Group increased approximately $4,320,000 or 18.6%; and (4) net sales for the Mobile Asphalt Group increased approximately $3,271,000 or 9.5%. Parts sales for the quarter ended June 30, 2006 were $42,077,000 compared to $35,085,000 for the quarter ended June 30, 2005, for an increase of $6,992,000 or 19.9%. For the quarter ended June 30, 2006 compared to the same period of 2005, the increase in the sales for the Asphalt, Underground and Mobile business segments related to a significant increase in international sales. The increase in the Aggregate Group was due to an increase in international sales as well an increase in domestic sales related to improving domestic economic conditions and increased customer confidence.

For the six months ended June 30, 2006, net sales increased $44,538,000, or 13.4%, to $376,986,000 from $332,448,000 for the six months ended June 30, 2005. For the six months ended June 30, 2006 compared to the six months ended June 30, 2005, (1) net sales for the Asphalt Group increased approximately $2,626,000 or 2.6%; (2) net sales of the Aggregate and Mining Group increased approximately $25,845,000 or 21.0%; (3) net sales for the Underground Group increased approximately $5,250,000 or 11.7%; and (4) net sales for the Mobile Asphalt Group increased approximately $10,817,000 or 17.1%. For the six months ended June 30, 2006 compared to the same period of 2005, the Company believes that the increase in the sales for all business segments related to an increase in international sales as well an increase in domestic sales related to improving domestic economic conditions and increased customer confidence.

International sales for the quarter ended June 30, 2006 compared to the same period of 2005 increased $20,426,000, or 61.7%. International sales were $53,525,000 for the quarter ended June 30, 2006 compared to $33,099,000 for the quarter ended June 30, 2005. For the quarters ended June 30, 2006 and 2005, international sales accounted for approximately 28.0% and 19.4% of net sales, respectively. International sales increased for the second quarter of 2006 compared to the same period in 2005, in the Middle East, Canada, Africa, Europe and South America while for the comparable periods international sales decreased in the West Indies, China, Japan and Korea. The Company believes the overall increased level of international sales relates to improving economic conditions in certain foreign economies and continued weakness of the U.S. dollar compared to certain foreign currencies.

International sales for the six months ended June 30, 2006 compared to the same period of 2005 increased $26,648,000, or 43.3%. International sales were $88,217,000 for the six months ended June 30, 2006 compared to $61,569,000 for the six months ended June 30, 2005. For the six months ended June 30, 2006 and 2005, international sales accounted for approximately 23.4% and 18.5% of net sales, respectively. International sales increased for the six months ended June 30, 2006 compared to the same period in 2005, in Canada, Europe the Middle East, Australia and Africa while for the comparable periods international sales decreased in the West Indies, China, Japan and Korea. The Company believes the overall increased level of international sales relates to improving economic conditions in certain foreign economies and continued weakness of the U.S. dollar compared to certain foreign currencies.

Gross profit for the three months ended June 30, 2006 increased $8,110,000 or 20.6%, to $47,403,000 from $39,293,000 for the three months ended June 30, 2005. Gross profit as a percentage of sales for the three months ended June 30, 2006 and 2005 was 24.8% and 23.0%, respectively. For the quarter ended June 30, 2006 compared to the same period in 2005, gross profit for the Asphalt Group increased from approximately $11,186,000 to approximately $12,259,000 or an increase of approximately $1,073,000 or 9.6%. This resulted in an increase in gross profit as a percentage of sales from 23.4% to 25.4% or 200 basis points for the same periods for the Asphalt Group. For the quarter ended June 30, 2006 compared to the same period in 2005, gross profit for the Aggregate and Mining Group increased from approximately $16,074,000 to approximately $19,394,000 or an increase of approximately $3,320,000 or 20.7%. This resulted in an increase in gross profit as a percentage of sales from 24.7% to 25.0% or 30 basis points for the same periods for the Aggregate and Mining Group. For the quarter ended June 30, 2006 compared to the same period in 2005, gross profit for the Mobile Asphalt Paving Group increased from approximately $7,666,000 to approximately $9,398,000 or an increase of approximately $1,732,000 or 22.6%. This resulted in an increase in gross profit as a percentage of sales from 22.1% to 24.8% or 270 basis points for the same periods for the Mobile Asphalt Paving Group. For the quarter ended June 30, 2006 compared to the same period in 2005, gross profit for the Underground Group increased from approximately $4,391,000 to approximately $6,267,000 or an increase of approximately $1,876,000 or 42.7%. This resulted in an increase in gross profit as a percentage of sales from 18.9% to 22.7% or 380 basis points for the same periods for the Underground Group. The gross profit percentage increase for the quarter ended June 30, 2006 compared to the same period of 2005 was primarily due to a favorable mix of products, including increased parts sales, price increases and the impact of the Company's cost and design initiative program implemented in 2005 that continues in 2006.

Gross profit for the six months ended June 30, 2006 increased $18,218,000 or 24.5%, to $92,543,000 from $74,325,000 for the six months ended June 30, 2005. Gross profit as a percentage of sales for the six months ended June 30, 2006 and 2005 was 24.5% and 22.4%, respectively. For the six months ended June 30, 2006 compared to the same period in 2005, gross profit for the Asphalt Group increased from approximately $21,843,000 to approximately $26,821,000 or an increase of approximately $4,978,000 or 22.8%. This resulted in an increase in gross profit as a percentage of sales from 21.6% to 25.8% or 420 basis points for the same periods for the Asphalt Group. For the six months ended June 30, 2006 compared to the same period in 2005, gross profit for the Aggregate and Mining Group increased from approximately $29,674,000 to approximately $36,604,000 or an increase of approximately $6,930,000 or 23.4%. This resulted in an increase in gross profit as a percentage of sales from 24.1% to 24.6% or 50 basis points for the same periods for the Aggregate and Mining Group. For the six months ended June 30, 2006 compared to the same period in 2005, gross profit for the Mobile Asphalt Paving Group increased from approximately $14,682,000 to approximately $18,651,000 or an increase of approximately $3,969,000 or 27.0%. This resulted in an increase in gross profit as a percentage of sales from 23.2% to 25.1% or 190 basis points for the same periods for the Mobile Asphalt Paving Group. For the six months ended June 30, 2006 compared to the same period in 2005, gross profit for the Underground Group increased from approximately $8,165,000 to approximately $10,487,000 or an increase of approximately $2,322,000 or 28.4%. This resulted in an increase in gross profit as a percentage of sales from 18.3% to 21.0% or 270 basis points for the same periods for the Underground Group. The gross profit percentage increase for the six months ended June 30, 2006 compared to the same period of 2005 was primarily due to a favorable mix of products, including increased parts sales, price increases and the impact of the Company's cost and design initiative program implemented in 2005 that continues in 2006.

Selling, general, administrative and engineering expenses for the quarter ended June 30, 2006 were $27,254,000, or 14.2% of net sales, compared to $22,650,000, or 13.3% of net sales for the quarter ended June 30, 2005, an increase of $4,604,000 or 20.3%. The increase in selling, general, administrative and engineering expenses for the three months ended June 30, 2006 compared to the same period of 2005 related primarily to an increase in personnel expenses of approximately $889,000 due to increased staffing in order to support increased sales volume. Group health insurance expense increased approximately $1,083,000 due to an increase in the utilization rate as compared to the prior year and an increase in staffing. Sales commissions increased approximately $592,000 due to increased sales volumes while travel expense, including airline tickets, rental cars, lodging and meals, increased approximately $557,000 due to increased selling efforts by the Company and cost increases by vendors in these services.

Selling, general, administrative and engineering expenses for the six months ended June 30, 2006 were $55,012,000, or 14.6% of net sales, compared to $45,621,000, or 13.7% of net sales for the six months ended June 30, 2005, an increase of $9,391,000 or 20.6%. The increase in selling, general, administrative and engineering expenses for the six months ended June 30, 2006 compared to the same period of 2005 related primarily to an increase in personnel expenses of approximately $2,567,000 due to increased staffing in order to support increased sales volume. Group health insurance expense increased approximately $1,229,000 due to an increase in the utilization rate as compared to the prior year and an increase in staffing. Profit-sharing expense increased approximately $1,157,000 and is a formula-driven amount based on the performance of the Company's subsidiaries. Sales commissions increased approximately $957,000 due to increased sales volumes. Expenses related to advertising and exhibits increased approximately $763,000 and stock option expense related to the adoption of SFAS 123R was approximately $381,000. Travel expense, including airline tickets, rental cars, lodging and meals, increased approximately $992,000 due to increased selling efforts and cost increases in these services.

Effective January 1, 2006, the Company adopted SFAS 123R, using the modified prospective method. The fair value of each option grant was estimated based on the date of grant using the Black-Scholes option pricing model. SFAS 123R requires the recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements and is measured based on the grant date calculated fair value of the award. SFAS 123R also requires the stock option compensation expense to be recognized over the period during which an employee is required to provide service in exchange for the award (the vesting period). Prior to the adoption SFAS 123R on January 1, 2006, the Company accounted for stock-based compensation plans in accordance with the provisions of APB No. 25 and applied the disclosure only provision of SFAS 123. Under APB 25, generally no compensation expense was recorded when the terms of the award were fixed and the exercise price of the employee stock option equaled or exceeded the market value of the underlying stock on the date of grant. The Company did not record compensation expense for option awards in periods prior to January 1, 2006.

In the second quarter of fiscal 2006, the Company recorded compensation expense related to stock options that reduced income from operations by $21,000, decreased the provision for income taxes by $6,000, decreased net income by $15,000. Basic and diluted net income per share was not impacted. Cash received from options exercised during the three months ended June 30, 2006 totaled $4,217,000 and is included in the accompanying condensed statement of cash flows as a financing activity. The excess tax benefit realized from the exercise of these options totaled $1,500,000. The stock option compensation expense was included in selling, general and administrative expenses in the accompanying condensed consolidated statement of income.

For the six months ended June 30, 2006, the Company recorded compensation expense related to stock options that reduced income from operations by $381,000, decreased the provision for income taxes by $83,000, decreased net income by $298,000 and decreased basic and diluted net income per share by $.01 each. Cash received from options exercised during the six months ended June 30, 2006 totaled $8,748,000 and is included in the accompanying condensed statement of cash flows as a financing activity. The excess tax benefit realized from the exercise of these options totaled $2,397,000. The stock option compensation expense was included in selling, general and administrative expenses in the accompanying condensed consolidated statement of income. As of June 30, 2006, no unrecognized compensation costs related to stock options remained to be expensed.

The Company adopted SFAS 123R using the modified prospective method and, consequently, the statement of operations for the quarter and six months ended June 30, 2005 have not been restated to reflect the impact of applying the provisions of SFAS 123R. Had the Company accounted for stock-based compensation according to SFAS 123R during the quarter and six months ended June 30, 2005, net income would have been reduced by approximately $331,000 and $419,000, respectively, resulting in a $0.02 and $0.01 reduction in basic and diluted earnings per share, respectively for the three months ended June 30, 2005 and a $0.02 reduction in basic and diluted earnings per share for the six month period ending June 30, 2005.

For the quarter ended June 30, 2006 compared to the quarter ended June 30, 2005, interest expense decreased $567,000, or 57.6%, to $417,000 from $984,000. Interest expense as a percentage of net sales was 0.22% and 0.58% for the quarters ended June 30, 2006 and 2005, respectively. The decrease in interest expense for the three months ended June 30, 2006 compared to the same period of 2005 related primarily to the elimination of the Company's outstanding debt during late 2005 and no borrowings were made against the Company's line of credit in 2006. Interest expense for the three months ended June 30, 2006 related primarily to the amortization of prepaid loan fees related to the GECC credit agreement which provides availability through May 2007.

For the six months ended June 30, 2006 compared to the six months ended June 30, 2005, interest expense decreased $1,317,000, or 60.9%, to $847,000 from $2,164,000. Interest expense as a percentage of net sales was 0.22% and 0.65% for the six month periods ended June 30, 2006 and 2005, respectively. The decrease in interest expense for the six months ended June 30, 2006 compared to the same period of 2005 related primarily to the elimination of the Company's outstanding debt during late 2005 and no borrowings were made against the Company's line of credit in 2006. Interest expense for the six months ended June 30, 2006 related primarily to the amortization of prepaid loan fees related to the GECC credit agreement which provides availability through May 2007.

Other income, net was $187,000 for the quarter ended June 30, 2006 compared to other income, net of $96,000 for the quarter ended June 30, 2005, for an increase of $91,000. Other income, net for the quarters ended June 30, 2005 and 2006 consisted primarily of interest income offset by foreign currency exchange losses.

Other income, net was $482,000 for the six months ended June 30, 2006 compared to other income, net of $135,000 for the six months ended June 30, 2005, for an increase of $347,000. Other income, net for the six months ended June 30, 2005 and 2006 consisted primarily of interest income offset by foreign currency exchange losses.

For the three months ended June 30, 2006, the Company recorded income tax expense of $7,512,000, compared to income tax expense of $5,497,000 for the three months ended June 30, 2005. This resulted in effective tax rates for the quarters ended June 30, 2006 and 2005 of 37.7% and 34.9%, respectively. The increase in the effective tax rate for the three months ended June 30, 2006 compared to the same periods in 2005 is primarily due to an increase in permanent differences, such as meals and entertainment expense, as a percentage of income before income taxes.

For the six months ended June 30, 2006, the Company recorded income tax expense of $13,859,000, compared to income tax expense of $9,603,000 for the six months ended June 30, 2005. This resulted in effective tax rates for the six months ended June 30, 2006 and 2005 of 37.3% and 36.0%, respectively. The increase in the effective tax rate for the six months ended June 30, 2006 compared to the same period in 2005 is primarily due to an increase in permanent differences, such as meals and entertainment expense, as a percentage of income before income taxes.

For the three months ended June 30, 2006, the Company had net income of $12,365,000 compared to net income of $10,221,000 for the three months ended June 30, 2005 for an increase of $2,144,000 or 21.0%. Earnings per diluted share for the three months ended June 30, 2006 were $0.56 compared to earnings per diluted share for the quarter ended June 30, 2005 of $0.49 for an increase of $0.07 or 13.8%. Diluted shares outstanding for the three months ended June 30, 2006 and 2005 were 22,044,210 and 20,735,201, respectively. The increase in shares outstanding is primarily due to the exercise of stock options by employees of the Company.

For the six months ended June 30, 2006, the Company had net income of $23,262,000 compared to net income of $17,013,000 for the six months ended June 30, 2005 for an increase of $6,249,000 or 36.7%. Earnings per diluted share for the six months ended June 30, 2006 were $1.06 compared to earnings per diluted share for the six months ended June 30, 2005 of $0.83 for an increase of $0.23 or 28.0%. Diluted shares outstanding for the six months ended June 30, 2006 and 2005 were 21,975,519 and 20,575,752, respectively. The increase in shares outstanding is primarily due to the exercise of stock options by employees of the Company.

The backlog of orders at June 30, 2006 was $121,650,000 compared to $88,033,000 at June 30, 2005, for an increase of $33,617,000 or 38.2%. The increase in the backlog of orders at June 30, 2006 compared to June 30, 2005 related to an increase in domestic backlog totaling approximately $9,465,000 and an increase in international backlog of orders of approximately $24,152,000. The increase in domestic backlog at June 30, 2006 was due primarily to a $10,572,000 increase in the Asphalt Group's domestic backlog. The increase in international backlog at June 30, 2006 related primarily to increased backlog for the Company's Aggregate and Mining Group, which increased approximately $16,746,000 and Underground Group, which increased approximately $8,207,000. The Company is unable to determine whether the increase in backlog was experienced by the industry as a whole.

The Company entered into a revolving credit facility and senior note agreement with General Electric Capital Corporation ("GECC") on May 14, 2003. During the third quarter of 2005, the Company used available cash to pay off the senior note (term loan) portion of the GECC debt early. Currently, under the amended GECC revolving credit facility which expires on May 14, 2007, maximum borrowings of $87,500,000 are based on a percentage of eligible receivables and inventory. The $87,500,000 limit includes $5,000,000 for use by the Canadian subsidiary Breaker Technology Ltd., as discussed further below. Availability under the revolving facility is adjusted monthly and interest is due in arrears. Interest rates are based on applicable index rates plus a sliding scale of applicable index margins from zero to three-fourths of one percent (0.75%), or at the option of the borrower, the LIBOR margin plus an applicable index margin from two percent (2.0%) to two and three-fourths percent (2.75%) based on a level of total funded debt ratio. Additionally, the GECC amended agreement permits the Company to hold inventory notes or customer financing of up to $4,000,000 at any time. The credit facility contains certain restrictive financial covenants relative to operating ratios and capital expenditures. As of June 30, 2006, total availability under the revolving GECC credit facility was approximately $81,855,000 and no borrowings were outstanding.

The Company was in compliance with the financial covenants under its credit facility as of June 30, 2006.

The Company's Canadian subsidiary, Breaker Technology Ltd, ("BTL") has available a credit facility issued by General Electric Capital-Canada ("GEC Canada") dated May 14, 2003 with a term of four years for $5,000,000 to finance short-term working capital needs, as well as to cover the short-term establishment of letter of credit guarantees. Interest rates are based on applicable index rates plus a sliding scale of applicable index margins from two percent (2.0%) to two and three-fourths percent (2.75%) based on a level of total funded debt ratio. At June 30, 2006, no amounts were outstanding under the credit facility but BTL did have approximately $284,000 in letter of credit guarantees under the facility. This amount is included in total letter of credit guarantees disclosed in "Note 8 - Contingent Matters". The Company is the primary guarantor to GEC Canada of payment and performance for this $5,000,000 credit facility. The term of the guarantee is equal to the related debt. The maximum potential amount of future payments the Company would be required to make under its guarantee at June 30, 2006 was $284,000.

The Company's South African subsidiary, Osborn Engineered Products SA (Pty) Ltd., ("Osborn") has available a credit facility of approximately $2,791,000 (ZAR 20,000,000) to finance short-term working capital needs, as well as to cover the short-term establishment of letter of credit performance guarantees. As of June 30, 2006, Osborn had no outstanding borrowings under the credit facility, but approximately $977,000 in performance and retention bonds were guaranteed under the facility. The facility is secured by Osborn's accounts receivable and retention balances. The available facility fluctuates monthly based upon fifty percent (50%) of Osborn's accounts receivables, retention and cash balances at the end of the prior month. As of June 30, 2006, Osborn Engineered Products had available credit under the facility of approximately $1,814,000.

Net cash provided by operating activities for the six months ended June 30, 2006 was $3,665,000 compared to net cash provided by operating activities of $14,300,000 for the six months ended June 30, 2005. The decrease in net cash provided by operating activities for the six months ended June 30, 2006 compared to the same period of 2005 relates primarily to the increase in accounts receivable and inventory, offset by increases in net income and customer deposits.

Net cash used by investing activities for the six months ended June 30, 2006 was $15,080,000 compared to net cash used by investing activities of $7,053,000, for the six months ended June 30, 2005. The increase in net cash used by investing activities for the six months ended June 30, 2006 compared to the same period of 2005 relates primarily to an increase in capital expenditures during the six months ended June 30, 2006 compared to the same period in 2005. Capital expenditures for the six months ended June 30, 2006 were $15,108,000 compared to $7,104,000 for the six months ended June 30, 2005.

Net cash provided by financing activities for the six months ended June 30, 2006 was $11,123,000 compared to net cash used by financing activities of $4,844,000 for the six months ended June 30, 2005. The increase in net cash provided by financing activities for the six months ended June 30, 2006 compared to the same period of 2005 relates primarily to proceeds from the exercise of stock options by Company employees in 2006 and repayments of debt during 2005.

The Company believes that its current working capital, cash flows generated from future operations and available capacity remaining under its credit facility will be sufficient to meet the Company's working capital and capital expenditure requirements through June 30, 2007.

Capital expenditures for 2006 are forecasted to total approximately $29,360,000. The Company expects to finance these expenditures using currently available cash balances and internally generated funds.

The Company is engaged in certain pending litigation involving claims or other matters arising in the ordinary course of business. Most of these claims involve product liability or other tort claims for property damage or personal injury against which the Company is insured. As a part of its litigation management program, the Company maintains general liability insurance coverage for product liability and other similar tort claims in amounts the Company believes are adequate. The coverage is subject to a substantial self-insured retention under the terms of which the Company has the right to coordinate and control the management of its claims and the defense of these actions.

As mentioned above, the Company is currently a party to various claims and legal proceedings that have arisen in the ordinary course of business. If management believes that a loss arising from such claims and legal proceedings is probable and can reasonably be estimated, the Company records the amount of the loss (including estimated legal costs), or the minimum estimated liability when the loss is estimated using a range, and no point within the range is more probable than another. As management becomes aware of additional information concerning such contingencies, any potential liability related to these matters is assessed and the estimates are revised, if necessary. If management believes that a loss arising from such claims and legal proceedings is either (i) probable but cannot be reasonably estimated or (ii) reasonably possible but not probable, the Company does not record the amount of the loss but does make specific disclosure of such matter. Based upon currently available information and with the advice of counsel, management believes that the ultimate outcome of its current claims and legal proceedings, individually and in the aggregate, will not have a material adverse effect on the Company's financial position, cash flows or results of operations. However, claims and legal proceedings are subject to inherent uncertainties and rulings unfavorable to the Company could occur. If an unfavorable ruling were to occur, there exists the possibility of a material adverse effect on the Company's financial position, cash flows or results of operations.

Management, with oversight of the Audit Committee of the Board of Directors, has been addressing the material weakness disclosed in the Company's 2005 Form 10-K and is committed to effectively remediating the underlying significant deficiencies in internal controls. Although the Company's remediation efforts are well underway, these significant deficiencies will not be considered remediated until the new internal controls over financial reporting are fully implemented and operational for a period of time and are successfully tested, and management concludes that these controls are operating effectively. The Company's Chief Executive Officer and Chief Financial Officer have therefore concluded that there have been no changes made in the Company's internal controls over financial reporting in connection with its six-month period ended June 30, 2006 evaluation that would materially affect, or are reasonably likely to affect, its internal control over financial reporting. The current status of the Company's remediation efforts related to the significant deficiencies identified at Astec Underground, Inc. is as follows:

     1. Improvements to Steel Inventory Control- (a) The perpetual inventory procedure for the issuance of steel into production has been changed from relieving steel inventory late in the manufacturing process ("back flushing") to now issuing steel into production at the time it is used. This allows for easier and more accurate cycle counts of steel inventory; (b) The Company's prior practice of taking a full physical inventory once a year has been modified to include monthly physical counts of steel plate inventory and test counting of other steel inventory. Further refinements to the perpetual inventory procedures are continuing to be made; (c) Cycle count procedures are being modified to improve accuracy of our perpetual inventory to include using ABC classifications of inventory to obtain a higher dollar value of count coverage and improve the accuracy of the overall inventory valuation; (d) Bills of materials have been and are continuing to be reviewed for accuracy and corrections have been made as needed to improve the accuracy of the relief of inventory usage; (e) A new procedure has been developed whereby all inventory adjustments are reported and reviewed monthly for accuracy; and f) Further enhancements to the way Underground's ERP (Enterprise Resource Planning) system is utilized, including MRPII (Manufacturing Resource Planning II) and control of finished goods in the Utility product line are being implemented. Additional cycle counts procedures and the use of scanners are also being implemented to improve the overall accuracy of inventory control efforts.

     2. Accounting System Access Controls- Underground's management has completed a review of access to the ERP system, including the general ledger module, and has limited the access to only those individuals who are deemed to have a viable need to use a particular function. The documentation of all systems and controls is currently in process and further refinements to user access may be made.

     3. Journal Entry Authorization- Improved procedures are now in place to ensure that all journal entries posted are properly authorized including: (a) documented review of all journal entries entered; (b) comparison of journal entries entered to a revised journal entry checklist; (c) review of accounting support documents to ensure that all reviews are properly documented and that all required reconciliations have been prepared and properly approved. Additionally, one individual in the accounting department has been assigned the responsibility to ensure that all supporting documents are properly approved and filed. The formal documentation of all revised procedures and controls is currently in process.

     4. Monitoring Controls- The process of fully documenting controls and the development of the process of monitoring the significant controls is currently in process.

During 2005, the Company's Telsmith subsidiary completed the process of installing the general ledger, purchasing, sales, production, product development and customer resource modules of a new ERP computer system as part of a phased implementation schedule. Additional refinements to the modules related to production, product development and customer resource management are scheduled for installation during the third quarter of 2006. The new systems installed were subjected to testing prior to and after installation and are functioning to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. We have not experienced any significant difficulties to date in connection with the implementation or operations of the new systems.