exv13

EXHIBIT 13

Founded 50 years ago, in 1956, Raven today is an industrial manufacturer that believes in “old values and new ideas.” The company has four operating units and focuses on cash return on invested capital and shareholder value. Operating Unit Products Markets Competitive Strengths

> Computerized control hardware and software for precision farming “Leading developer of GPS-based control system · Precision application of pesticides.fertilizers and other chemicals

Domestic and International agricultural OEMs and sprayer manufacturers

Agricultural equipment aftermarket

Marine navigation Market leader for ag sprayer controls Strong brand recognition and distribution network Wide range of precision agricultural products

SALES
(dollars in millions)

2004 2005 2006

• Electronics Manufacturing Services (EMS)

Primarily industrial OEMs in North America
Fortune 500 companies that contract their low-volume, high-mix production

· Advanced manufacturing technology Full-service provider, from engineering and manufacturing to customer service · ISO 9001 SALES (dollars in millions) 156.2

2004 2005 2006

• High-altitude aerostats · Custom-shaped Inflatable ‘ Protective wear · Military parachutes · US and foreign governments · NASA and scientific agencies · Promotional and advertising markets, including Disney and Macy’s · Reputation for innovation and quality · Sole source in US for scientific balloons • Best technology for sewing and sealing SALES (dollars in millions)

2004 2005 2006

’ Rugged reinforced plastic · Manufactured housing and RVs • Vertically integrated SALES manufacturing capabilities (dollar in millions) · Temporary grain coven for agriculture · Temporary building construction enclosures · Pond lining and containment for oil exploration > Broad product line > Superior target marketing · High productivity and low-cost structure

2004 2005 2006

Page 1
RAVEN 2006 Annual Report

ELEVEN-YEAR FINANCIAL SUMMARY


	For the years ended January 31
Dollars in thousands, except per-share data	2006			2005			2004

OPERATIONS FOR THE YEAR
Net sales
Ongoing operations	$	204,528		$	168,086		$	142,727
Sold businesses^(a)		—			—			—
Total		204,528			168,086			142,727
Gross profit		53,231			43,200			33,759
Operating income
Ongoing operations		37,363			27,862			21,981
Sold businesses^(a)		(79	)		—			(355	)
Total		37,284			27,862			21,626
Income before income taxes		37,494			27,955			21,716
Net income	$	24,262		$	17,891		$	13,836
Net income % of sales		11.9	%		10.6	%		9.7	%
Net income % of beginning equity		36.7	%		26.9	%		23.8	%
Cash dividends	$	5,056		$	15,298	^(b)	$	3,075
FINANCIAL POSITION
Current assets	$	71,345		$	61,592		$	55,710
Current liabilities		20,050			20,950			11,895
Working capital	$	51,295		$	40,642		$	43,815
Current ratio		3.56			2.94			4.68
Property, plant and equipment	$	25,602		$	19,964		$	15,950
Total assets		106,157			88,509			79,508
Long-term debt, less current portion		9			—			57
Shareholders’ equity	$	84,389		$	66,082		$	66,471
Long-term debt / total capitalization		0.0	%		0.0	%		0.1	%
Inventory turnover (CGS / year-end inventory)		5.4			5.4			6.5
CASH FLOWS PROVIDED BY (USED IN)
Operating activities	$	21,189		$	18,871		$	19,732
Investing activities		(11,435	)		(7,631	)		(4,352	)
Financing activities		(6,946	)		(19,063	)		(6,155	)
Increase (decrease) in cash and cash equivalents		2,790			(7,823	)		9,225
COMMON STOCK DATA
Net income per share — basic	$	1.34		$	0.99		$	0.77
Net income per share — diluted		1.32			0.97			0.75
Cash dividends per share		0.28			0.85	^(b)		0.17
Book value per share		4.67			3.67			3.68
Stock price range during year
High	$	33.15		$	26.94		$	15.23
Low		16.54			13.08			7.56
Close	$	31.60		$	18.38		$	14.11
Shares outstanding, year-end (in thousands)		18,072			17,999			18,041
Number of shareholders, year-end		9,263			6,269			3,560
OTHER DATA
Price / earnings ratio		23.9			18.9			18.8
Average number of employees		819			807			770
Sales per employee	$	250		$	208		$	185
Backlog	$	43,619		$	43,646		$	47,120

All per-share, shares outstanding and market price data reflect the October 2004 two-for-one stock split, the January 2003 two-for-one stock split and the July 2001 three-for-two stock split. All other figures are as reported.

Price / earnings ratio is determined as closing stock price divided by net income per share-diluted.

Book value per share is computed by dividing total shareholders’ equity by the number of common shares outstanding.


(a)		In fiscal 2003, 2001, 2000 and 1996, the company sold its Beta Raven Industrial Controls, Plastic Tank, Glasstite and Astoria businesses, respectively.

(b)		Includes a special dividend of $.625 per share that was paid during the second quarter of fiscal 2005.

Page 16
RAVEN 2006 Annual Report



2003			2002			2001			2000			1999			1998			1997			1996

$	119,589		$	112,018		$	113,360		$	107,862		$	108,408		$	104,489		$	101,869		$	84,379
	1,314			6,497			19,498			42,523			46,798			47,679			39,576			38,010
	120,903			118,515			132,858			150,385			155,206			152,168			141,445			122,389
	27,515			23,851			21,123			24,217			24,441			24,929			25,287			22,660

	16,861			13,788			7,417	^(c)		7,971			8,220			9,555			9,321			7,692
	204			(613	)		3,331	^(d)		2,606	^(e)		1,453			1,007			2,650			1,869
	17,065			13,175			10,748			10,577			9,673			10,562			11,971			9,561
	17,254			13,565			10,924			10,503			9,649			12,540	^(f)		11,915			9,566
$	11,185		$	8,847		$	6,411	^(c)(d)	$	6,762	^(e)	$	6,182		$	8,062		$	7,688		$	6,197
	9.3	%		7.5	%		4.8	%		4.5	%		4.0	%		5.3	%		5.4	%		5.1	%
	21.5	%		18.4	%		11.8	%		10.9	%		10.0	%		14.2	%		15.6	%		13.6	%
$	2,563		$	2,371		$	2,399		$	2,895		$	2,944		$	2,709		$	2,367		$	2,130

$	49,351		$	45,308		$	51,817		$	55,371		$	60,279		$	57,285		$	56,696		$	45,695
	13,167			13,810			13,935			14,702			15,128			17,816			20,016			14,771
$	36,184		$	31,498		$	37,882		$	40,669		$	45,151		$	39,469		$	36,680		$	30,924
	3.75			3.28			3.72			3.77			3.98			3.22			2.83			3.09
$	16,455		$	14,059		$	11,647		$	15,068		$	19,563		$	19,817		$	18,142		$	18,069
	72,816			67,836			65,656			74,047			83,657			82,066			80,662			67,553
	151			280			2,013			3,024			4,572			1,128			3,181			2,816
$	58,236		$	52,032		$	47,989		$	54,519		$	62,293		$	61,563		$	56,729		$	49,151
	0.3	%		0.5	%		4.0	%		5.3	%		6.8	%		1.8	%		5.3	%		5.4	%
	4.4			5.0			5.9			5.2			4.9			4.8			4.5			4.1

$	12,735		$	18,496		$	9,441		$	10,375		$	8,326		$	9,274		$	7,088		$	9,687
	(9,166	)		(13,152	)		9,752			6,323			(3,127	)		(4,979	)		(5,090	)		(4,158	)
	(5,830	)		(8,539	)		(14,227	)		(16,326	)		(2,714	)		(4,884	)		(2,363	)		(4,029	)
	(2,261	)		(3,195	)		4,966			372			2,485			(589	)		(365	)		1,500

$	0.61		$	0.48		$	0.31		$	0.26		$	0.22		$	0.28		$	0.27		$	0.22
	0.60			0.47			0.31			0.26			0.22			0.28			0.27			0.22
	0.14			0.13			0.12			0.11			0.10			0.09			0.08			0.08
	3.21			2.82			2.53			2.32			2.21			2.13			1.96			1.74

$	9.20		$	5.88		$	3.48		$	3.04		$	3.79		$	4.29		$	3.92		$	3.46
	4.38			3.02			1.88			2.25			2.54			3.27			2.67			2.58
$	7.91		$	5.64		$	3.04		$	2.40		$	2.67		$	3.77		$	3.75		$	3.21
	18,133			18,424			18,956			23,496			28,164			28,944			29,016			28,296
	2,781			2,387			2,460			2,749			3,014			3,221			3,011			3,190

	13.2			12.1			9.8			9.2			12.4			13.7			13.9			14.9
	758			838			1,043			1,320			1,445			1,511			1,387			1,368
$	160		$	141		$	127		$	114		$	107		$	101		$	102		$	89
$	42,826		$	33,834		$	38,239		$	44,935		$	47,431		$	47,154		$	38,102		$	32,539


(c)		Includes $2.6 million of business repositioning charges, net of gains on plant sales, primarily in Electronic Systems Division and Aerostar.

(d)		Includes the $3.1 million pretax gain ($1.4 million net of tax) on the sale of the company’s Plastic Tank Division.

(e)		Includes the $1.2 million pretax gain ($764,000 net of tax) on the sale of assets of the company’s Glasstite subsidiary.

(f)		Includes the $1.8 million pretax gain ($1.2 million net of tax) on the sale of an investment in an affiliate.

Page 17
RAVEN 2006 Annual Report

BUSINESS SEGMENTS


	For the years ended January 31
Dollars in thousands	2006			2005			2004			2003			2002			2001

FLOW CONTROLS DIVISION
Sales	$	47,506		$	40,726		$	35,059		$	28,496		$	23,178		$	16,758
Operating income		13,586			10,516	^(b)		8,254			6,897			5,509	^(d)		3,985
Assets		30,047			23,701			19,304			21,483			20,313			9,578
Capital expenditures		938			1,372			341			729			677			327
Depreciation & amortization		1,085			876			1,004			948			443			353

ENGINEERED FILMS DIVISION
Sales	$	82,794		$	58,657		$	42,636		$	35,096		$	35,796		$	35,403
Operating income		19,907			15,739			10,563			10,030			8,257			7,397
Assets		33,512			25,181			15,941			17,244			13,691			11,520
Capital expenditures		7,359			3,960			712			4,080			3,178			633
Depreciation & amortization		2,436			1,403			1,611			1,475			1,001			946

ELECTRONIC SYSTEMS DIVISION
Sales	$	56,219		$	47,049		$	44,307		$	38,589		$	32,289		$	32,039
Operating income (loss)		8,916			4,492			5,797			4,022			2,264			(542	)^(f)
Assets		20,191			17,382			14,975			14,528			13,910			15,359
Capital expenditures		1,612			1,201			841			395			774			1,492
Depreciation & amortization		871			880			850			978			1,101			1,089

AEROSTAR
Sales	$	18,009		$	21,654		$	20,725		$	17,408		$	20,755		$	29,160
Operating income		2,133			3,609			3,092	^(c)		1,012			2,907	^(e)		2,996
Assets		6,837			7,492			7,756			7,032			7,150			8,872
Capital expenditures		179			542			1,130			570			256			163
Depreciation & amortization		359			389			436			374			347			367

REPORTABLE SEGMENTS TOTAL
Sales	$	204,528		$	168,086		$	142,727		$	119,589		$	112,018		$	113,360
Operating income		44,542			34,356	^(b)		27,706	^(c)		21,961			18,937	^(d,e)		13,836	^(f)
Assets		90,587			73,756			57,976			60,287			55,064			45,329
Capital expenditures		10,088			7,075			3,024			5,774			4,885			2,615
Depreciation & amortization		4,751			3,548			3,901			3,775			2,892			2,755

CORPORATE & OTHER^(a)
Sales from sold businesses	$	—		$	—		$	—		$	1,314		$	6,497		$	19,498
Operating income (loss) from sold businesses		(79	)		—			(355	)		204			(613	)		3,331	^(g)
Operating (loss) from administrative expenses		(7,179	)		(6,494	)		(5,725	)		(5,100	)		(5,149	)		(6,419	)
Assets		15,570			14,753			21,532			12,529			12,772			20,327
Capital expenditures		270			466			306			259			209			475
Depreciation & amortization		400			293			244			191			253			912

TOTAL COMPANY
Sales	$	204,528		$	168,086		$	142,727		$	120,903		$	118,515		$	132,858
Operating income		37,284			27,862	^(b)		21,626	^(c)		17,065			13,175	^(d,e)		10,748	^(f,g)
Assets		106,157			88,509			79,508			72,816			67,836			65,656
Capital expenditures		10,358			7,541			3,330			6,033			5,094			3,090
Depreciation & amortization		5,151			3,841			4,145			3,966			3,145			3,667


(a)		Operating income from sold businesses includes administrative expenses directly attributable to the sold businesses. Assets are principally cash, investments, deferred taxes and notes receivable.

(b)		Includes a $1.3 million pretax writeoff of assets related to the Fluent Systems product line (See Note 5).

(c)		Includes $182,000 of pretax gain on plant sale.

(d)		Includes a $550,000 in-process research and development charge related to the Starlink acquisition.

(e)		Includes $414,000 of pretax gains on plant sales.

(f)		Includes $1.8 million of business repositioning charges in the Electronic Systems Division and $2.6 million for the total company.

(g)		Includes a $3.1 million pretax gain on the sale of the company’s Plastic Tank Division.

Page 18
RAVEN 2006 Annual Report

FINANCIAL REVIEW AND ANALYSIS

RESULTS OF OPERATIONS

The following table presents comparative financial performance for the past three years:


	For the years ended January 31
	2006							2005							2004
				%		%					%		%					%		%
Dollars in thousands, except per-share data				Sales		Change					Sales		Change					Sales		Change

Net sales	$	204,528			100.0		+ 21.7	$	168,086			100.0		+ 17.8	$	142,727			100.0		+ 18.1
Gross profit		53,231			26.0		+ 23.2		43,200			25.7		+ 28.0		33,759			23.7		+ 22.7
Operating expenses		15,868			7.8		+ 12.9		14,056			8.4		+ 17.5		11,960			8.4		+ 12.5
Loss on disposition of businesses & assets		79							1,282							173
Operating income		37,284			18.2		+ 33.8		27,862			16.6		+ 28.8		21,626			15.2		+ 26.7
Income before income taxes		37,494			18.3		+ 34.1		27,955			16.6		+ 28.7		21,716			15.2		+ 25.9
Income taxes		13,232			6.5		+ 31.5		10,064			6.0		+ 27.7		7,880			5.5		+ 29.8
Net income	$	24,262			11.9		+ 35.6	$	17,891			10.6		+ 29.3	$	13,836			9.7		+ 23.7
Net income per share — diluted	$	1.32					+ 36.1	$	0.97					+ 29.3	$	0.75					+ 25.0
Effective income tax rate		35.3	%				- 1.9		36.0	%				- 0.8		36.3	%				+ 3.1

EXECUTIVE SUMMARY

Raven Industries, Inc. is an industrial manufacturer providing a variety of products to customers within the industrial, agricultural, construction and military/aerospace markets, primarily in North America. The company operates in four business segments: Flow Controls, Engineered Films, Electronic Systems and Aerostar.

Consolidated Operating Results

The company delivered record sales and profits in fiscal 2006, exceeding fiscal 2005 record-setting results. Net income rose to $24.3 million, an increase of $6.4 million, or 35.6% over last year’s results. Earnings per diluted share of $1.32 topped the prior fiscal year’s record of $.97 by 36.1%. Net sales reached $204.5 million, surpassing fiscal 2005 by $36.4 million, or 21.7%. The Engineered Films, Electronic Systems, and Flow Controls segments all contributed to the company’s sales and profit growth for fiscal 2006, with the higher sales levels in each of these segments driving the increase in company profits.

In fiscal 2006, the company increased its quarterly dividend from 5 1/2 cents per share paid in fiscal 2005 to 7 cents per share. During fiscal 2005, the company split its stock two-for-one and paid a one-time special dividend of 62 1/2 cents per share, which totaled $11.3 million. Capital expenditures totaled $10.4 million for fiscal 2006 and were made primarily in the company’s Engineered Films segment for additional manufacturing capacity and facilities. Fiscal 2005 capital spending totaled $7.5 million and included increased spending for additional capacity in the Engineered Films segment. The company has planned for continued investment in the expansion of Engineered Films manufacturing capacity to exceed $13 million in fiscal 2007. The company also completed the strategic acquisition of Montgomery Industries, Inc. in its Flow Controls segment at the beginning of fiscal 2006.

Management expects another year of record sales and profits in fiscal 2007. The additional Engineered Films manufacturing capacity will enable the segment to satisfy customer demand in the upcoming year. New product introductions and continued demand for the company’s precision agriculture products in the Flow Controls segment are expected to aid in the company’s fiscal 2007 sales and profit growth.

The following discussion highlights the consolidated operating results. Operating results are more fully explained in the segment discussions that follow.

Page 19
RAVEN 2006 Annual Report

Fiscal 2006 versus fiscal 2005

Net sales for the fiscal year ended January 31, 2006, surpassed the $200 million mark, exceeding fiscal 2005 by $36.4 million, or 21.7%. The record fiscal 2006 sales performance followed a strong fiscal 2005, which recorded a 17.8% increase over fiscal 2004. The Flow Controls, Engineered Films, and Electronic Systems segments reported increased revenues over one year earlier, with the Engineered Films segment posting the largest sales gain of $24.1 million, or 41.1% to reach $82.8 million. Fiscal 2006 revenue levels topped the prior year in all of Engineered Films’ markets, reflecting the segment’s additional manufacturing capacity, high demand for oil and pond liners, and higher selling prices due to increased resin costs. Flow Controls’ net sales reached $47.5 million, a 16.6% increase over last year. Increased demand for the segment’s standard sprayer control systems and sales of automatic boom height control systems (“Autoboom™”), which was acquired during the year as part of the Montgomery Industries, Inc. acquisition, boosted revenue levels for the fiscal year. Electronic Systems reported a 19.5% increase in annual sales due to increased demand from its existing customer base. Aerostar’s net sales of $18.0 million fell short of last year’s twelve-month period by $3.6 million due primarily to an expected cargo parachute revenue decrease and lower uniform contract sales.

For the year ended January 31, 2006, operating income rose to $37.3 million, a 33.8% increase over one year earlier. Higher sales levels in the company’s Flow Controls and Engineered Films segments drove the profit growth, with the Electronic Systems segment contributing to the increase in company profits through higher sales and increased manufacturing efficiencies on existing customer contracts. Flow Controls’ operating income of $13.6 million was $3.1 million, or 29.2% higher than the previous fiscal year. Fiscal 2006 operating income of $19.9 million reported in the Engineered Films segment rose $4.2 million, while Electronic Systems’ operating income of $8.9 million almost doubled that of the previous year. Aerostar operating income of $2.1 million fell short of the prior year by $1.5 million, or 40.9%, and reflects the segment’s lack of a follow-on military parachute order in fiscal 2006.

Fiscal 2005 versus fiscal 2004

Fiscal 2005 net sales reached $168.1 million, 17.8% higher than fiscal 2004, with all segments recording increases over their fiscal 2004 revenue levels. Operating income of $27.9 million was $6.2 million over the $21.6 million reported for fiscal 2004. Profit gains were a result of significant sales increases in the company’s higher-margin product lines, including Flow Controls’ precision ag products and Engineered Films’ plastic sheeting. In fiscal 2005, a strong agricultural economy and new product introductions resulted in a net sales increase of $5.7 million, or 16.2% for the Flow Controls’ segment, with revenue reaching $40.7 million. Flow Controls’ operating income rose 27.4% to $10.5 million. Engineered Films posted the largest revenue gain, increasing net sales by 37.6%, or $16.0 million. This segment also recorded the largest operating income gain of $5.2 million, a 49.0% increase over fiscal 2004 results. Electronic Systems’ net sales of $47.0 million were $2.7 million higher than fiscal 2004, although the increase in revenue did not result in positive profit growth. Electronic Systems’ operating income decreased $1.3 million from the prior year due to unfavorable product mix and start-up issues with a new customer contract. Aerostar recorded a modest net sales increase over fiscal 2004 of 4.5%, while operating income of $3.6 million rose 16.7%.

Fiscal 2004 results included an operating loss of $355,000 for ongoing environmental and legal liabilities associated with previously sold businesses.

FISCAL 2006 PERFORMANCE MEASURES

The company has set ambitious goals for achieving higher growth, better returns on invested capital, and increased shareholder value. The company’s net income as a percent of net sales has steadily risen over the last several years. Net income was 11.9% of sales in fiscal 2006, which exceeded fiscal 2005’s record of 10.6%. Net income as a percent of average assets was 24.9% as compared to 21.3% in fiscal 2005. As a percent of beginning equity, fiscal 2006 net income was 36.7%, up almost 10 percentage points from fiscal 2005.


	2006			2005			2004			2003			2002			2001

Net income as % of
Net sales		11.9	%		10.6	%		9.7	%		9.3	%		7.5	%		4.8	%
Average assets		24.9	%		21.3	%		18.2	%		15.9	%		13.3	%		9.2	%
Beginning equity		36.7	%		26.9	%		23.8	%		21.5	%		18.4	%		11.8	%

Page 20
RAVEN 2006 Annual Report

SEGMENT ANALYSIS

SALES AND OPERATING INCOME BY SEGMENT

2006

2005

2004

Dollars in thousands

amount

change

amount

change

amount

change

SALES

Flow Controls

47,506

+16.6

40,726

+16.2

35,059

+23.0

Engineered Films

82,794

+ 41.1

58,657

+ 37.6

42,636

+21.5

Electronic Systems

56,219

+ 19.5

47,049

+ 6.2

44,307

+14.8

Aerostar

18,009

–16.8

21,654

+ 4.5

20,725

+19.1

Total

204,528

+21.7

168,086

+17.8

142,727

+18.1


	2006					2005					2004
				%					%					%
Dollars in thousands	amount			sales		amount			sales		amount			sales

OPERATING INCOME (LOSS)
Flow Controls	$	13,586			28.6	$	10,516			25.8	$	8,254			23.5
Engineered Films		19,907			24.0		15,739			26.8		10,563			24.8
Electronic Systems		8,916			15.9		4,492			9.5		5,797			13.1
Aerostar		2,133			11.8		3,609			16.7		3,092			14.9
Sold businesses		(79	)				—					(355	)
Corporate expenses		(7,179	)				(6,494	)				(5,725	)

Total	$	37,284			18.2	$	27,862			16.6	$	21,626			15.2

FLOW CONTROLS

The Flow Controls Division (FCD), including Raven Canada, provides electronic and Global Positioning System (GPS) products for the precision agriculture, marine navigation and other niche markets.

Fiscal 2006 versus fiscal 2005

Net sales in fiscal 2006 were $47.5 million, up 16.6%, or $6.8 million over fiscal 2005 levels. The segment’s standard sprayer control systems and the acquired Autoboom™ product line accounted for the majority of the sales growth on a fiscal year-to-date basis. Sprayer control system sales were up from one year earlier due to increased original equipment manufacturer orders, while acceptance of the Autoboom™ product line also generated revenue growth. As a percentage of net sales, gross profit margins improved slightly to 37.0% from the 36.7% reported for the prior year’s comparable period due to the impact of the increased sales level on fixed costs. Fiscal 2006 fourth-quarter sales, hampered by a weakening agricultural economy, increased only 3.6% to $10.2 million while operating income rose 36.0% to $2.7 million. The higher operating income level was a result of reduced spending levels and lower warranty expense in the current year’s fourth quarter. Fiscal 2006 operating income of $13.6 million increased $3.1 million, or 29.2% as compared to the year ended January 31, 2005. Included in the prior year’s operating income is a $1.3 million pretax write-off of assets related to the segment’s fiscal 2004 Fluent Systems acquisition. Excluding the write-off, fiscal 2006 operating income increased $1.8 million, or 15.2%. The fiscal 2006 operating income increase over fiscal 2005, excluding the Fluent write-off, reflects the segment’s higher sales level, tempered by increases in product development and distribution investments. Fiscal 2006 selling expenses were $3.9 million, a $784,000, or 25.1%, increase over fiscal 2005. Higher selling expenses related to the segment’s precision agriculture distribution plan and expenses incurred to leverage the segment’s products offerings in Canada contributed to the fiscal 2006 selling expense increase.

Fiscal 2005 versus fiscal 2004

Fiscal 2005 net sales reached $40.7 million, an increase of 16.2% over fiscal 2004 despite the decrease of $6.0 million in sales recorded one year earlier under a special order for chemical injection systems. An improved farm economy, new product sales, and an increase in market share contributed to the fiscal 2005 revenue growth. Increased sales volume and value-engineering activities were the main contributors to a gross profit margin increase from 30.4% of net sales in fiscal 2004 to 36.7% in fiscal 2005. Fiscal 2005 operating income of $10.5 million grew 27.4% due to the higher sales level, high-margin product sales, and value-engineering activities. The operating income growth was tempered by a $1.3 million write-off of Fluent Systems assets, which were acquired in December 2003. Fiscal 2005 selling expenses rose $729,000, or 30.4%, due to increased investment in the segment’s precision agriculture distribution plan.

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RAVEN 2006 Annual Report

Prospects

FCD continues to focus on gaining market share, domestically and internationally, in the precision agriculture market. New product offerings, together with reaching international markets in Europe, South America, and Australia, is expected to help offset weakness in the North American agricultural market. These efforts are also expected to increase selling expense in fiscal 2007. The company expects revenue growth in the upcoming fiscal year to be under 10%.

ENGINEERED FILMS

The Engineered Films Division (EFD) produces rugged reinforced plastic sheeting for industrial, construction, manufactured housing and agriculture applications.

Fiscal 2006 versus fiscal 2005

A strong sales performance in fiscal 2006 resulted in revenues rising to $82.8 million, an increase of 41.1% over fiscal 2005. All of EFD’s market segments achieved higher sales levels in fiscal 2006, with the pit and pond lining segment posting the largest revenue growth of $7.9 million, or 60.1%. Increased oil drilling activity due to high oil prices throughout the year boosted sales volume for this particular market category. Engineered Films also reported significant sales growth in its agricultural, industrial and construction markets. Fiscal 2006 disaster film sales of $11.4 million were $2.0 million, or 21.6%, higher than fiscal 2005.EFD’s additional manufacturing capacity that was brought online during the latter part of fiscal 2005 and the beginning of fiscal 2006 enabled the division to fulfill increased customer demand. Increased product pricing resulting from higher raw material prices also positively impacted the overall sales level for fiscal 2006. The increase in the segment’s fiscal 2006 sales resulting from higher product pricing due to increased resin costs is estimated to be 12 – 16%. Fiscal 2006 fourth-quarter sales as compared to the prior year’s fourth quarter increased 45.5%, resulting in additional operating income of $1.6 million. As with the fiscal year, the pit lining segment posted the largest sales increase for the quarter and disaster film sales were up $1.2 million. Fiscal 2006 operating income climbed to $19.9 million, increasing 26.5% over the prior year. The positive profit impact of the higher sales level was partially offset by higher resin costs, as reflected in the current fiscal year’s gross profit as a percent of sales, which fell from 31.4% in fiscal 2005 to 27.6% for fiscal 2006. Selling expenses rose 10.5% during fiscal 2006, reaching $2.9 million mainly due to increased personnel costs to support the segment’s higher sales level.

Fiscal 2005 versus fiscal 2004

The segment’s net sales exceeded fiscal 2004 net sales by $16.0 million, or 37.6%, to reach $58.7 million. Disaster film sales of $9.4 million boosted the sales level for fiscal 2005 together with net sales gains in the pit lining, manufactured housing, and agricultural markets. Fiscal 2005 operating income climbed to $15.7 million, a $5.2 million, or 49.0%, increase over fiscal 2004 results. Increased selling expenses, which rose $461,000, or 21.3%, due to higher personnel and advertising expenses partially offset the profit impact of the segment’s higher sales level. Gross profit as a percentage of net sales increased from 30.0% to 31.4%. The fiscal 2005 gross profit rate reflects favorable plant utilization due to the higher sales level that was partially offset by higher raw material costs.

Prospects

Management expects that continued capital investment in the upcoming year will enable EFD to sustain its revenue growth above 15%, with additional manufacturing capacity for its current products as well as the ability to develop and produce new products. Volatility in resin prices could impact product selling prices as well as gross profit rates in fiscal 2007. A drop in disaster film sales could negatively impact the segment.

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RAVEN 2006 Annual Report

ELECTRONIC SYSTEMS

The Electronic Systems Division (ESD) is a total-solutions provider of electronics manufacturing services, primarily to North American original equipment manufacturers.

Fiscal 2006 versus fiscal 2005

ESD ended fiscal 2006 with sales of $56.2 million, up from fiscal 2005 by $9.2 million, or 19.5%. The fiscal 2006 sales growth was due to increased deliveries to long-term customers on existing contracts. This segment sought to improve gross profit rates by increasing manufacturing efficiencies in fiscal 2006 and successfully attained that goal. Fiscal 2006 operating income of $8.9 million almost doubled that of the prior year, reflecting the increased sales level and better operational execution on current contracts, which contrasts to fiscal 2005’s start-up inefficiencies and customer-driven delays. As a percentage of sales, the gross profit rate climbed to 17.4% as compared to fiscal 2005’s gross profit rate of 11.3%. Fiscal 2006 selling expenses of $885,000 were up 7.5% compared to fiscal 2005.

Fiscal 2005 versus fiscal 2004

Electronic Systems increased sales 6.2%, or $2.7 million over fiscal 2004 to reach $47.0 million. Operating income fell behind fiscal 2004 results, decreasing by $1.3 million. Fiscal 2005 net sales were positively impacted by shipments made to a new customer, although low profit margins due to high start-up costs did not result in a corresponding increase in operating income. Higher personnel costs in fiscal 2005 accounted for selling expenses increasing 6.9% to $823,000. As a percentage of sales, gross profits declined to 11.3% as compared to 14.8% for fiscal 2004, reflecting the segment’s start-up costs related to new contracts.

Prospects

ESD is expected to build on its revenue growth achieved in fiscal 2006 with increases coming from existing accounts and the addition of one or two new customers. Fiscal 2007 sales growth for this segment is targeted to reach the 15-20% range. ESD will continue to strive for operational excellence in all of its manufacturing areas in order to maintain its level of fiscal 2006 profitability; however, a higher percentage of new business is expected to reduce gross profits as a percent of sales.

AEROSTAR

The Aerostar segment manufactures military cargo parachutes, government service uniforms, custom-shaped inflatable products, and high-altitude balloons for government and commercial research.

Fiscal 2006 versus fiscal 2005

Fiscal 2006 net sales dropped to $18.0 million from the fiscal 2005 sales level of $21.7 million, with the majority of the decrease due to lower military parachute shipments. New government contracts for parachute products were not obtained in fiscal 2006 and Aerostar faced lower sales levels and under-utilization of plant capacity. Partially offsetting the decline in parachute sales and lower contract uniform deliveries was an increase in high-altitude research balloon revenue. For the full year, operating income of $2.1 million was $1.5 million behind the prior fiscal year. An increase in high-altitude research balloon profits due to the higher sales level was offset by lower parachute product and uniform contract profits. As a percentage of sales, gross profits decreased from 21.1% for fiscal 2005 to 16.9% for the current fiscal year. Selling expenses of $910,000 were down slightly in fiscal 2006, decreasing $40,000 from the prior year.

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RAVEN 2006 Annual Report

Fiscal 2005 versus fiscal 2004

Fiscal 2005 net sales of $21.7 million increased $929,000, or 4.5%, above fiscal 2004 net sales due to sales growth in parachute products, military decoys, and uniforms. Partially offsetting these increases were declines in the segment’s sales of hot-air balloons, commercial inflatable products, and high-altitude research balloons. Fourth-quarter sales of $4.0 million were down 16.0% from the prior year. The lower fourth-quarter sales reflect a reduced shipping schedule for Army cargo parachutes and resulted in a $97,000 fourth-quarter operating loss. Fiscal 2005 operating income was up $517,000, or 16.7%, from fiscal 2004 results due to relatively high profitability realized on the parachute products and military decoys. Gross profit as a percentage of sales increased from 18.1% for fiscal 2004 to 21.1% for fiscal 2005. Selling expenses rose to $950,000 in fiscal 2005, an increase of $117,000, or 14.0%. Most of the selling expense increase was due to an increased emphasis on attaining government contract business.

Prospects

Fiscal 2007 revenue growth will depend on obtaining new government and uniform contracts where Aerostar can leverage its capacity and experience. If a new military parachute order is obtained, Aerostar would not expect any material impact on sales and profits until the second half of fiscal 2007. Aerostar results are expected to be down through the first half of the year.

DIVESTITURES AND OTHER REPOSITIONING ACTIVITIES

Fiscal 2004 divestiture activities included the sale of a sewing plant closed in fiscal 2003. The sale of that plant and its related equipment resulted in cash proceeds of $196,000 and a pretax gain of $182,000. This gain was offset by a $355,000 loss from increased liabilities for environmental and legal issues related to previously sold businesses, as estimated by the company and its advisors. During fiscal 2006, a $79,000 pretax loss was incurred from increased liabilities for these environmental issues.

EXPENSES, INCOME TAXES AND OTHER

Corporate expenses increased 10.5% over fiscal 2005 reaching $7.2 million for fiscal 2006. Higher personnel costs, increased investment in information technologies, and a higher level of corporate giving accounted for the $685,000 fiscal 2006 increase. As a percentage of sales, corporate expenses were 3.5% of net sales for fiscal 2006 as compared to fiscal 2005’s 3.9% of net sales. Fiscal 2005 corporate expenses of $6.5 million increased 13.4% over fiscal 2004. Higher professional service fees and increased personnel costs contributed to the $769,000 increase.

Fiscal 2006 interest expense of $35,000 was even with fiscal 2005 and consisted of interest on short-term borrowings and capital leases. Seasonal short-term borrowings of $4.5 million were required during the first quarter of fiscal 2006, but were repaid by April 30, 2005. No borrowings were made in fiscal 2005. Fiscal 2006 other income of $245,000 increased from $128,000 in fiscal 2005. The main component of other income is interest income, which increased in fiscal 2006 due to higher interest rates received on the company’s cash balances and short-term investments. Fiscal 2006’s effective income tax rate of 35.3% decreased from fiscal 2005’s effective rate of 36.0% and was one percentage point lower than the fiscal 2004 rate of 36.3%, reflecting the impact of the U.S. Federal tax deduction for income attributable to manufacturing activities.

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RAVEN 2006 Annual Report

LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes cash provided by (used in) the company’s business activities for the past three fiscal years:


Dollars in thousands	2006			2005			2004

Operating activities	$	21,189		$	18,871		$	19,732
Investing activities		(11,435	)		(7,631	)		(4,352	)
Financing activities		(6,946	)		(19,063	)		(6,155	)

OPERATING ACTIVITIES AND CASH POSITION

The company’s cash flow from operations totaled $59.8 million over the past three years compared to net income of $56.0 million over the same period. Net cash provided by operating activities in fiscal 2006 totaled $21.2 million, a $2.3 million increase as compared to operating cash inflows in fiscal 2005. The cash impact of the company’s strong earnings performance and higher accrued liabilities at fiscal 2006 year-end were tempered by higher accounts receivable and inventory levels and a lower accounts payable balance. Fiscal 2006 net income was $6.4 million higher than fiscal 2005 while accrued operating liability balances increased by $3.0 million. Fiscal 2006’s ending accounts receivable balance was $29.3 million, an operating increase of $3.8 million from fiscal 2005. Accounts receivable balances for the company’s Engineered Films, Flow Controls, and Electronic Systems segments were higher at fiscal 2006 year-end as compared to their fiscal 2005 year-ending balances due to higher sales levels. The fiscal 2006 ending inventory balance of $27.8 million exceeded fiscal 2005 by $4.5 million. In support of higher delivery levels, January 31, 2006 inventory balances in Engineered Films, Electronic Systems, and Flow Controls were up as compared to one year earlier, with Engineered Films accounting for over half of the increase. Fiscal 2005 operating cash flows were $18.9 million as compared to cash flows of $19.7 million for fiscal 2004. Fiscal 2005 net income was $4.1 million higher than fiscal 2004 while accounts payable increased by $6.6 million due to higher inventory levels and to the extension of payment terms on certain vendor invoices.

Cash, cash equivalents and short-term investments totaled $11.4 million at January 31, 2006, an increase of $1.8 million from one year earlier. The higher company earnings helped finance the fiscal 2006 increase in working capital requirements, additional capital expenditures, and the Flow Controls’ Canadian acquisition in February 2005. The company expects that cash and short-term investments, combined with continued positive operating cash flows, will continue to be sufficient to fund day-to-day operations. The company utilized its short-term credit facility to fund the Flow Controls’ Canadian acquisition in February 2005 and to help with short-term seasonal cash needs during the first quarter of fiscal 2006. All of these short-term borrowings were repaid by April 30, 2005.

INVESTING ACTIVITIES

Net cash used in investing activities in fiscal 2006 totaled $11.4 million versus $7.6 million in fiscal 2005. Fiscal 2006 capital expenditures of $10.4 million increased by $2.8 million from fiscal 2005, with $7.4 million being invested in the Engineered Films segment for additional manufacturing capacity and facilities. In February 2005, the company acquired substantially all of the assets of Montgomery Industries, Inc. for $2.7 million in cash. A quarterly payment of six percent of Montgomery product sales was contained in the asset purchase agreement of which $149,000 was paid in fiscal 2006. A $650,000 investment in an unconsolidated real estate affiliate was sold in fiscal 2006, resulting in no material gain or loss on the sale and $1.0 million of short-term investments were liquidated. The company used $7.6 million of cash for investing activities in fiscal 2005 versus $4.4 million one year earlier. Fiscal 2005 investing activities included $7.5 million of capital expenditures, $1.0 million of short-term investment sales, and the $650,000 real estate investment. The company plans to continue its capital investment in additional Engineered Films capacity, with fiscal 2007 capital expenditures expected to reach $13 million for this segment. Total company capital expenditures are planned to be over $17 million in fiscal 2007.

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RAVEN 2006 Annual Report

FINANCING ACTIVITIES

Net cash used in financing activities in fiscal 2006 of $6.9 million decreased $12.1 million from the $19.1 million used in fiscal 2005. The decrease in cash used was due primarily to the $11.3 million special dividend paid in fiscal 2005 and lower treasury stock purchases in fiscal 2006 as compared to fiscal 2005. The company’s main financing activities continue to be the payment of dividends and the repurchase of company stock. The company increased its quarterly dividend on a per-share basis for the nineteenth consecutive year. Fiscal 2006 quarterly dividend payments of 7 cents per share increased 27.3%, excluding the special 62 1/2 cent dividend paid in fiscal 2005. Purchases of 67,800 treasury shares were made during fiscal 2006 at an average share price of $24.91. In fiscal 2005, 186,500 treasury shares were purchased at an average price of $18.87, while 288,350 shares were repurchased at an average price of $10.64 during fiscal 2004.

Short-term borrowings on the company’s line of credit facility totaled $4.5 million for fiscal 2006. These borrowings were used for seasonal cash needs and to fund the Montgomery Industries, Inc. acquisition. The borrowings were repaid by April 30, 2005, and there were no borrowings outstanding as of January 31, 2006. The debt of the company consists of a capital lease utilized by the Raven Canada operation and is scheduled to be repaid by fiscal 2008.

Contractual obligations consist of capital leases and non-cancelable operating leases for facilities and equipment, and unconditional purchase obligations primarily for raw materials. Letters of credit have been issued for workers’ compensation insurance obligations that remain from the period of self-insurance (February 1, 2001, and prior). In the event the bank chooses not to renew the company’s line of credit, the letters of credit would cease and alternative methods of support for the insurance obligations would be necessary that would be more expensive and require additional cash outlays. The company believes the chances of such an event are remote. In fiscal 2005, the company entered into an agreement to purchase for $1.8 million a building to be used in the Engineered Films segment. The agreement required an earnest payment of $25,000 at signing with the remainder due upon closing. On February 1, 2006, the company purchased the building for $1.8 million. A summary of the obligations and commitments at January 31, 2006, and for the next five years is shown below.


					FY 2008-		FY 2010-
Dollars in thousands	Total		FY 2007		FY 2009		FY 2011

Contractual Obligations:
Line of credit^(a)	$	—	$	—	$	—	$	—
Capital leases		16		7		9		—
Operating leases		557		272		279		6
Unconditional purchase obligations^(b)		29,293		29,293		—		—
Real estate purchase agreement		1,756		1,756		—		—

		31,622		31,328		288		6
Other Commercial Commitments:
Letters of credit		2,032		2,032		—		—

	$	33,654	$	33,360	$	288	$	6


(a)		$8.0 million line bears interest at 7.25% as of January 31, 2006, and expires June 2006. The line of credit is reduced by outstanding letters of credit.

(b)		Unconditional purchase obligations include $5.2 million for Engineered Films capital equipment investments.

CAPITAL REQUIREMENTS

The company maintains an excellent financial condition and capacity for growth. Management continues to look for opportunities to expand its core businesses through acquisitions or internal growth. The company has the capacity to assume additional financing and will do so if the appropriate strategic opportunity presents itself. Capital expenditures for fiscal 2007 are planned to be over $17 million, with $13 million of these expenditures supporting Engineered Films with extrusion equipment and facilities capacity. The company intends to return approximately 30% of its earnings to shareholders in the form of dividends. Stock repurchases are anticipated to continue, although at a somewhat reduced level, as a means to return additional cash to shareholders and increase the leverage of the company’s balance sheet. Cash generated from operations and the availability of cash under existing credit facilities is anticipated to be sufficient to fund these initiatives.

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RAVEN 2006 Annual Report

CRITICAL ACCOUNTING POLICIES AND NEW ACCOUNTING STANDARDS

CRITICAL ACCOUNTING POLICIES

Critical accounting policies for the company are those policies that require the application of judgment when valuing assets and liabilities on the company’s balance sheet. These policies are discussed below because a fluctuation in actual results versus expected results could materially affect the company’s operating results and because the policies require significant judgments and estimates to be made. Accounting related to these policies is initially based on best estimates at the time of original entry in the accounting records. Adjustments are periodically recorded when our actual experience differs from the expected experience underlying the estimates. These adjustments could be material if experience were to change significantly in a short period of time. The company, other than utilizing operating leases, does not enter into off-balance sheet financing or derivatives.

Inventories

The company’s most significant accounting judgment is determining inventory value at the lower of cost or market. The company estimates inventory reserves on a quarterly basis. Typically, when a product reaches the end of its life cycle, inventory value declines slowly or the product has alternative uses. Management uses its manufacturing resources planning data to help determine if inventory is slow-moving or has become obsolete due to an engineering change. The company closely reviews items that have balances in excess of the prior year’s requirements or that have been dropped from production requirements. Despite these reviews, technological or strategic decisions, made by management or the company’s customers, may result in unexpected excess material. In the Electronic Systems Division, the company typically has recourse to customers for obsolete or excess material. When ESD customers authorize inventory purchases, especially of long lead-time items, they are required to take delivery of unused material or compensate the company accordingly. In every operating unit of the company, management must manage obsolete inventory risk. The accounting judgment ultimately made is an evaluation of the success that management will have in controlling inventory risk and mitigating the impact of obsolescence when it does occur.

Warranty

Estimated warranty liability costs are based upon historical warranty costs and average time elapsed between purchases and returns for each business segment. Warranty issues that are unusual in nature are accrued for individually.

Allowance for Doubtful Accounts

Determining the level of the allowance for doubtful accounts requires management’s best estimate of the amount of probable credit losses based on historical write-off experience by segment and an estimate of the collectibility of any known problem accounts. Factors which are considered beyond historical experience include the length of time the receivables are outstanding, the current business climate, and the customer’s current financial condition.

Revenue Recognition

The company recognizes and records revenue when there is persuasive evidence of an arrangement, delivery has occurred, the sales price is determinable, and collectibility is reasonably assured. Revenue is typically recognized at time of shipment because sales terms are FOB shipping point. Estimated returns, allowances or warranty charges are recognized upon shipment of a product. The company sells directly to customers or distributors who incur the expense and commitment for any post-sale obligations beyond stated warranty terms.

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RAVEN 2006 Annual Report

Self-insurance Reserves

The company purchases insurance with deductibles for product liability; general insurance, including aviation product liability; and workers’ compensation. Third party insurance is carried for what is believed to be the major portion of potential exposure. The company has established accruals for potential uninsured claims, including estimated costs and legal fees. Management considers these accruals adequate, although a substantial change in the number and/or severity of claims would result in materially different amounts.

Goodwill and Long-lived Asset Impairment

The company periodically assesses goodwill and other long-lived assets for impairment, or more frequently if events or changes in circumstances indicate that an asset might be impaired, using fair value measurement techniques. For goodwill, the company performs impairment reviews annually by reporting units, which are the company’s reportable segments except for Aerostar’s high-altitude research balloon operation, which is evaluated independently from Aerostar’s other operations. Estimates of fair value are primarily determined using discounted cash flows, market comparisons and recent transactions. These valuation methodologies use significant estimates and assumptions, which include projected future cash flows, including timing and the risks inherent in future cash flows, perpetual growth rates and determination of appropriate market comparables.

NEW ACCOUNTING STANDARDS

In December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS No. 123 (Revised 2004), Share-Based Payment, or SFAS No. 123(R), which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. SFAS No. 123(R) is effective for the company beginning February 1, 2006. The company began expensing stock options in fiscal 2003 utilizing the modified prospective method and does not expect adoption of this revised statement will have a significant effect on consolidated results of operations or financial position. Beginning February 1, 2006, the company will change its cash flow presentation in accordance with SFAS 123(R) which requires the cash flows from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows, instead of operating cash flows. The company expects to provide certain disclosures required by SFAS 123(R) but are not required by SFAS 123, beginning in the first quarter of fiscal 2007.

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RAVEN 2006 Annual Report

In May 2005, the FASB issued FASB Statement No. 154, Accounting Changes and Error Corrections. This new standard replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. Among other changes, Statement 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. The adoption of this statement is not expected to have an effect on the company’s consolidated results of operations or financial position.

In June 2005, the FASB Emerging Issues Task Force (EITF) reached a final consensus on EITF 05-6, Determining the Amortization Period for Leasehold Improvements. EITF 05-6 addresses the determination of the amortization period for leasehold improvements in operating leases that are either (a) purchased subsequent to the inception of the lease or (b) acquired in a business combination. The provisions of EITF 05-6 are effective for periods beginning after June 30, 2005, and are not expected to have an effect on the company’s consolidated results of operations or financial position.

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RAVEN 2006 Annual Report

QUARTERLY INFORMATION (Unaudited)


														Net Income				Common Stock				Cash
Dollars in thousands,	Net		Gross		Operating			Pretax			Net			Per Share ^(a)(b)				Market Price^(b)				Dividends
except per-share data	Sales		Profit		Income			Income			Income			Basic		Diluted		High		Low		Per Share^(b)

FISCAL 2006
First Quarter	$	50,704	$	15,161	$	11,136		$	11,098		$	7,157		$	0.40	$	0.39	$	22.28	$	16.54	$	0.070
Second Quarter		45,304		10,882		7,299			7,391			4,774			0.26		0.26		27.78		18.68		0.070
Third Quarter		54,135		14,213		10,568			10,635			6,869			0.38		0.37		31.99		21.75		0.070
Fourth Quarter		54,385		12,975		8,281			8,370			5,462			0.30		0.30		33.15		26.75		0.070

Total Year	$	204,528	$	53,231	$	37,284		$	37,494		$	24,262		$	1.34	$	1.32	$	33.15	$	16.54	$	0.280

FISCAL 2005
First Quarter	$	38,408	$	11,678	$	8,451		$	8,475		$	5,415		$	0.30	$	0.29	$	17.17	$	13.65	$	0.055
Second Quarter		37,077		8,759		5,651			5,677			3,642			0.20		0.20		19.43		13.08		0.680	^(c)
Third Quarter		48,597		12,962		8,099	^(d)		8,115	^(d)		5,194	^(d)		0.29		0.28		23.89		17.41		0.055
Fourth Quarter		44,004		9,801		5,661			5,688			3,640			0.20		0.20		26.94		17.05		0.055

Total Year	$	168,086	$	43,200	$	27,862		$	27,955		$	17,891		$	0.99	$	0.97	$	26.94	$	13.08	$	0.845

FISCAL 2004
First Quarter	$	36,942	$	9,437	$	6,544		$	6,556		$	4,183		$	0.23	$	0.23	$	9.50	$	7.56	$	0.040
Second Quarter		36,110		7,811		4,937			4,976			3,163			0.17		0.17		11.00		7.90		0.040
Third Quarter		36,081		9,219		6,121			6,126			3,902			0.22		0.21		13.73		10.62		0.045
Fourth Quarter		33,594		7,292		4,024			4,058			2,588			0.14		0.14		15.23		11.89		0.045

Total Year	$	142,727	$	33,759	$	21,626		$	21,716		$	13,836		$	0.77	$	0.75	$	15.23	$	7.56	$	0.170


(a)		Net income per share is computed discretely by quarter and may not add to the full year.

(b)		All per-share and market price data reflect the October 2004 two-for-one stock split.

(c)		A special dividend of $.625 per share was paid during the second quarter of fiscal 2005.

(d)		Includes a pretax $1.3 million ($845,000 net of tax) writeoff of assets related to the Fluent Systems product line (See Note 5).

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RAVEN 2006 Annual Report

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management has assessed our internal control over financial reporting in relation to criteria described in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment using those criteria, we concluded that, as of January 31, 2006, our internal control over financial reporting was effective.

Our management’s assessment of the effectiveness of our internal control over financial reporting as of January 31, 2006 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears on page 43 of this Annual Report.



Ronald M. Moquist		Thomas lacarella
President & Chief Executive Officer		Vice President & Chief Financial Officer

March 23, 2006

Page 31
RAVEN 2006 Annual Report

CONSOLIDATED BALANCE SHEETS


	As of January 31
Dollars in thousands, except per-share data	2006		2005		2004

ASSETS
Current assets
Cash and cash equivalents	$	9,409	$	6,619	$	14,442
Short-term investments		2,000		3,000		4,000
Accounts receivable, net		29,290		25,370		18,454
Inventories, net		27,819		23,315		16,763
Deferred income taxes		1,746		1,465		1,313
Prepaid expenses and other current assets		1,081		1,823		738

Total current assets		71,345		61,592		55,710

Property, plant and equipment, net		25,602		19,964		15,950
Goodwill		6,401		5,933		6,776
Other assets, net		2,809		1,020		1,072

Total assets	$	106,157	$	88,509	$	79,508


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Current portion of long-term debt	$	7	$	57	$	72
Accounts payable		8,179		10,322		3,666
Accrued liabilities		11,147		9,716		7,784
Customer advances		717		855		373

Total current liabilities		20,050		20,950		11,895

Long-term debt, less current portion		9		—		57
Other liabilities, primarily compensation and benefits		1,709		1,477		1,085

Commitments and contingencies

Shareholders’ equity		84,389		66,082		66,471
Common shares, par value $1.00 per share
Authorized — 100,000,000
Outstanding — 2006: 18,072,369; 2005: 17,999,468 2004: 18,041,088 (9,020,544 pre-split)

Total liabilities and shareholders’ equity	$	106,157	$	88,509	$	79,508

The accompanying notes are an integral part of the consolidated financial statements.

Page 32
RAVEN 2006 Annual Report

CONSOLIDATED STATEMENTS OF

SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME


																Accumulated
	$1 Par															Other
	Common			Paid-in			Treasury stock						Retained			Comprehensive
Dollars in thousands, except per-share data	Stock			Capital			Shares			Cost			Earnings			Income		Total

Balance January 31, 2003	$	15,856		$	340			(6,789,268	)	$	(35,113	)	$	77,153		$	—	$	58,236

Net income		—			—			—			—			13,836			—		13,836
Cash dividends ($.170 per share)^(a)		—			—			—			—			(3,075	)		—		(3,075	)
Purchase of stock		—			—			(144,175	)		(3,068	)		—			—		(3,068	)
Purchase and retirement of stock		(39	)		(804	)		—			—			—			—		(843	)
Employees’ stock options exercised		137			435			—			—			—			—		572
Stock compensation expense		—			282			—			—			—			—		282
Tax benefit from exercise of stock options		—			531			—			—			—			—		531

Balance January 31, 2004		15,954			784			(6,933,443	)		(38,181	)		87,914			—		66,471

Net income		—			—			—			—			17,891			—		17,891
Cash dividends ($.220 per share)		—			—			—			—			(3,971	)		—		(3,971	)
Cash dividend — Special ($.625 per share)		—			—			—			—			(11,327	)		—		(11,327	)
Two-for-one stock split		15,954			(411	)		(6,933,443	)		—			(15,543	)		—		—
Purchase of stock		—			—			(186,500	)		(3,519	)		—			—		(3,519	)
Purchase and retirement of stock		(40	)		(646	)		—			—			—			—		(686	)
Employees’ stock options exercised		185			327			—			—			—			—		512
Stock compensation expense		—			309			—			—			—			—		309
Tax benefit from exercise of stock options		—			402			—			—			—			—		402

Balance January 31, 2005		32,053			765			(14,053,386	)		(41,700	)		74,964			—		66,082

Net income		—			—			—			—			24,262			—		24,262
Change in cumulative foreign currency translation adjustment		—			—			—			—			—			13		13
Cash dividends ($.280 per share)		—			—			—			—			(5,056	)		—		(5,056	)
Purchase of stock		—			—			(67,800	)		(1,689	)		—			—		(1,689	)
Purchase and retirement of stock		(27	)		(689	)		—			—			—			—		(716	)
Employees’ stock options exercised		168			410			—			—			—			—		578
Stock compensation expense		—			485			—			—			—			—		485
Tax benefit from exercise of stock options		—			430			—			—			—			—		430

Balance January 31, 2006	$	32,194		$	1,401			(14,121,186	)	$	(43,389	)	$	94,170		$	13	$	84,389


(a)		Reflects the October 2004 two-for-one stock split.

The accompanying notes are an integral part of the consolidated financial statements.

Page 34
RAVEN 2006 Annual Report

CONSOLIDATED STATEMENTS OF CASH FLOWS


	For the years ended January 31
Dollars in thousands	2006			2005			2004

Cash flows from operating activities
Net income	$	24,262		$	17,891		$	13,836
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		4,684			3,410			3,674
Amortization of intangible assets		467			431			471
Provision for losses on accounts receivable, net of recoveries		78			34			67
Loss on disposition of businesses and assets		79			1,282			173
Deferred income taxes		(809	)		(31	)		254
Stock compensation expense		485			309			282
Change in operating assets and liabilities, net of effects from acquisition and disposition of businesses and assets		(8,086	)		(4,669	)		850
Other operating activities, net		29			214			125

Net cash provided by operating activities		21,189			18,871			19,732


Cash flows from investing activities
Capital expenditures		(10,358	)		(7,541	)		(3,330	)
Purchase of short-term investments		(4,500	)		(3,000	)		(4,000	)
Sale of short-term investments		5,500			4,000			4,000
Acquisition of businesses		(2,828	)		(414	)		(1,038	)
Sales of businesses and assets, net of cash sold		—			—			257
Sale of (investment in) unconsolidated affiliate		650			(650	)		—
Other investing activities, net		101			(26	)		(241	)

Net cash used in investing activities		(11,435	)		(7,631	)		(4,352	)


Cash flows from financing activities
Proceeds from borrowing under line of credit		4,500			—			—
Repayment on borrowing under line of credit		(4,500	)		—			—
Long-term debt principal payments		(63	)		(72	)		(141	)
Dividends paid		(5,056	)		(15,298	)		(3,075	)
Purchase of treasury stock		(1,689	)		(3,519	)		(3,068	)
Other financing activities, net		(138	)		(174	)		129

Net cash used in financing activities		(6,946	)		(19,063	)		(6,155	)


Effect of exchange rate changes on cash		(18	)		—			—


Net increase (decrease) in cash and cash equivalents		2,790			(7,823	)		9,225
Cash and cash equivalents at beginning of year		6,619			14,442			5,217

Cash and cash equivalents at end of year	$	9,409		$	6,619		$	14,442

The accompanying notes are an integral part of the consolidated financial statements.

Page 35
RAVEN 2006 Annual Report

NOTES TO FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Raven Industries, Inc. and its wholly owned subsidiaries (the “company”). The company is an industrial manufacturer providing a variety of products to customers within the industrial, agricultural, construction and military/aerospace markets, primarily in North America. The company operates three divisions (Flow Controls, Engineered Films and Electronic Systems) in addition to two wholly owned subsidiaries, Aerostar International, Inc. (Aerostar) and Raven Industries Canada, Inc. (Raven Canada). All significant intercompany balances and transactions have been eliminated in consolidation. The company sold its 50% ownership in Zip City Partners, LLC in fiscal 2006. The equity method was used to account for this investment.

USE OF ESTIMATES

The preparation of the company’s financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates.

FOREIGN CURRENCY

The Canadian dollar is considered the functional currency of the Canadian operations. The balance sheet of the Canadian subsidiary is translated into U.S. dollars at period-end exchange rates, while the statement of income is translated at average rates. Adjustments resulting from financial statement translations are included as cumulative translation adjustments in accumulated other comprehensive income (loss) within shareholders’ equity. Foreign currency transaction gains or losses are recognized in the period incurred and are included in other income (expense) in the Consolidated Statements of Income.

CASH AND CASH EQUIVALENTS

The company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Cash and cash equivalent balances are principally concentrated in checking and savings accounts with Wells Fargo Bank.

SHORT-TERM INVESTMENTS

The investments consist of certificates of deposit with varying maturities, all less than 12 months from the balance sheet date. Rates on the deposits at January 31, 2006, are 4.10%.

ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the company’s best estimate of the amount of probable credit losses based on historical write-off experience by segment and an estimate of the collectibility of any known problem accounts.

INVENTORY VALUATION

Inventories are stated at the lower of cost or market, with cost determined on the first-in, first-out basis. Market value encompasses consideration of all business factors including price, contract terms and usefulness.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost and are depreciated over the estimated useful lives of the assets using accelerated methods. The estimated useful lives used for computing depreciation are as follows:


Buildings and improvements		7 to 39 years
Machinery and equipment		3 to 7 years

Maintenance and repairs are charged to expense in the year incurred and renewals and betterments are capitalized. The cost and related accumulated depreciation of assets sold or disposed of are removed from the accounts and the resulting gain or loss is reflected in operations.

INTANGIBLE ASSETS

Intangible assets, primarily comprised of technologies acquired through acquisition, are recorded at cost and are presented net of accumulated amortization. Amortization is computed on a straight-line basis over estimated useful lives ranging from 3 to 20 years. The straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in each reporting period.

GOODWILL

The company recognizes the excess cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed, as goodwill. Goodwill is tested for impairment on an annual basis during the fourth quarter, and between annual tests whenever there is an impairment indicated. Fair values are estimated based on future cash flows and are compared with the corresponding carrying value of the related asset.

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RAVEN 2006 Annual Report

LONG-LIVED ASSETS

The company periodically assesses the recoverability of long-lived and intangible assets using fair value measurement techniques, where fair value is calculated based upon anticipated future earnings and undiscounted operating cash flows. If the fair value is less than the carrying amount of the asset, an impairment loss is recognized to the extent the carrying value exceeds the fair value of the asset.

INSURANCE OBLIGATIONS

The company employs insurance policies covering workers’ compensation and general liability costs. Liabilities are accrued related to claims filed and estimates for claims incurred but not reported. To the extent these obligations will be reimbursed by insurance, the expected reimbursement is included as a component of other current assets.

CONTINGENCIES

The company is involved as a defendant in lawsuits, claims or disputes arising in the normal course of business. An estimate of the loss on these matters is charged to operations when it is probable that an asset has been impaired or a liability has been incurred, and the amount of the loss can be reasonably estimated. The settlement of such claims cannot be determined at this time; however, management believes that any liability resulting from these claims will be substantially mitigated by insurance coverage. Accordingly, management does not believe that the ultimate outcome of these matters will be significant to its results of operations, financial position or cash flows.

REVENUE RECOGNITION

The company recognizes revenue and records revenues upon shipment of products. The company sells directly to customers or distributors who incur the expense and commitment for any post-sale obligations beyond stated warranty terms. Estimated returns, allowances or warranty charges are recognized upon shipment of a product. The company does not typically require collateral from its customers. Shipping and handling costs are classified as a component of cost of goods sold.

WARRANTIES

Accruals necessary for product warranties are estimated based upon historical warranty costs and average time elapsed between purchases and returns for each division. Additional accruals are made for any significant, discrete warranty issues.

RESEARCH AND DEVELOPMENT

Research and development expenditures of $2.5 million in fiscal 2006, $2.0 million in fiscal 2005, and $1.7 million in fiscal 2004 were charged to cost of goods sold in the year incurred. Expenditures are principally composed of labor and material costs.

STOCK-BASED COMPENSATION

The company records compensation expense related to its stock-based compensation plan using the fair value method permitted by SFAS No. 123, Accounting for Stock-Based Compensation under the modified prospective method outlined by SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure.

INCOME TAXES

Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities and reserves. Judgmental reserves are maintained for income tax audits and other tax issues. Deferred income taxes reflect temporary differences between assets and liabilities reported on the company’s balance sheet and their tax bases. These differences are measured using enacted tax laws and statutory tax rates applicable to the periods when the temporary differences will impact taxable income. Deferred tax assets are reduced by a valuation allowance to reflect realizable value, when necessary. Under the guidance in FASB Staff Position No. FSP 109-1, Application of FASB Statement No. 109, “Accounting for Income Taxes,” to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004, the deduction is treated as a “special deduction.” As such, the special deduction has no effect on deferred tax assets and liabilities. Rather, the impact of this deduction is reported in the period in which the deduction is claimed on the company’s tax return.

STOCK SPLITS

The company completed a two-for-one stock split effected in the form of a 100% stock dividend on October 15, 2004. All share and per-share information reflects the effect of this stock split.

Page 37
RAVEN 2006 Annual Report

NOTES TO FINANCIAL STATEMENTS (continued)

NEW ACCOUNTING STANDARDS

In June 2005, the FASB Emerging Issues Task Force (EITF) reached a final consensus on EITF 05-6, Determining the Amortization Period for Leasehold Improvements. EITF 05-6 addresses the determination of the amortization period for leasehold improvements in operating leases that are either (a) purchased subsequent to the inception of the lease or (b) acquired in a business combination. The provisions of EITF 05-6 are effective for periods beginning after June 30, 2005, and are not expected to have an effect on the company’s consolidated results of operations or financial position.

Note 2. Selected Balance Sheet Information

Following are the components of selected balance sheet items:


	As of January 31
Dollars in thousands	2006			2005			2004

Accounts receivable, net:
Trade accounts	$	29,547		$	25,635		$	18,719
Allowance for doubtful accounts		(257	)		(265	)		(265	)

	$	29,290		$	25,370		$	18,454


Inventories, net:
Finished goods	$	3,504		$	3,538		$	2,500
In process		3,652			2,820			2,120
Materials		20,663			16,957			12,143

	$	27,819		$	23,315		$	16,763


Property, plant and equipment, net:
Land	$	1,084		$	1,084		$	1,110
Building and improvements		16,662			15,184			13,049
Machinery and equipment		43,256			36,486			32,479
Accumulated depreciation		(35,400	)		(32,790	)		(30,688	)

	$	25,602		$	19,964		$	15,950


Other assets, net:
Amortizable assets:
Purchased technology	$	3,380		$	1,080		$	1,250
Other intangibles		1,265			946			1,136
Accumulated amortization		(2,300	)		(1,831	)		(1,494	)

		2,345			195			892
Investment in unconsolidated affiliate		—			650			—
Deferred income taxes		318			—			—
Other, net		146			175			180

	$	2,809		$	1,020		$	1,072


Accrued liabilities:
Salaries and benefits	$	2,167		$	1,992		$	1,875
Vacation		2,119			1,852			1,638
401(k) contributions		1,049			980			906
Insurance obligations		1,632			1,541			524
Income taxes		808			567			267
Profit sharing		1,168			900			544
Warranty		569			452			263
Other		1,635			1,432			1,767

	$	11,147		$	9,716		$	7,784

Page 38
RAVEN 2006 Annual Report

Note 3. Supplemental Cash Flow Information


	For the years ended January 31
Dollars in thousands	2006			2005			2004

Changes in operating assets and liabilities, net of effects from the acquisition and sale of businesses:
Accounts receivable	$	(3,821	)	$	(6,950	)	$	(2,072	)
Inventories		(4,356	)		(6,704	)		4,603
Prepaid expenses and other assets		(103	)		150			(16	)
Accounts payable		(2,688	)		6,576			(1,625	)
Accrued and other liabilities		3,021			1,777			187
Customer advances		(139	)		482			(227	)

	$	(8,086	)	$	(4,669	)	$	850


Cash paid during the year for:
Interest	$	35		$	77		$	50
Income taxes	$	12,806		$	9,596		$	7,014

Note 4. Montgomery Industries Acquisition

On February 17, 2005, the company acquired substantially all of the assets of Montgomery Industries, Inc., a privately held Canadian corporation, for $2.7 million in cash plus the assumption of certain liabilities and a quarterly payment of six percent on future sales of Montgomery products up to a maximum payment of $1.825 million. Montgomery has developed and sold an automatic boom height control system under the name “Autoboom™” for agricultural sprayers designed to successfully maintain optimum boom height in uneven terrain without compromising the speed with which the sprayer can be operated. Of the purchase price, $289,000 was allocated to current assets, $82,000 was allocated to property, plant and equipment, $2.560 million was allocated to amortizable intangible assets (to be amortized over approximately seven years), $539,000 to current liabilities assumed and $285,000 to goodwill, which is deductible for tax purposes.

For the year ended January 31, 2006, the earn-out on the sales of Montgomery products was $183,000, which was recorded as an increase in goodwill.

The operation is a component of the Flow Controls segment. The results of operations for the acquired business have been included in the consolidated financial statements since the date of acquisition. Pro forma earnings are not presented due to the immateriality of the effect of the acquisition to the company’s consolidated operations.

Note 5. Fluent Systems

On December 19, 2003, the company acquired substantially all of the assets of Fluent Systems, LLC for $1.0 million in cash and a payment deferred until December 2004, which was valued at $60,000. This start-up company had developed a wireless liquid level monitoring system used with anhydrous ammonia tanks. Of the purchase price, $79,000 was assigned to equipment, $195,000 was assigned to intangible assets, $19,000 to current liabilities assumed and $848,000 to goodwill, which was fully deductible for tax purposes. The operation was assigned to the Flow Controls segment. Pro forma earnings are not presented due to the immateriality of the effect of the acquisition to the company’s consolidated operations.

The results of operations were included in the consolidated financial statements from the date of acquisition. In the third quarter of fiscal 2005, Flow Controls decided to abandon the Fluent Systems product line resulting in a $1.3 million pretax writeoff of inventory, equipment, intangible assets and goodwill.

Note 6. Divestitures and Other Repositioning Activities

A $79,000 pretax loss was incurred during fiscal 2006 from increased liabilities for environmental issues related to the company’s fiscal 2000 sale of its Glasstite subsidiary. Fiscal 2004 divestiture activities were limited to the sale by the company’s Aerostar subsidiary of a sewing plant closed in fiscal 2003. The sale of that plant and its related equipment resulted in cash proceeds of $196,000 and a pretax gain of $182,000. This gain was offset by a $355,000 loss from increased estimated liabilities for environmental and legal issues related to previously sold operations. At January 31, 2006, the company had an undiscounted accrual remaining of $151,000 for environmental monitoring and clean-up costs of sold operations.

Note 7. Goodwill and Other Intangibles

Goodwill

The changes in the carrying amount of goodwill by reporting segment are shown below:


	Flow			Engineered		Electronic
Dollars in thousands	Controls			Films		Systems		Aerostar		Total

Balance at January 31, 2003	$	4,940		$	96	$	433	$	464	$	5,933
Goodwill acquired during year		843			—		—		—		843

Balance at January 31, 2004		5,783			96		433		464		6,776
Adjustment		5			—		—		—		5
Writeoff of Fluent Systems		(848	)		—		—		—		(848	)

Balance at January 31, 2005		4,940			96		433		464		5,933
Goodwill acquired during year		285			—		—		—		285
Acquisition earn-outs		183			—		—		—		183

Balance at January 31, 2006	$	5,408		$	96	$	433	$	464	$	6,401

Intangible Assets

Estimated future amortization expense based on the current carrying value of amortizable intangible assets for fiscal periods 2007 through 2011 is $433,000, $377,000, $366,000, $365,000 and $351,000, respectively.

Page 39
RAVEN 2006 Annual Report

NOTES TO FINANCIAL STATEMENTS (continued)

Note 8. Employee Retirement Benefits

The company has a 401(k) plan covering substantially all employees and contributed 3% of qualified payroll. The company’s contribution expense was $892,000, $836,000 and $817,000 for fiscal 2006, 2005 and 2004, respectively.

In addition, the company provides postretirement medical and other benefits to senior executive officers and senior managers. The company accounts for these benefits in accordance with SFAS No. 106, Accounting for Postretirement Benefits Other Than Pensions. There are no assets held for the plans and any obligations are covered through the company’s operating cash and investments. The accumulated benefit obligation for these benefits is shown below:


	For the years ended January 31
Dollars in thousands	2006			2005			2004

Benefit obligation at beginning of year	$	2,722		$	2,607		$	2,235
Service cost		80			58			36
Interest cost		259			186			162
Actuarial loss		2,014			27			380
Retiree benefits paid		(147	)		(156	)		(206	)

Benefit obligation at end of year		4,928			2,722			2,607
Less: unrecognized actuarial losses		(3,045	)		(1,275	)		(1,395	)

Ending liability balance	$	1,883		$	1,447		$	1,212

The liability and expense reflected in the balance sheet and income statement are as follows:


	For the years ended January 31
Dollars in thousands	2006			2005			2004

Beginning liability balance	$	1,447		$	1,212		$	1,102
Employer expense		583			391			316
Retiree benefits paid		(147	)		(156	)		(206	)

Ending liability balance		1,883			1,447			1,212
Current portion		(174	)		(180	)		(200	)

Long-term portion	$	1,709		$	1,267		$	1,012

Assumptions used:
Discount rate		5.75	%		7.00	%		7.00	%
Wage inflation rate		4.00	%		4.00	%		4.00	%

The discount rate is based on matching rates of return on high-quality fixed-income investments with the timing and amount of expected benefit payments. No material fluctuations in retiree benefit payments are expected in future years.

The assumed health care cost trend rate for fiscal 2006 was 9.39% as compared to 7.00% assumed for fiscal 2005 and 2004. The impact of a one-percentage-point change in assumed health care rates would not be significant to the company’s income statement or balance sheet. The rate to which the fiscal 2006 health care cost trend rate is assumed to decline to is 4.25%, which is the ultimate trend rate. The fiscal year that the rate reaches the ultimate trend rate is expected to be fiscal 2026.

Note 9. Warranties

Changes in the warranty accrual were as follows:


	As of January 31
Dollars in thousands	2006			2005			2004

Beginning balance	$	452		$	263		$	156
Accrual for warranties		958			932			863
Settlements made (in cash or in kind)		(841	)		(743	)		(756	)

Ending balance	$	569		$	452		$	263

Note 10. Income Taxes

The reconciliation of income tax computed at the federal statutory rate to the company’s effective income tax rate is as follows:


	For the years ended January 31
	2006			2005			2004

Tax at U.S. federal statutory rate		35.0	%		35.0	%		35.0	%
State and local income taxes, net of U.S. federal benefit		1.1			0.9			0.9
Tax deduction on qualified production activities		(1.0	)		—			—
Other, net		0.2			0.1			0.4

		35.3	%		36.0	%		36.3	%

Significant components of the company’s income tax provision are as follows:


	For the years ended January 31
Dollars in thousands	2006			2005			2004

Income taxes:
Currently payable	$	14,041		$	10,095		$	7,626
Deferred		(809	)		(31	)		254

	$	13,232		$	10,064		$	7,880

Significant components of the company’s deferred tax assets and liabilities are as follows:


	As of January 31
Dollars in thousands	2006			2005			2004

Current deferred tax assets:
Accounts receivable	$	88		$	93		$	93
Inventories		220			237			182
Accrued vacation		680			591			532
Insurance obligations		282			161			183
Other accrued liabilities		476			383			323

		1,746			1,465			1,313

Non-current deferred tax assets (liabilities):
Accrued compensation and benefits		598			443			354
Depreciation and amortization		(439	)		(771	)		(502	)
Other		159			118			75

		318			(210	)		(73	)

Net deferred tax asset	$	2,064		$	1,255		$	1,240

Pre-tax book income for the U.S. companies was $37,380,000 and $114,000 for the Canadian subsidiary. As of January 31, 2006, undistributed earnings of the Canadian subsidiary were considered to have been reinvested indefinitely and, accordingly, the company has not provided United States income taxes on such earnings.

Page 40
RAVEN 2006 Annual Report

Note 11. Financing Arrangements

The company has an uncollateralized credit agreement providing a line of credit of $8.0 million with a maturity date of June 1, 2006 bearing interest at 0.25% under the prime rate. Letters of credit totaling $2.0 million have been issued under the line, primarily to support self-insured workers’ compensation bonding requirements. No borrowings were outstanding as of January 31, 2006, 2005 or 2004, and $6.0 million was available at January 31, 2006. The credit agreement contains certain restrictive covenants that, among other things, require maintenance of certain levels of net worth and working capital. Borrowings on the credit line bore interest as of January 31, 2006, 2005 and 2004 at 7.25%, 5.25% and 4.00%, respectively. The weighted-average interest rate for borrowing under the short-term credit line in fiscal 2006 was 5.63%. There were no borrowings under the credit line in fiscal years 2005 or 2004. The debt of the company consists of a capital lease utilized by the Raven Canada operation and is scheduled to be repaid by fiscal 2008.

Wells Fargo Bank, N.A. provides the company’s line of credit and holds the company’s cash and cash equivalents. One member of the company’s board of directors is also on the board of directors of Wells Fargo & Co., the parent company of Wells Fargo Bank, N.A.

The company leases certain vehicles, equipment and facilities under operating leases. Total rent and lease expense was $381,000, $305,000, and $355,000 in fiscal 2006, 2005 and 2004, respectively. Future minimum lease payments under non-cancelable operating leases for fiscal periods 2007 to 2010 are $272,000, $228,000, $51,000, and $6,000 with all leases scheduled to expire by fiscal 2010.

Note 12. Stock Options

Senior officers and key employees of the company have been granted options to purchase stock under the company’s 2000 Stock Option and Compensation Plan (“Plan”). The Plan, administered by the board of directors, allows for either incentive or non-qualified options with terms not to exceed ten years. There are 580,500 shares of the company’s common stock reserved for future option grants under the plan at January 31, 2006. Options are granted with exercise prices not less than market value at the date of grant. These stock options vest over a four-year period and expire after five years.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions by grant year.


	For the years ended January 31
	2006			2005			2004

Risk-free interest rate		4.36	%		3.51	%		3.02	%
Expected dividend yield		0.90	%		1.07	%		1.33	%
Expected volatility factor		39.25	%		34.92	%		35.89	%
Expected option term (in years)		4.25			4.50			4.50

Weighted average grant date fair value	$	10.90		$	5.91		$	4.11
Stock compensation expense	$	485,000		$	309,000		$	282,000

Information regarding option activity is as follows:


	For the years ended January 31
	2006					2005					2004
				weighted					weighted					weighted
				average					average					average
				exercise					exercise					exercise
	options			price		options			price		options			price

Outstanding at beginning of year		612,176		$	9.02		723,676		$	5.89		872,112		$	3.72
Granted		76,500			31.05		86,600			22.00		129,000			13.50
Exercised		(167,962	)		3.44		(184,600	)		2.77		(274,436	)		2.61
Forfeited		(1,300	)		17.93		(13,500	)		9.79		(3,000	)		2.65

Outstanding at end of year		519,414		$	14.05		612,176		$	9.02		723,676		$	5.89

Options exercisable at end of year		282,383		$	8.66		323,076		$	5.27		326,608		$	3.57

The following table contains information about stock options outstanding at January 31, 2006:


	Remaining
Exercise	Contractual		Number		Number
Price	Life (Years)		Outstanding		Exercisable

$ 4.38		0.75		91,489		91,489
7.00		1.75		146,075		109,556
13.50		2.75		120,000		60,000
22.00		3.75		85,350		21,338
31.05		4.75		76,500		—

				519,414		282,383

Page 41
RAVEN 2006 Annual report

NOTES TO FINANCIAL STATEMENTS (continued)

Note 13. Net Income Per Share

Basic net income per share is computed by dividing net income by the weighted-average common shares outstanding. Common shares outstanding represent common shares issued less shares purchased and held in treasury. Share and per-share data in the net income per share computation have been restated to reflect the October 15, 2004, two-for-one stock split. Diluted net income per share is computed by dividing net income by the weighted-average common and common-equivalent shares outstanding, which includes the shares issuable upon exercise of employee stock options, net of shares assumed purchased with the option proceeds. Certain outstanding options were excluded from the diluted net income per-share calculations because their exercise prices were greater than the average market price of the company’s common stock during those periods. For fiscal 2006, 2005 and 2004, 19,125, 21,650, and 32,250 options, respectively, were excluded from the diluted net income per-share calculation. Details of the computation are presented below.


	For the years ended January 31
Dollars in thousands, except per-share amounts	2006		2005		2004

Net income	$	24,262	$	17,891	$	13,836

Weighted-average common shares outstanding		18,055,439		18,066,223		18,081,712
Dilutive impact of stock options		259,104		344,104		407,868

Weighted-average common and common-equivalent shares outstanding		18,314,543		18,410,327		18,489,580

Net income per common share:
— basic	$	1.34	$	0.99	$	0.77

— diluted	$	1.32	$	0.97	$	0.75

Note 14. Comprehensive Income

Pursuant to the provisions of SFAS No. 130, Reporting Comprehensive Income, comprehensive income includes all changes to shareholders’ equity during a period, except those resulting from investment by and distributions to shareholders. Components of comprehensive income for the company include net income and changes in foreign currency translation adjustments. Total comprehensive income was as follows:


	As of January 31
Dollars in thousands	2006		2005		2004

Net Income	$	24,262	$	17,891	$	13,836
Foreign currency translation adjustments		13		—		—

Total comprehensive income	$	24,275	$	17,891	$	13,836

Note 15. Business Segments and Major Customer Information

The company’s reportable segments are defined by their common technologies, production processes and inventories. These segments reflect the organization of the company into the three Raven divisions, each with a Divisional Vice President, and its Aerostar subsidiary. Raven Canada is consolidated with the Flow Controls Division.

The company measures the performance of its segments based on their operating income exclusive of administrative and general expenses. The accounting policies of the operating segments are the same as those described in Note 1, Summary of Significant Accounting Policies. Other income, interest expense and income taxes are not allocated to individual operating segments, and assets not identifiable to an individual segment are included as corporate assets. Segment information is reported consistent with the company’s management reporting structure as required by SFAS No. 131 Disclosures about Segments of an Enterprise and Related Information.

No customer accounted for more than 10% of the company’s consolidated sales or accounts receivable in fiscal 2006, 2005 or 2004.

The company had sales of $16.8 million for the year ended January 31, 2006, to countries outside the United States, primarily to Canada. These sales were included in the Flow Controls, Engineered Films, Electronic Systems and Aerostar segments and totaled $6.7 million, $1.3 million, $8.0 million and $779,000, respectively.

Market and segment information for 2006, 2005 and 2004 is presented on pages 1 and 18 of this annual report.

Note 16. Subsequent Event

In fiscal 2005, the company entered into an agreement to purchase for $1.8 million a building to be used in the Engineered Films segment. The agreement required an earnest payment of $25,000 at signing with the remainder due upon closing. On February 1, 2006, the company purchased the building for $1.8 million.

Note 17. Quarterly Information (Unaudited)

The company’s quarterly information is presented on page 30.

Page 42
RAVEN 2006 Annual Report

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Raven Industries, Inc:

We have completed integrated audits of Raven Industries, Inc.’s 2006 and 2005 consolidated financial statements and of its internal control over financial reporting as of January 31, 2006, and an audit of its 2004 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of shareholders’ equity and comprehensive income and of cash flows present fairly, in all material respects, the financial position of Raven Industries, Inc. and its subsidiaries at January 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2006 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements 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 of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control over Financial Reporting appearing on page 31 of the 2006 Annual Report to Shareholders, that the Company maintained effective internal control over financial reporting as of January 31, 2006 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting 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 effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

PricewaterhouseCoopers LLP
Minneapolis, Minnesota
March 23, 2006

Page 43
RAVEN 2006 Annual Report

INVESTOR INFORMATION

Independent Registered Public
Accounting Firm
PricewaterhouseCoopers LLP
Minneapolis, MN

Stock Transfer Agent & Registrar
Wells Fargo Bank, N.A.
161 N. Concord Exchange
P.O. Box 64854
South St. Paul, MN 55164-0854
Phone: 1-800-468-9716

Form 10-K
Upon written request, Raven Industries, Inc.’s Form 10-K for the fiscal year ended January 31, 2006, which has been filed with the Securities and Exchange Commission, is available free of charge.

Direct inquires to:
Raven Industries, Inc.
Attention: Investor Relations
P.O. Box 5107
Sioux Falls, SD 57117-5107
Phone: 605-336-2750

Raven Website
www.ravenind.com

Stock Quotations
Listed on the Nasdaq Stock Market — RAVN

Annual Meeting
May 23, 2006, 9:00 a.m.
Ramkota Hotel and Conference Center
3200 W. Maple Avenue
Sioux Falls, SD

Raven Industries, Inc. is an Equal Employment Opportunity Employer with an approved affirmative action plan.

Dividend Reinvestment Plan
Raven Industries, Inc. sponsors a Dividend Reinvestment Plan whereby shareholders can purchase additional Raven common stock without the payment of any brokerage commission or fees. For more information on how you can take advantage of this plan, contact your broker, our stock transfer agent or write: Investor Relations; P.O. Box 5107, Sioux Falls, SD 57117-5107

SIC Codes:
3672, 3081, 3829

Design: Creative Design Board, Chicago, IL
Page 9, Photo credit: BMW Environmental Lining Systems
Page 13 (large photo): Photographer, Larry Wagner

FORWARD-LOOKING STATEMENTS

Certain statements contained in this report are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding the expectations, beliefs, intentions or strategies regarding the future. Without limiting the foregoing, the words “anticipates,” “believes,” “expects,” “intends,” “may,” “plans” and similar expressions are intended to identify forward-looking statements. The Company intends that all forward-looking statements be subject to the safe harbor provisions of the Private Securities Litigation Reform Act. Although the Company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, there is no assurance that such assumptions are correct or that these expectations will be achieved. Such assumptions involve important risks and uncertainties that could significantly affect results in the future. These risks and uncertainties include, but are not limited to, those relating to weather conditions, which could affect certain of the Company’s primary markets, such as agriculture and construction, or changes in competition, raw material availability, technology or relationships with the Company’s largest customers, any of which could adversely impact any of the Company’s product lines, as well as other risks described in the Company’s 10-K under Item 1A. The foregoing list is not exhaustive and the company disclaims any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements.