**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**FORM 10-KSB**

 

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**ý****                                ****ANNUAL REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For theFiscal Year ended September 30, 2005**

 

**o****                                ****TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**Commissionfile number 0-13111**

 

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**ANALYTICALSURVEYS, INC.**

(Exactname of registrant as specified in its charter)

 
| **Colorado**                                                     | ** ** | **84-0846389**                         |
|------------------------------------------------------------------|------------|----------------------------------------|
| (State  or other jurisdiction of  incorporation or organization) |       | (IRS  Employer  Identification Number) |

 

**9725Datapoint Drive, Suite 300B, San Antonio, Texas 78229**

(Addressof principal executive offices)

 

**(210) 657-1500**

(Registrant’stelephone number, including area code)

 

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**SECURITIESREGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:**

 
| **Title Of Each Class**                   | ** ** | **Name Of Each Exchange On Which  Registered** |
|-------------------------------------------|------------|------------------------------------------------|
| **Common  Stock, no par value per share** | ** ** | **NASDAQ**                                     |

 

**SECURITIESREGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: COMMON STOCK**

 

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.    Yes  ý    No  o.

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.  ý

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12 B-2 ofthe Exchange Act) Yes  o   No  ý

 

State issuer’s revenues forits most recent fiscal year, September 30, 2005: $6,062,741

 

The aggregate market valueof the voting and non-voting common equity held by non-affiliates of theregistrant is $3,672,668, based on the closing price of the Common Stock on December1, 2005.

 

The number of sharesoutstanding of the registrant’s Common Stock, as of December 23, 2005, was2,869,272.

 

Documentsincorporated by reference:    None

 

TransitionSmall Business Disclosure Format (check one):       Yes  o   No  ý

 

 

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**TABLE OFCONTENTS**

 
| ** **                     | ** ** | ** **                                                                                  | ** ** | **Page** |
|--------------------------------|------------|---------------------------------------------------------------------------------------------|------------|----------|
|                           |
| PART I.                   |
|                           |
| Item 1.                   |       | Business                                                                                    |       | 1        |
| Item 2.                   |       | Property                                                                                    |       | 9        |
| Item 3.                   |       | Litigation                                                                                  |       | 9        |
| Item 4.                   |       | Submission of  Matters to a Vote of Shareholders                                            |       | 10       |
|                           |       |                                                                                        |       |     |
| PART II.                  |
|                           |
| Item 5.                   |       | Market for the  Registrant’s Common Stock and Related Shareholder Matters              |       | 11       |
| Item 6.                   |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |       | 13       |
| Item 7.                   |       | Financial  Statements                                                                       |       | 21       |
| Item 8.                   |       | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure       |       | 36       |
| Item  8a.                      |       | Statement  on Disclosure Controls and Procedures                                            |       | 37       |
|                           |       |                                                                                        |       |     |
| PART III.                 |
|                           |
| Item 9.                   |       | Directors  and Executive Officers of the Registrant                                         |       | 38       |
| Item 10.                  |       | Executive  Compensation                                                                     |       | 40       |
| Item 11.                  |       | Security  Ownership of Other Beneficial Owners and Management                               |       | 45       |
| Item 12.                  |       | Certain  Relationships and Related Party Transactions                                       |       | 47       |
| Item 13.                  |       | Exhibits                                                                                    |       | 48       |
| Item 14.                  |       | Principal  Accountant Fees and Services                                                     |       | 50       |
| Signatures and  Certifications |       | 51                                                                                          |
| Exhibits                       |       |                                                                                        |

 

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**PART I**

 

**Item 1. Business**

 

**Overview**

 

Analytical Surveys, Inc. (“ASI”, “we”, “our” orthe “Company”), formed in 1981, provides customized data conversion, spatialdata management and technical services for the geographic information systemsmarket. Geographic information systems (“GIS”) consist of computer software,hardware, data, and personnel that are designed to help manipulate, analyze,and present information that is tied to a spatial (geographic) location.  GIS benefits users in various ways.  Business and industry rely on GIS to promoteenhanced infrastructure management and decision support for planning andanalysis, and to provide focused development of operational needs based onefficient modeling techniques.  Suchsystems are used by federal, state and local governments, utilities,telecommunications companies, emergency services, and other businesses topresent multi-dimensional information about the physical location andcharacteristics of their diverse assets. We help customers by transforming or updating raw, often confusinginformation from multiple sources (maps, blueprints, construction drawings,databases, aerial photography, field inventory of asset attributes, satelliteimagery, etc.) into a high-resolution, large-scale, richly detailed digital andvisual representation on which organizations can rely to make better decisionswith speed and confidence. We have historically targeted our services toutilities and state and local governments.

 

We believe that the market for GIS systems andGIS-related software services has grown due to growing awareness of thebenefits of GIS technology coupled with lower hardware prices and increasedsoftware capability.  Our customers todayuse GIS technology to:

 

•                  improve networkoperations business processes to reduce operating expenses;

 

•                  improve corporate customer information processes thatcapture, report and monitor information related to usage, billing, payments,order processing, special service requests, and records documentation.  The goal is to enable improved customer servicesatisfaction ratings and to meet and exceed the expectations and/orrequirements of regulatory agencies; and

 

•                  access andupdate accurate information regarding the location, condition, and function ofphysical assets in support ofoperations and maintenance of facilities. Considerations include monitoring device and equipment performance,establishing inspection schedules and priorities, developing corrective actionsnecessary to remedy identified unsatisfactory performance, and ensuring updateof enterprise information systems.

 

**While there seems to have been an increase in demands forGIS solutions in response to catastrophic events and homeland securityinitiatives in 2004 and 2005, we have not experienced a corresponding increasein demands for GIS data conversion services. As noted in the 2005 Geospatial Technology Report published by TheGeospatial Information and Technology Association (“GITA”), the federalgovernment has shifted increased responsibilities to the state and local levelswithout a corresponding shift in funding. The result is critically tight budgets driven by these economicsadversely impacting service providers. We believe that many of the new GIS software solutions reduce the needfor data conversion services.  Theincreased interest in GIS solutions has resulted in the investment by ourtraditional customers in the establishment or expansion of GIS in-house staff,thereby reducing the need for our traditional services.  GIS technology solutions have advanced andbroadened the scope of GIS capabilities, and many of our customers haveinvested in in-house GIS staff.  Thereport also indicates that overall project planning offered by consultants hasdiminished and customers are focused on contracting for specific developmenttasks to supplement their in-house implementation efforts.  Competition from service firms with largelabor content in India has resulted in lower margins and increased competitionin the data conversion service industry.**

** **

**Many utilities invested in GIS technology in the late 1990sresulting in improvements in operations and customer service levels.  Our belief is that while many of these samecompanies desire new levels of improvement and maintenance of qualityinformation, they are challenged to do so because of the cost of training andretaining highly specialized GIS technicians. We are GIS specialists and we believe that we are well positioned toprovide such specialized services to these companies.  Our ongoing involvement with technologyleaders such as Intergraph and ESRI, has kept our employees abreast of thelatest GIS technology.  We think that byentering into long-term outsourcing contracts with us, our customers can sparethe expense and risk of developing the internal resource capability necessary toprovide them with higher cost savings through an efficient implementation ofthe latest GIS technologies. Unfortunately, our US-based customers have been slow to adoptoutsourcing as a long-term solution, and we have experienced considerable pricepressure when offering our services.  Todate, we have not been successful in establishing outsourcing services as amajor business line.  We will continue toprovide GIS outsourcing and conversion services, but we recognize that we mustdiversify our lines of business.**

** **

**Our sales and marketing efforts have not beensuccessful.  We have acquired three newcustomers with material contracts during the past two years, and the majorityof our current contracts are ongoing services from past customers.  We reduced our staff in 2005 to**

 

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**meet the lower demands of our existing business, and weexperienced additional loss of personnel in fiscal 2005 due to the uncertaintyof the acquisition of new GIS contracts. To address concern created by this loss of personnel on the part of ourcustomers, partners, and employees, we engaged Wind Lake Solutions, Inc. (“WLS”),to manage our Wisconsin-based personnel in October 2005.  The WLS management team includes severalprofessionals who have longstanding relationships with ASI and its customerbase, including two individuals who successfully managed the Wisconsin office,or Intelligraphics, prior to its acquisition by ASI in December 1995.  We believe this strategy has stabilized ourWisconsin office and satisfied our customer’s concerns regarding our ability toprovide consistent service to them.  Webelieve WLS’s long-term involvement is necessary to maintain stability in ourWisconsin office.  WLS’s managementagreement includes an option to purchase the Wisconsin-based operations, whichif exercised, may include a non-compete in the US-based utility market.  .**

** **

**During fiscal 2005, we evaluated a broad spectrum ofbusiness opportunities.  We engaged aconsultant and evaluated acquisitions that would facilitate our entrance intothe federal markets, and we also evaluated various opportunities, includingsoftware and service solutions for location based services, state and local GISinitiatives.  As of the date of thispublication, we have not identified an acceptable acquisition serving the GISmarketplace that produces suitable margins or sufficient returns on acquisitioncosts.**

** **

The 2005 Geospatial Technology Reportsuccinctly addresses the traditional marketplace in which ASI serves.  Historically, the most significant costsassociated with GIS project implementations were acquiring/loading the systemwith GIS data.  The report states thatthe effort associated with this activity approached 75% of the total projectcost.  Today’s technology hasdramatically altered the landscape in such ways that commercial off-the-shelf (“COTS”)hardware and software solutions provide the ability to offer the customer lowcost base map data.  Additionally,satellite remote sensing base data is supplemented with companies offeringtopographic, planimetric, and cadastral data, all COTS available.  This trend shifted spending on digitizingefforts to COTS acquisitions.  This shiftto COTS coupled with offerings from service firms with large laborcontent in India, has resulted in lower margins and increased competition inthe industry. The technologies utilized by our GIS customer base continue toadvance and demand a current and accurate depiction of their spatially locatedassets, however, this need appears to be satisfied by in-house customeroperations on an increasing basis.

 

**We enter into long-term fixed price contracts.  Payments for these contracts are often spreadthroughout the term of the contract and may be based on successful interim datadeliveries or milestone payments.  Weattempt to negotiate new contracts to minimize negative cash flow and beself-funding throughout the life of the contract.**

** **

**Strategy**

 

Our objective is to maintain our position in thedata conversion and digital mapping industry and to supplement our data conversionbusiness with higher margin business endeavors. This objective is reflected inthe following summary of our strategy:

 

Strategiesto Generate Efficiencies and Reduce Costs. During the past four years, we implemented strategies that were intendedto return to profitability and positive cash flow.  These strategies included:

 

•               standardizedproject management and cost estimation processes;

 

•               focusedon the government and utility conversion and data management sectors of themarket;

 

•               streamlinedoperations by reducing from five main production centers in the beginning offiscal 2001 to two centers at the end of fiscal 2003;

 

•               reduced occupancy expenses by relocatingour corporate headquarters in San Antonio, Texas to more cost-efficientfacilities and reduced the size of our Wisconsin-based facilities;

 

•               streamlinedoperational management;

 

•               reduced corporate and overhead expensesand eliminated corporate borrowing;

 

The turnaround efforts included resolving corporate challenges.  During the last two years, we:

 

•               redeemed84% of our outstanding preferred stock for 12% of the redemption value andaccrued dividends;

 

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•               restructureda senior convertible debenture to eliminate a default that would have triggeredthe holder’s right to impose cash penalties and demand a cash redemption.  The holder of the debenture exercised theconversion feature in November 2004;

 

•               reducedour debt to equity ratio and eliminated the majority of our debt, as well asconstraints that prevented us from pursuing new business opportunities thatcould be financed through the issuance of new debt and equity; and

 

•               prevailedin a large arbitration case.

 

RevisedApproach to Existing Markets.  We will continue to provide ourservices to our existing customers to capitalize on the increasingsophistication and number of GIS users in our core utilities markets.  On a limited basis, we continue to evaluateother opportunities in other sectors that utilize geospatial information.  In addressing our market, we have adopted amore technical focus and consultative approach to marketing and businessdevelopment**.**

 

Continueto Maintain and Develop Technological and Operational Capabilities.  Wedeveloped and acquired proprietary software and procedures that automateportions of otherwise labor-intensive data conversion processes.  We continue to enhance this software, whichhas enabled us to provide cost-effective and high-quality services on a timely basis.  We have augmented the capabilities of thissoftware to provide data processing and consolidated reporting via aweb-enabled reporting system. Our current development efforts are focused onoffering capabilities supporting a service oriented architecture environment.

 

Pursuit of Other Business Endeavors.  On December 7, 2005, we engaged PlurisPartners, Inc., a merchant banking firm specializing in merger andacquisition, private equity placement and financial advisory services, tofacilitate the expansion of our service offering into the energy sector,including the acquisition of oil and gas exploration and productionrights.  We intend to acquire workinginterests of oil and gas properties in a series of drilling programs.  We will evaluate other acquisitionopportunities in the energy sector, including both exploration and productionoperations and technology solutions, as well as any other sector that presentsattractive opportunities for our shareholders. We intend to finance this expansion through private placement of equitysupplemented by issuance of debt, which is dependent on the terms on which weare able to negotiate, if any.

 

**ASI Services**

 

We offer a full range of services to create digitalland base maps and databases of related geo-referenced information used in GIS.Utilizing a base map with land surveys and legal descriptions, we create linksto tabular databases; other geo-referenced data, such as buildings, telephonepoles and zoning restrictions, are collected, verified, converted into digitalformat and added to the base map to create a GIS. We provide an experiencedfield inventory staff to collect and verify information and use computerizedand manual techniques to verify and digitize data from paper sources and legacyelectronic systems. Once a GIS is completed, users can view the base map andany or all of the layers of data on a computer screen and can retrieve selecteddata concerning any desired location appearing on the screen or all datamatching one or more variables. We maintain these databases for customers on anas-needed basis.  Our data capture GPSenabled technologiesenhance field asset management processes and promote efficient, cost-effectiveperformance.  Our mobile solution, whichis a .NET application, provides for field data capture and wireless transferutilizing standard XML formatting. Additionally, data processing and consolidation is readily provided viaweb enabled reporting system.  We continue to enhance our software andproduct offerings to provide cost-effective and high-quality services on atimely basis.

 

**Dispositions and FacilityConsolidations and Relocations**

 

In April 2001, we sold substantially all of ourassets of the Colorado Springs, Colorado-based digital orthophotography andphotogrammetric mapping facility to Sanborn Map Company for a totalconsideration of $10.1 million. The sale agreement contains clauses thatprohibit us from competing directly with the buyer in the orthophotography andphotogrammetric markets for three years. Both companies agreed to cooperate tocomplete customer contracts where services are provided by more than one of ourproduction facilities. The sale allowed us to reduce debt and to refocusattention on utility and municipal mapping services.

 

In March 2002, we consolidated our Cary, NorthCarolina facility and transferred existing project work to our Texas andWisconsin facilities. The principal activity of the North Carolina facility hadbeen cadastral and photogrammetric mapping.

 

In June 2002, we consolidated and relocated ourIndianapolis, Indiana office to smaller office space. We consolidated officesin response to reduced demand for technology services in the government andutility marketplace. Existing project work in Indiana was also transferred toour Texas and Wisconsin facilities.

 

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On January 1, 2003, we moved our corporateheadquarters from Indianapolis, Indiana to San Antonio, Texas, so that theexecutive team could be closer in proximity to the production staff. TheIndianapolis, Indiana, office was closed effective January 2, 2003.

 

On March 1, 2005, we relocated our corporateheadquarters to a more cost-efficient facility in San Antonio, Texas.

 

**Customers**

 

We derive revenues primarily from two core markets:utilities and state and local governments. We also serve commercial businesses. Four of our current customersaccounted for 72% of our consolidated revenues in fiscal 2005 (BritishTelecommunications PLC (“BT”), 21%; MWH Americas, Inc., 18%; WorldwideServices, Inc, and Intergraph (“WWS”), 16%; and Michigan Consolidated GasCompany (“Michcon”), 17%).  All four ofthese customers fall within our utility market. Two customers, WWS and Michcon, accounted for 68% and 10%, respectively,or 78%, of total accounts receivable and revenue in excess of billings at September 30,2005. The loss of any of these customers would have a material adverse effecton us.  We completed our contract withSyntegra subsequent to September 30, 2005, and we expect to complete allwork orders from Michcon in the second quarter of fiscal 2006.   Therefore, we anticipate revenues from thesemarkets will continue to decrease in future periods.  See “Risk Factors — Our customer contractsmay be adversely modified, changed or terminated prior to the expiration of thecontract terms” and “— Our business comes from two core markets and adversechanges in those markets could cause a reduction in the demand for ourservices,” and Note 9 to the consolidated financial statements.

 

**Sales and Marketing**

 

We have traditionally marketed our products andservices in domestic and international markets primarily through an internalsales force.  We have not added asignificant number of new customers as a result of our sales and marketingefforts during the last two fiscal years. We have reduced our sales and marketing efforts.  These efforts are currently conducted by oursenior management and project managers. We augment these sales efforts by:

 

•                maintainingrelationships and forming alliances with regional businesses offering complementaryservices;

 

•               obtainingreferrals, either directly or indirectly, from consultants in the GIS industry;

 

•               maintainingmemberships in professional and trade associations; and

 

•               activelyparticipating in industry conferences.

 

Our sales cycle is generally lengthy, as customersnormally take several months to go through the bidding/planning and awardphases of a GIS project. Once awarded, it generally takes 30 to 60 days untilthe final contract is signed. Most projects take from 6 to 24 months to complete.See “Risk Factors — We receive some business from referrals and any reductionin those referrals could effect our business.”

 

**Subcontractors**

 

We use subcontractors when necessary to expandcapacity, meet deadlines, reduce production costs and manage workload. Weengage domestic subcontractors on a project-by-project basis.  In September 2004, our five-yearexclusive supply agreement with InfoTech Enterprises, Ltd., an India-basedcompany, to provide production capacity for data conversion and other relatedservices expired.  We utilizedInfoTech to provide more than 90% of our offshore subcontractor services.  We have continued to utilize InfoTech foroffshore conversion capacity but have also engaged alternate sources of laborin India.  We have not experienced anysignificant increase in our offshore production costs.  However, we do not have a long-term contractwith any supplier, and accordingly, we do not have a guaranteed productioncapacity or negotiated contract price. If we need to obtain additional or less expensive sources of offshoresubcontract services, our cost for such services may increase in the short termas we train a new supplier.  We intend to continue to utilize offshoresubcontractors for a large percentage of certain data entry production work(which work constitutes less than 10% of our total production costs) in fiscal2006 to reduce production costs. We also employ certain select foreign anddomestic subcontractors for tasks outside our expertise, or to augment in-housecapacity (such as field data surveying). See “Risk Factors — The unavailability or unsatisfactory performance ofour subcontractors may affect our ability to deliver quality services to ourcustomers,” and “ — The unsatisfactory performance or unavailability ofoverseas subcontractors may impact our ability to profitably perform servicesunder existing contracts.”

 

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**Research and Development**

 

We continue to develop new technology and to improveexisting technology and procedures to enhance our ability to expand intoadditional markets and further improve our production capacity andproductivity.  Most of these activitiesoccur as we develop software or design a product or process for a particularcontract.  These efforts aretypically included as an integral part of our services for the particularproject and, accordingly, the associated costs are charged to that project.Such custom-designed software can often be applied to projects for othercustomers.  Less than one full-time equivalent employee issubstantially engaged in research and development efforts.  The amount that we have spent on research anddevelopment over the last three fiscal years is immaterial.  See “Risk Factors — We may be unableto protect our proprietary rights,****permittingcompetitors to duplicate our products and services,” and “ — We may need toinvest in research and development to remain competitive and to obtain newbusiness.”

 

**Competition**

 

The GIS services business is highly competitive andhighly fragmented. Competitors include small regional firms, independent firms,and large companies with GIS services divisions, customer in-house operationsand international low-cost providers of data conversion services.  Two of our nationally recognized competitorsfor conversion services are Avineon and Rolta. We also compete with numerous regional firms for conversion services andfield data collection services.  Becauseour competitors are all privately owned companies, it is difficult to determinethe relative ranking in the market between our competitors and us.

 

We seek to compete on the basis of:

 

•                thequality of our products and the breadth of our services;

 

•                theaccuracy, responsiveness and efficiency with which we provide services to customers.  We routinely complete our projects within ourcustomer’s challenging accuracy requirements and typically deliver data withina high level of accuracy tolerance; and

 

•                ourcapacity to perform large complex projects. We have completed data conversion and field projects for investor ownedelectric, gas and telephone utilities in the United States.

 

We use internally developed proprietary productionsoftware and commercially available software to automate much of the otherwiselabor-intensive GIS production process. We believe this automated approach enables us to achieve more consistentquality and greater efficiencies than more manually intensive methods.

 

To compete against low-cost providers, we minimizecosts by using offshore subcontractors for a large percentage of certain dataentry production work, which work constitutes less than 10% of our totalproduction costs.  See “Risk Factors— Theunavailability or unsatisfactory performance of our subcontractors may affectour ability to deliver quality services to our customers.”

 

**Personnel**

 

At September 30, 2005, we had approximately 82employees compared to 109 at September 30, 2004.  We reduced the workforce to align ourheadcount with our production and administration requirements.

 

We believe that retention of highly qualifiedmanagers and executive officers is critical to our ability to compete in theGIS data conversion industry. Almost all of our employees work on a full-timebasis.  We do not have a collectivebargaining agreement with any of our employees and generally consider relationswith our employees to be good. See “Risk Factors — The market for our servicesis highly competitive and such competition within our industry can lead tolower profit margins and reduced volume of new work,” and “ — If we are unableto retain the members of our senior management team our business operations maybe adversely impacted.”

 

**RISKFACTORS**

 

*In addition to the otherinformation set forth in this Form 10-KSB the issues and risks describedbelow should be considered carefully in evaluating our outlook and future.*

 

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**Our cash flow may be insufficientto meet our operating and capital requirements.**

 

We currently do not have a line of credit with anylender and rely solely on cash flow from operations to fund future operationsand expenditures.  There is no assurancethat the cash flow from operations will be sufficient to meet our capitalrequirements. We must convert accounts receivable and amounts earned notbilled to cash in excess of our operating expenses in order to meet our debtpayments.  On or before December 28, 2006, we must make a cash payment totalingapproximately $332,870 to redeem the outstanding Series A Preferred Stock.

 

**Our current and former independentauditors have expressed that there is substantial doubt about our ability tocontinue as a going concern.**

 

During fiscal years 2000 through 2005, weexperienced significant operating losses with corresponding reductions inworking capital and net worth, excluding the impact of debt forgiveness.  Our revenues and backlog have also decreasedsubstantially during the same period. Our independent auditors issued a going concern qualification on ourfinancial statements for fiscal 2004 and 2005, based on the significant operatinglosses reported in fiscal 2005 and prior years and a lack of external financing.Our former independent auditorsissued a going concern qualification on our financial statements for fiscal2000, 2001, 2002, and 2003.  The going-concernqualification, which expressed substantial doubt about our ability to continueas a going concern, was based on the significant operating losses reported infiscal 2003 and 2002 and a lack of external financing to fund working capitaland debt requirements.  As of September 30,2005, the amount of our accumulated deficit is approximately $33.7 million.

 

**Successful implementation of ourturnaround efforts is required to return the Company to profitability.**

 

The successful implementation of our turnaroundefforts requires the cooperation of customers, subcontractors, vendors,lenders, outside professionals and employees and the implementation of newlines of business operations.  There canbe no assurance that the specific strategies designed to return our operationsto profitability and positive cash flow can be implemented to the extent and inthe timeframe planned.  We haveimplemented financial and operational restructuring plans designed to improveoperating efficiencies, reduce and eliminate cash losses and position ourselvesfor profitable operations.  Delays and difficulties in achieving salestargets, realizing cost savings, retaining employees and implementingadditional profitable lines of business, and other turnaround efforts couldresult in continued operating losses and a decrease or loss in the value of ourcommon stock.

 

**The market for our services ishighly competitive and such competition within our industry can lead to lowerprofit margins and reduced volume of new work.**

 

As the GIS services industry evolves, additionalcompetitors may enter the industry.  Inaddition, other improvements in technology could provide competitors orcustomers with tools to perform the services we provide and lower the cost ofentry into the GIS services industry.  Weare facing increased price competition, particularly in the utilities market,from relatively new entrants to the market, which perform their work utilizingmostly offshore labor, and from smaller privately held firms which are willingto operate with low profit margins.  Anumber of our competitors or potential competitors may have capabilities andresources greater than ours.

 

**Our customer contracts may beadversely modified, changed or terminated prior to the expiration of thecontract terms.**

 

Most of our revenue is earned under long-term,fixed-price contracts.  Our contractualobligations typically include large projects that will extend over six monthsto two years.  These long-term contractsentail significant risks, including:

 

•                  Our ability to accurately estimate our coststo ensure the profitability of projects.

 

•                  Ourskill at controlling costs under such fixed-price contracts once in productionfor profitable operations.

 

•                  Contractsmay be signed with a broad outline of the scope of the work, with detailedspecifications prepared after a contract is signed.  In preparing the detailed specifications,customers may negotiate specifications that reduce our planned projectprofitability.

 

•                  Customersmay increase the scope of contracts and we must negotiate change orders tomaintain planned project profit margins and cash flows.

 

•                  Customers may request us to slow down orscale back the scope of a project to satisfy their budget or cash constraints. Schedule delaysand scope reductions may interrupt workflow, create inefficiencies, andincrease cost.

 

•                  Customers may require a compressed schedule thatmay place additional strains on cash availability and management’s ability tohire and train personnel required to meet deadlines.

 

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•                  Contracts are generally terminable by thecustomer on relatively short notice, and it may be difficult for us to recoupour entire investment if a project is terminated prior to completion.

 

•                  Large, long-term, fixed-price contractsgenerally increase our exposure to the effects of inflation and currencyexchange rate fluctuation.

 

**We experience quarterly variationsin our operating results due to external influences beyond our control; suchvariations could result in a decreased stock value.**

 

Our quarterly operating results vary significantly from quarter toquarter, depending upon factors such as the following:

 

•                  The timing ofcustomers’ budget processes.  Ourcustomers have greatly reduced purchasing of technology solutions over the pastfour years.  This reduction, broadlyreflective of technology spending in general, may create a large demand foradditional resources in the future in order to update aging systems.

 

•                  Slowdowns oracceleration of work by customers.  Ourcontracts are generally scheduled for completion over many months or perhapsyears.  If delivery schedules areaccelerated or delayed, our revenues may fluctuate accordingly.  Costs generally increase when a schedule islengthened due to the additional management and administrative costs associatedwith a longer project.

 

•                  The impact ofweather conditions on the ability of our subcontractors to obtain satisfactoryaerial photography or field data.  Someof the data is collected in the field at the customer’s location.  Winter weather conditions and other adverseweather can greatly impact our ability to collect data bundles and therebygenerate revenue.  Similarly, cloudyconditions or snow cover impacts the collection of accurate aerial photography.

 

For these reasons, period-to-period comparisons of our results ofoperations are not and will not be necessarily a reliable indication of futureperformance.  The fluctuations of ouroperating results could result in a decreased value of our stock.  We also could experience inconsistentquarterly revenues as a result of general weak economic conditions as customersdefer projects or cancel planned expenditures**.**

 

**We may need to invest in research anddevelopment to remain competitive and obtain new business.**

 

We have devoted a limited amount of resources to developing andacquiring specialized data collection and conversion hardware andsoftware.  In order to remaincompetitive, we must increase our selection of, investment in, acquisition anddevelopment of new and enhanced technology on a timely basis.  If competitors introduce new products andservices embodying new technologies, or if we fail to adopt or develop newtechnologies or to adapt our products and services to emerging industrystandards, we may be unable to obtain new business or maintain existingbusiness.  There can be no assurance thatwe will be successful in these efforts or in anticipating developments in dataconversion technology.

 

**We may be unable to protect our proprietaryrights, permitting competitors to duplicate our products and services.**

 

We do not have any patent protection for our products or technology.  Third parties could independently develop technology similar to ours, obtain unauthorized access to our proprietary technology or misappropriate technology to which we have granted access.  Because our means of protecting our intellectual property rights may not be adequate, it may be possible for a third party to copy, reverse engineer or otherwise obtain and use our technology without authorization.  Unauthorized copying, use or reverse engineering of our products could result in the loss of current or future customers.

 

**Our business comes from two coremarkets and adverse changes in those markets could cause a reduction in thedemand for our services.**

 

We derive our revenues primarily from two coremarkets, utilities and state and local governments.  The ongoing consolidation and reducedtechnology budgets of the utilities industry has and may continue to increase competitionand reduce profitability for the GIS projects of current and potentialcustomers.  Also, to the extent thatutilities remain regulated, legal, financial and political considerations mayconstrain the ability of utilities to fund geographic information systems.  Many state and municipal entities are subjectto legal constraints on spending, and a multi-year contract with any suchentity may be subject to termination in any subsequent year if the entity doesnot choose to appropriate funds for such contracts in that year.  Moreover, fundamental changes in the businesspractices or capital spending policies of any of these customers, whether dueto budgetary, regulatory, technological or other developments or changes in thegeneral economic conditions in the industries in which they operate, couldcause a material

 

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reduction in demand by such customers for theservices we offer.  Any such reduction indemand could have a significant adverse impact on our net revenue levels.

 

**The unavailability of a skilledlabor force may hinder our ability to produce accurate, cost-effectivesolutions to meet the terms of our contracts.**

 

Our business is labor-intensive and requires trainedemployees.  We compete for qualifiedpersonnel against numerous companies, including more established companies withsignificantly greater financial resources than ours.  Our business, financial condition and resultsof operations could be materially adversely affected if we are unable to hirequalified personnel or if we are unable to retain qualified personnel in thefuture.  High turnover among ouremployees could increase our recruiting and training costs, could affect ourability to perform services and earn revenues on a timely basis and coulddecrease operating efficiencies and productivity.  Inaddition, a significant portion of our costs consists of wages to hourlyworkers.  An increase in hourly wages,costs of employee benefits or employment taxes could increase our other generaland administrative costs and thereby reduce our net income.

 

**If we are unable to retain themembers of our senior management team our business operations may be adverselyimpacted.**

 

We have experienced a high volume of turnover in oursenior management team in recent years. Our ability to retain our management team is an important factor in ourturnaround program and our ability to pursue our overall business plan.  There is no assurance that we will be able toretain the services of such key personnel. We do not maintain any key personal life insurance policies.  Layoffs in recent years may impair ourability to retain and recruit other key personnel. The loss or interruption ofthe services of any member of the senior management team could have a materialadverse effect on our business, financial condition and results ofoperations.  Our future financial resultswill also depend upon our ability to attract and retain highly skilledtechnical, managerial and marketing personnel.

 

**The unavailability or unsatisfactoryperformance of our subcontractors may affect our ability to deliver qualityservices to our customers.**

 

Certain of our services require us to performtasks that are outside our expertise such as the acquisition of aerialphotography.  We are dependent upon thecontinued availability of third party subcontractors for such productiontasks.  We also use subcontractors forwork similar to that performed by our own employees such as field dataacquisition.  The insufficientavailability of, or unsatisfactory performance by, these unaffiliatedthird-party subcontractors could have a material adverse effect on ourbusiness, financial condition and results of operations due to delays inproject schedules, product quality and increased costs of production.

 

**The unsatisfactory performance orunavailability of overseas subcontractors may impact our ability to profitablyperform services under existing contracts.**

 

##### We utilize subcontractors inIndia and may from time to time use subcontractors in other overseas locationsto perform certain tasks such as data conversion and photogrammetricinterpretation at lower costs than could be achieved in the United States.  Our ability to perform services under someexisting contracts on a profitable basis is dependent upon the continuedavailability of our overseas subcontractors and the quality of their work.  For example, India has in the pastexperienced significant inflation, civil unrest and regional conflicts.  Events or governmental actions that wouldimpede or prohibit the operations of our subcontractors could have a materialadverse effect on us.  In September 2004,we concluded a five-year exclusive agreement with InfoTech Enterprises, Ltd.,an India-based company, which provided production capacity for data conversionand other related services.  During theterm of the agreement, InfoTech provided more than 90% of our offshoresubcontractor services (which services constituted less than 10% of our totalproduction costs).  We continue toutilize InfoTech’s services as well as alternate sources of labor inIndia.  If we seek additional sources oflabor in India, our cost of offshore services may increase in the short term aswe train a new supplier.

#####  

**We receive some business fromreferrals and any reduction in those referrals could affect our business.**

 

A portion of our sales is the result of referralsderived, either directly or indirectly, from engineers, software developers andconsultants in the GIS industry.  Webelieve that our continued success in the GIS services market is dependent, inpart, on our ability to maintain current relationships and to cultivateadditional relationships with other industry participants.  Such participants could acquire a GIS datacollection or data conversion business or businesses or form otherrelationships with our competitors. There can be no assurance that relationships with GIS consultants willcontinue to be a source of business for us. Our inability to maintain such relationships or to form newrelationships could reduce our ability to obtain new business and maintainexisting business, thereby reducing our revenue.

 

8

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**We have outstanding preferred stockand “blank check” preferred stock that could be issued resulting in thedilution of share ownership.**

 

Our Articles of Incorporation allow the Board ofDirectors to issue up to 2,500,000 shares of preferred stock and to fix therights, privileges and preferences of those shares without any further vote oraction by the shareholders.  Ouroutstanding preferred stock holds dividend priority and liquidation preferencesover shares of our common stock (“Common Stock”).  However, because the outstanding preferredstock is not convertible to Common Stock, it has no potential dilutive effecton our outstanding shares of Common Stock. Nonetheless, the Common Stock will be subject to dilution if our Boardof Directors utilizes its right to issue additional shares of preferred stockthat is convertible into Common Stock.  The rights of the holders of CommonStock are and will be subject to, andmay be adversely affected by, the rights of the holders of the 166,435 sharesof preferred stock that we have previously issued and any preferred stock thatwe may issue in the future.  Any such issuancecould be used to discourage an unsolicited acquisition proposal by a thirdparty.

 

**Our stock price is highly volatileand the purchase or sale of relatively few shares can disproportionatelyinfluence the share price.**

 

The trading price and volumeof our Common Stock hasbeen and may continue to be subject to significant fluctuations in response to:

 

•           actual or anticipated variations in ourquarterly operating results;

 

•           the introduction of new services ortechnologies by us or our competitors;

 

•           changes in other conditions in the GISindustry or in the industries of any of our customers;

 

•           changes in governmental regulation,government spending levels or budgetary procedures; and

 

•           changes in the industry generally, orseasonal, general market or economic conditions.

#####  

The trading price of our Common Stock may vary without regard to our operatingperformance.  Historically, we havebeen a thinly traded stock, therefore relatively few shares traded candisproportionately influence share price.

 

**Item 2. Property**

 

We operate two offices in the United States.  We lease approximately 8,000 square feet inSan Antonio, Texas, and approximately 8,100 square feet in Waukesha, Wisconsin.

 

**Item 3. Litigation**

 

On June 26, 2002, twoof our shareholders, the Epner Family Limited Partnership and the BravermanFamily Limited Partnership, (“Claimants”), initiated arbitration proceedingsagainst us.  They alleged that certainrepresentations and warranties, which we made in connection with ouracquisition of Cartotech, Inc., in June 1998, were false because ourfinancial condition allegedly was worse than depicted in our financialstatements for 1997 and the unaudited reports for the first two quarters offiscal 1998.   In December 2003, anAmerican Arbitration Association panel ruled in our favor, awarding zerodamages to the Claimants and ordering each side to bear its own attorneys’fees.  The Claimants also filed suitagainst four of our former officers for alleged violation of Texas and Indianasecurities laws in connection with our acquisition of Cartotech.  The case was dismissed on January 30,2004.  Our insurer reimbursed $1.8million of the defense costs, which totaled approximately $2.1 million.

 

In November 2005, we received an aliassummons notifying us that we have been named as a party to a suit filed bySycamore Springs Homeowners Association. The summons names the developer of the Sycamore Springs neighborhood aswell as other firms that may have rendered professional services during thedevelopment of the neighborhood.  Theclaimants allege that the services of Mid-States Engineering, which was asubsidiary of MSE Corporation when we acquired MSE in 1997, affected thedrainage system of Sycamore Springs neighborhood, and seek damages fromflooding that occurred on September 1, 2003.  The summons does not quantify the amount ofdamages that are being sought nor the period that the alleged wrongful actionsoccurred.  We sold Mid-States Engineeringon September 30, 1999.   We believethat we have been wrongfully named in the suit and we are diligently pursuingdismissal without prejudice.

 

9

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We are also subject to various other routinelitigation incidental to our business. Management does not believe that any of these routine legal proceedingswould have a material adverse effect on our financial condition or results ofoperations.

 

**Item 4. Submission Of Matters To A Vote OfShareholders**

 

On September 29, 2005, at the annual meeting ofshareholders, our shareholders reelected four directors to the Board ofDirectors and ratified the appointment of Pannell Kerr Forster of Texas, P.C.as our independent registered public accounting firm for the fiscal year ended September 30,2005.

 

The following table provides the number of votescast on each matter:

 
| ** **                     | ** ** | **FOR**   | ** ** | **AGAINST** | ** ** | **WITHHELD** | ** ** |
|--------------------------------|------------|-----------|------------|-------------|------------|--------------|------------|
| Election of Board of Directors |       |      |       |        |       |         |       |
|                           |       |      |       |        |       |         |       |
| R. Thomas Roddy                |       | 2,468,716 |       | —      |       | 44,101       |       |
| Edward P. Gistaro              |       | 2,468,603 |       | —      |       | 44,214       |       |
| Rad Weaver                     |       | 2,468,709 |       | —      |       | 44,108       |       |
| Lori A. Jones                  |       | 2,504,187 |       | —      |       | 8,630        |       |

 
| ** **                                                                                             | ** ** | **FOR**   | ** ** | **AGAINST** | ** ** | **ABSTAIN** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-----------|------------|-------------|------------|-------------|------------|
| Ratification  of Pannell Kerr Forster of Texas, P.C. as independent registered public  accounting firm |       | 2,400,973 |       | 107,448     |       | 4,396       |       |

 

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**PART II.**

 

**Item 5. Market For The Registrant’s Common Stock AndRelated Shareholder Matters**

 

Since June 6, 2002 our common stock (“CommonStock”) has traded on the NASDAQ SmallCap Market under the symbol “ANLT.”  As of October 1, 2005, we hadapproximately 5,200 holders of record. The following table sets forth the high and low closing bid prices forour Common Stock as reported on NASDAQ. Prices have been adjusted to reflect the one-for-ten reverse spliteffective October 2, 2002.

 

| ** **                         | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------------------------|------------|----------|------------|---------|------------|
| Year Ended September 30, 2005 |       |     |       |    |       |
| First quarter                      |       | $        | 8.70       |    | $          | 1.10 |   |
| Second quarter                     |       | 4.18     |       | 2.16    |       |
| Third quarter                      |       | 2.37     |       | 1.32    |       |
| Fourth quarter                     |       | 2.25     |       | 1.33    |       |
|                               |       |     |       |    |       |
| Year Ended September 30, 2004 |       |     |       |    |       |
| First quarter                      |       | 4.09     |       | 1.30    |       |
| Second quarter                     |       | 5.43     |       | 2.51    |       |
| Third quarter                      |       | 3.90     |       | 1.60    |       |
| Fourth quarter                     |       | 2.01     |       | 1.25    |       |
|                                    |            |          |            |         |            |  |  |

 

The high and low bid prices reflect inter-dealerprices, without retail mark-up, markdown or commission and may not necessarilyrepresent actual transactions.

 

Our April 2, 2002, we issued a senior securedconvertible promissory note (“Old Note”) to Tonga Partners, L.P. (“Tonga”) inthe original principal amount of $2.0 million and a warrant (“Warrant”) topurchase 500,000 shares of our Common Stock. The sale and issuance of such securities were deemed to be exempt fromregistration under Section 4(2) of the Securities Act of 1933. Inconnection with the transaction, Tonga established to our satisfaction that itis an accredited investor.

 

On October 29, 2003, Tonga converted $300,000principal of the Old Note.  We issued261,458 shares of our Common Stock pursuant to the partial conversion andinterest due thereon at a conversion price of $1.24, which represented 90% ofthe average closing bid prices for the three trading days having the lowestclosing bid price during the 20 trading days immediately prior to October 29,2003.  The $2 million note was exchangedfor the shares and a $1.7 million note (“Second Note”) bearing the sameterms.  The newly issued shares increasedour total common shares outstanding from 823,965 to 1,085,423. Tonga owned 24%of our outstanding shares immediately after the partial conversion.

 

On June 30, 2004, we restructured theSecond Note to cure an event of default that was triggered when the ourRegistration Statement on Form S-3 filed with the Securities and ExchangeCommission (“SEC”) on December 30, 2003, was not declared effective by theSEC as required by the terms of the Second Note. See Note 3 to the consolidatedfinancial statements.  The maturity dateof the restructured $1.7 million senior secured convertible promissory note(the “Restructured Note”) and bears interest at a rate of 5% per annum withsuch interest accruing beginning on November 4, 2003.  (The Old Note, Second Note, and RestructuredNote are sometimes collectively referred to as the “Note.”)  The principal amount of the RestructuredNote, together with accrued and unpaid interest, is due and payable at Tonga’soption in cash or shares of our Common Stock on January 2, 2006.  Tonga retained the ability to convert theRestructured Note for shares of our Common Stock at any time, waivedapproximately $134,000 of accrued interest on the Second Note, waived itsrights to assess liquidated damages pursuant to the Second Note, relinquishedits rights under the Warrant and canceled the Warrant.

 

On November 10, 2004, Tonga convertedthe Restructured Note and accrued interest into shares of our CommonStock.  As provided by the terms of theRestructured Note, the conversion price was equal to 90% of the average closingbid prices for the three trading days having the lowest closing bid priceduring the 20 trading days immediately prior to the conversion date.  Accordingly, we issued 1,701,349 shares atthe conversion price of $1.05 per share. The newly issued shares increased our total common shares outstandingfrom 1,104,173 to 2,805,522.  Tonga owned67% of our outstanding shares immediately after the conversion.  As of November 15, 2004, Tonga hadliquidated all of its holdings of our Common Stock.  See Note 3 to the consolidated financialstatements.

 

11

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**Dividends**

 

Under the terms of our Restructured Note, we were prohibited frompaying dividends on our Common Stock without consent from Tonga.  As a result of Tonga’s conversion ofthe Restructured Note, Tonga’s consent is no longer required to paydividends.  Since becoming apublic company, we have not declared or paid cash dividends on our Common Stockand do not anticipate paying cash dividends in the foreseeable future.  We presently expect that we will retain allfuture earnings, if any, for use in our operations and the expansion of ourbusiness.

 

**EquityCompensation Plan Information**

 

The following table gives information about equity awards under ourequity compensation plans.  The tableincludes inducement options that were issued in fiscal 2004.

 
| ** **                                                  | ** ** | **(a)**                                                                                            | ** ** | **(b)**                                                                           | ** ** | **(c)**                                                                                                                                              | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Plan category**                                           | ** ** | **Number of securities to be  issued upon exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average exercise  price of outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation plans  (excluding securities  reflected in column (a))** | ** ** |
| Equity  compensation plans approved by security holders     |       | 122,303                                                                                            |       | $                                                                                 | 4.07       |                                                                                                                                                 | 353,291    |   |
| Equity  compensation plans not approved by security holders |       | 25,575                                                                                             |       | $                                                                                 | 2.70       |                                                                                                                                                 | 59,425     |   |
| Total                                                       |       | 147,878                                                                                            |       | $                                                                                 | 3.83       |                                                                                                                                                 | 412,716    |   |

 

**RecentSales of Unregistered Securities**

 

None

 

**IssuerPurchases of Equity Securities.**

 

None

 

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**Item 6. Management’s Discussion And Analysis OfFinancial Condition And Results Of Operations**

 

*The discussion of our financialcondition and results of operations of the Company set forth below should beread in conjunction with the consolidated financial statements and relatednotes thereto included elsewhere in this Form 10-KSB. This Form 10-KSBcontains forward-looking statements that involve risk and uncertainties. Thestatements contained in this Form 10-KSB that are not purely historicalare forward-looking statements within the meaning of Section 27A of theSecurities Act and Section 21E of the Exchange Act. When used in this Form 10-KSB,or in the documents incorporated by reference into this Form 10-KSB, thewords “anticipate,” “believe,” “estimate,” “intend” and “expect” and similarexpressions are intended to identify such forward-looking statements. Suchforward-looking statements include, without limitation, the statements in “Business – Overview and – Risk Factors” and statements relating to competition,management of growth, our strategy, future sales, future expenses and futureliquidity and capital resources. All forward-looking statements in this Form 10-KSBare based upon information available to us on the date of this Form 10-KSB,and we assume no obligation to update any such forward-looking statements. Ouractual results could differ materially from those discussed in this Form 10-KSB.Factors that could cause or contribute to such differences include, but are notlimited to, the resolution or outcome of the lawsuits described in “Litigation”above, the effect of changes in our management and the ability to retainqualified individuals to serve in key management positions, and those discussedbelow, in “ Business— Risk Factors,” and elsewhere in this Form 10-KSB.*

 

**Overview**

 

Founded in 1981, we are a provider of dataconversion and digital mapping services to users of customized geographicinformation systems.

 

Our independent auditors, Pannell KerrForster of Texas, P.C., issued a going concern qualification on our financialstatements for the fiscal years ended September 30, 2005 and 2004.  The going-concern qualification, whichexpressed substantial doubt about our ability to continue as a going concern,is based on the significant operating losses reported in fiscal 2005, 2004, and2003, and a lack of external financing.

 

We experience yearly and quarterly fluctuations inproduction costs, salaries, wages and related benefits and subcontractor costs.These costs may vary as a percentage of sales from period to period.  In September 2004, our five-yearexclusive supply agreement with InfoTech Enterprises, Ltd., an India-basedcompany, to provide production capacity for data conversion and other relatedservices expired.  We utilizedInfoTech to provide more than 90% of our offshore subcontractor services (which work constitutes less than 10% of ourtotal production costs).  Duringfiscal 2005 we supplemented our offshore conversion capacity as we utilizedadditional sources of offshore services in addition to InfoTech.   Weintend to continue to utilize offshore subcontractors for a large percentage ofcertain data entry production work in fiscal 2006 to reduce production costsand develop new services.

 

Our backlog has been impacted by changes inmacroeconomic and industry market conditions. These conditions, first encountered in fiscal 2000 and which havecontinued through fiscal 2005, include interest rate and exchange rate stability,public sector spending levels, and the size of investment spending.  The 2005 Geospatial Technology Report succinctly addresses thetraditional marketplace in which ASI serves. Historically, the most significantcosts associated with GIS project implementations was acquiring / loading thesystem with GIS data. In fact, the effort associated with this activityapproached 75% of total project cost. Today’s technology has dramatically altered the landscape in such waysthat commercial off-the-shelf (“COTS”) hardware and software solutions providethe ability to offer the customer low cost base map data.  Additionally, satellite remote sensing basedata is supplemented with companies offering topographic, planimetric, andcadastral data, all COTS available. This trend has shifted spending ondigitizing efforts to COTS acquisitions. This shift to COTS coupled with offerings from service firms with largelabor content in India, has resulted in lower margins and increased competitionin the industry. The technologies utilized by our GIS customer base continue toadvance and demand a current and accurate depiction of their spatially locatedassets, however, this need appears to be satisfied by in-house customeroperations on an increasing basis.  We believe these adverse market conditions were and continue to beprimarily caused by the recessionary economic climate, consolidation in theutility industry, an industry trend to utilize new software solutions thatenable our traditional customers to employ their own geospatial informationresources, as well as increased competition from companies with offshoreoperations.  Backlog increases when newcontracts are signed and decreases as revenues are recognized.  The changes in macroeconomic and industrymarket conditions have resulted in a reduction of the execution of newcontracts and the renewal of expiring contracts, thus causing a decrease in ourbacklog.  At September 30, 2005,backlog was $4.0 million, $3.7 million of which we expect to fill in fiscal2006.  At September 30, 2004,backlog was $6.5 million.

 

We seek long-term GIS conversion projects andcurrently have two contracts that have a contract value greater than $2 millionor longer than two years in duration, which can increase risk due to inflation,as well as changes in customer expectations and funding availability.  Our contracts are generally terminable onshort notice, and while we rarely experience such termination, there is no

 

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assurance that we will receive all of the revenue anticipatedunder signed contracts.  See Item 1. “Business— Risk Factors – Our customer contracts may be adversely modified, changed orterminated prior to the expiration of the contract terms.”

 

We are pursuing alternative business strategiesdesigned to diversify our operations and the risks thereon.  We are seeking business lines that have ashorter sales cycle and higher margins than is produced by our current businessendeavors.  In December 2005, weengaged a consulting firm to assist in identifying and pursuing such endeavors,with a particular focus on the oil and gas energy sector, including explorationand production, as well as any other sector that presents attractiveopportunities for our shareholders.  However, there is no assurance that we can identifysuch business strategies and execute our entrance to such markets in a timelymanner.

 

**Critical Accounting Policies**

 

**Revenue Recognition. **We recognize revenue using the percentage of completion method ofaccounting on a cost-to-cost basis.  Foreach contract, an estimate of total production costs is determined and theseestimates are reevaluated monthly.  Theestimation process requires substantial judgments on the costs over the life ofthe contract, which are inherently uncertain. The duration of the contracts and the technical challenges included incertain contracts affect our ability to estimate costs precisely.  Production costs consist of internal costs,primarily salaries and wages, and external costs, primarily subcontractorcosts.  Internal and external productioncosts may vary considerably among projects and during the course of completionof each project.  At each accountingperiod, the percentage of completion is based on production costs incurred todate as a percentage of total estimated production costs for each of thecontracts.  This percentage is thenmultiplied by the contract’s total value to calculate the sales revenue to berecognized. The percentage of completion is affected by any factors whichinfluence either the estimate of future productivity or the production cost perhour used to determine future costs.  Werecognize losses on contracts in the period such loss is determined. In fiscal2005, we recognized $.7 million in provision for loss contracts.  Sales and marketing expenses associated withobtaining contracts are expensed as incurred. If we underestimate the total cost to complete a project we wouldrecognize a disproportionately high amount of revenue in the earlier stages ofthe contract, which would result in disproportionately high profit margins inthe same period.  Conversely, if weoverestimate the cost to complete a project, a disproportionately low amount ofrevenue would be recognized in the early stages of a contract.  While our contracts generally containtermination clauses they also provide for reimbursement of costs incurred todate in the event of termination.

 

**Valuation of AccountsReceivable. **We maintain allowances for doubtful accountsfor estimated losses resulting from the inability of our customers to makerequired payments.  Management routinelyassesses the financial condition of our customers and the markets in whichthese customers participate.  If thefinancial condition of our customers were to deteriorate, resulting in animpairment of their ability to make payments, additional allowances might berequired.

 

**Litigation. **We are subject to various claims, lawsuits and administrativeproceedings that arise from the ordinary course of business.  Liabilities and costs associated with thesematters require estimates and judgment based on professional knowledge andexperience of management and our legal counsel. When estimates of our exposure for claims or pending or threatenedlitigation matters meet the criteria of SFAS No. 5, amounts are recordedas charges to operations.  The ultimateresolution of any exposure may change as further facts and circumstances becomeknown.

 

**Income Taxes. **We reported a net loss in fiscal 2004 and 2005.  The current and prior year losses havegenerated a sizeable federal tax net operating loss, or NOL, carryforward whichtotals approximately $29 million as of September 30, 2005.

 

U.S. generally accepted accounting principlesrequire that we record a valuation allowance against the deferred tax assetassociated with this NOL if it is “more likely than not” that we will not beable to utilize it to offset future taxes. Due to the size of the NOL carryforward in relation to our recenthistory of unprofitable operations and due to the continuing uncertaintiessurrounding our future operations as discussed above, we have not recognizedany of this net deferred tax asset.  Wecurrently provide for income taxes only to the extent that we expect to paycash taxes (primarily state taxes and the federal alternative minimum tax) oncurrent taxable income.

 

It is possible, however, that we could be profitablein the future at levels which cause management to conclude that it is morelikely than not that we will realize all or a portion of the NOLcarryforward.  Upon reaching such aconclusion, we would immediately record the estimated net realizable value ofthe deferred tax asset at that time and would then provide for income taxes ata rate equal to our combined federal and state effective rates, which wouldapproximate 39% under current tax rates. Subsequent revisions to the estimated net realizable value of thedeferred tax asset could cause our provision for income taxes to varysignificantly from period to period, although our cash tax payments wouldremain unaffected until the benefit of the NOL is utilized.

 

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**Results Of Operations**

 

The following table sets forth, for the fiscal yearsended September 30, 2005 and 2004, selected consolidated statement ofoperations data expressed as a percentage of sales:

 
| **Percentage of Sales:**          | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
|                              |       |     |       |     |       |
| Revenues                          |       | 100.0    | %          | 100.0    | %          |
| Costs and expenses:               |       |     |       |     |       |
| Salaries,  wages and benefits     |       | 86.8     |       | 52.0     |       |
| Subcontractor  costs              |       | 25.1     |       | 32.0     |       |
| Other  general and administrative |       | 38.1     |       | 30.4     |       |
| Bad debts  (recoveries)           |       | 0.0      |       | 0.0      |       |
| Depreciation  and amortization    |       | 2.9      |       | 2.4      |       |
| Severance  and related costs      |       | 1.1      |       | 1.4      |       |
| Loss from operations              |       | (54.0    | )          | (18.2    | )          |
| Other expense, net                |       | (1.1     | )          | (5.2     | )          |
| Gain on extinguishment of debt    |       | —   |       | 12.7     |       |
| Loss before income taxes          |       | (55.1    | )          | (10.7    | )          |
| Income taxes                      |       | —   |       | —   |       |
| Net loss                          |       | (55.1    | )%         | (10.7    | )%         |

 

**Fiscal Years Ended September 30,2005 and 2004**

 

**Revenues.*** *We recognize revenues as services areperformed.  Revenues recorded in a periodare reported net of adjustments to reflect changes in estimated profitabilityof each project.  Revenues decreased47.8% or $5.5 million to $6.1 million for fiscal 2005 from $11.6 million forfiscal 2004.  The decrease in revenues isdue to a lower number of active contracts in the fiscal 2005 period.  The level of new contract signings in each ofthe past four fiscal years was lower than in previous years and, as a result,revenues have decreased as well.  Webelieve this decrease in contract signings is attributable to lower demand forand reduced spending levels in information technology services and increasedcompetition by low-cost service providers both in general and specific to theGIS industry.

 

**Salaries, Wages and Benefits.** Salaries, wages and benefits include employeecompensation for production, marketing, selling, administrative, and executiveemployees.  Salaries, wages and benefitsdecreased 12.9% to $5.3 million for fiscal 2005 from $6.0 million for fiscal2004.  The decrease was a result ofreductions in our workforce related to reduced revenue volume, our decision tosubcontract a portion of our production work to offshore subcontractors, andour use of domestic subcontractors to manage fluctuating labor needs.

 

**Subcontractor Costs.** Subcontractor costs include production costsincurred through the use of third parties for production tasks such as dataconversion services to meet contract requirements, and field surveyservices.  The use of domesticsubcontractors enables us to better manage the fluctuations in labor requirementsas we complete and begin new projects as well as during the various phases ofcontracts.  Subcontractor costs decreased59.0% to $1.5 million for fiscal 2005 from $3.7 million for fiscal 2004, and to25.1% from 32.0%, respectively, as a percentage of revenues.  The decrease was due to our reduced businessvolume.

 

**Other General and Administrative.**  Othergeneral and administrative expenses include rent, maintenance, travel,supplies, utilities, insurance and professional services**. **Suchexpenses decreased 34.6% to $2.3 million for fiscal 2005 from $3.5 million forfiscal 2004.  The decrease wasattributable to decreases in occupancy, travel, and professional fee expenses,as well as the general decrease in personnel and related expenses in fiscal 2005as compared to fiscal 2004.  Additionally, we received a $143,000 legal expense reimbursement relatedto the Tonga debt conversion that served to reduce general and administrativeexpenses.

 

**Depreciation and Amortization.** Depreciation and amortization for fiscal 2005decreased 35.9% to $175,000 from $273,000 for fiscal 2004 due to equipmentbecoming fully depreciated.  Thereplacement cost on computer equipment is significantly lower than the replaceditems.  Additionally, we have been ableto upgrade existing equipment, which has minimized our need to purchase newequipment.  Accordingly, depreciationexpense has decreased in recent periods.

 

**Severance and Related Costs.**  Weincurred severance expense of $67,000 in fiscal 2005 and $164,000 in fiscal 2004.  The expense in fiscal 2005 was incurred as aresult of the termination of the former CEO employment contract that providedfor a significant severance payment, while the fiscal 2004 expense was relatedto the reduction of several positions during that year.

 

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**Other Income (Expense).** Other income (expense) is comprised primarilyof interest expense and other income resulting from the change in the fairvalue of the derivative features of the Restructured Note.  Interest expense decreased to $78,000 forfiscal 2005 from $681,000 in fiscal year 2004. The decrease, which totaled $603,000 for the year, was a result of theelimination of interest expense effected by the conversion of the RestructuredNote on November 10, 2004 and the early redemption of our Preferred Stockin June 2004.   We incurrednon-cash interest expense related to the Second Note and the Restructured Noteand the Preferred Stock of $17,000 and $190,000 in fiscal 2005 and 2004,respectively.  We incurred non-cashinterest expense related to the dividends accrued and accretion of thePreferred Stock totaling $71,000 in fiscal 2005 as compared to $486,000 infiscal 2004.  See Note 4 to theconsolidated financial statements.  Otherinterest expense related to various other debt instruments was offset byinterest income.

 

Other income (expense) is earned (incurred)as a result of the decrease or increase in the fair market values of thederivative features, which change proportionately with the change in the marketvalue of our Common Stock.  We recordedother income totaling $12,000 and $75,000 in fiscal 2005 and 2004,respectively, as a result of the decrease in the fair market value of thederivative features of and amortization of the premium on the Restructured Noteat the end of each period.

 

**Gain onExtinguishment of Debt.**  In fiscal year 2004, we recorded a $1,475,000 gain on the earlyredemption of 1,341,100 shares of our Preferred Stock.  We paid the holders of these preferred sharesa payment totaling $251,456, to redeem the shares.  The carrying value of the shares on theredemption dates was approximately $1,535,000. Accrued dividends totaling approximately $191,000 were forgiven in theredemption agreement.

 

**Income Tax Benefit.**  Federalincome tax expense for fiscal year 2005 is projected to be zero andaccordingly, we recorded an effective federal income tax rate of 0%.  Federal income tax expense for fiscal year2004 was zero.  As a result of theuncertainty that sufficient future taxable income can be recognized to realizeadditional deferred tax assets, no income tax benefit has been recognized forfiscal 2005 and 2004.

 

**Net Loss. **Net loss available to common shareholdersincreased $2.1 million to $3.3 million in fiscal 2005 from the $1.2 million netloss in fiscal 2004.  The larger net lossin fiscal 2005 was a result of lower revenues and increases in project costs in2005.  Additionally, the fiscal 2004 lossfrom operations was offset by the $1.475 million gain on extinguishment of debtthat we recorded in fiscal 2004.

 

**Liquidity And Capital Resources**

 

**Table of ContractualObligations. **Below is a schedule (by period due) ofthe future payments (in thousands), which we are obligated to make over thenext five years based on agreements in place as of September 30, 2005.

 
| ** **                 | ** ** | **Fiscal Year Ending September 30** | ** ** |
|----------------------------|------------|------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                 | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Total** | ** ** |
| Operating leases           |       | $                                        | 107        |   | — |   | — |   | — |   | — |   | $ | 107 |   |
| Capital lease obligations  |       | 21                                       |       | 21 |   | 16 |   | — |   | — |   | 58 |   |
| Debt                       |       | —                                   |       | — |   | — |   | — |   | — |   | — |   |
| Preferred stock redemption |       | —                                   |       | 300 |   | — |   | — |   | — |   | 300 |   |
| Total                      |       | $                                        | 128        |   | 321 |   | 16 |   | — |   | — |   | $ | 465 |   |

 

**Historically, the principal sourceof our liquidity consisted of cash flow from operations supplemented by securedlines-of-credit and other borrowings.  AtSeptember 30, 2005, our debt obligations included, redeemable preferredstock with a redemption value of $266,298 and miscellaneous borrowings. Amandatory redemption payment of $299,583 is due on December 27, 2006.  On December 28, 2006, the redemptionpayment increases to $332,870.  We do nothave a line of credit and there is no assurance that we will be able to obtainadditional borrowings should we seek to do so.**

 

Our debt is summarized asfollows (in thousands).

 
| ** **                                          | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** |
|-----------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Long-Term Debt**                                  |       |                         |       |                         |       |
| Senior secured convertible note—related  party |       | $                            | 0          |                         | $          | 1,601 |   |
| Other debt and capital lease obligations            |       | 47                           |       | 53                           |       |
| Redeemable preferred stock                          |       | 247                          |       | 319                          |       |
|                                                |       | 294                          |       | 1,973                        |       |
| Less current portion                                |       | (17                          | )          | (182                         | )          |
|                                                |       | $                            | 277        |                         | $          | 1,791 |   |

 

16

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On April 2,2002, we completed the sale of a $2.0 million senior secured convertible note (“OldNote”) and a warrant (“Warrant”) to purchase 500,000 of our common stock (“CommonStock”) to Tonga.  The Old Note, whichcarried a face value of $2 million, had a maturity date of April 2, 2005,and accrued interest at an annual rate of 5.00%.  Accrued interest was not payable in cash butwas to be converted into Common Stock upon the Old Note’s voluntary conversiondate or maturity.

 

On October 29,2003, we received a notice of conversion from Tonga for $300,000 in principalof the Old Note.  On November 6,2003, we issued 241,936 shares at a conversion price equal to $1.24, whichrepresented 90% of the average closing bid prices for the three trading dayshaving the lowest closing bid price during the 20 trading days immediatelyprior to October 29, 2003.  We alsoissued 19,522 shares at the same conversion price for $24,208 of accruedinterest on the converted principal.  TheOld Note was exchanged for the shares and a $1.7 million debenture (“SecondNote”) bearing the same terms.  The newlyissued shares increased our total common shares outstanding from 823,965 to1,085,423.  Tonga owned 24% of ouroutstanding shares immediately after the partial conversion.

 

On May 28,2004, an event of default was triggered under the Second Note when ourRegistration Statement on Form S-3 filed with the SEC on December 30,2003 to register shares of our Common Stock that were issued or are issuablepursuant to the Old Note, the Second Note, and the Warrant was not declaredeffective by the SEC.

 

On June 30,2004, the event of default was cured when we restructured the Second Note.  The restructured $1.7 million senior securedconvertible promissory note (the “Restructured Note”) bore interest at a rateof 5% per annum with such interest accruing beginning on November 4,2003.  The principal amount of theRestructured Note, together with accrued and unpaid interest, was due andpayable at Tonga’s option in cash or shares of our Common Stock on January 2,2006.  Tonga retained the right toconvert the Restructured Note for shares of our Common Stock at any time.  Tonga waived accrued interest on the SecondNote through November 3, 2003, which totaled $134,000.  Tonga also waived its rights to assessliquidated damages pursuant to the Second Note, relinquished its rights underthe Warrant and canceled the Warrant.

 

Thecarrying value of the Second Note immediately prior to execution of theRestructured Note was $1.616 million, which reflected the $1.7 million facevalue less the $84,000 unamortized discount. Additionally, immediately prior to the execution of the RestructuredNote, the fair value of the Warrant totaled approximately $67,000, and the fairvalue of the conversion feature of the Second Note totaled approximately$62,000.  As a result of the extendedterm of the Restructured Note, the estimated fair value of the conversionfeature increased to approximately $119,000. We recorded the Restructured Note at $1.581 million reflecting adiscount for the $119,000 estimated fair value of the conversion feature, whichwas recorded as a current liability. This transaction resulted in a net decrease in total liabilities ofapproximately $180,000.  The decreaseconsisted of $134,000 of waived interest, the $68,000 fair value of thecanceled Warrant, and a $35,000 decrease in the carrying value of theRestructured Note, offset by a $57,000 increase in the fair value of theconversion feature.  We recorded the$180,000 decrease in liabilities as a capital contribution pursuant to StaffAccounting Bulletin Topic 1:B.

 

The$1.581 million carrying value of the Restructured Note was accreted to its facevalue as we recorded interest expense over the remaining eighteen-month term ata rate of approximately $20,000 per quarter. The effective interest rate of the Restructured Note was 12.14%.  On September 7, 2004, our amendedRegistration Statement on Form S-3/A was declared effective by theSEC.  Simultaneous to the effectivenessof the registration, the net cash settlement provisions in the RestructuredNote that effected the derivative classification of the conversion feature wereextinguished.  We revalued andreclassified the conversion feature as a conversion premium (“Premium”) with anestimated value of $129,000, which would be amortized to income over theremaining term of the Restructured Note, or through January 2, 2006.  We amortized the Premium, recognizingapproximately $7,000 in other income from September 7 to September 30,2004.  At September 30, 2004,accrued interest on the Restructured Note totaled approximately $78,000, andthe carrying value of the unamortized Premium totaled approximately $122,000.

 

On November 11,2004, we received a notice of conversion (“Conversion”) dated November 10,2004, from Tonga to convert the outstanding principal of the Restructured Noteand the related accrued interest into our Common Stock at the conversion priceset forth in the Restructured Note.  Theconversion price was $1.05, and was equal to 90% of the average closing bidprices for the three trading days having the lowest closing bid price duringthe 20 trading days immediately prior to November 10, 2004.  The newly issued shares increased our totalcommon shares outstanding from 1,104,173 to 2,805,522.  Tonga owned 67% of our outstanding sharesimmediately after the Conversion. According to filings made by Tonga under Section 16 of the ExchangeAct, Tonga liquidated its holdings of our Common Stock by November 15,2004.

 

On November 10,2004, the carrying value of the Restructured Note and accrued interest thereontotaled approximately $1,719,420 ($1.7 million less unamortized discount of$90,857, plus unamortized Premium of $110,277) and $86,417, respectively.  The 

 

17

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Conversionresulted in a decrease in related party debt consisting of the carrying valueof the Restructured Note and the related accrued interest, totaling $1,805,837,and a corresponding increase in stockholders’ equity.

 

We weregenerally restricted from issuing additional equity securities without Tonga’sconsent, and Tonga had a right of first refusal as to certain subsequentfinancings.  The Restructured Note was securedby all of our assets.  As part of the transaction, for a period of threeyears from the date of the Old Note, Tonga had the right to appoint a majorityof our board of directors.  Tongaappointed three members to the Board and as a result, controlled ASI.   However, the conversion of the RestructuredNote released the security interest in all of our assets.  Upon Tonga’s disposal of its holdings of ourCommon Stock, Tonga relinquished its right to appoint directors.  In December 2004, we appointed two newindependent directors in conjunction with the resignation of the threeTonga-appointed directors.  As a result,Tonga relinquished control of ASI.

 

At September 30, 2005, 166,435 shares ofPreferred Stock were outstanding, and which are redeemable on or before December 28,2006.  In December 2004, we redeemed92,465 shares pursuant to the terms of the Preferred Stock, which provided fora mandatory redemption payment on December 28, 2004.  We paid the holder of the Preferred Stock$129,450 and redeemed the shares at $1.40 per share.  The redemption price increases by $0.20 peryear to $1.80 on December 28, 2005 ($299,583), and to $2.00 on December 28,2006 ($332,870).  We must redeem thePreferred Stock on or before December 28, 2006.

 

The Preferred Stock earns a dividend at theannual rate of 5.00% of the then applicable redemption price on a cumulative,non-participating basis and has a liquidation preference equal to the thenapplicable redemption value of shares outstanding at the time ofliquidation.  Since its issuance, we haveaccrued but not declared or paid dividends on the Preferred Stock.  Accrued dividends at September 30, 2005,totaled approximately $57,000.

 

The accompanying financialstatements have been prepared on a going concern basis, which contemplates therealization of assets and the satisfaction of liabilities in the normal courseof business.  Since fiscal 2000, we haveexperienced significant operating losses with corresponding reductions inworking capital.  Our revenues andbacklog decreased significantly during that time.  These factors, among others, have resulted inour independent auditors issuing an audit opinion on the September 30,2005, financial statements that expressed substantial doubt about our abilityto continue as a going concern.

 

To address thegoing concern issue, management implemented financial and operationalrestructuring plans designed to improve operating efficiencies, reduce andeliminate cash losses, and position us for profitable operations. Financial steps included theretirement of 84% of our preferred stock for 12% of its redemption value andaccrued dividends, which also reduced future interest expense incurred on thepreferred stock.  We restructured ourconvertible debt by issuing the Restructured Note to cure an event of defaultand reduced the total interest payable thereon. The conversion of the Restructured Note by Tonga in November 2004reduced our debt by $1,696,000, eliminated future related interest expense andimproved our debt to equity ratio.  Wehave reduced our general and administrative expenses by reducing occupancycosts and streamlining our executive, senior and middle management teams.  Financial steps includedrestructuring our bank debt through the issuance of preferred stock andconvertible debt, subsequent collection of the federal income tax refund andsale of non-core assets. Operational steps included the consolidation ofproduction services to two solution centers, reduction of corporate andnon-core spending activities, outsourcing certain components of projects, andstreamlining our sales and marketing team. In fiscal 2004, we retired 84% ofour preferred stock for 12% of its redemption value and accrued dividends.

 

**The financialstatements do not include any adjustments relating to the recoverability ofassets and the classifications of liabilities that might be necessary should webe unable to continue as a going concern. However, we believe that our turnaround efforts, if successful, willimprove operations and generate sufficient cash to meet our obligations in atimely manner.**

** **

**In the absenceof a line of credit and because of our inability to secure debt on terms thatwould be considered reasonable based on our recent operating history, we dependon internal cash flow to sustain operations. Internal cash flow is significantly affected by customer contract termsand progress achieved on projects. Fluctuations in internal cash flow are reflected in three contract-relatedaccounts: accounts receivable; revenues in excess of billings; and billings inexcess of revenues. Under the percentage of completion method of accounting:**

** **

•                  “Accounts receivable” iscreated when an amount becomes due from a customer, which typically occurs whenan event specified in the contract triggers a billing.

 

•                  “Revenues in excess ofbillings” occur when we have performed under a contract even though a billingevent has not been triggered.

 

•                  “Billings in excess ofrevenues” occur when we receive an advance or deposit against work yet to beperformed.

 

18

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These accounts,which represent a significant investment by us in our business, affect our cashflow as projects are signed, performed, billed and collected.  At September 30, 2005, we had multiplecontracts with fourof our current customers accounted for 72% of our consolidated revenues infiscal 2005 (British Telecommunications PLC (“BT”), 21%; MWH Americas, Inc.,18%; Worldwide Services, Inc, and Intergraph (“WWS”), 16%; and MichiganConsolidated Gas Company (“Michcon”), 17%). All four of these customers fall within our utility market.  Two customers, WWS and Michcon, accounted for68% and 10%, respectively, or 78%, of total accounts receivable and revenue inexcess of billings at September 30, 2005.  Billing terms arenegotiated in a competitive environment and, as stated above, are based onreaching project milestones.  Weanticipate that sufficient billing milestones will be achieved during fiscal2005 such that revenue in excess of billings for these customer contracts willbegin to decline.

 

In order to meet our short-termcash requirements we must collect more cash from our customers than we pay toour employees and suppliers.  To meet ourlong-term cash requirements, we must complete certain projects in fiscal 2006and 2007 that are related to the balance of revenues in excess of billings at September 30,2005, in order to generate sufficient cash flow to fund operations andexpenditures and to meet our debt requirements. We anticipate that the successful completion of these projects will reducethe balance of unearned revenue and generate cash sufficient to meet both ourshort-term and long-term debt obligations. We expect that we will be able to complete a majority of these contractsby June 30, 2006, but there can be no assurance that market conditions orother factors may prevent us from doing so or that the cash generated will beequal to the amount that we currently anticipate.  If we are unable to complete the contractsand generate cash by earning and collecting our unearned revenues, we will beforced to obtain additional financing and/or restrict capital and operatingexpenditures to match available resources. If these actions are not sufficient, and we are not able to meet ourcommitments when due, then we will be forced to liquidate assets and repay oursecured creditors with the proceeds.

 

We are pursuing alternative business strategiesdesigned to diversify our operations and the risks thereson.  We are seeking business lines that have ashorter sales cycle and higher margins than is produced by our current businessendeavors.  In December 2005, weengaged a consulting firm to assist in identifying and pursuing such endeavors,with a particular focus on the oil and gas energy sector, including explorationand production.  We will also evaluate othersectors that present attractive opportunities for our shareholders. However, there is no assurance that we canidentify such business strategies and execute our entrance to such markets in atimely manner.

 

**Our operatingactivities used $48,000 and $757,000 cash in fiscal 2005 and 2004,respectively.  Contract-related accountsdescribed in the previous paragraph declined $3.3 million and $3.0 million infiscal 2005 and 2004, respectively. Accounts payable and accrued expenses decreased $367,000 and $1.9million in fiscal 2005 and 2004, respectively. Prepaid expenses decreased $102,000 in fiscal 2005 and increased $17,000in 2004.**

** **

Cash provided byinvesting activities principally consisted of proceeds from sales of assets,offset by the purchases of equipment and leasehold improvements.  We purchased equipment and leaseholdimprovements totaling $88,000 and $23,000 in 2005 and 2004.

 

Cash used by financing activitiesfor fiscal years 2005 and 2004 was $111,000 and $310,000, respectively. We paid $129,450 in accordance with themandatory redemption terms of our preferred stock and redeemed 92,465 shares inDecember 2004.

 

**Impact Of Recently IssuedAccounting Pronouncements**

 

In December 2004, theFinancial Accounting Standards Board (“FASB”) published revisions to SFAS No. 123.  The revised SFAS No. 123 (“SFAS No. 123R”)requires companies to account for share-based payment transactions using afair-value based method, thereby eliminating the disclosure-only provisions ofSFAS No. 123.  SFAS No. 123R iseffective for all small business public entities as of the beginning of thefirst interim or annual reporting period for fiscal years beginning after December 15,2005.  We are currently evaluating theimpact on our financial condition and the results of operations.  We currently elect the disclosure-onlyprovisions of Statement SFAS No. 123R.

 

In December 2004, the FASBissued SFAS No. 153, “*Accounting forNon-monetary Transactions*” (“SFAS 153”).  SFAS 153 requires non-monetary exchanges to beaccounted for at fair value, recognizing any gain or loss, if the transactionsmeet a commercial-substance criterion and fair value is determinable.  SFAS No. 153 is effective fornon-monetary transactions occurring in fiscal years beginning after June 15,2005.  The Company believes that theimplementation of this standard will not have a material effect on the Company’sconsolidated financial position or results of operations.

 

In May 2005, the FASB issuedStatement of Financial Accounting Standards No. 154 (“SFAS 154”), “*Accounting for Changes and Error Corrections—areplacement of APB Opinion No. 20 and FASB Statement No. 3*.”  This statement changes the requirements forthe accounting for and reporting of a change in accounting principle.  This statement applies to all voluntarychanges in accounting principle.  It alsoapplies to changes required by an accounting pronouncement in the unusualinstance that the pronouncement does 

 

19

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not include specific transitionprovisions.  When a pronouncementincludes specific transition provisions, those provisions should befollowed.  This statement is effectivefor fiscal years beginning after December 15, 2005 and is not expected tohave a material impact on the Company’s consolidated financial statements.

 

20

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**Item 7. Financial Statements**

 

**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

 

To the Board of Directors and Stockholders of

Analytical Surveys, Inc.

 

We have audited theaccompanying consolidated balance sheets of Analytical Surveys, Inc. andSubsidiaries as of September 30, 2005 and 2004, and the relatedconsolidated statements of operations, stockholders’ equity and cash flows foreach of the years then ended.  Theseconsolidated financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of AnalyticalSurveys, Inc. and Subsidiaries as of September 30, 2005 and 2004, andthe results of their operations and their cash flows for each of the years thenended in conformity with U. S. generally accepted accounting principles.

 

The accompanying consolidatedfinancial statements have been prepared assuming that the Company will continueas a going concern.  As discussed in Note14 to the consolidated financial statements, the Company has sufferedsignificant operating losses in 2005 and prior years and does not currentlyhave external financing in place to fund working capital requirements, whichraises substantial doubt about the Company’s ability to continue as a goingconcern.  Management’s plans in regard tothis matter are also described in Note 14. The consolidated financial statements do not include any adjustmentsthat might result from the outcome of this uncertainty.

 

 
| /s/ PANNELL KERR FORSTER OF TEXAS, P.C. |   |
|-----------------------------------------|--------|
|                                    |
|                                    |
| December 7, 2005                   |
| Houston, Texas                          |

 

21

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**ANALYTICAL SURVEYS, INC.**

**AND SUBSIDIARIES**

 

Consolidated Balance Sheets

 

September 30, 2005 and2004

(In thousands)

 

 
| ** **                                                                                                                                                                                           | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Assets**                                                                                                                                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                                                                                      |       |       |       |       |       |
| Cash and cash equivalents                                                                                                                                                                            |       | $          | 622        |       | $          | 867 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $50 and $54 at September 30, 2005 and 2004,  respectively                                                                       |       | 1,529      |       | 3,431      |       |
| Revenue earned in excess of billings                                                                                                                                                                 |       | 1,612      |       | 3,006      |       |
| Prepaid expenses and other                                                                                                                                                                           |       | 81         |       | 183        |       |
| Total current assets                                                                                                                                                                                 |       | 3,844      |       | 7,487      |       |
| Equipment and leasehold improvements, at  cost:                                                                                                                                                      |       |       |       |       |       |
| Equipment                                                                                                                                                                                            |       | 3,979      |       | 4,783      |       |
| Furniture and fixtures                                                                                                                                                                               |       | 363        |       | 484        |       |
| Leasehold improvements                                                                                                                                                                               |       | 75         |       | 267        |       |
|                                                                                                                                                                                                 |       | 4,417      |       | 5,534      |       |
| Less accumulated depreciation and  amortization                                                                                                                                                      |       | (4,249     | )          | (5,274     | )          |
| Net equipment and leasehold improvements                                                                                                                                                             |       | 168        |       | 260        |       |
| Total assets                                                                                                                                                                                         |       | 4,012      |       | 7,747      |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                       |       |       |       |       |       |
| Current liabilities:                                                                                                                                                                                 |       |       |       |       |       |
| Current portion of long-term debt and  capital lease obligations                                                                                                                                     |       | 17         |       | 53         |       |
| Billings in excess of revenue earned                                                                                                                                                                 |       | 425        |       | 468        |       |
| Accounts payable                                                                                                                                                                                     |       | 289        |       | 882        |       |
| Accrued interest – related party                                                                                                                                                                |       | —     |       | 78         |       |
| Accrued liabilities                                                                                                                                                                                  |       | 688        |       | 479        |       |
| Accrued payroll and related benefits                                                                                                                                                                 |       | 687        |       | 678        |       |
| Redeemable preferred stock – current  portion                                                                                                                                                   |       | —     |       | 129        |       |
| Fair value of derivative features – related  party                                                                                                                                              |       | —     |       | 122        |       |
| Total current liabilities                                                                                                                                                                            |       | 2,106      |       | 2,889      |       |
| Long-term debt:                                                                                                                                                                                      |       |       |       |       |       |
| Capital lease obligations, less current  portion                                                                                                                                                     |       | 30         |       | —     |       |
| Long-term debt – related party                                                                                                                                                                  |       | —     |       | 1,601      |       |
| Redeemable preferred stock; no par value.  Authorized 2,500 shares; 166 and 259 shares issued and outstanding at  September 30, 2005 and 2004, (liquidation value $266 and $362),  respectively |       | 247        |       | 190        |       |
| Total long-term debt                                                                                                                                                                                 |       | 277        |       | 1,791      |       |
| Total liabilities                                                                                                                                                                                    |       | 2,383      |       | 4,680      |       |
| Commitments and contingencies                                                                                                                                                                        |       |       |       |       |       |
| Stockholders’ equity:                                                                                                                                                                           |       |       |       |       |       |
| Common stock, no par value. Authorized  10,000 shares; 2,869 and 1,104 shares issued and outstanding at  September 30, 2005 and 2004, respectively                                              |       | 35,312     |       | 33,410     |       |
| Accumulated deficit                                                                                                                                                                                  |       | (33,683    | )          | (30,343    | )          |
| Total stockholders’ equity                                                                                                                                                                      |       | 1,629      |       | 3,067      |       |
| Total liabilities and stockholders’ equity                                                                                                                                                      |       | $          | 4,012      |       | $          | 7,747 |   |

 

See accompanying notes to consolidated financialstatements.

 

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**ANALYTICAL SURVEYS, INC.**

**AND SUBSIDIARIES**

 

Consolidated Statements ofOperations

 

Years ended September 30,2005 and 2004

(In thousands, except pershare amounts)

 
| ** **                                | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
|                                      |       |     |       |     |       |
| Revenues                                  |       | $        | 6,063      |     | $          | 11,608 |   |
| Costs and expenses:                       |       |     |       |     |       |
| Salaries, wages and benefits              |       | 5,261    |       | 6,041    |       |
| Subcontractor costs                       |       | 1,524    |       | 3,714    |       |
| Other general and administrative          |       | 2,310    |       | 3,533    |       |
| Depreciation and amortization             |       | 175      |       | 273      |       |
| Severance and related costs               |       | 67       |       | 164      |       |
| Total operating costs                     |       | 9,337    |       | 13,725   |       |
| Loss from operations                      |       | (3,274   | )          | (2,117   | )          |
| Other income (expense):                   |       |     |       |     |       |
| Interest expense, net                     |       | (78      | )          | (681     | )          |
| Other income, net                         |       | 12       |       | 76       |       |
| Gain on extinguishment of debt            |       | —   |       | 1,475    |       |
| Total other income (expense)              |       | (66      | )          | 870      |       |
| Loss before income taxes                  |       | (3,340   | )          | (1,247   | )          |
| Income taxes                              |       | —   |       | —   |       |
| Net loss available to common shareholders |       | $        | (3,340     | )        | $          | (1,247 | ) |
|                                      |       |     |       |     |       |
| Basic earnings (loss) per common share:   |       |     |       |     |       |
| Net loss available to common shareholders |       | $        | (1.26      | )        | $          | (1.17 | ) |
|                                      |       |     |       |     |       |
| Diluted earnings (loss) per common share: |       |     |       |     |       |
| Net loss available to common shareholders |       | $        | (1.26      | )        | $          | (1.17 | ) |
|                                      |       |     |       |     |       |
| Weighted average common shares:           |       |     |       |     |       |
| Basic                                     |       | 2,644    |       | 1,061    |       |
| Diluted                                   |       | 2,644    |       | 1,061    |       |

 

See accompanying notes to consolidated financialstatements.

 

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**ANALYTICAL SURVEYS, INC.**

**AND SUBSIDIARIES**

 

Consolidated Statements ofStockholders’ Equity

 

Years ended September 30,2005 and 2004

(In thousands)

 
| ** **                                                                                             | ** ** | **Common Stock** | ** ** | **Accumulated** | ** ** | **Total   Stockholders’** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------|------------|-----------------|------------|--------------------------------|------------|
|                                                                                                   |       | **Shares**       |       | **Amount**      |       | **Deficit**                    |       | **Equity** |   |
| Balances at October 1, 2003                                                                       |       | 824              |       | $               | 32,839     |                           | $          | (29,096 | ) | $ | 3,743 |   |
| Net loss                                                                                               |       | —           |       | —          |       | (1,247                         | )          | (1,247 | ) |
| Common stock issued pursuant to conversion  of senior secured convertible note                         |       | 261              |       | 324             |       | —                         |       | 324 |   |
| Issuance of inducement stock options                                                                   |       | —           |       | 52              |       | —                         |       | 52 |   |
| Common stock issued pursuant to exercise of  stock options                                             |       | 19               |       | 15              |       | —                         |       | 15 |   |
| Contributed capital from issuance of note  payable to related party                                    |       | —           |       | 180             |       | —                         |       | 180 |   |
| Balances at September 30, 2004                                                                    |       | 1,104            |       | 33,410          |       | (30,343                        | )          | 3,067 |   |
| Net loss                                                                                               |       | —           |       | —          |       | (3,340                         | )          | (3,340 | ) |
| Common stock issued pursuant to conversion  of senior secured convertible note, net of expenses of $18 |       | 1,701            |       | 1,788           |       | —                         |       | 1,788 |   |
| Issuance of inducement stock options                                                                   |       | —           |       | 22              |       | —                         |       | 22 |   |
| Common stock issued pursuant to exercise of  stock options                                             |       | 64               |       | 92              |       | —                         |       | 92 |   |
| Balances at September 30, 2005                                                                    |       | 2,869            |       | $               | 35,312     |                           | $          | (33,683 | ) | $ | 1,629 |   |

 

See accompanying notes to consolidated financialstatements.

 

24

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**ANALYTICAL SURVEYS, INC.**

**AND SUBSIDIARIES**

 

Consolidated Statements ofCash Flows

 

Years ended September 30,2005 and 2004

(In thousands)

 
| ** **                                                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                         |       |     |       |     |       |
| Cash flows from operating activities:                                        |       |     |       |     |       |
| Net loss                                                                     |       | $        | (3,340     | )        | $          | (1,247 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |     |       |     |       |
| Depreciation and amortization                                                |       | 175      |       | 273      |       |
| Issuance of inducement stock options                                         |       | 22       |       | 52       |       |
| Gain on extinguishment of debt                                               |       | —   |       | (1,475   | )          |
| Accretion of interest expense on preferred  stock                            |       | 57       |       | 486      |       |
| Accretion of interest expense on  convertible debt – related party      |       | 9        |       | 104      |       |
| Change in fair value of derivative  instruments – related party         |       | (12      | )          | (75      | )          |
| Loss on sale of assets                                                       |       | 53       |       | 6        |       |
| Changes in operating assets and  liabilities:                                |       |     |       |     |       |
| Accounts receivable, net                                                     |       | 1,902    |       | (402     | )          |
| Revenue earned in excess of billings                                         |       | 1,394    |       | 3,106    |       |
| Prepaid expenses and other                                                   |       | 102      |       | (17      | )          |
| Billings in excess of revenue earned                                         |       | (43      | )          | 306      |       |
| Accounts payable and other accrued  liabilities                              |       | (376     | )          | (1,594   | )          |
| Accrued payroll and related benefits                                         |       | 9        |       | (280     | )          |
| Net cash used in operating activities                                        |       | (48      | )          | (757     | )          |
| Cash flows from investing activities:                                        |       |     |       |     |       |
| Purchase of equipment and leasehold  improvements                            |       | (88      | )          | (23      | )          |
| Cash proceeds from sale of assets                                            |       | 2        |       | 5        |       |
| Net cash used in investing activities                                        |       | (86      | )          | (18      | )          |
| Cash flows from financing activities:                                        |       |     |       |     |       |
| Principal payments on long-term debt and  capital lease obligations          |       | (56      | )          | (74      | )          |
| Redemption of preferred stock                                                |       | (129     | )          | (251     | )          |
| Issuance of common stock pursuant to  exercise of options                    |       | 92       |       | 15       |       |
| Costs relating to issuance of shares                                         |       | (18      | )          | —   |       |
| Net cash used in financing activities                                        |       | (111     | )          | (310     | )          |
| Net decrease in cash                                                         |       | (245     | )          | (1,085   | )          |
| Cash and cash equivalents at beginning of  year                              |       | 867      |       | 1,952    |       |
| Cash and cash equivalents at end of year                                     |       | $        | 622        |     | $          | 867 |   |
|                                                                         |       |     |       |     |       |
| Supplemental disclosures of cash flow  information:                          |       |     |       |     |       |
| Cash paid for interest                                                       |       | $        | 2          |     | $          | 6 |   |
| Equipment acquired under capital leases                                      |       | $        | 50         |     | $          | — |   |
| Non-cash financing activities                                                |       |     |       |     |       |
| Issuance of common stock pursuant to  conversion of debt                     |       | $        | 1,806      |     | $          | 324 |   |
| Capital contribution pursuant to  restructured note                          |       | $        | —     |     | $          | 180 |   |
| Accretion of preferred stock                                                 |       | $        | 57         |     | $          | 405 |   |

 

See accompanying notes to consolidated financialstatements.

 

25

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**ANALYTICALSURVEYS, INC.**

**ANDSUBSIDIARIES**

** **

**Notes toConsolidated Financial Statements**

 

**(1)**                  **Summary of SignificantAccounting Policies**

 

***(a)***             ***Businessand Basis of Financial Statement Presentation***

 

Ourprimary business is the production of precision computerized maps andinformation files used in Geographic Information Systems (“GIS”). State andlocal governments and utility companies use GIS to manage information relatingto utilities, natural resources, streets, and land use and property taxation.

 

Ourconsolidated financial statements include the accounts of our majority ownedsubsidiaries. All significant intercompany balances and transactions have beeneliminated in consolidation.

 

Thepreparation of the financial statements in conformity with U.S. generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenue and expenses during thereporting period. Actual results could differ from those estimates.

 

***(b)***             ***Statementof Cash Flows***

 

Forpurposes of the statement of cash flows, we consider all highly liquid debtinstruments purchased with an original maturity of three months or less to becash equivalents

 

***(c)***              ***Equipmentand Leasehold Improvements***

 

Equipmentand leasehold improvements are recorded at cost and are depreciated andamortized using the straight-line method over estimated useful lives of threeto ten years.  Repairs and maintenanceare charged directly to operations as incurred.

 

***(d)***             ***Revenueand Cost Recognition***

 

Contractrevenues are recognized using the percentage of completion method based on thecost-to-cost method, whereby the percentage complete is based on costs incurredin relation to total estimated costs to be incurred. Costs associated withobtaining new contracts are expensed as incurred. We generally do not combineor segment contracts for purposes of recognizing revenue. Reimbursableout-of-pocket expenses are recorded as revenue.

 

Customersare billed based on the terms included in the contracts, which are generallyupon delivery of certain products or information, or achievement of certainmilestones defined in the contracts. When billed, such amounts are recorded asaccounts receivable. Revenue earned in excess of billings represents revenuerelated to services completed but not billed, and billings in excess of revenueearned represent billings in advance of services performed.

 

Contractcosts include all direct material and labor costs and those indirect costsrelated to contract performance, such as indirect labor, supplies, tools anddepreciation costs. Losses on contracts are recognized in the period suchlosses are determined. We do not believe warranty obligations on completedcontracts are significant. Changes in job performance, job conditions, andestimated profitability, including those arising from contract penaltyprovisions, and final contract settlements may result in revisions to costs andincome and are recognized in the period in which the revisions are determined.

 

***(e)***              ***IncomeTaxes***

 

Incometaxes are reflected under the liability method, which establishes deferred taxassets and liabilities to be recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases. Deferred tax

 

26

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assetsand liabilities are measured using enacted tax rates expected to apply totaxable income in the years in which those temporary differences are expectedto be recovered or settled. The effect on deferred tax assets and liabilitiesof a change in tax rates is recognized in income in the period that includesthe enactment date.

 

U.S.generally accepted accounting principles require that we record a valuationallowance against deferred tax assets if it is “more likely than not” that wewill not be able to utilize it to offset future taxes. Due to the size of thenet operating loss carryforward in relation to our recent history ofunprofitable operations and due to the continuing uncertainties surrounding ourfuture operations as discussed above, we have not recognized any of this netdeferred tax asset. We currently provide for income taxes only to the extentthat we expect to pay cash taxes (primarily state taxes and the federalalternative minimum tax) on current taxable income.

 

***(f)***                ***Impairmentof Long-Lived Assets Other Than Goodwill***

 

Long-livedassets other than goodwill held and used are reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying value of an assetmay not be recoverable. An impairment loss is recognized when estimatedundiscounted future cash flows expected to be generated by an asset are lessthan its carrying value. Measurement of the impairment loss is based on thefair value of the asset, which is determined using generally accepted valuationtechniques such as discounted present value of expected future cash flows.

 

***(g)***             ***Stock-BasedCompensation***

 

As permitted by Statement onFinancial Accounting Standards (“SFAS”) No. 123, we account for ourstock-based compensation utilizing the intrinsic-value method in accordancewith Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees”, and related interpretations.  Pro forma information regarding net earnings(loss) and earnings (loss) per share is based on the fair valuemethod at the date of the grant as required by SFAS No. 148.

 

We granted inducement stock options (“Option”) toour former Chief Executive Officer (“CEO”) on March 22, 2004.  The Option was not issued pursuant to ourstock option plans, and would have vested at the end of a twelve-monthperiod.  The Option originally providedfor the purchase of 75,000 shares of****common stock at an exercise price equal to$1.50 per share, which was below the market value of $2.82 on the date ofgrant.  During fiscal 2004, we recognizedapproximately $51,700 in compensation expense for these options.  Upon his resignation on December 20,2004, we accelerated his vesting rights on 56,250 shares, with a market valueof $1.93 per share, and cancelled his right to purchase the remaining 18,750shares.  The intrinsic value of thevested shares totaled approximately $24,000. Mr. Fuquay exercised hisrights under the Option on December 28, 2004, and purchased 56,250 sharesof our common stock.  During fiscal 2005,we recognized compensation expense of $22,173 related to the original grant ofthe Options as well as the remeasured value of the accelerated Options.    During the year ended September 30,2005, 45,000 options were granted to our three new directors, and 100,000options were granted to three members of the management team, including 40,000options to our CEO.  Had compensation costs for our stock basedcompensation been determined at the grant date consistent with the provisionsof SFAS No. 123, our net loss and net loss per share would have increasedto the pro forma amounts indicated below:

 
| ** **                                             | ** ** | **Year ended September 30,** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                             | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Net loss available to common shareholders  as reported |       | $                                 | (3,340     | ) | $ | (1,247 | ) |
| Add: Inducement stock option expense as  recorded      |       | 22                                |       | 52 |   |
| Less: Pro forma option expense                         |       | (50                               | )          | (114 | ) |
| Pro forma net loss                                     |       | $                                 | (3,368     | ) | $ | (1,309 | ) |
| Basic loss per share, as reported                      |       | $                                 | (1.26      | ) | $ | (1.17 | ) |
| Add: Inducement stock option expense as  recorded      |       | 0.01                              |       | 0.05 |   |
| Less: Pro forma option expense                         |       | (0.02                             | )          | (0.11 | ) |
| Pro forma basic loss per share                         |       | $                                 | (1.27      | ) | $ | (1.23 | ) |
| Diluted loss per share, as reported                    |       | $                                 | (1.26      | ) | $ | (1.17 | ) |
| Add: Inducement stock option expense as  recorded      |       | 0.01                              |       | 0.05 |   |
| Less: Pro forma option expense                         |       | (0.02                             | )          | (0.11 | ) |
| Pro forma diluted loss per share                       |       | $                                 | (1.27      | ) | $ | (1.23 | ) |

 

27

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Theweighted average fair value of options granted during fiscal 2005 and 2004was  $2.11 and $1.46 per share,respectively. The fair value of each option granted was estimated at the dateof grant using the Black-Scholes option-pricing model with the followingassumptions: no expected dividends, expected life of the options of two tothree years, volatility ranging from 92% to 197% and a risk-free interest rateranging from 4% to 6%.

 

Theabove pro forma disclosures are not necessarily representative of the effect onthe historical net loss for future periods because options vest over severalyears, and additional awards are made each year.

 

***(h)***             ***Earnings(Loss) Per Share***

 

Basicearnings (loss) per share are computed by dividing earnings (loss) available tocommon shareholders by the weighted average number of common shares outstandingfor the period.  Diluted earnings (loss)per share include the effects of the potential dilution of outstanding options,warrants, and convertible debt on our Common Stock, determined using thetreasury stock method.

 

| ** **                                           | ** ** | **Year Ended September 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                           | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| **Basic and Diluted**                                |       |                              |       |   |   |
| Loss available to  common shareholders               |       | $                                 | (3,340     | ) | $ | (1,247 | ) |
| Weighted average  shares                             |       | 2,644                             |       | 1,061 |   |
| Net loss per  share available to common shareholders |       | $                                 | (1.26      | ) | $ | (1.17 | ) |

 

Alldilutive common stock equivalents are reflected in our earnings per sharecalculation; the conversion of 1,573,169 shares under the convertible debtagreement are antidilutive for the years ended September 30, 2005 and2004, and therefore they have been excluded. Additionally, for the years ended September 30, 2005 and 2004,potential dilutive common shares under the warrant agreement and stock optionplans of 148,000 and 152,000, respectively, were not included in thecalculation of diluted earnings per share as they were antidilutive.

 

***(i)***                ***FinancialInstruments***

 

The carrying amounts of financial instruments areestimated to approximate estimated fair values. The fair value of a financialinstrument is the amount at which the instrument could be exchanged in acurrent transaction between willing parties. The carrying amounts of cash,receivables, accounts payable, and accrued liabilities approximate fair valuedue to the short maturity of these instruments. The carrying amounts of debtapproximate fair value due to the variable nature of the interest rates andshort-term maturities of these instruments. The carrying amount of the derivative features of our senior securedpromissory note was marked to market at the end of each reportingperiod, and the conversion premium was amortized over the term of the Old Noteand the Second Note.   The derivativefeature attributable to a warrant was terminated on June 30, 2004, whenthe Second Note was restructured, and the derivative conversion feature wasreclassified as a conversion premium on September 7, 2004, when ourRegistration Statement on Form S-3/A was declared effective by the SEC, atwhich time net cash settlement provisions of the Restructured Note thateffected the derivative classification of the conversion feature wereextinguished.  The fairvalue of these derivative features was $129,000 and $207,000 immediately priorto the restructure of the Note on June 30, 2004, and at September 30,2003, respectively.  The fair value ofthe derivative feature was $119,000 on June 30, 2004, immediately afterthe Note was restructured and $122,000 on September 7, 2004.  The conversion premium totaled $122,000 at September 30,2004.  Other income totaling $12,000 and$75,000 was recognized for the years ended September 30, 2005 and 2004,respectively, as a result of marking derivative features to fair value at theend of each period and amortizing the conversion premium.

 

28

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***(j)***                ***Concentrationof Credit Risk***

 

Wemaintain our cash with a major U.S. domestic bank.  The amounts held in this bank exceed theinsured limit of $100,000 from time to time. The terms of these deposits are on demand to minimize risk.  We have not incurred losses related to thesedeposits.

 

***(k)***             ***OperatingCycle***

 

Inaccordance with industry practice, we include in current assets and liabilitiesamounts relating to long-term contracts, which generally have operating cyclesextending beyond one year. Other assets and liabilities are classified ascurrent and non-current on the basis of expected realization within or beyondone year.

 

**(2)**                  **Accounts Receivable, RevenueEarned in Excess of Billings and Billings in Excess of Revenue Earned**

 

AtSeptember 30, 2005, the estimated period to complete contracts in processranges from three month to eighteen months, and we expect to collectsubstantially all related accounts receivable and revenue earned in excess ofbillings within eighteen months. Reserves on revenue earned in excess of billings total $52,000 for theyears ended September 30, 2005 and 2004, which are netted, with revenueearned in excess of billings. In fiscal 2004, $48,000 in reserves was writtenoff against revenue earned in excess of billings.

 

Thefollowing summarizes contracts in process at September 30 (in thousands):

 
| ** **                                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Costs incurred on uncompleted contracts                               |       | $        | 18,463     |     | $          | 26,873 |   |
| Estimated earnings                                                    |       | 1,921    |       | 6,982    |       |
|                                                                  |       | 20,384   |       | 33,855   |       |
| Less billings to date                                                 |       | (19,197  | )          | (31,317  | )          |
|                                                                  |       | $        | 1,187      |     | $          | 2,538 |   |
| Included in the accompanying consolidated  balance sheets as follows: |       |     |       |     |       |
| Revenue earned in excess of billings                                  |       | $        | 1,612      |     | $          | 3,006 |   |
| Billings in excess of revenue earned                                  |       | (425     | )          | (468     | )          |
|                                                                  |       | $        | 1,187      |     | $          | 2,538 |   |

 

We have established a reserve (“allowance for doubtful accounts”) forestimated uncollectible amounts of billed and unbilled accountsreceivable.  When we determine that thecollection of a billed or unbilled account receivable related to an activecontract is not probable, we reduce the contract value accordingly.  When we determine that the collection of abilled or unbilled account receivable related to a completed contract is notprobable, we record bad debt expense and increase the allowance for doubtfulaccounts.  When we identify that thecollection of a reserved account receivable will not be collected, we write offthe account receivable and reduce the allowance for doubtful accounts.

 

The allowance for doubtful accounts totaled $50,000 and $54,000 for theyears ended September 30, 2005 and 2004, respectively, which are nettedwith accounts receivable.  In fiscal2004, $46,000 in reserves was written off against accounts receivable.  In fiscal 2005, no reserves were written offagainst receivables and no new reserves were established.

 

**(3)**                  **Debt**

 

Thecomponents of debt at September 30 are summarized as follows (inthousands):

 
| ** **                                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|
| **Long-Term Debt**                                     |       |     |       |     |       |
| Senior secured convertible note—related  party    |       | $        | —     |     | $          | 1,601 |   |
| Other debt and capital lease obligations  (see Note 5) |       | 47       |       | 53       |       |
| Redeemable preferred stock (See Note 4)                |       | 247      |       | 319      |       |
|                                                   |       | 294      |       | 1,973    |       |
| Less current portion                                   |       | (17      | )          | (182     | )          |
|                                                   |       | $        | 277        |     | $          | 1,791 |   |

 

29

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OnDecember 28, 2001, we completed a Waiver Agreement and Amendment No. 12to Credit Agreement and Other Loan and Lease Documents (the “Agreement”) withour senior lenders providing our line-of-credit, note payable and capital leaseobligation. Under the Agreement, these senior lenders accepted a cash paymentof $1.25 million and non-convertible redeemable preferred stock with a facevalue of $3.2 million in payment of the $4.4 million line-of-credit and all but$3.0 million of the note payable. The Agreement provided for the remaining $3.0million note payable to be reduced to zero with a cash payment of up to$875,000 by March 31, 2002 (later amended to April 2, 2002).

 

On April 2, 2002, we completed the sale of a $2.0 million seniorsecured convertible note (“Old Note”) and a warrant (“Warrant”) to purchase500,000 of our Common Stock to Tonga.  Weused the proceeds to repay $700,000 to senior lenders, pay transaction expensesof approximately $95,000 and fund operations. Senior lenders accepted the$700,000 cash payment and a $175,000 unsecured promissory note in fullsatisfaction of the $3.0 million note payable outstanding at March 31,2002.  On March 31, 2003, we paidthe $175,000 unsecured promissory note in full together with interest totaling$10,048.

 

The Old Note, which carried a face value of $2 million, had a maturitydate of April 2, 2005, and accrued interest on its face value at an annualrate of 5.00%.  Accrued interest was notpayable in cash but was to be converted into Common Stock upon the Old Note’svoluntary conversion date or maturity. We recorded the Old Note at $1.664 million reflecting a discount aftergiving effect to the $200,000 and $136,000 estimated fair value of the Warrantand the conversion feature, respectively (“derivative features”), which wererecorded as current liabilities.

 

On October 29, 2003, we received a notice of conversion from Tongafor $300,000 in principal of the Old Note. On November 6, 2003, we issued 241,936 shares at a conversion priceequal to $1.24, which represented 90% of the average closing bid prices for thethree trading days having the lowest closing bid price during the 20 tradingdays immediately prior to October 29, 2003.  We also issued 19,522 shares at the sameconversion price for $24,208 of accrued interest on the converted principal.  The Old Note was exchanged for the shares anda $1.7 million debenture (“Second Note”) bearing the same terms.  The newly issued shares increased our totalcommon shares outstanding from 823,965 to 1,085,423.  Tonga owned 24% of our outstanding sharesimmediately after the partial conversion.

 

On May 28, 2004, an event of default was triggered under theSecond Note when our Registration Statement on Form S-3 filed with the SECon December 30, 2003 to register shares of our Common Stock that were issuedor are issuable pursuant to the Old Note, the Second Note, and the Warrant wasnot declared effective by the SEC.

 

On June 30, 2004, the event of default was cured when werestructured the Second Note.  Therestructured $1.7 million senior secured convertible promissory note (the “RestructuredNote”) bears interest at a rate of 5% per annum with such interest accruingbeginning on November 4, 2003.  Theprincipal amount of the Restructured Note, together with accrued and unpaidinterest, is due and payable at Tonga’s option in cash or shares of our CommonStock on January 2, 2006.  Tongaretained the right to convert the Restructured Note for shares of our CommonStock at any time.  Tonga waived accruedinterest on the Second Note through November 3, 2004, which totaled$134,000.  Tonga also waived its rightsto assess liquidated damages pursuant to the Second Note, relinquished itsrights under the Warrant and canceled the Warrant.

 

The carrying value of the Second Note immediately prior to execution ofthe Restructured Note was $1.616 million, which reflected the $1.7 million facevalue less the $84,000 unamortized discount. Additionally, immediately prior to the execution of the RestructuredNote, the fair value of the Warrant totaled approximately $67,000, and the fairvalue of the conversion feature of the Second Note totaled approximately$62,000.  As a result of the extendedterm of the Restructured Note, the estimated fair value of the conversionfeature increased to approximately $119,000. We recorded the Restructured Note at $1.581 million reflecting adiscount for the $119,000 estimated fair value of the conversion feature, whichwas recorded as a current liability. This transaction resulted in a net decrease in total liabilities ofapproximately $180,000.  The decreaseconsisted of $134,000 of waived interest, the $68,000 fair value of thecanceled Warrant, and a $35,000 decrease in the carrying value of theRestructured Note, offset by a $57,000 increase in the fair value of theconversion feature.  We recorded the$180,000 decrease in liabilities as a capital contribution pursuant to StaffAccounting Bulletin Topic 1:B.

 

30

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Prior to the issuance of the Restructured Note, the carrying value ofthe Second Note was accreted to its face value as we recorded interest expenseover its three-year term at a rate of $28,000 per quarter.  The effective rate of interest on the SecondNote was 12.5%.  The $336,000 currentliability was increased or decreased to reflect the fair value of thederivatives at the end of each quarter. The $1.581 million carrying value of the Restructured Note will beaccreted to its face value as we record interest expense over the remainingeighteen-month term at a rate of approximately $20,000 per quarter.  The effective interest of the RestructuredNote is 12.14%.  The $119,000 currentliability will be increased or decreased to reflect the fair value of theconversion feature at the end of each quarter until the Restructured Note ispaid in full or converted into Common Stock. At September 30, 2004, we had accrued interest of approximately$78,000 related to the Restructured Note.

 

The fair value ofthe derivative features of the Second Note decreased $78,000 from $207,000 on September 30,2003, to $129,000 on September 7, 2004, when ouramended Registration Statement on Form S-3/A was declared effective by theSEC.  Simultaneous to the effectivenessof the registration, the net cash settlement provisions in the Restructured Notethat effected the derivative classification of the conversion feature wereextinguished.  We revalued andreclassified the conversion feature as a conversion premium (“Premium”) with anestimated value of $129,000, which would be amortized to income over theremaining term of the Restructured Note, or through January 2, 2006.  We amortized the Premium, recognizingapproximately $7,000 in other income from September 7 to September 30,2004.  At September 30, 2004,accrued interest on the Restructured Note totaled approximately $78,000, andthe carrying value of the unamortized Premium totaled approximately$122,000.   We recorded other incomerelating to the Restructured Note totaling approximately $75,000 in fiscal2004.

 

On November 11, 2004, we received a notice ofconversion dated November 10, 2004, from Tonga to convert the outstandingprincipal and accrued interest into our Common Stock at the conversion priceset forth in the Restructured Note.  Theconversion price was $1.05, and was equal to 90% of the average closing bidprices for the three trading days having the lowest closing bid price duringthe 20 trading days immediately prior to November 10, 2004.  The newly issued shares increased ourtotal common shares outstanding from 1,104,173 to 2,805,522.  Tonga owned 67% of our outstanding sharesimmediately after the conversion. According to filings made by Tonga under Section 16 of the ExchangeAct, Tonga liquidated its holdings of our Common Stock by November 15,2004.

 

We were generally restricted from issuing additional equity securitieswithout Tonga’s consent, and Tonga had a right of first refusal as to certainsubsequent financings.  TheRestructured Note was secured by all of our assets.  As part of the transaction, for aperiod of three years from the date of the Old Note, Tonga had the right toappoint a majority of our board of directors. Tonga appointed three members to the Board and as a result, controledASI.   However, the conversion of the Restructured Note released all of our assets.  Upon Tonga’s disposal of its holdings of ourCommon Stock, Tonga relinquished its right to appoint directors.  In December 2004, weappointed two new independent directors in conjunction with the resignation ofthe three Tonga-appointed directors.  As aresult, Tonga relinquished control of ASI.

 

Requiredprincipal payments on long-term debt at September 30, 2005 are $128,000for the year ending September 30, 2006; $321,000 for fiscal 2007; and$16,000 for fiscal 2008.

 

**(4)**                  **Redeemable Preferred Stock**

 

On December 28, 2001, weissued 1.6 million shares of no par value Series A Preferred Stock (“PreferredStock”) with a face value of $3.2 million, pursuant to the extinguishment of abank credit agreement (“Agreement”).  Werecorded this Preferred Stock at a fair market value of $300,000 as describedbelow.  In June 2004, we redeemed1,341,100 shares of our Preferred Stock (“Shares”), or 84%, of the outstandingShares.  We paid the holders of theShares $251,456 to redeem the Shares, which, on the redemption dates, werecarried at approximately $1,535,000 plus accrued dividends totalingapproximately $191,000, resulting in a gain of approximately $1,475,000.  The early redemption reduced the number ofpreferred shares outstanding to 258,900 shares and reduced a mandatoryredemption payment, which was classified as a current liability, from $800,000to $129,450.  We paid this obligation in December 2004and redeemed 92,465 shares of Preferred Stock at $1.40 per share.

 

**At September 30,2005, 166,435 shares of Preferred Stock are outstanding which are redeemable onor before December 28, 2006.  Until December 27,2005, we are entitled to redeem these shares at $1.60 per share, or**

** **

**31**

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** **

**$266,296.  The redemption price increases by $0.20 peryear to $1.80 on December 28, 2005 ($299,583), and to $2.00 on December 28,2006 ($332,870).  We must redeem thePreferred Stock on or before December 28, 2006.**

** **

**The PreferredStock earns a dividend at the annual rate of 5.00% of the then applicableredemption price on a cumulative, non-participating basis and has a liquidationpreference equal to the then applicable redemption value of shares outstandingat the time of liquidation.  Dividendsare recorded as interest expense.  Accrueddividends at September 30, 2005 and 2004 totaled approximately $57,000 and$42,000, respectively.**

 

**The carrying value for theoutstanding Preferred Stock is approximately $247,000 at September 30,2005.  The carrying value represents theestimated fair market value of the stock on the date of issuance plus issuancecosts, adjusted for accretion of the difference between fair market value atthe date of issuance and the redemption value at the mandatory redemptiondates.  The accretion of Preferred Stockis recorded as interest expense. The fair market value was based on the presentvalue of required cash flows using a discount rate of 80%.  We selected the discount rate based ondiscussions with third parties that factored in market conditions for similarsecurities, the current economic climate and our financial condition andperformance.**

** **

**(5)**                  **Leases**

 

Welease our facilities and certain equipment under non-canceable leaseagreements.  Certain of the equipmentleases are classified as capital leases. During 2005, we acquired equipment totaling approximately $50,000, whichis included as a component of our equipment and leasehold improvements.  Accumulated depreciation relating to theseassets was approximately $5,000 at September 30, 2005.  Amounts due under operating and capitalleases at September 30, 2005 are as follows (in thousands):

 
| ** **                                    | ** ** | **Operating leases** | ** ** | **Capital leases** | ** ** |
|-----------------------------------------------|------------|----------------------|------------|--------------------|------------|
| Years ending September 30                |       |                 |       |               |       |
| 2006                                          |       | $                    | 107        |               | $          | 21 |   |
| 2007                                          |       | —               |       | 21                 |       |
| 2008                                          |       | —               |       | 16                 |       |
|                                          |       | $                    | 107        |               | $          | 58 |   |
| Less amount  representing interest            |       |                 |       | (11                | )          |
| Present  value of minimum lease obligations   |       |                 |       | 47                 |       |
| Less current  maturities of lease obligations |       |                 |       | (17                | )          |
|                                          |       |                 |       | $                  | 30         |   |

 

Facilityrent expense totaled $340,000 and $569,000 for the years ended September 30,2005 and 2004.

 

**(6)**                  **Income Taxes**

 

Income tax expense (benefit) for the years ended September 30 isas follows (in thousands):

 
| ** **      | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| Current:        |       |     |       |     |       |
| Federal         |       | $        | —     |     | $          | — |   |
| State and local |       | —   |       | —   |       |
|            |       | —   |       | —   |       |
| Deferred:       |       |     |       |     |       |
| Federal         |       | —   |       | —   |       |
| State and local |       | —   |       | —   |       |
|            |       | $        | —     |     | $          | — |   |

 

Actual income tax expense (benefit) differs from the amount computedusing the federal statutory rate of 34% for the years ended September 30as follows (in thousands):

 
| ** **                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|----------|------------|
| Computed “expected” income tax expense  (benefit) |       | $        | (1,303     | )        | $          | (486 | ) |
| State income taxes, net of federal tax  effect              |       | —   |       | —   |       |
| Change in deferred tax valuation allowance                  |       | 1,297    |       | 1,219    |       |
| Other, net                                                  |       | 6        |       | (733     | )          |
| Actual income tax expense (benefit)                         |       | $        | —     |     | $          | — |   |

 

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Thetax effects of temporary differences that give rise to significant portions ofdeferred tax assets and liabilities at September 30 are as follows (inthousands): 

 
| ** **                                                                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets:                                                                                 |       |     |       |     |       |
| Accrued liabilities, primarily due to accrued  compensated absences for financial statement purposes |       | $        | 79         |     | $          | 74 |   |
| Equipment and leasehold improvements,  primarily due to differences in depreciation                  |       | 101      |       | 141      |       |
| Bad debt and revenue earned in excess of  billing allowances                                         |       | 40       |       | 41       |       |
| NOL carryforward                                                                                     |       | 11,293   |       | 9,801    |       |
| Impairment of deductible goodwill                                                                    |       | 1,881    |       | 2,175    |       |
| Accrued marketing incentives                                                                         |       | 83       |       | 48       |       |
| Other, net                                                                                           |       | 207      |       | 107      |       |
| Valuation allowance                                                                                  |       | (13,684  | )          | (12,387  | )          |
| Net deferred tax assets                                                                              |       | $        | —     |     | $          | — |   |

 

AtSeptember 30, 2005, we had net operating loss carryforwards ofapproximately $29 million that will expire through September 30,2024.  We recorded a valuation allowanceto reflect the estimated amount of deferred tax assets that may not be realizeddue to the uncertainty surrounding our ability to generate sufficient futuretaxable income to fully realize the deferred tax assets.  For the year end September 31, 2005, thevaluation allowance increased by approximately $1,297,000.

 

**(7)**                  **Stockholders’ Equity and Stock Options**

 

Wemay issue up to 2.6 million shares of preferred stock, no par value, withdividend requirements, voting rights, redemption prices, liquidationpreferences and premiums, conversion rights and other terms without a vote ofthe shareholders. In December 2001, we issued 1.6 million shares ofpreferred stock to our senior lenders as partial consideration to reduce ouroutstanding debt. Terms of the issuance are more fully discussed in Note 4.

 

Wecurrently have five nonqualified stock option plans with 412,716 shares availablefor grant as of September 30, 2005. One of the plans expired on September 30,2003, and options outstanding under that plan will remain outstanding untilexercised or cancelled, but no new options will be issued under the plan. Theexercise price of the options are established by the Board of Directors on thedate of grant and are generally equal to the market price of the stock on thatdate. Options vest equally over a one or two year period from the date of grantor at 25% six months from date of grant and 25% on the anniversary dates of thegrant thereafter, as determined by the Board of Directors. The options areexercisable in whole or in part for a period of up to ten years from the dateof grant. The options may vest earlier under certain circumstances, such as achange in control.

 

Wealso issued and have outstanding inducement options that were not issuedpursuant to our stock option plans.  On March 22,2004, we issued inducement stock options as an employment inducement to ourChief Executive Officer.  The inducement options were not issuedpursuant to any stock option plan. The options vest over a twelve-month periodand provide for the purchase of 75,000 shares of our Common Stock at anexercise price equal to $1.50 per share, which was below the market value of$2.82 on the date of grant.  Duringfiscal 2005 and 2004, we recognized approximately $22,200 and $51,700,respectively, in compensation expense for these options.

 

Stockoption activity for the plans and the inducement grant for the years ended September 30are summarized as follows (shares in thousands):

 
| ** **                       | ** ** | **Number of  Options** | ** ** | **Weighted  Average   Exercise price  Per share** | ** ** |
|----------------------------------|------------|------------------------|------------|---------------------------------------------------|------------|
| Balance, October 1, 2003    |       | 149                    |       | $                                                 | 13.95      |   |
| Granted                          |       | 115                    |       | 1.74                                              |       |
| Exercised                        |       | (19                    | )          | 0.79                                              |       |
| Canceled                         |       | (93                    | )          | 14.66                                             |       |
| Balance, September 30, 2004 |       | 152                    |       | $                                                 | 5.92       |   |
| Granted                          |       | 145                    |       | 2.11                                              |       |
| Exercised                        |       | (64                    | )          | 1.50                                              |       |
| Canceled                         |       | (85                    | )          | 6.40                                              |       |
| Balance, September 30, 2005 |       | 148                    |       | $                                                 | 3.84       |   |

 

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AtSeptember 30, 2004 and 2005, approximately 49,000 and 39,000 options,respectively, were exercisable.

 

Asummary of the range of exercise prices and the weighted-average contractuallife of outstanding stock options at September 30, 2005 is as follows:

 
| **Range of  Exercise  Price**                                                             | ** **                                             | **Number  Outstanding  at  September 30,  2005** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Life (years)** | ** ** | **Number  Exercisable  at September 30,  2005** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|-------------------------------------------------------------------------------------------|--------------------------------------------------------|-------------------------------------------------------|------------|----------------------------------------|------------|-------------------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------|------------|
| $                                                                                         |  0.73 –  1.00                           |                                                  | 5,000      |                                   | $          | 0.73                                                        |       | 7.4                                                  |       | 5,000                                  |       | $ | 0.73 |   |
|  1.01 –  2.00                                                              |                                                   | 53,750                                                |       | 1.62                                   |       | 8.9                                                         |       | 8,750                                                |       | 1.74                                   |       |
|            2.01  –  5.00 |                                                   | 85,375                                                |       | 2.34                                   |       | 9.4                                                         |       | 21,625                                               |       | 2.34                                   |       |
|       5.01 –  50.00                                    |                                                   | 2,700                                                 |       | 27.47                                  |       | 1.3                                                         |       | 2,700                                                |       | 27.47                                  |       |
| 100.01 – 200.00                                                                      |                                                   | 593                                                   |       | 125.00                                 |       | 1.0                                                         |       | 593                                                  |       | 125.00                                 |       |
|     201.01 – 283.75                                              |                                                   | 460                                                   |       | 278.86                                 |       | 1.6                                                         |       | 460                                                  |       | 278.86                                 |       |
| $                                                                                         |       0.73 – 283.75 |                                                  | 147,878    |                                   | $          | 3.84                                                        |       | 8.9                                                  |       | 39,128                                 |       | $ | 8.84 |   |

 

**(8)**                  **Employee Benefit Plan**

 

Wesponsor a qualified tax deferred savings plan in accordance with the provisionsof section 401(k) of the Internal Revenue Code. Employees may defer up to50% of their compensation, subject to certain limitations. We match 50% ofemployee contributions up to 4% of their compensation. We contributed $44,000and $67,000 to the plan in fiscal 2005 and 2004, respectively.

 

**(9)**                  **Concentrations of CreditRisk**

 

AtSeptember 30, 2005, we had contracts with two customers that represented78% of the total balance of net accounts receivable and revenue in excess ofbillings. Revenues from these and two other customers for the fiscal year endedSeptember 30, 2005 totaled 72% (16%, 17%, 18% and 21%, respectively) oftotal revenue.  Revenues from thesecustomers for the fiscal year ended September 30, 2004 totaled 67% (27%,16%, 12% and 12%, respectively) of total revenue.  At September 30, 2004, these customersrepresented 67% (27%, 16%, 12% and 12%, respectively) of the total balance ofnet accounts receivable and revenue in excess of billings. Billing terms arenegotiated in a competitive environment and are based on reaching projectmilestones. We anticipate that sufficient billing milestones will be achievedduring fiscal 2006 such that revenue in excess of billings for these customercontracts will begin to decline.

 

**(10)**           **Litigation and Other Contingencies**

** **

OnJune 26, 2002, two of our shareholders, the Epner Family LimitedPartnership and the Braverman Family Limited Partnership (“Claimants”),initiated arbitration proceedings against us. They alleged that certain representations and warranties, which we madein connection with our acquisition of Cartotech, Inc., in June 1998,were false because our financial condition allegedly was worse than depicted inour financial statements for 1997 and the unaudited reports for the first twoquarters of fiscal 1998.   In December 2003,an American Arbitration Association panel ruled in our favor, awarding zerodamages to the Claimants and ordering each side to bear its own attorneys’fees.  The Claimants also filed suitagainst four of our former officers for alleged violation of Texas and Indianasecurities laws in connection with our acquisition of Cartotech.  The case was dismissed on January 30,2004.  Our insurer reimbursed $1.8million of the defense costs, which totaled approximately $2.1 million.

 

In November 2005, we received an alias summons notifying us thatwe have been named as a party to a suit filed by Sycamore Springs HomeownersAssociation.  The summons names thedeveloper of the Sycamore Springs neighborhood as well as other firms that mayhave rendered professional services during the development of theneighborhood.  The claimants allege thatthe services of Mid-States Engineering, which was a subsidiary of MSECorporation when we acquired MSE in 1997, affected the drainage system ofSycamore Springs neighborhood, and seek damages from flooding that occurred on September 1,2003.  The

 

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summons does not quantify the amount of damages that are being soughtnor the period that the alleged wrongful actions occurred.  We sold Mid-States Engineering on September 30,1999.   We believe that we have beenwrongfully named in the suit and we are diligently pursuing dismissal withoutprejudice.

 

Weare also subject to various other routine litigation incidental to ourbusiness. Management does not believe that any of these routine legalproceedings would have a material adverse effect on our financial condition orresults of operations.

 

**(11)****          ****Accrued payroll and relatedbenefits**

 

Our accruedpayroll and related benefits at September 30 are summarized as follows (inthousands).

 
| ** **                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Accrued payroll                      |       | $        | 426        |     | $          | 358 |   |
| Accrued health benefits              |       | 109      |       | 130      |       |
| Accrued vacation                     |       | 152      |       | 190      |       |
| Accrued payroll and related benefits |       | $        | 687        |     | $          | 678 |   |

 

**(12)**           **Segment Information**

 

We historically evaluated operationsand made key strategic and resource decisions based on operating results of ourindividual production centers.  Segmentdata includes revenue, operating income, including allocated costs charged toeach of the operating segments, equipment investment and project investment,which includes net accounts receivables and revenue earned in excess ofbillings.  Recent management changes andrealignment of organization structure have altered the business pursuit anddecision making process such that traditional segment reporting is no longermeaningful.  Accordingly, segmentinformation is no longer being presented.

 

**(13)**           **Impact of Recently IssuedAccounting Pronouncements**

 

In December 2004, the Financial Accounting StandardsBoard (“FASB”) published revisions to SFAS No. 123.  The revised SFAS No. 123 (“SFAS No. 123R”)requires companies to account for share-based payment transactions using afair-value based method, thereby eliminating the disclosure-only provisions ofSFAS No. 123.  SFAS No. 123R iseffective for all small business public entities as of the beginning of thefirst interim or annual reporting period for fiscal years beginning after December 15,2005.  We are currently evaluating theimpact on our financial condition and the results of operations.  We currently elect the disclosure-onlyprovisions of Statement SFAS No. 123R.

 

In December 2004, the FASB issued SFAS No. 153, “*Accounting for Non-monetary Transactions*”(“SFAS 153”).  SFAS 153 requiresnon-monetary exchanges to be accounted for at fair value, recognizing any gainor loss, if the transactions meet a commercial-substance criterion and fairvalue is determinable.  SFAS No. 153is effective for non-monetary transactions occurring in fiscal years beginningafter June 15, 2005.  The Company believesthat the implementation of this standard will not have a material effect on theCompany’s consolidated financial position or results of operations.

 

In May 2005, the FASB issued Statement of FinancialAccounting Standards No. 154 (“SFAS 154”), “*Accounting for Changes and Error Corrections—a replacement of APBOpinion No. 20 and FASB Statement No. 3*.”  This statement changes the requirements forthe accounting for and reporting of a change in accounting principle.  This statement applies to all voluntarychanges in accounting principle.  It alsoapplies to changes required by an accounting pronouncement in the unusualinstance that the pronouncement does not include specific transitionprovisions.  When a pronouncementincludes specific transition provisions, those provisions should befollowed.  This statement is effectivefor fiscal years beginning after December 15, 2005 and is not expected tohave a material impact on the Company’s consolidated financial statements.

 

**(14)**           **Liquidity**

 

Theaccompanying financial statements have been prepared on a going concern basis,which contemplates the realization of assets and the satisfaction ofliabilities in the normal course of business. During the fiscal years of 2000through 2005, we experienced significant operating losses with correspondingreductions in working capital and net worth, excluding the impact of debtforgiveness, and do not currently have any external

 

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financingin place to support operating cash flow requirements. Our revenues and backloghave also decreased substantially during the same period.  If we do not have the cash flow necessary to meet our operating andcapital requirements, we will be forced to restrict capital and operatingexpenditures to match available resources or seek additional financing, whichmay be available only at unfavorable interest rates or not available atall.  These factors, among others, raisesubstantial doubt about our ability to continue as a going concern.

 

To address the going concern issue, management implemented financialand operational restructuring plans designed to improve operating efficiencies,reduce and eliminate cash losses, and position us for profitable operations.Financial steps included restructuring our bank debt through the issuance ofpreferred stock and convertible debt, subsequent collection of the federalincome tax refund and sale of non-core assets. Operational steps included theconsolidation of production services to two solution centers, reduction ofcorporate and non-core spending activities, outsourcing certain components ofprojects, and deploying new sales and marketing team.  In fiscal 2004, we retired 84% of ourpreferred stock for 12% of its redemption value and accrued dividends.  We also restructured our convertible debt byissuing the Restructured Note to cure an event of default and reduced the totalinterest payable thereon.  Further, theconversion of the Restructured Note in November 2004 eliminated debttotaling approximately $1,786,000.

 

Thefinancial statements do not include any adjustments relating to therecoverability of assets and the classifications of liabilities that might benecessary should we be unable to continue as a going concern.  We are pursuing alternative businessstrategies designed to diversify our operations and the risks thereon.  We are seeking business lines that have ashorter sales cycle and higher margins than is produced by our current businessendeavors.  In December 2005, weengaged a consulting firm to assist in identifying and pursuing such endeavors,with a particular focus on the oil and gas energy sector, including explorationand production.  We will also evaluate othersectors that present attractive opportunities for our shareholders.  While,there is no assurance that we can identify such business strategies and executeour entrance to such markets in a timely manner, we believe that these efforts,with our continued turnaround efforts, if successful, will improve operationsand generate sufficient cash to meet our obligations in a timely manner.

 

**(15)**          **Subsequent Events**

 

EffectiveOctober 7, 2005, ASI entered into a Management and ConsultingAgreement with Wind Lake Solutions, Inc., a Wisconsin corporation, (“WLS”).  WLS’s authority and responsibility, asconsultant, is to provide personnel, project, and facility management servicesto the Wisconsin operation of ASI. The term of the Agreement shall continue fora period of one year and contains one additional year renewal option upon the writtenconsent of both parties. WLS shall have the exclusive right to purchase theassets of the business on or after April 1, 2006 through the term of theAgreement.  The agreement may beterminated by either party upon 90 days written notice.

 

EffectiveDecember 7, 2005, ASI engaged Pluris Partners, Inc. tofacilitate the expansion of ASI’s service offering into the energy sector.  ASI has assigned Pluris with several specificobjectives, including the pursuit of opportunities in the exploration and productionsector.

 

Effective December 2, 2005, Brian Morrow resigned as president andchief operating officer to pursue other opportunities. Mr. Morrow joinedthe Company on June 9, 2005.

 

**Item 8. Changes In And Disagreements With AccountantsOn Accounting And Financial Disclosure.**

 

On August 7, 2004, weengaged Pannell Kerr Forster of Texas, P.C. (“PKF”) as our new independentaccountants for the fiscal year ending September 30, 2004.  KPMG LLP, previously our principalindependent accountant, was dismissed on August 6, 2004.  The decision to change our independentaccountants from KPMG LLP to PKF was made and approved by the AuditCommittee.  KPMG LLP reported on ourconsolidated financial statements for each of the fiscal years ended September 30,2003 and 2002 and its report was modified as set forth in Exhibit 99.1 tothe Current Report on Form 8-K which we filed with the Securities andExchange Commission on August 12, 2004. During the fiscal year ended September 30, 2003, and the subsequentinterim period through August 6, 2004, there were no “reportable events”(as defined in Regulation S-K Item 304(a)(1)(v)) requiring disclosure pursuantto Item 304(a)(1)(v) of Regulation S-K. During the fiscal year ended September 30, 2003, and thesubsequent interim period through August 6, 2004, PKF has not beenengaged as independent accountants to audit our financial

 

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statements, nor has it been consultedregarding the application of accounting principles to any specifiedtransaction, either completed or proposed, or the type of audit opinion thatmight be rendered on our financial statements, or any matter that was thesubject of a disagreement or reportable event.

 

**Item 8a. Statement on Disclosure Controls and Procedures**

 

As of the end of the period covered by this report,we carried out an evaluation, under the supervision and with the participationof our management, including our Chief Executive Officer and Chief AccountingOfficer, of the effectiveness of our disclosure controls and procedures (asdefined in rules 13a-15(e) and 15d-15(e) of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”)). Based upon thatevaluation, the Chief Executive Officer and Chief Accounting Officer haveconcluded that the disclosure controls and procedures are effective alertingthem on a timely basis to material information relating to the Company(including our consolidated subsidiaries) that is required to be included inour periodic filings under the Exchange Act.

 

There has been no change in our internal controlover financial reporting (as defined in Rules 13a-13(f) and 15d-15(f) underthe Exchange Act) that occurred during our fourth fiscal quarter of the fiscalyear ended September 30, 2005, that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

37

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**PART III.**

 

**Item 9. Directors and Executive Officers of theRegistrant**

 

**Directors**

 

The following lists the directors of AnalyticalSurveys, Inc. (“ASI”, “we”, “our” or the “Company”), their ages, and adescription of their business experience and positions held. The Board consistsof four directors. Directors are elected to a one-year term. The date thepresent term of office expires for each director is the date of the AnnualMeeting of our shareholders or until successors are elected and qualified.

 

R.Thomas Roddy, 65, has served as one of our directors and as Chairman of theBoard since December 20, 2004.  Mr. Roddy is the chairman of San Antonio,Texas- based Lone Star Capital Bank and is former president of NASDAQ-listedBenson Financial Corp.  His term as aboard member of the San Antonio Branch of the Federal Reserve Bank of Dallaswas completed on December 31, 2004. Mr. Roddy is an independent outside director and also serves on theaudit committee.

 

Edward P. Gistaro, 70, has served as one of ourdirectors since December 13, 2004, and as our Chairman of the AuditCommittee of the Board since December 20, 2004.  Mr. Gistaro served as the chairman and CEO of Docucon, Inc., anow-privately held document-imaging company. In 1973, Mr. Gistaro joinedDatapoint Corporation as VP of Marketing. During his tenure at Datapoint, heheld various management positions, including CEO, CFO, President and chiefoperating officer. While at Datapoint, Mr. Gistaro negotiated and executedmore than $250 million in acquisition and financing transactions, and took thecompany from a $350 million company to a $600 million company, at which timeDatapoint Corporation became a Fortune 500 company. He brings valuableoperating, financial and M&A expertise to the Company. Mr. Gistaro isan independent outside director, and serves on the audit committee.

 

Rad Weaver, 30, was appointed as a directorof the Company in August 2005.  Mr. Weaverhas served as an investment analyst with McCombs Enterprises in San AntonioTexas, since March 2000, participating in the asset allocation of itsequity portfolio.  Mr. Weaver isalso a director of privately held Media Excel, Agilight, and Wholesale Clicks, Inc.  Mr. Weaver holds a BBA from theUniversity of Texas at Austin.  Mr. Weaveris an independent director and a member of the Audit Committee.

 

Lori A. Jones, 48, has served as a directorand Chief Executive Officer of the Company since December 2004.  Ms. Jones served as the Company’s ChiefFinancial Officer from January 2003 until December 2004.  From March 2001 to January 2003, Ms. Joneswas a partner with Tatum CFO Partners LLP, a financial consulting company. FromMay 2000 to March 2001, Ms. Jones served as the chief financialofficer of Worldmerc Incorporated. From January 1999 to May 2000, Ms. Joneswas the chief financial officer of Billserv Inc., an electronic billingpresentation and payment service company. From May 1990 to December 1998,Ms. Jones served in various capacities, including chief financial officer,at Docucon, Inc., a document imaging services company.  Ms. Jones is a C.P.A. and holds a M.B.A.from the University of Texas at San Antonio.

 

**Executive Officers**

 

Information concerning Ms. Jones, our chiefexecutive officer, appears under the heading “Directors” above.

 

**Audit Committee**

 

Mr. Gistaro has served as chairman and Mr. Roddyhas served as a member of the Audit Committee since their appointments to theBoard in December 2004.  Mr. Weaverwas appointed to the Audit Committee on August 15, 2005.  The Board has determined that both Mr. Roddyand Mr. Gistaro are audit committee financial experts as described in Item401(h) of Regulation S-K.

 

Prior to December 2004, Mr. ChristopherIllick served as Chairman of the Audit Committee.  Mssrs. Livingston Kosberg and ChristopherDean served as members of the Audit Committee until their resignations in December 2004,which were effected by the relinquishment of control of the Board of Directorsof Tonga.  See Note 3.

 

The primary purposes of the Audit Committee, whichmet four times in fiscal 2005, are to recommend the appointment of the Company’sindependent accountants; review the scope and results of the audit plans of theindependent accountants; oversee the scope and adequacy of the Company’sinternal accounting control and record-keeping systems; review non-auditservices to be performed by the independent accountants; and determine theappropriateness of fees for audit and non-audit services performed by theindependent accountants.

 

In this context, the Audit Committee has met and held discussions withmanagement and the independent auditors. Management represented to the Audit Committee that the Company’sconsolidated financial statements were prepared in accordance with

 

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accounting principles generallyaccepted in the United States, and the Audit Committee has reviewed anddiscussed the consolidated financial statements with management and theindependent registered public accounting firm. The Audit Committee discussed with the independent registered publicaccounting firm matters required to be discussed by Statement on AuditingStandards No. 61 (Communications with Audit Committees), as amended,including the quality and acceptability of the Company’s financial reportingprocess and controls.

 

The Audit Committee has discussed with the Company’s independentauditors the overall scope and plans for their respective audit.  The Audit Committee meets at least annuallywith the independent auditors, with and without management present, to discussthe results of their examinations, the evaluations of the Company’s internal controlsand the overall quality of the Company’s accounting principles.

 

In addition,the Audit Committee has discussed with the independent auditors the auditors’independence from the Company and its management, including the matters in thewritten disclosures required by the Independence Standard Boards Standard No. 1(Independence Discussions with Audit Committees) and also considered whetherthe provision of any non-audit services included below under “PrincipalAccountant Fees and Service” is compatible with maintaining their independence.

 

In performing all of these functions, the Audit Committee acts only inan oversight capacity and necessarily relies on the work and assurances of theCompany’s management and independent auditors, which, in their report, expressan opinion on the conformity of the Company’s annual financial statements toaccounting principles generally accepted in the United States.  In reliance on the reviews and discussionsreferred to in this Report and in light of its role and responsibilities, theAudit Committee recommended to the Board, and the Board has approved, that theaudited financial statements of the Company for the two years ended September 30,2005 be included for filing with the Securities and Exchange Commission in theCompany’s Annual Report on Form 10-KSB for the year ended September 30,2005.

 

By the Audit Committee

   Ed Gistaro

   Tom Roddy

   Rad Weaver

 

**Section 16(a) BeneficialOwnership Reporting Compliance**

 

Section 16(a) of the Securities ExchangeAct of 1934 requires our directors and executive officers, and any persons whoown more than 10 percent of our common stock (“Common Stock”), to file with theSecurities and Exchange Commission reports of ownership and changes ofownership of our Common Stock.

 

To our knowledge, based solely on review of thecopies of such reports furnished us during fiscal 2005 all such filingrequirements were met.

 

**Code of Ethics**

 

In July 2003 we adopted a code of ethics whichour senior financial officers, executive officers, and general and projectmanagers are expected to adhere to and promote throughout the organization andwhich may be found on our website at www.anlt.com.  We intend to disclose on our website anywaivers or amendments to our code of ethics within five business days of suchaction.

 

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**Item 10. Executive Compensation**

** **

**Executive Officers**

 

This table sets forth a summary of certaininformation regarding the compensation of our Chief Executive Officer and theother executive officers whose salary and bonus exceeded $100,000 during fiscal2005 (the “named executive officers”) for the fiscal years ended September 30,2005, 2004, and 2003.

 
| **Name and  Title**                                    | ** ** | **Year**   | ** ** | **Annual Compensation**               | ** ** | **Long Term  Compensation  Awards** | ** ** | **All Other  Compensation****(3)** | ** ** |
|--------------------------------------------------------|------------|------------|------------|---------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| **Salary**                                             | ** ** | **Bonus**  | ** ** | **Other Annual  Compensation****(1)** | ** ** | **Stock  Options****(2)**           |
| ** **                                             | ** ** | ** ** | ** ** | **$**                                 | ** ** | **$**                               | ** ** | **$**                              | ** ** | **(#)** | ** ** | **$** | ** ** |
| Lori A. Jones(4)President and  Chief Executive Officer |       | 2005       |       | 175,000                               |       | 60,000                              |       | —                             |       | 40,000 |   | 2,054 |   |
|                                                   | 2004       |       | 142,981    |                                  | —     |                                | —     |                               | —     |   | 2,860 |   |
|                                                   | 2003       |       | 88,269     |                                  | 3,500      |                                | —     |                               | 25,000     |   | 1,558 |   |
|                                                   |       |       |       |                                  |       |                                |       |                               |       |   |   |   |   |
| Brian Morrow(5)Chief Operating Officer                 |       |       |       |                                  |       |                                |       |                               |       |   |   |   |   |
|                                                   | 2005       |       | 49,038     |                                  | —     |                                | —     |                               | 30,000     |   | 5,985 |   |
|                                                   | 2004       |       | —     |                                  | —     |                                | —     |                               | —     |   | — |   |

 

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(1)                        Certain perquisites and other personalbenefits did not exceed the lesser of $50,000 or 10% of the total amountsreported in the Salary and Bonus columns in any of the fiscal years reported,except as indicated.

(2)                        Long term compensation consists only of stockoptions. There were no grants of restricted stock or payments from otherlong-term incentive plans, therefore columns for “Restricted Stock Awards” and “LTIPPayouts” are omitted.

(3)                        Other compensation includes employer’smatching contributions to the 401(k) Incentive Savings Plan and relocation.

(4)                        Ms. Jones joined ASI on January 24,2003. Accordingly, fiscal 2003 compensation information included in the tablerepresents only compensation from that date through September 30, 2003.

(5)                        Mr. Morrow’sannual compensation is $170,000.Mr. Morrow joined ASI as an executive officer on June 5, 2005.  Accordingly, compensation informationincluded in the table represents only compensation from that date through September 30,2005.  Mr. Morrow resigned asPresident and Chief Operating Officer effective December 2, 2005.

 

40

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**Options/SAR Grants in Last Fiscal Year**

 

This table sets forth certain information withrespect to grants we made of stock options to our named executive officersduring fiscal 2005.  No stockappreciation rights (“SARs”) were granted to the named executive officersduring fiscal 2005.

 
| ** **     | ** ** | **Number of  Securities  Underlying  Options** | ** ** | **Percent of  Total  Options to  Employees  In Fiscal** | ** ** | **Exercise  Price** | ** ** | **Expiration** | ** ** | **Potential Realizable  Value****(2) ****at  Assumed  Annual Rates of  Stock Appreciation  for  Option Term** | ** ** |
|----------------|------------|------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------|------------|----------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|
| **Name**       | ** ** | **Granted****(1)**                             | ** ** | **Year**                                                | ** ** | **($/sh)**          | ** ** | **Date**       | ** ** | **5% ($)**                                                                                                         | ** ** | **10% ($)** | ** ** |
| Lori A.  Jones |       | 40,000                                         |       | 40.00                                                   | %          | 2.30                |       | 03/12/15       |       | 57,858                                                                                                             |       | 146,624 |   |
| Brian Morrow   |       | 30,000                                         |       | 30.00                                                   | %          | 1.65                |       | 06/23/15       |       | 31,130                                                                                                             |       | 78,890 |   |

 

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(1)                         All options vest equally at the end of eachof four six-month periods.

 

(2)                         “Potential Realizable Value” is calculatedbased on the assumption that the price of our Common Stock will appreciate atthe rates shown. The 5% and 10% assumed rates are mandated by the rules ofthe Securities Exchange Commission and do not reflect our estimate orprojection of future stock prices. Actual gains, if any, realized upon futureexercise of these options will depend on the actual performance of our CommonStock and the continued employment of the named executive officer through thevesting period of the option.

 

**Aggregated Option Exercises in LastFiscal Year and Fiscal Year End Option Values**

 

This table provides certain information regardingthe number and value of unexercised stock options at September 30,2005.  As of that date, no SARs wereoutstanding.

 
| **Name**        | ** ** | **Shares acquired  on exercise (#)** | ** ** | **Value ($)**   | ** ** | **Number of Securities Underlying  Unexercised Options at  Fiscal Year End** | ** ** | **Value ($) of Unexercised In-the-  Money Options at  Fiscal Year End** | ** ** |
|-----------------|------------|--------------------------------------|------------|-----------------|------------|------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| **Exercisable** | ** ** | **Unexercisabe**                     | ** ** | **Exercisable** | ** ** | **Unexercisable**                                                            |
|            |       |                                 |       |            |       |                                                                         |       |                                                                    |       |   |   |   |   |
| Lori A.  Jones  |       | —                               |       | —          |       | 20,000                                                                       |       | 30,000                                                                  |       | 3,200 |   | — |   |
| Brian Morrow    |       | —                               |       | —          |       | —                                                                       |       | 30,000                                                                  |       | — |   | — |   |

 

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(1)                         The value of the unexercised in-the-money optionsis calculated using the closing bid price of our Common Stock on September 30,2005, at $1.36 per share. Amounts reflected are based on the assumed valueminus the exercise price and do not indicate actual sales or proceeds.

 

**Compensation of Directors**

 

In fiscal 2005, director compensation wasadjusted in order to attract new directors and provide compensation forattendance at more frequent meetings. Effective January 2005, non-employee directors of the Company areentitled to receive quarterly cash compensation of $5,000 for attendance atBoard and Committee meetings.  Committeechairmen and the Chairman of the Company are entitled to receive additionalquarterly cash compensation of $1,250 for service as chairman.  Directors who are also employees of theCompany do not receive any additional compensation for their service on theBoard.  The Board grants to each newlyappointed director, on a one-time basis, options to purchase a total of 15,000shares of Common Stock at an exercise price equal to the fair marketvalue at the date of grant.  Eachof Messrs. Roddy, Gistaro, and Weaver were granted options to purchase15,000 shares of Common Stock in fiscal 2005. Directors who are also employees do not receive any additionalcompensation for their service on the Board of Directors.

 

All options vest at the end of each of foursix-month periods equally.

 

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**Employment Contracts**

 

Chief Executive Officer

 

The Board appointed Lori Jones as Chief Executive Officer on December 20,2004.  Ms. Jones had served as theCompany’s Chief Financial Officer since January 2003 (see “Chief FinancialOfficer”).  Ms. Jones’ employmentcontract, which is effective April 1, 2005, provides for a base salary of$175,000 and bonus compensation of $50,000 for the achievement of certaincorporate goals.  Upon termination of Ms. Jones’employment without “cause” or if she resigns her employment for “good reason,”(as defined, which includes a termination of employment in connection with achange of control), Ms. Jones will continue to receive salary for a periodof twelve months.  If Ms. Jones isterminated by the Company for “cause” (as defined) or if she terminates heremployment voluntarily, she will not be entitled to receive severance pay.

 

Chief Financial Officer

 

**Effective January 24, 2003,the Company entered into an employment agreement with Ms. Jones, providingfor a base salary of $135,000. Her base salary was increased to $175,000 by aletter amendment in August 2004. The employment agreement expired on March 31, 2005, and was amendedto reflect her position as Chief Executive Officer. Pursuant to an amendmentdated November 26, 2003, Ms. Jones was entitled to receive a $60,000bonus payment upon the achievement of agreed-upon performance objectives forfiscal 2004.  The bonus payment was paidin January 2005.  Ms. Jonesalso participates in any and all plans that are maintained for the benefit ofthe Company executives or employees in general.**

** **

**The position of Chief FinancialOfficer remains open as December 23, 2005.**

** **

President and Chief Operating Officer

 

**Effective June 5, 2005,Brian Morrow was employed as President and Chief Operating Officer.  The Company entered into an employmentagreement with Mr. Morrow, which provides for a base salary of $170,000,plus a $10,000 relocation allowance.  Mr. Morrowis entitled to participate in a bonus plan under which he may receive up to$30,000, depending on whether agreed-upon performance objectives for fiscal2005 are satisfied. Mr. Morrow also participates in any and all plans thatare maintained for the benefit of the Company executives or employees ingeneral.  Upon termination of Mr. Morrow’semployment without “cause” (as defined), Mr. Morrow will continue toreceive salary and benefits for six months. Mr. Morrow resigned effective December 2, 2005.  The Company is not obligated to makeseverance payments to Mr. Morrow, and accordingly no payments will bemade.  Ms. Jones assumed his duties.**

** **

**Report of the Compensation Committee**

 

The compensation committee follows establishedrationale and policies for compensating our executive officers.  The compensation committee evaluatesthe compensation packages of our chief executive officer and all of our otherexecutive officers on an annual basis or at the end of a contract term.  The committee utilizes salary surveys andstatistics to ensure compensation is commensurate for the office held and thesize of the business.  Base salaries arealso negotiated after giving consideration to the risks and responsibilitiespertaining to the individual as a public company officer.  Bonus plans are included in the compensationpackage, but generally include only discretionary payments that are awardedbased on company performance, which include achievement of revenue, profits, orachievement of qualitative rather than quantitative milestones, such as asuccessful solution to corporate challenges such as a successful negotiation orthe settlement of litigation.  The following report of the compensationcommittee describes these policies and rationales with respect to thecompensation paid to such executive officers for the fiscal year ended September 30,2005.

 

*Officer Compensation Policy*.  Thecompensation committee’s fundamental policy is to provide a compensationprogram for executive officers that will enable us to attract and retain theservices of highly-qualified individuals and offer our executive officerscompetitive compensation opportunities based upon overall performance and theirindividual contribution to our financial success.  The compensation committee uses third partycompensation surveys and information to assure that executive compensation isset at levels within the current market range for companies in a similarindustry and stage as ASI.  It is thecommittee’s objective to have a substantial portion of each officer’scompensation contingent upon our performance, as well as upon such officer’sown level of performance.  Bonus targetsare established for each executive officer but are discretionary and areawarded based on company and personal performance, which include revenue,operating results, new sales, achievement of qualitative milestones, retentionincentives, and achievement of personal and company goals.  Adjudication of bonus payments is based onthe percentage of achievement of goals and evaluation of performance, withconsideration given to the availability of cash and the overall position ofASI.

 

*Employment Agreements.* The executive officers were employedpursuant to written employment agreements during fiscal 2005 and 2004. Thecompensation committee has considered the advisability of using employment orletter agreements and has determined that it is in our best interests becauseit permits us to achieve our desired goals of motivating and retaining the bestpossible executive

 

42

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talent. Each employment agreement or letteragreement separately reflects the terms that the compensation committee feltwere appropriate and/or necessary to recruit and retain the services of theparticular executive officer, within the framework of our compensationpolicies.

 

*Components of ExecutiveCompensation.*  Each executive officer’s compensation packageis comprised of three elements: base salary, which is designed to becompetitive with salary levels of similar companies that compete with us forexecutive talent and reflects individual performance and the executive’scontribution; performance bonuses, which are based on the terms of theemployment agreements; and long-term stock option awards, which create commoninterests for the executive officers and the shareholders.

 

*Base Salary*.  Thesalaries paid to the executive officers in fiscal 2005 were based on the termsof their employment agreements or letter agreements and are set forth in thesummary compensation table.

 

*Bonuses*.  Theexecutive officers are entitled to annual bonuses based upon the terms of theiremployment agreements (see “Employment Contracts” above) and discretionary bonusesbased on their respective performance.  In fiscal 2005, Ms. Jones received $60,000 bonus compensationpursuant to the November 2003 amendment to her employment contract asChief Financial Officer.

 

*Stock Option Plans.* We have the Analytical Surveys, Inc.1993 Non-Qualified Stock Option Plan, the Analytical Surveys, Inc. 1997Incentive Stock Option Plan, the Analytical Surveys, Inc. Officer andEmployee Recruitment Stock Incentive Plan and the Analytical Surveys, Inc.Year 2000 Stock Incentive Plan and the Analytical Surveys, Inc. 2003Non-Qualified Stock Option Plan, as amended and supplemented. The AnalyticalSurveys, Inc. 1993 Non-Qualified Stock Option Plan expired on September 30,2003. The 7,301 options outstanding under the plan will expire between June 2007and August 2013 unless otherwise forfeited, cancelled or exercised. Theoption plans are long-term incentive plans for employees and are intended toalign shareholder and employee interests by establishing a direct link betweenlong-term rewards and the value of our Common Stock. The compensation committeebelieves that long-term stock incentives for executive officers and employeesare an important factor in retaining valued employees. Because the value of anoption bears a direct relationship to our Common Stock price, the compensationcommittee believes that options motivate officers and employees to manage theCompany in a manner that will benefit all shareholders.

 

The options granted to the executive officers infiscal 2005 were made in accordance with the terms of their employmentagreements (see “Employment Contracts “) or at the discretion of theBoard.  Information with respect tooption grants in fiscal 2005 and 2004 to the executive officers is set forth inthe Option Grants Table.  Thecompensation committee views stock option grants as important components of ourlong-term, performance-based compensation philosophy.

 

*CEO Compensation*. The compensation paid to Mrs. Jonesduring fiscal 2005 was based upon the terms of her employment agreement thatwas dated January 20, 2003, and amended on November 26, 2003 andwhich expired on March 31, 2005, continued by a new employment agreementdated April 1, 2005. Such agreement is described under “EmploymentContracts.  Ms. Jones’ base salary isdesigned to be competitive with salary levels of chief executive officers ofsimilar companies that compete with us for executive talent and to bereflective of her performance and contribution to ASI.

 

*Deductibility of ExecutiveCompensation*.  The compensation committee is responsible foraddressing the issues raised by Internal Revenue Code Section 162(m). Section 162(m) limits to $1 million our deduction for compensation paid to certain of ourexecutive officers who not qualify as “performance-based.”  To qualify as performance based under Section 162(m),compensation payments must be made pursuant to a plan that is administered by acommittee of outside directors and must be based on achieving objectiveperformance goals.  In addition, thematerial terms of the plan must be disclosed to and approved by shareholders,and the compensation committee must certify that the performance goals wereachieved before payments can be awarded. We believe that all compensation paid to our executive officers listed inthe summary compensation table in fiscal 2004 is fully deductible and thatcompensation paid under the plans will continue to be deductible.  The committee’s present intention is tocomply with the requirements of Section 162(m) unless and until the committeedetermines that compliance would not be in the best interest of the Company andour shareholders.

 

By the Compensation Committee

   Ed Gistaro

   Tom Roddy

   Rad Weaver

 

43

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**PERFORMANCE GRAPH**

 

The following graph compares the cumulative totalreturn on our Common Stock with the index of the cumulative total return forthe NASDAQ Stock Market (U.S.) (“Total U.S.”) and the index of the NASDAQComputer and Data Processing Services Stocks (“DP&S”). The graph assumesthat $100 was invested on October 1, 2000, and that all dividends, if any,were reinvested.

 

**COMPARISONOF 5 YEAR CUMULATIVE TOTAL RETURN***

AMONGANALYTICAL SURVEYS, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX

AND THE NASDAQCOMPUTER & DATA PROCESSING INDEX

 

 

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* $100invested on 9/30/00 in stock or index- including reinvestment of dividends. Fiscalyear ending September 30.

 

The following data points were used in constructingthe performance graph:

 
| ** **                                 | ** ** | **Cumulative Total Return** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|
| ** **                                 | ** ** | **9/00**                    | ** ** | **9/01** | ** ** | **9/02** | ** ** | **9/03** | ** ** | **9/04** | ** ** | **9/05** | ** ** |
| ANALYTICAL SURVEYS, INC.                   |       | 100.00                      |       | 34.50 |   | 10.00 |   | 7.55 |   | 6.35 |   | 6.80 |   |
| NASDAQ STOCK MARKET (U.S.)                 |       | 100.00                      |       | 41.00 |   | 33.00 |   | 50.54 |   | 53.30 |   | 59.63 |   |
| NASDAQ COMPUTER & DATA PROCESSING |       | 100.00                      |       | 40.23 |   | 32.00 |   | 47.35 |   | 51.59 |   | 57.05 |   |

 

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**Item 11. Security Ownership of Certain Beneficial Owners andManagement**

 

The followingtable sets forth information with respect to the shares of our Common Stock(the only outstanding class of voting securities) owned of record andbeneficially as of December 5, 2005, unless otherwise specified, by (i) allpersons known to possess voting or dispositive power over more than 5% of ourCommon Stock, (ii) each director and named executive officer, and (iii) alldirectors and executive officers as a group: (Except as otherwise noted in thetable, each person or group identified possesses sole voting and investmentpower with respect to such shares, subject to community property laws, whereapplicable, and the address of each shareholder is c/o Analytical Surveys, Inc.,9725 Datapoint Drive, Suite 300B, San Antonio, Texas 78229.)

 
| ** **                                                       | ** ** | **Amount and Nature of  Beneficial Ownership****(1)** | ** ** | **Percentage  of Class** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------|------------|
| Edward P.  Gistaro (2)*                                          |       | 7,500                                                 |       | **                       |       |
| Lori A.  Jones (3) *                                        |       | 27,840                                                |       | 1                        | %          |
| Thomas P.  Roddy (2)*                                            |       | 7,500                                                 |       | **                       |       |
| Rad Weaver *                                                     |       | —                                                |       | **                       |       |
|                                                             |       |                                                  |       |                     |       |
| All  directors and executive officers as a group (4 persons) (4) |       | 42,840                                                |       | 1                        | %          |

 

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*                                      Director

**                               Lessthan 1%

(1)                               Allpersons have sole voting and investment power with respect to their shares.  All amounts shown in this column includeshares obtainable upon exerciseof stock options currently exercisable or exercisable within 60 days of thedate of this table.

(2)                               Includes 7,500 shares of Common Stockunderlying options that are exercisable within 60 days of December 5,2005.

(3)                               Includes 20,000 shares of Common Stockunderlying options that are exercisable within 60 days of December 5,2005.

(4)                               Includes 35,000 shares of Common Stockunderlying options that are exercisable within 60 days of December 5,2005.

 

**Change in Control**

 

On April 2, 2002, Tonga invested $2.0million in ASI in exchange for the issuance of a senior secured convertiblepromissory note in the principal amount of $2.0 million (the “Old Note”) andthe issuance of a Warrant to purchase 500,000 (subject to adjustment) shares ofour Common Stock and the right to appoint a majority of our Board of Directors(the “Change in Control Transaction”). The note was convertible at any timeinto Common Stock, and the Warrant was exercisable at any time through April 2,2007.  In addition, as part of thetransaction, for a period of three years from the date of the note (until April 2,2005) Tonga received the right to appoint a majority of our Board ofDirectors.  Accordingly, all three outsidedirectors were Tonga appointees.  Theright to appoint directors arose solely from the provisions of the note and notfrom Tonga’s ownership of our Common Stock. The source of the $2.0 million that Tonga invested in ASI was availablecash.

 

In November 2003, Tonga converted$300,000 in principal amount of the Old Note and received 261,458 shares of ourCommon Stock and a $1.7 million note (“Second Note”) bearing the same terms. OnJune 30, 2004, we restructured the Second Note to cure an event of default(the “Restructured Note”).  On November 10,2004, Tonga converted the Restructured Note and accrued interest into shares ofour Common Stock.  As provided by theterms of the Restructured Note, the conversion price was equal to 90% of theaverage closing bid prices for the three trading days having the lowest closingbid price during the 20 trading days immediately prior to the conversiondate.  Accordingly, we issued 1,701,349shares at the conversion price of $1.05 per share.  The newly issued shares increased our totalcommon shares outstanding from 1,104,173 to 2,805,522.  Tonga owned 67% of our outstanding sharesimmediately after the conversion. According to filings made by Tonga under Section 16 of the ExchangeAct, Tonga liquidated its holdings of our Common Stock by November 15,2004.  Tonga simultaneously relinquishedits right to appoint directors, which resulted in the appointment of newindependent directors and relinquishment of Tonga’s control.

 

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**Equity Compensation PlanInformation**

 

The following table gives information about equityawards under our equity compensation plans.

 
| ** **                                                  | ** ** | **(a)**                                                                                          | ** ** | **(b)**                                                                            | ** ** | **(c)**                                                                                                                                          | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Plan category**                                           | ** ** | **Number of securities to be issued upon exercise of outstanding  options, warrants and rights** | ** ** | **Weighted-average exercise  price of outstanding  options, warrants and  rights** | ** ** | **Number of securities remaining available for future issuance under  equity compensation plans (excluding securities  reflected in column (a)** | ** ** |
| Equity compensation plans approved by  security holders     |       | 122,303                                                                                          |       | $                                                                                  | 4.07       |                                                                                                                                             | 353,291    |   |
| Equity compensation plans not approved by  security holders |       | 25,575                                                                                           |       | $                                                                                  | 2.70       |                                                                                                                                             | 59,425     |   |
| Total                                                       |       | 147,878                                                                                          |       | $                                                                                  | 3.83       |                                                                                                                                             | 412,716    |   |

 

**Summary Description of EquityCompensation Plans That Have Not Been Approved by the Shareholders**

 

**2000 Stock Incentive Plan**

 

In September 2000, the Board of Directorsadopted the 2000 Stock Incentive Plan (the “2000 Plan”). Pursuant to applicablelaw, the 2000 Plan has not been approved by the shareholders.  The 2000 Plan provides for the granting ofincentive stock options and non-qualified stock options, as determined by acommittee appointed by the Board of Directors.

 

*Number of Shares Subject to the2000 Plan*.  The 2000 Plan authorizes the grant of optionsrelating to an aggregate of 50,000 shares of Common Stock.  If any corporate transaction occurs whichcauses a change in our capitalization (for example, a reorganization,recapitalization, stock split, stock dividend, or the like), the number ofshares of stock available and the number of shares of stock subject tooutstanding options granted under the 2000 Plan will be adjusted appropriatelyand equitably to prevent dilution or enlargement of a participant’s rights.

 

*Eligibility for Participation*. Individuals eligible to participate in the 2000 Plan are employees ofASI and our subsidiaries, but not any officers of ASI or our subsidiaries.

 

*Terms of Options*. Options granted to employees may be either incentive stock options(ISOs), which satisfy the requirements of Internal Revenue Code Section 422,or nonstatutory stock options (NSOs), which are not intended to satisfy suchrequirements.  The exercise price for thegrant of an NSO under the 2000 Plan may be any price that is greater than orequal to 85% of the fair market value of the Common Stock on the date the NSOis granted.  The exercise price of an ISOmust be at least equal to 100% (110% for 10%-shareholders) of the fair marketvalue of our Common Stock on the date the ISO is granted.  Options expire at the times determined by thecommittee, as specified in the applicable award agreement. However, no optionis exercisable later than the tenth anniversary of the grant date, and any ISOgranted to a 10%-shareholder must be exercisable on or before the fifth anniversaryof the grant date.

 

*Vesting and Acceleration*. Options vest at the times determined by the committee, as specified inthe applicable award agreement. A participant’s options become fully vestedupon the termination of the participant’s employment as a result of a reductionin force and upon the occurrence of a change in control of ASI.  In general, a change in control will bedeemed to have occurred upon the acquisition by any person of more than 50% ofour outstanding voting securities (or securities subject to conversion intovoting securities), the acquisition by any person of the power to elect amajority of our directors, certain mergers and other corporate transactions ifthe holder’s of our voting securities before the transaction receive less than50% of the outstanding voting securities of the reorganized, merged orconsolidated entity, after the transaction, and a complete liquidation ordissolution of ASI, or the sale of all or substantially all of the assets ofASI, if approval of our shareholders is required for the transaction.

 

*Deduction to ASI*.  Wewill be entitled to an income tax deduction equal to the amount of ordinaryincome recognized by a participant.  Thededuction generally will be allowed for our taxable year in which occurs thelast day of the calendar year in which the participant recognizes ordinaryincome.

 

*Term*.  The2000 Plan expires on September 8, 2010.

 

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**2000 Officer and EmployeeRecruitment Stock Incentive Plan**

 

In September 2000, the Board of Directorsadopted the 2000 Officer and Employee Recruitment Stock Incentive Plan (the “2000Recruitment Plan”).  Pursuant toapplicable law, the 2000 Recruitment Plan has not been approved by theshareholders.  The 2000 Recruitment Planprovides for the granting of incentive stock options and non-qualified stockoptions, as determined by a committee appointed by the Board of Directors.

 

*Number of Shares Subject to the2000 Recruitment Plan*.  The 2000 Recruitment Plan authorizes the grantof options relating to an aggregate of 50,000 shares of Common Stock, subjectto adjustment in the case of a change in our capitalization in the same manneras is provided in the 2000 Plan (described above).

 

*Eligibility for Participation*.  Anindividual is eligible for participation in the 2000 Recruitment Plan if suchindividual has not been previously employed by ASI and the award of options ismade in connection with the entry into an employment contract with suchindividual.

 

*Terms of Options*.  Theoptions granted under the 2000 Recruitment Plan have the same terms as aredescribed above with respect to the 2000 Plan.

 

*Vesting and Acceleration*.  Theoptions granted under the 2000 Recruitment Plan are subject to the same vestingand acceleration provisions as are described above with respect to the 2000Plan.

 

*Deduction to ASI*.  Wewill be entitled to deductions for options granted under the 2000 RecruitmentPlan as described above with respect to the 2000 Plan.

 

*Term*.  The2000 Recruitment Plan expires on September 8, 2010.

 

**Inducement Option**

 

In March 2004, the Board of Directors issued aninducement option to Mr. Wayne Fuquay as an inducement to employment asour Chief Executive Officer (“Inducement Option”).  Pursuant to applicable law, the InducementOption has not been approved by our shareholders.  The Inducement Option was a one-time,non-recurring grant that was approved by a committee appointed by the Board ofDirectors.

 

*Number of Shares Subject to theInducement Option*.  The Inducement Option granted optionsrelating to an aggregate of 75,000 shares of our Common Stock.

 

*Terms of Options*.  Theoptions granted under the Inducement Option were nonqualified stock options andcarried an exercise price of $1.50, which was below the fair market value ofour Common Stock on the date the options were granted.  The options were not exercisable later thanthe tenth anniversary of the grant date, and, in the event that Mr. Fuquay’semployment is terminated for any reason other than death, the options would beexercisable no later than ninety days after such termination occurs.

 

*Vesting and Acceleration*.   The options granted under the InducementOption were scheduled to vest on March 22, 2005.   The Option originally provided for thepurchase of 75,000 shares of****common stock at an exercise price equal to$1.50 per share, which was below the market value of $2.82 on the date ofgrant.  Upon his resignation on December 20,2004, we accelerated his vesting rights on 56,250 shares, with a market valueof $1.93 per share, and cancelled his right to purchase the remaining 18,750shares.  The intrinsic value of thevested shares totaled approximately $24,000. Mr. Fuquay exercised hisrights under the Option on December 28, 2004, and purchased 56,250 sharesof our common stock.

 

*Deduction to ASI*.  Weare entitled to an income tax deduction equal to the amount of ordinary incomerecognized by Mr. Fuquay.  Thededuction generally will be allowed for our taxable year in which occurs thelast day of the calendar year in which the participant recognizes ordinaryincome.

 

*Term*.  TheInducement Option, had it not been exercised, would have expired on March 22,2014.

 

**Item 12. Certain Relationships and Related PartyTransactions.**

 

On April 2, 2002, Tonga invested $2.0 million in ASI in exchangefor the Old Note and the issuance of the Warrant to purchase 500,000 shares ofour Common Stock.  As part of thetransaction, Tonga received the right to appoint a majority of our board ofdirectors until April 2, 2005.

 

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On November 6, 2003, Tonga converted $300,000 in principal amountof the Old Note at the conversion price of $1.24 plus accrued interest into261,458 shares of our Common Stock, which was 90% of the average closing bidprices for our Common Stock for the three trading days having the lowestclosing bid price during the 20 trading days immediately prior to theconversion date.  The Second Note havingthe same terms as the Old Note was issued to Tonga on November 4, 2003,for the remaining $1.7 million in principal amount not converted under the OldNote.  On June 30, 2004, werestructured the Second Note to cure an event of default that was triggeredwhen the our Registration Statement on Form S-3 filed with the SEC on December 30,2003, was not declared effective by the SEC as required by the terms of theSecond Note. See Note 3 to the consolidated financial statements.  The maturity date of the  $1.7 million Restructured Note was extendedto January 2, 2006, and was payable at Tonga’s option in cash or shares ofour Common Stock. Tonga retained the ability to convert the Restructured Notefor shares of our Common Stock at any time, waived $134,000 in accrued intereston the Second Note, waived its rights to assess liquidated damages pursuant tothe Second Note, relinquished its rights under the Warrant and canceled theWarrant.

 

On November 10,2004, Tonga converted the Restructured Note and accrued interest into shares ofour Common Stock.  As provided by theterms of the Restructured Note, the conversion price was equal to 90% of theaverage closing bid prices for the three trading days having the lowest closingbid price during the 20 trading days immediately prior to the conversion date.  Accordingly, we issued 1,701,349 shares atthe conversion price of $1.05 per share. The newly issued shares increased our total common shares outstandingfrom 1,104,173 to 2,805,522.  Tonga owned67% of our outstanding shares immediately after the conversion.  According to filings made by Tonga under Section 16of the Exchange Act, Tonga liquidated its holdings of our Common Stock by November 15,2004. Upon Tonga’sdisposal of its holdings of our Common Stock, Tonga relinquished its right toappoint directors.  In December 2004,we appointed two new independent directors in conjunction with the resignationof the three Tonga-appointed directors. As a result, Tonga relinquished control of ASI.

 

**Item 13. Exhibits**

 
| (a)    |   | (1)    |   | Financial Statements                                                                                                                                                            |
|--------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                                                                            |
|   |   |   |   | Included in Part II of this Report:                                                                                                                                        |
|   |   |   |   |                                                                                                                                                                            |
|   |   |   |   | Report of Independent Registered Public Accounting Firm                                                                                                                         |
|   |   |   |   |                                                                                                                                                                            |
|   |   |   |   | Consolidated Balance Sheets, September 30,  2005 and 2004                                                                                                                  |
|   |   |   |   |                                                                                                                                                                            |
|   |   |   |   | Consolidated Statements of Operations, Years Ended September 30,  2005 and 2004                                                                                            |
|   |   |   |   |                                                                                                                                                                            |
|   |   |   |   | Consolidated Statements of Stockholders’ Equity, Years Ended  September 30, 2005 and 2004                                                                             |
|   |   |   |   |                                                                                                                                                                            |
|   |   |   |   | Consolidated Statements of Cash Flows, Years Ended September 30,  2005 and 2004                                                                                            |
|   |   |   |   |                                                                                                                                                                            |
|   |   |   |   | Notes to Consolidated Financial Statements, September 30, 2005  and 2004                                                                                                   |
|   |   |   |   |                                                                                                                                                                            |
|   |   | (2)    |   | Exhibits                                                                                                                                                                        |
|   |   |   |   |                                                                                                                                                                            |
|   |   |   |   | The following exhibits are filed herewith or incorporated by  reference herein (according to the number assigned to them in Item 601 of  Regulation S-K), as noted:             |
|   |   |   |   |                                                                                                                                                                            |
|   |   | 3.0    |   | Articles of Incorporation and By-Laws                                                                                                                                           |
|   |   |   |   |                                                                                                                                                                            |
|   |   | 3.1    |   | Articles of Incorporation, as amended (incorporated by reference to  ASI’s Registration Statement on Form S-18, (Registration  No. 2-93108-D)).                  |
|   |   |   |   |                                                                                                                                                                            |
|   |   | 3.3    |   | By-Laws (incorporated by reference to ASI’s Registration Statement on  Form S-18 (Registration No. 2-93108-D).                                                   |
|   |   |   |   |                                                                                                                                                                            |
|   |   | 3.3    |   | Amendment to By-laws (incorporated by reference to ASI’s Annual  Report on Form 10-K for the year ended September 30, 1998).                                     |
|   |   |   |   |                                                                                                                                                                            |
|   |   | 4.0    |   | Instruments defining the rights of Security Holders including  Indentures                                                                                                       |
|   |   |   |   |                                                                                                                                                                            |
|   |   | 4.1    |   | Form of Stock Certificate (incorporated by reference to ASI’s  Registration Statement on Form S-18 (Registration No. 2-93108-D)).                           |
|   |   |   |   |                                                                                                                                                                            |
|   |   | 10.0   |   | Material Contracts                                                                                                                                                              |
|   |   |   |   |                                                                                                                                                                            |
|   |   | 10.1   |   | 1993 Non-Qualified Stock Option Plan dated December 11, 1992  (incorporated by reference to ASI’s Proxy Statement dated January 11,  1993).                      |
|   |   |   |   |                                                                                                                                                                            |
|   |   | 10.2   |   | Analytical Surveys, Inc. 1997 Incentive Stock Option Plan, as  amended and restated (incorporated by reference to ASI’s Proxy Statement  dated January 8, 1998). |

 

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|   |   | 10.3   |   | Analytical Surveys, Inc. Officer and Employee Recruitment Stock  Incentive Plan and form of stock option agreement (incorporated by reference  to ASI’s Annual Report on Form 10-K/A for the year ended  September 30, 2000).                                                               |
|--------|--------|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                                                                                                                                                                                                            |
|   |   | 10.4   |   | Analytical Surveys, Inc. Year 2000 Stock Incentive Plan and form  of agreement (incorporated by reference to ASI’s Annual Report on  Form 10-K/A for the year ended September 30, 2000).                                                                                                    |
|   |   |   |   |                                                                                                                                                                                                                                                                                                            |
|   |   | 10.5   |   | Analytical Surveys, Inc. Year 2003 Stock  Option Plan and form of agreement (incorporated by reference to ASI’s Proxy  Statement dated July 21, 2003, for its 2003 Annual Meeting).                                                                                                              |
|   |   |   |   |                                                                                                                                                                                                                                                                                                            |
|   |   | 10.6   |   | Employment Agreement dated January 20, 2003, by and between  Analytical Surveys, Inc. and Lori Jones (incorporated by reference to  Exhibit 10 to ASI’s Quarterly Report on Form 10-Q for the period  ended December 31, 2002).                                                   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                            |
|   |   | 10.7   |   | First Amendment to Employment Agreement dated November 26, 2003,  by and between Analytical Surveys, Inc. and Lori Jones (incorporated by  reference to ASI’s Annual Report on Form 10-K/A for the year ended  September 30, 2003, as filed with the Commission on May 17, 2004). |
|   |   |   |   |                                                                                                                                                                                                                                                                                                            |
|   |   | 10.8   |   | Employment Agreement dated March 22, 2004, by and between  Analytical Surveys, Inc. and Wayne Fuquay (incorporated by reference to  ASI’s Quarterly Report on Form 10-Q for the period ended March 31,  2004).                                                                         |
|   |   |   |   |                                                                                                                                                                                                                                                                                                            |
|   |   | 10.9   |   | Employment  Agreement dated April 1, 2005, by and between Analytical  Surveys, Inc. and Lori Jones (incorporated by reference to  Exhibit 10.8 to ASI’s Current Report on Form 8-K dated  June 28, 2005).                                                                         |
|   |   |   |   |                                                                                                                                                                                                                                                                                                            |
|   |   | 10.10  |   | Employment Agreement dated June 5, 2005, by and between  Analytical Surveys, Inc. and Brian Morrow (incorporated by reference to  Exhibit 10.8 to ASI’s Current Report on Form 8-K dated  June 28, 2005).                                                                         |
|   |   |   |   |                                                                                                                                                                                                                                                                                                            |
|   |   | 10.11  |   | Management and Consulting Agreement dated October 7, 2005, by  and between Analytical Surveys, Inc. and Wind Lake Solutions, Inc.  (incorporated by reference to Exhibit 10.8 to ASI’s Current Report on  Form 8-K dated October 13, 2005).                                  |
|   |   |   |   |                                                                                                                                                                                                                                                                                                            |
|   |   | 10.12  |   | Consulting Agreement dated December 7, 2005, by and between  Analytical Surveys, Inc. and Pluris Partners, Inc. (incorporated by  reference to Exhibit 10.8 to ASI’s Current Report on Form 8-K dated  December 13, 2005).                                                   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                            |
|   |   | 11.1   |   | Statement Regarding Computation of Per Share Earnings                                                                                                                                                                                                                                                           |
|   |   |   |   |                                                                                                                                                                                                                                                                                                            |
|   |   | 14.1   |   | Code of Ethics (incorporated by reference to ASI’s Annual Report on  Form 10-K for the fiscal year ended September 30, 2003).                                                                                                                                                                    |
|   |   |   |   |                                                                                                                                                                                                                                                                                                            |
|   |   | 16.0   |   | Letter regarding change in certifying accountant (incorporated by  reference to Exhibit 16 to ASI’s Current Report on Form 8-K dated  August 13, 2004).                                                                                                                                     |
|   |   |   |   |                                                                                                                                                                                                                                                                                                            |
|   |   | 23.1   |   | *Consent of Pannell Kerr Forster of Texas, P.C.                                                                                                                                                                                                                                                                 |
|   |   |   |   |                                                                                                                                                                                                                                                                                                            |
|   |   | 31.1   |   | *Section 302 Certification of Chief Executive Officer                                                                                                                                                                                                                                                      |
|   |   |   |   |                                                                                                                                                                                                                                                                                                            |
|   |   | 31.2   |   | *Section 302 Certification of Chief Accounting Officer                                                                                                                                                                                                                                                     |
|   |   |   |   |                                                                                                                                                                                                                                                                                                            |
|   |   | 32.1   |   | *Section 906 Certification of Chief Executive Officer                                                                                                                                                                                                                                                      |
|   |   |   |   |                                                                                                                                                                                                                                                                                                            |
|   |   | 32.2   |   | *Section 906 Certification of Chief Accounting Officer                                                                                                                                                                                                                                                     |
|   |   |   |   |                                                                                                                                                                                                                                                                                                            |
|        |
|   |   |   |   | *Filed herein                                                                                                                                                                                                                                                                                                   |

 

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**I**t**em 14. Principal Accountant Fees and Services.**

 

**(a)****                     ****Audit Fees.**

 

As of December 10, 2005, audit fees billed byPannell Kerr Forster of Texas, P.C. for the audit of our annual financialstatements for the fiscal year ended September 30, 2005 and 2004, and forthe review of the financial statements included in our Quarterly Reports on Form 10-Qfiled with the Securities and Exchange Commission for these years were $134,308and $46,633, respectively.

 

The aggregate fees billed for professionalservices rendered by KPMG LLP for the review of the financial statementsincluded in our Quarterly Reports on Form 10-Q filed with the Securitiesand Exchange Commission for the fiscal year ended September 30, 2004, was$30,000.

 

**(b)****                     ****Audit-Related Fees.**

 

The aggregate fees billed for professional servicesrendered by Pannell Kerr Forster of Texas, P.C., for assurance and related services in eachof the fiscal years ended September 30, 2005 and September 30,2004 were $15,551 and $0, respectively. The aggregate fees billed for professional services rendered by KPMG LLP for assurance and related services ineach of the fiscal years ended September 30, 2005 and September 30,2004 were $0 and $182,222, respectively.

 

**(c)****                     ****Tax Fees**

 

The aggregate fees billed for professionalservices rendered by Pannell Kerr Forster of Texas, P.C. for tax compliance,tax advice, and tax planning in each of the fiscal years ended September 30,2005 and September 30, 2004, were $19,248 and $0, respectively.  Tax fees in fiscal 2005 were incurred forpreparation of our federal and state income tax returns as well as for a reviewof Internal Revenue Code Section 382 rules related to a proposedtransaction and Puerto Rican tax compliance services.

 

**(d)****                     ****All Other Fees.**

 

**There were no other fees billedin either of the fiscal years ended September 30, 2005 or September 30,2004 for services rendered by Pannell Kerr Forster of Texas, P.C. or by KPMGLLP not reportable as Audit Fees, Audit-Related Fees or Tax Fees.**

** **

**(e)****                      AuditCommittee Pre-Approval Policies.**

 

The Audit Committee has established a policy intended to clearly definethe scope of services performed by our independent auditors for non-auditservices.  This policy relates to auditservices, audit-related services, tax and all other services which may beprovided by our independent auditor and is intended to assure that suchservices do not impair the auditor’s independence.  The policy requires the pre-approval by theAudit Committee of all services to be provided by our independent auditor.  Under the policy, the Audit Committee willannually review and pre-approve the services that may be provided by theindependent auditor without obtaining specific pre-approval from the AuditCommittee or its designee.  In addition,the Audit Committee may delegate pre-approval authority to one or more of itsmembers.  The member or members to whomsuch authority is delegated is required to report to the Audit Committee at itsnext meeting any services which such member or members has approved.  The policy also provides that the AuditCommittee will pre-approve the fee levels for all services to be provided bythe independent auditor.  Any proposedservices exceeding these levels will require pre-approval by the AuditCommittee.

 

All of the services provided byour independent registered public accounting firm described above under thecaptions Audit Fees, Audit-Related Fees, Tax Fees and All Other Fees wereapproved by the Audit Committee and the Audit Committee has determined that theauditor independence has not been compromised as a result of providing theseservices and receiving the fees for such services as noted above.

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
| Analytical Surveys, Inc. |
|-------------------------------|
|                          |   |   |   |   |
| By:                           |   | /s/ Lori A. Jones |   | Date:   December 27, 2005 |
|                          |   | Lori A. Jones |   |   |
|                          |   | Chief Executive Officer |   |   |
|                          |   |   |   |   |
| By:                           |   | /s/ Barry Golko |   | Date:   December 27, 2005 |
|                          |   | Barry Golko |   |   |
|                          |   | Chief Accounting Officer |   |   |
|                          |   |   |   |   |
| By:                           |   | /s/ R. Thomas Roddy |   | Date:   December 27, 2005 |
|                          |   | R. Thomas Roddy |   |   |
|                          |   | Chairman of the Board |   |   |
|                          |   |   |   |   |
| By:                           |   | /s/ Edward P. Gistaro |   | Date:   December 27, 2005 |
|                          |   | Edward P. Gistaro |   |   |
|                          |   | Director |   |   |
|                          |   |   |   |   |
| By:                           |   | /s/ Rad Weaver |   | Date:   December 27, 2005 |
|                          |   | Rad Weaver |   |   |
|                          |   | Director |   |   |

 

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