**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

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**FORM10-KSB**

 

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**x****                           ****ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934**

**For the Fiscal Year ended September30, 2006**

**o****                              ****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

**Commission file number 0-13111**

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**ANALYTICAL SURVEYS, INC.**

(Exact name of registrant as specified in itscharter)

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

 

**8610N. New Braunfels, Suite 205, San Antonio, Texas 78217**

(Addressof principal executive offices)

**(210)657-1500**

(Registrant’stelephone number, including area code)

SECURITIES REGISTEREDPURSUANT 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**                                                                  |

 

SECURITIES REGISTEREDPURSUANT TO SECTION 12 (g) OF THE ACT:**COMMONSTOCK**

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Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.      Yesx  No o.

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of Registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form10-KSB or any amendment to this Form 10-KSB.  x

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12 B-2 of the Exchange Act)  Yes o  No x

State issuer’s revenues for its most recent fiscalyear, September 30, 2006: $4,320,424

The aggregate market value of the voting andnon-voting common equity held by non-affiliates of the registrant is $1,927,421,based on the closing price of the Common Stock on December 1, 2006.

The number of shares outstanding of the registrant’sCommon Stock, as of December 1, 2006, was 3,779,256.

Documents incorporated by reference: None

Transition Small Business Disclosure Format (checkone):      Yes o  Nox

 

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**TABLE OF CONTENTS**
| PART I.                       |   |
|-------------------------------|--------|
|                          |   |
| Item 1.                       |   | Description of  Business |   |   |   |
| Item 2.                       |   | Description of  Property |   |   |   |
| Item 3.                       |   | Legal Proceedings |   |   |   |
| Item 4.                       |   | Submission of  Matters to a Vote of Security Holders |   |   |   |
|                          |   |   |   |   |   |
| PART II.                      |   |
|                          |   |
| Item 5.                       |   | Market for  Common Equity and Related Stockholder Matters and Small Business Issuer  Purchases of Equity Securities |   |   |   |
| Item 6.                       |   | Management’s  Discussion and Analysis or Plan of Operation |   |   |   |
| Item 7.                       |   | Financial Statements |   |   |   |
| Item 8.                       |   | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure |   |   |   |
| Item 8A.                      |   | Controls and  Procedures |   |   |   |
| Item 8B.                      |   | Other Information |   |   |   |
|                          |   |   |   |   |   |
| PART III.                     |   |
|                          |   |
| Item 9.                       |   | Directors,  Executive Officers, Promoters and Control Person; Compliance with Section  16(a) of the Exchange Act |   |   |   |
| Item 10.                      |   | Executive  Compensation |   |   |   |
| Item 11.                      |   | Security  Ownership of Beneficial Owners and Management and Related Stockholder Matters |   |   |   |
| Item 12.                      |   | Certain  Relationships and Related Transactions |   |   |   |
| Item 13.                      |   | Exhibits |   |   |   |
| Item 14.                      |   | Principal  Accountant Fees and Services |   |   |   |
| Signatures and Certifications |   |   |   |
| Exhibits                      |   |   |   |
|                               |        |  |  |  |  |  |  |

 

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**PART I**

**Item1.  Description of Business**

**Overview**

Analytical Surveys, Inc. (“ASI”, “we”, “our” or the “Company”)was formed in 1981, and has, since inception, provided customized dataconversion, spatial data management and technical services for the geographicinformation systems (“GIS”) market.  GISconsists of computer software, hardware, data and personnel that are designedto help manipulate, analyze, and present information that is tied to a spatial(geographical) location.  GIS technologyenables its users to improve corporatecustomer information processes that capture, report and monitor informationrelated to usage, billing, payments, order processing, special servicerequests, and records documentation, with a goal to improve customer serviceratings and to meet the requirements of regulatory agencies.  GIS technology also enables users to accessand update accurate information regarding the location, condition, and functionof physical assets in support ofoperations and maintenance of facilities.

While there has been anapparent increase in demand for GIS solutions in response to catastrophicevents and homeland security initiatives in recent years, we have experienced asignificant decrease in demand for GIS data conversion services.  We believe that the primary reason for suchdecrease is that existing and potential customers have been using newlyemerging technology to reduce the need for outsourcing GIS data conversionservices, which historically accounted for as high as 75% of the total cost ofa typical GIS solution.  Specifically,the emergence in recent years of commercial off-the-shelf (“COTS”) hardware andsoftware solutions for gathering satellite remote sensing base data andtopographic, planimetric and cadastral data have given customers increasedcapabilities to replace our services with an in-house, significantly lower costalternative.  We believe this shift toCOTS, coupled with offerings from service firms with large labor content inIndia, has resulted in lower margins and increased competition in theindustry.  Our financial results reflectthis trend.  In fiscal years 2004, 2005and 2006, our revenues were $11.6 million, $6.1 million, and $4.3 million, respectively.In spite of significant cost cutting measures, in those years we experiencednet losses of $1.2 million, $3.3 million, and $0.38 million, respectively.

We have acquired onlythree new customers with material contracts during the last three fiscalyears.  The majority of our revenue inthose periods was derived from ongoing service contracts with pastcustomers.  Since the beginning of fiscal2004, when we closed our facilities in Indianapolis, Indiana, our GISoperations have been conducted from our production center in Waukesha, Wisconsin,and our corporate offices and production center in San Antonio, Texas.  We have continued to downsize by reducing thesize of our staff each year to meet the lower demands of our lower businessvolume.  In fiscal 2005, we experiencedadditional loss of personnel due to the uncertainty of the acquisition of newGIS contracts.  To address concernscreated by this loss of personnel on the part of our customers, partners, andemployees, we engaged Wind Lake Solutions, Inc. (“WLS”), to manage ourWisconsin-based personnel in October 2005. While this strategy temporarily stabilized our Wisconsin office andsatisfied our customer’s concerns regarding our ability to provide consistentservice to them, it did not result in a long-term solution to sustain or buildour GIS business.

During fiscal 2005, weevaluated a broad spectrum of business opportunities.  We engaged a consultant and evaluatedacquisitions that would facilitate our entrance into the federal markets.  We also evaluated various opportunities,including software and service solutions for location based services, state andlocal GIS initiatives.  We were not ableto identify an acceptable acquisition serving the GIS marketplace that producedsuitable margins or sufficient returns on acquisition costs.

In May 2006,we formed ASI Energy, a division ofAnalytical Surveys, Inc. (“ASI Energy”), for the sole purpose of acting as anindependent oil and gas enterprise focused on leveraging non-operatingparticipation in drilling and production prospects for the development ofon-shore oil and natural gas reserves in the United States.  As such, we are engaged in the acquisition ofleases, drilling and production of oil and natural gas in the UnitedStates. We act as a non-operator, which means we do not directly manageexploration, drilling or development operations, but instead, we pursue oil andgas prospects in partnership with oil and gas companies with exploration,development and production expertise.  Weseek to achieve a balanced growth strategy that includes participation in lowerrisk development drilling, combined with higher potential exploratorylocations.  In addition, we continue toseek acquisitions of proven production with upside potential attributable tobehind pipe reserves, infill drilling locations, deeper reservoirs and/or fieldextension opportunities.  In an effort tomaximize efficient use of capital, yet diversify risk, we are focused oninvestments in the Arkoma and Anadarko Basins, South Texas, and the Texas GulfCoast regions. We intend to continue to finance these acquisitions through theprivate placement of equity supplemented by issuance of debt, which isdependent on the terms which we are able to negotiate.

In fiscal 2006, weinvested approximately $2.0 million in non-operating working interests in threeoil and natural gas properties that are in various stages of drilling andcompletion or recompletion and are not generating significant quantities of oilor gas.  We did not

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generate anysignificant revenue from these investments in fiscal 2006.  Therefore, the discussion of our results ofoperations in this annual report on Form 10-KSB for the period ended September30, 2006, is principally related to our operations as a provider of GISservices.

Effective August1, 2006, we sold the assets associated with our Wisconsin-based productioncenter to RAMTeCH Software Solutions, Inc. (“RAMTeCH”) for $235,000 in cash,which includes $85,000 for fixed assets with a net book value of approximately$30,000, $5,000 for a non-competition clause prohibiting us from indirectlycontacting or marketing data conversion or data maintenance services in thecontinental United States for a period of three years, and $145,000 fortransitional consulting services to assist RAMTeCH with the operation of theproduction center until December 31, 2006. There are no direct costs related tothe consulting agreement.  We transferred several ongoing GIS servicecontracts to RAMTeCH, who assumed the employment obligations relating to thepersonnel associated with the production center.  RAMTeCH will be entitled to payment forservices rendered pursuant to the assigned contracts after August 1, 2006, andis responsible for all costs related to those contracts as well as theoperation of the production facility located in Waukesha, Wisconsin.

At September 30,2006, two contracts were in the final stages of completion, both of which weexpect to be completed on or before December 31, 2006.  We completed the production phases of ourcontract with Worldwide Services and Intergraph (“WWS”), including the fieldcollection phase in Puerto Rico and the conversion of that data prior toSeptember 30, 2006, and are in a reconciliation process which will result in afinal billing and collection of approximately $1.2 million after September 30,2006.  We will continue to performservices on the other contract through December 31, 2006; however, the revenuegenerated from those services will not be material.

**Strategy**

We have a business strategy that is based uponnon-operating investments in exploration and production of U.S. onshore oil andnatural gas reserves. Based upon that strategy, our plan is to acquireinterests in leases, wells, mineral rights, working interests, royaltyinterests, overriding royalty interests and partnerships in Oklahoma and Texas.As a non-operator we pursue opportunities through partnerships with othercompanies that maintain specific exploration, development, production,geological and geophysical expertise. In addition to drilling activity, we areseeking to acquire proven production with upside potential attributable tobehind pipe reserves, infill drilling locations, deeper reservoirs and/or fieldextensions.

In February 2006, we took initial steps inimplementing our business strategy with the purchase of a twenty percent (20%)working interest (with a 16.7% net revenue interest) in an oil well designatedas Welker 1-7, located in Pawnee County, Oklahoma for $300,000 cash.  Contemporaneously with such purchase, weentered into an operating agreement with the seller and owner of the other 80%working interest.  Additionally, in March2006, we purchased certain oil and gas working interests and field equipmentfor 129,032 shares of our common stock having a fair market value (equal to theclosing bid on March 14, 2006) of $1.55 per share, or $200,000, plus $150,000in cash.

In April 2006, we formed ASI Energy and hired DonaldL. Fryhover, a Senior Vice President, to lead the development and expansioninto the energy sector.  In September2006, we hired Louis Dorfman, Jr., as Executive Vice President of ASI Energy toexpand our capabilities and presence in the energy sector.

As part of the growth strategy of ASI Energy, wepurchased a 12.5% working interest (with a 10% net revenue interest) in arelatively large natural gas well known as the Adrienne 1-9, located in WashitaCounty, Oklahoma.  We purchased the leasehold interest for this wellutilizing existing cash reserves.  Thepurchase was based upon a review of the relevant geological, financial andother information, including the relative risk profile of the well and theidentity and stature of the operator.  We believe this venture constitutesa unique opportunity to participate and align our operations with a highlyrespected operator that possesses sophisticated knowledge and experiencespecific to the Anadarko basin and the structures underlying this portion ofWashita County.

We intend to use the expert services of consultantsand contractors to perform geology and geophysical evaluations, reservoirengineering, procurement and legal services. We believe the outsourcing ofthese services will enable us to limit management and employee costs and tobetter control overhead.

The business of oil andgas investment is capital intensive, and we intend to continue to financeacquisitions through the private placement of equity supplemented by theissuance of debt.  These financingtransactions are dependent upon the terms which we can

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negotiate. In an effort to maximize the efficient useof capital, yet diversify risk, we are focused on investments in the Arkoma andAnadarko basins of Oklahoma, South Texas and Texas Gulf Coast regions.

We have streamlined and will continue to bringefficiencies to our business operations. Subsequent to fiscal 2006 year-end, werelocated our corporate offices to a smaller and less costly facility in SanAntonio and reduced our staff to nine persons. We intend to utilize the cashrealized from the sale of our Wisconsin production center, plus cash generatedfrom the collection of accounts receivable related to the GIS contracts weretained, to fund our short-term operations. Subsequent to year-end, wecollected $1.0 million from WWS, and combined with cash reserves, we paid$2,012,274 in principal and interest on our senior secured convertible notesoriginally due May 31, 2008 (the “Senior Notes”). The holders of the SeniorNotes accelerated the maturity of the Senior Notes when our shareholders didnot approve certain conversion terms of the Senior Notes.  Payment of the Senior Notes enabled us toavoid an event of default with related penalties and potential liquidation ofour assets.

**Customers—GIS Services**

We derived GIS service revenues primarily from twocore markets: utilities and state and local governments.  We also served commercial businesses. Thefollowing threecustomers accounted for 70% of our consolidated revenues in fiscal 2006:WWS, 35%; AGL Resources (“AGL”), 23%; and Michigan Consolidated Gas Company (“Michcon”),12%.  At September 30, 2006, WWS accounted for 97% of ourtotal accounts receivable and revenue in excess of billings.  We collected $1.2 million, substantially allof such balances, subsequent to September 30, 2006.

**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 three fiscal years. We discontinued our efforts to market GIS products and services when wesold our Wisconsin-based production center in August 2006.

**Subcontractors**

We utilized subcontractors when necessary to expandcapacity, meet deadlines, reduce production costs and manage workload of ourGIS contracts. We engaged domestic subcontractors on a project-by-projectbasis.  We also utilized multiple sourcesof labor in India.  All activitiesperformed by subcontractors were assumed by RAMTeCH, the purchaser of ourWisconsin-based production center.  Wewill not use subcontractors to complete the contracts that we did not assign toRAMTeCH pursuant to the sale of the Wisconsin-based production center.

**Research and Development**

In late fiscal 2006, we ceased our activities relatedto the development of new or improved technology and procedures that were intendedto enhance our GIS services.  Until thattime, most of these activities were related to software development or designof a product or process for a particular contract.  These efforts were typically included as anintegral part of our services for the particular project and, accordingly, theassociated costs were charged to that project. Less than one full-time equivalent employee was substantially engaged inresearch and development efforts.  Theamount that we have spent on research and development over the last threefiscal years is immaterial.

**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 competed with numerous regional firms for conversion servicesand field data collection services. Because our competitors are all privately owned companies, it isdifficult to determine the relative ranking in the market between ourcompetitors and us.

Our competitors inthe exploration, development, acquisition and production business include majorintegrated oil and gas companies as well as numerous independents, includingmany that have significantly greater financial resources and in-house technicalexpertise.

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**Personnel**

 

At September 30, 2006, we had approximately nine employeescompared to 82 at September 30, 2005.  Wereduced the workforce as we completed contracts, and on August 1, 2006, RAMTeCHassumed all obligations for employees related to our Wisconsin-based productioncenter.  The remaining personnel will befocused on our oil and gas business operations and the completion of ourlimited GIS operations.

**RISK FACTORS**

*In addition to the other informationset forth in this Form 10-KSB the issues and risks described below should beconsidered carefully in evaluating our outlook and future.*

**GeneralPerspective on the Overall Risks Involved**

For the lastseveral years, our traditional GIS data conversion business has been shrinkingdramatically, causing us to incur severe operating losses.  Although we have reduced our operating lossesin the current fiscal year as a result of cost cutting measures, our backlogcontinues to decline, and we have not been successful in obtaining anysignificant contracts.  The fixedoverhead costs required to perform the remaining contracts preclude us frombeing able to return to profitability by pursuing our traditionalbusiness.  Indeed, without additionalcost cutting measures, our cash flow derived solely from the GIS business maybe insufficient to meet the operating and capital requirements of our businessbeyond the current fiscal year.

As we enter intothe oil and gas exploration and production business, we are seeking to makeinvestments in oil and gas activities that will result in a level of operatingincome that will generate cash flow sufficient to meet our operating andcapital requirements.  Our acquisitionsof the working interests in February and March 2006 were small and will notproduce significant cash flows.  Ourdecision in May 2006 to invest $1.7 million in the Washita County well, wasintended to provide the potential for significant cash flow.  However, there is no assurance that such cashflow, if any, will be realized.

There is noassurance that our intended transition into an oil and gas producer will indeedbe seamless.  In other words, a majorrestructuring of the Company might be necessary if the Washita County well isunsuccessful.

**Our cash flow may be insufficient tomeet 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 receive cash from our investments in oil and natural gasproperties and convert accounts receivable and revenue earned in excess ofbillings to cash in order to meet our operating expenses and debtpayments.  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.

**Our current and former independent auditors have expressedthat there is substantial doubt about our ability to continue as a goingconcern.**

During fiscal years 2000 through 2006, we experiencedsignificant operating losses with corresponding reductions in working capitaland net worth, excluding the impact of debt forgiveness.  Our revenues and backlog have also decreasedsubstantially during the same period. After September 30, 2006, we will no longer generate any significantrevenue from GIS services, but we will depend on realizing cash flow from ourinvestments in oil and natural gas properties. Our independent auditors issued a going concern qualification on ourfinancial statements for fiscal 2004, 2005, and 2006, based on the significantoperating losses reported in those years and a lack of external financing. Ourformer independent auditors issued a going concern qualification on ourfinancial statements for fiscal 2000, 2001, 2002, and 2003.  The going-concern qualification, whichexpressed substantial doubt about our ability to continue as a going concern,was based on the significant operating losses reported in fiscal 2003 and 2002and a lack of external financing to fund working capital and debtrequirements.  As of September 30, 2006,the amount of our accumulated deficit is approximately $34.1 million.

**We haveoutstanding preferred stock and “blank check” preferred stock that could beissued resulting in the dilution of common stock ownership.**

OurArticles of Incorporation allow the board of directors to issue up to 2,500,000shares of preferred stock and to fix the rights, privileges and preferences ofthose shares without any further vote or action by the shareholders. Wecurrently have outstanding

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280,000 shares of Series A Convertible PreferredStock, which together with the related warrants and possible dividends paid inkind, are convertible into a total of 262,670 shares of common stock, an amountwhich is approximately 6.95% of the 3,779,256 shares of common stock currentlyoutstanding as of December 1, 2006.  Whenconverted, these shares will represent a dilution to the existing shareholders.  The preferred stock holds dividend priorityand a liquidation preference over shares of our common stock.  Our common stock will be subject toadditional dilution if our board of directors utilizes its right to issueadditional shares of preferred stock that is convertible into common stock.Thus, the rights of the holders of common stock are and will be subject to, andmay be adversely affected by, the rights of the holders of the preferred stockcurrently outstanding and any preferred stock that we may issue in the future.Any such issuance could be used to discourage an unsolicited acquisitionproposal by a third party.

**Existingshareholders may experience very significant dilution from the sale of ourcommon stock pursuant to outstanding Class A, Class B, and Class E Warrants.**

The sale of our common stock pursuant to ouroutstanding Class A, B, and E Warrants will have a very significant dilutiveimpact on our shareholders.  Up to1,515,852 shares of common stock could be issuable upon the exercise of theClass A, B, and E Warrants, representing 40.1% of the 3,779,256 shares issuedand outstanding as of December 1, 2006. However, the Class E Warrant contains exercise limitations that arelikely to cause its exercise to extend over its entire combined five-year exerciseperiod and could prevent the exercise of a portion of the Class EWarrants.  Nevertheless, it is highlyprobable and unavoidable that our net income per share will decrease in futureperiods and the market price of our common stock could decline. If our stockprice decreases, then our existing shareholders would experience greaterdilution.  Moreover, the perceived riskof dilution may cause our shareholders to sell their shares, which wouldcontribute to a decline in the price of our common stock. The perceived risk ofdilution and the resulting downward pressure on our stock price could encourageinvestors to engage in short sales of our common stock. By increasing thenumber of shares offered for sale, material amounts of short selling couldfurther contribute to progressive price declines in our common stock.

**Ourstock price is highly volatile and the purchase or sale of relatively fewshares can disproportionately influence the share price.**

The trading price and volume of our common stock hasbeen and may continue to be subject to significant fluctuations in response to:

·                     actual or anticipated quarterlyvariations in our operating results;

·                     conditions generally affecting theoil and gas industry;

·                     the success of our business andoperating strategy; and

·                     theoperating and stock price performance of other comparable companies.

The trading price of our common stock may vary withoutregard to our operating performance. Historically, we have been a thinly tradedstock, therefore relatively few shares traded can disproportionately influenceshare price.

**We facepossible delisting from The NASDAQ Capital Market, which could result in alimited trading market for our common stock, and could negatively affect theprice of our common stock.**

One July 21, 2006, we received a notice from theNASDAQ****Stock Market that we wereno longer in compliance with the requirements for continued inclusion of ourcommon stock on the NASDAQ****Capital Market pursuant to theNASDAQ’s Marketplace Rule 4310(c)(4) (the “Rule”) because our common stockclosed below $1.00 per share for 30 consecutive business days.  We were given 180 calendar days, or untilJanuary 17, 2007, to regain compliance with the Rule.  To regain compliance with the Rule, theclosing bid price of our common stock must be $1.00 per share or more for a minimumof 10 consecutive business days before January 17, 2007.

If we fail to comply with the continued listingrequirements of the NASDAQ Capital Market, including the Rule and the minimumstockholders equity requirement, we may be delisted from trading on suchmarket, and thereafter trading in our common stock, if any, would be conductedthrough the over-the-counter market or on the Electronic Bulletin Board of theNational Association of Securities Dealers, Inc.  There is no guarantee that an active tradingmarket for our common stock will be maintained on the NASDAQ Capital Market.

**Futuresales of our common stock may cause stock price to decline.**

Sales of substantial amounts of our common stock inthe public market, or the perception that these sales may occur, could causethe market price of our common stock to decline.  In addition, the sale ofour common stock could impair our ability to raise capital

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through the sale of additional common or preferredstock.  As of December 1, 2006, we had3,779,256 shares of common stock outstanding, excluding stock options, ofwhich, 3,696,302 shares are freely tradeable.

****Theresults of oil and gas investments may yield revenue that falls short ofexpectations causing harm to our business.****

****Although several oil and gas investments have beenmade, the Washita County well is our largest investment to date and thereforesignificant emphasis has been placed upon this investment. While the Adrienne1-9 is an offset well to a significant producer of natural gas, there is noassurance that this well will be a significant producer of natural gas.  There is also no assurance that, uponcompletion, the wells will ultimately yield production in amounts necessary tosupport the financial projections.  Ineither case, we will not realize the revenue expected by us.  In the extreme case, where no revenue isrealized because the operator was forced to plug and abandon the wells, ouroverall business will be significantly harmed, and we may be forced toliquidate our assets.****

**If weare unable to retain the members of our senior management team our businessoperations may be adversely impacted.**

Our success depends upon the continued service of ourkey employees:  Lori A. Jones, ChiefExecutive Officer, Donald L. Fryhover, Senior Vice President, and LouisDorfman, Jr., Executive Vice President. Our ability to retain our management team is an important factor in ourturnaround program and our ability to pursue our overall business plan.  Other than Messrs. Fryhover and Dorfman, wedo not have qualified personnel who have experience in oil and gas explorationand production.  In order to successfullyimplement and manage our entry into the oil and gas business, we may have torecruit additional qualified personnel having experience in the oil and gasexploration and production business. Competition in the oil and gas sector forqualified individuals is intense.  We maynot be able to find, attract and retain qualified personnel on acceptableterms.  In addition, while we have anemployment agreement with Ms. Jones, there is no assurance that we will be ableto retain 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 of the services ofMs. Jones or Messrs. Fryhover or Dorfman could have a material adverse effecton our business, financial condition and results of operations.  Our future financial results will also dependupon our ability to attract and retain highly skilled technical, managerial andmarketing personnel.

****If we are unable toobtain additional funding our business operations will be harmed.****

****We believe that our current cash position will besufficient to meet our share of the operating expenses and capital expendituresrequired to exploit completely the oil and gas interests we have acquired thusfar, including the Washita County well. However, in order to fully implement our strategy of transitioning intothe oil and gas sector, we will need to acquire additional oil and gasinterests and will, therefore, require additional funding.  Although we may receive approximately$1,972,705, less expenses, from the exercise of currently issued warrants, wehave no way of estimating the ultimate amount that we will receive from theexercise of warrants.  Also, we do notknow if additional financing will be available when needed, or if it isavailable, if it will be available on acceptable terms.  Insufficient funds may prevent us fromimplementing our business strategy.****

**Competitionin the oil and gas industry is intense, which may adversely affect our abilityto succeed.**

Theoil and gas industry is intensely competitive and we compete with othercompanies that have greater resources.  Many of these companies not only explore forand produce oil and gas, but also carry on refining operations and marketpetroleum and other products on a regional, national or global basis.  These companies may be able to pay more forproductive oil and gas properties and exploratory prospects or define,evaluate, bid for and purchase a greater number of properties and prospectsthan our financial or human resources permit. In addition, these companies may have a greater ability to continueexploration activities during periods of low oil and gas market prices.  Our larger competitors may be able to absorbthe burden of present and future federal, state, local and other laws andregulations more easily than we can, which would adversely affect our competitiveposition.  Our ability to acquireadditional properties and to discover reserves in the future will be dependentupon our ability to evaluate and select suitable properties and to consummatetransactions in a highly competitive environment.  In addition, because we have fewer financialand human resources than many companies in our industry, we may be at adisadvantage in bidding for exploratory prospects and producing oil and gasproperties.

****The marketability ofnatural resources is affected by numerous factors beyond our control which mayresult in us not receiving an adequate return on invested capital to beprofitable or viable.****

Themarketability of natural resources which may be acquired or discovered by uswill be affected by numerous factors beyond our control. These factors includemarket fluctuations in oil and gas pricing and demand, the proximity andcapacity of natural resource markets and processing equipment, governmentalregulations, land tenure, land use, regulations concerning the importing and

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exportingof oil and gas and environmental protection regulations. The exact effect ofthese factors cannot be accurately predicted, but the combination of thesefactors may result in us not receiving an adequate return on invested capitalto be profitable or viable.

**Environmentalliabilities and environmental regulations may have an adverse effect on ourbusiness.**

The oil and gas businessis subject to environmental hazards such as spills, leaks or any discharges ofpetroleum products and hazardous substances. These environmental hazards could expose us to material liabilities forproperty damage, personal injuries and/or environmental harms, including thecosts of investigating and rectifying contaminated properties.

Environmental laws andregulations govern several aspects of our oil and gas business, such asdrilling and exploration, production, transportation and waste management.  Compliance with environmental laws andregulations can require significant costs or may require a decrease in production.  Moreover, noncompliance with these laws andregulations could subject us to significant administrative, civil or criminalfines or penalties.

**Theoil and gas business is subject to changing government regulations.**

Federal, state or localgovernment agencies may impose environmental, labor or other regulations thatincrease costs and/or terminate or suspend operations.  The oil and gas business is subject tofederal, state and local laws and regulations. These regulations relate to,among other things, the exploration, development, production and transportationof oil and gas.  Existing laws andregulations could be changed, and any changes could increase costs ofcompliance and costs of operations.

****Our business involvesnumerous operating hazards.****

****Our operations, including the Washita County well,are subject to certain hazards inherent in drilling for oil or gas, such asblowouts, reservoir damage, loss of production, loss of well control,punchthroughs, craterings or fires.  Theoccurrence of these events could result in the suspension of drillingoperations, damage to or destruction of the equipment involved and injury ordeath to rig personnel.  Operations alsomay be suspended because of machinery breakdowns, abnormal drilling conditions,failure of subcontractors to perform or supply goods or services or personnelshortages.  Damage to the environmentcould also result from our operations, particularly through oil spillage orextensive uncontrolled fires.  We mayalso be subject to damage claims by other oil and gas companies.****

****Although we, and the operators we engage, willmaintain insurance in the areas in which we operate, pollution andenvironmental risks generally are not fully insurable.  Our insurance policies and contractual rightsto indemnity may not adequately cover our losses, and we do not have insurancecoverage or rights to indemnity for all risks. If a significant accident or other event occurs and is not fully coveredby insurance or other contractual indemnity, it could adversely affect ourfinancial position and results of operations.****

**Item2.  Description of Property**

On November 1, 2006, we relocated to our principalexecutive offices, currently consisting of 2,900 square feet of office space,located at 8610 N. New Braunfels, Suite 205, San Antonio, Texas  78217. This space is leased through December 2011.

**Item 3.  Legal Proceedings**

 

In November 2005, we received an alias summonsnotifying us that we have been named as a party to a suit filed by SycamoreSprings Homeowners Association in the State of Indiana.  The summons names the developer of theSycamore Springs neighborhood as well as other firms that may have renderedprofessional services during the development of the neighborhood.  The claimants allege that the services of Mid-StatesEngineering, which was a subsidiary of MSE Corporation which we acquired in1997, affected the drainage system of Sycamore Springs neighborhood, and seekdamages from flooding 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 Engineeringin September 1999.  We believe that wehave been wrongfully named in the suit and we are diligently pursuing dismissalwithout prejudice.

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.

7

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**Item4.  Submission of Matters To A Vote OfSecurity Holders**

 

On September 29, 2006, at the annual meeting of shareholders, ourshareholders reelected four directors to the Board of Directors and ratifiedthe appointment of Pannell Kerr Forster of Texas, P.C. as our independentregistered public accounting firm for the fiscal year ended September 30,2006.  Shareholders did not approve theissuance of shares of our common stock pursuant to our Senior Note or the issuanceof common stock to Pluris Partners.

 

The following table provides the number of votes cast on each matter:

 
|                                 | ** ** | **FOR**   | ** ** | ** ** | ** ** | **WITHHELD** | ** ** |
|---------------------------------|------------|-----------|------------|------------|------------|--------------|------------|
| Election of  Board of Directors |       |      |       |       |       |         |       |
|                            |       |      |       |       |       |         |       |
| R. Thomas Roddy                 |       | 3,036,801 |       |       |       | 30,906       |       |
| Edward P.  Gistaro              |       | 3,037,256 |       |       |       | 30,451       |       |
| Rad Weaver                      |       | 3,037,160 |       |       |       | 30,547       |       |
| Lori A. Jones                   |       | 3,039,776 |       |       |       | 27,931       |       |

 
|                                                                                                                                                                                                                                                                                  | ** ** | **FOR**   | ** ** | **AGAINST** | ** ** | **ABSTAIN** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|-------------|------------|-------------|------------|
| Authorization  and approval of the issuance of shares of Common Stock upon conversion of the  Company’s Secured Convertible Promissory Notes and upon the exercise of  certain warrants, all issued as part of the private placement transaction  effected on May 31, 2006. |       | 163,531   |       | 225,246     |       | 13,246      |       |
|                                                                                                                                                                                                                                                                             |       |      |       |        |       |        |       |
| Issuance of  75,000 shares of Common Stock and warrants to purchase 75,000 shares of  Common Stock to Pluris Partners, Inc., pursuant to the Consulting Agreement,  dated December 7, 2005, as amended.                                                                          |       | 169,490   |       | 224,034     |       | 8,499       |       |
|                                                                                                                                                                                                                                                                             |       |      |       |        |       |        |       |
| Ratification of Pannell  Kerr Forster of Texas, P.C. as independent registered public accounting firm                                                                                                                                                                            |       | 3,046,070 |       | 11,434      |       | 10,203      |       |

 

8

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**PART II.**

 

**Item5.  Market For Common Equity and RelatedStockholder Matters and Small Business Issuer Purchases of Equity Securities**

Our common stock (“Common Stock”) is traded on theNASDAQ Capital Market under the symbol “ANLT.” As of October 1, 2006, we had approximately 4,900 holders ofrecord.  The following table sets forththe high and low sales prices for our Common Stock as reported on NASDAQ.  The high and low sale prices reflectinter-dealer prices, without retail mark-up, markdown or commission and may notnecessarily represent actual transactions.
|                                | ** ** | **High**   | ** ** | **Low**    | ** ** |
|--------------------------------|------------|------------|------------|------------|------------|
| Year Ended  September 30, 2006 | ** ** | ** ** | ** ** | ** ** | ** ** |
| First quarter                  |       | $          | 3.74       |       | $          | 1.04 |   |
| Second quarter                 |       | 2.22       |       | 1.26       |       |
| Third quarter                  |       | 1.75       |       | 0.25       |       |
| Fourth quarter                 |       | 1.15       |       | 0.40       |       |
|                           |       |       |       |       |       |
| Year Ended  September 30, 2005 |       |       |       |       |       |
| First quarter                  |       | 8.74       |       | 1.01       |       |
| Second quarter                 |       | 4.19       |       | 2.15       |       |
| Third quarter                  |       | 2.39       |       | 1.30       |       |
| Fourth quarter                 |       | 2.26       |       | 1.22       |       |
|                                |            |            |            |            |            |  |  |

 

**Dividends**

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.

**RecentSales of Unregistered Securities**

In March 2006, we financed two acquisitions in partfrom proceeds of a $760,000 private placement of Series A Convertible PreferredStock (convertible into 598,425 shares of our common stock) (the “ConvertiblePreferred”) accompanied by Class A Warrants (exercisable into 299,212 shares ofour common stock at $1.34 per share) and Class B Warrants (exercisable into299,212 shares of our common stock at $1.49 per share).  As of September30, 2006, 280,000 shares of the Convertible Preferred remain outstanding andnone of the Class A and Class B Warrants have been exercised.  The shares of our common stock issuable uponconversion of the Convertible  Preferredand exercise of the Class A and Class B Warrants were registered for resaleunder a Registration Statement on Form S-3 (Registration No. 333-132691) filedwith the SEC on March 29, 2006, and which became effective on April 11, 2006.

In May 2006, we financedan acquisition by means of a $2 million private placement.  In connection with the private placement, weissued the Senior Notes, Class E Warrants, Class C Warrants, and Class DWarrants, all to two investors pursuant to Section 4(2) of the SecuritiesAct.  At our Annual Meeting ofShareholders held on August 29, 2006, the shareholders considered and rejectedcertain conversion terms of the Senior Notes and the issuance of warrants otherthan Class E Warrants entitling the holders to purchase 752,072 shares of ourcommon stock at an exercise price of $1.186 per share, the closing bid price ofour common stock on May 31, 2006, the closing date of the privateplacement.  We filed a RegistrationStatement on Form S-3 (Registration No. 333-136078) with the SEC registeringthe shares of Common Stock issuable upon exercise of the Class E Warrants.  The Registration Statement was declaredeffective on October 13, 2006.

P**otentialIssuance of Shares of Common Stock Pursuant to the Warrants**

The followingtables set forth the number of shares of Common Stock that could be issued uponand exercise of the Warrants:

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|                     | ** ** | **Number of Shares of Common Stock  Issuable Upon Exercise of Warrants(1)** | ** ** |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|
| ** **          | ** ** | **Class E(1)**                                                                                                      | ** ** | **# shares** | ** ** | **% ownership(2)** | ** ** |
| Longview Fund,  LLP |       | 564,054                                                                                                                  |       | 564,054 |   | 12.99 | % |
| Alpha Capital,  AG  |       | 188,018                                                                                                                  |       | 188,018 |   | 13.14 | %(3) |
| Total               |       | 752,072                                                                                                                  |       | 752,072 |   | 23.14 | % |

 

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(1)          Upon exercise of theClass E Warrants, net proceeds to the Company will total approximately$891,957, less expenses.  We intend touse any such proceeds for working capital purposes.

(2)          Percentageownership is based on 3,779,256 shares of our common stock outstanding as ofDecember 1, 2006.  In computing thenumber of shares of common stock beneficially owned by a person or entity andthe percentage ownership of that person or entity prior to the offering, wedeemed outstanding shares of common stock subject to the warrants held by thatperson that are currently exercisable or exercisable within 60 days of December1, 2006.  We did not deem these sharesoutstanding, however, for purposes of computing the percentage ownership of anyother person.

(3)          Includes12,056 shares held directly, 157,480 shares of common stock issuable uponconversion of 200,000 shares of Convertible Preferred, 15,433 shares of commonstock potentially issuable in lieu of cash for payment of dividends on theConvertible Preferred, 98,425 shares of common stock issuable upon the exerciseof Class A Warrants and 98,425 shares issuable upon the exercise of Class BWarrants.

**IssuerPurchases of Equity Securities.**

None

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**Item 6. Management’s DiscussionAnd Analysis Or Plan Of Operation**

 

*The discussion of our financialcondition and results of operations set forth below should be read inconjunction with the consolidated financial statements and related notesthereto included elsewhere in this Form 10-KSB. This Form 10-KSB containsforward-looking statements that involve risk and uncertainties. The statementscontained in this Form 10-KSB that are not purely historical areforward-looking statements within the meaning of Section 27A of the SecuritiesAct and Section 21E of the Exchange Act. When used in this Form 10-KSB, or inthe documents incorporated by reference into this Form 10-KSB, the words “anticipate,”“believe,” “estimate,” “intend” and “expect” and similar expressions areintended to identify such forward-looking statements. Such forward-lookingstatements include, without limitation, the statements in “Business – Overviewand – Risk Factors” and statements relating to competition, management ofgrowth, our strategy, future sales, future expenses and future liquidity andcapital resources. All forward-looking statements in this Form 10-KSB are basedupon information available to us on the date of this Form 10-KSB, and we assumeno obligation to update any such forward-looking statements. Our actual resultscould differ materially from those discussed in this Form 10-KSB. Factors thatcould cause or contribute to such differences include, but are not limited to,the resolution or outcome of the lawsuits described in “Litigation” above, theeffect of changes in our management and the ability to retain qualifiedindividuals to serve in key management positions, and those discussed below, in“Business— Risk Factors,” and elsewhere in this Form 10-KSB.*

**Overview**

Founded in 1981, we have historically served as aprovider of data conversion and digital mapping services to users of customizedgeographic information systems.  We haveexperienced a steady decrease in the demand for our services over the past fiveyears.  We believe that the primary reason for suchdecrease is newer technology that has reduced the need for outsourcing GIS dataconversion services, which historically accounted for as high as 75% of thetotal cost of a typical GIS solution. Commercial off-the-shelf (“COTS”) hardware and software solutions haveprovided our target customers with increased capabilities to replace ourservices with an in-house, significantly lower cost alternative.  This shift to COTS, coupled with offeringsfrom service firms with large labor content in India, has resulted in lowermargins and increased competition in the industry. Our backlog has decreased substantially in each of the past five years,and we have been unsuccessful in winning new business at acceptable margins.

Our independent auditors, Pannell Kerr Forster ofTexas, P.C., issued a going concern qualification on our financial statementsfor the fiscal years ended September 30, 2006 and 2005.  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 2006 and 2005,and a lack of external financing.

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.  We were unable to identifyan acceptable acquisition serving the GIS marketplace that produced suitablemargins or sufficient returns on acquisition costs.

In fiscal 2006, we acted upon our belief that wewould not be able to sustain the operations of our historical business.  We are transitioning our principal businessinto that of an independent oil and gas enterprise focused on leveragingnon-operating participation in drilling and production prospects for thedevelopment of U.S. on-shore oil and natural gas reserves.

On December 7, 2005, we engaged Pluris Partners, Inc., amerchant banking firm specializing in merger and acquisition, private equityplacement and financial advisory services, to facilitate the expansion of ourservice offering into the energy sector, including the acquisition of oil andgas exploration and production rights.

On April 24, 2006, we appointed Mr. DonFryhover as senior vice president and in May2006, we announced the formation of the ASI Energy.  We seek to achieve a balanced growth strategythat includes participation in lower risk development drilling, combined withhigher potential exploratory locations.  We intend to continue to financethese acquisitions through the private placement of equity supplemented byissuance of debt, which is dependent on the terms on which we are able tonegotiate, if any.  On September 29, 2006,we appointed Mr. Louis Dorfman, Jr. as Executive Vice President of ASI Energy.

Our decision to transition ourprincipal business from a our traditional GIS data conversion business wasbased on the dramatic decrease of the GIS business in past years and the severe operatinglosses we have incurred.  We haveacquired only four new customers with material contracts during the past threefiscal years, and the majority of our revenue during those years was derivedfrom ongoing services with past customers. We reduced our staff in fiscal 2005 to meet the lower demands of ourexisting business, and we experienced additional loss of personnel due to theuncertainty of the acquisition of new GIS contracts.  To address concern created by this loss ofpersonnel on the part of our customers, partners, and employees, we engagedWind Lake Solutions, Inc.

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(“WLS”), to manage ourWisconsin-based personnel in October 2005. We terminated this management agreement with WLS on June 30, 2006.  While this strategy temporarily stabilizedour Wisconsin office and satisfied our customer’s concerns regarding ourability to provide consistent service to them, it did not result in a long-termsolution to sustain or build our GIS business.

Effective August 1, 2006, we soldthe assets associated with our Wisconsin-based production center to RAMTeCHSoftware Solutions, Inc. (“RAMTeCH”) for $235,000 in cash, which includes$85,000 for fixed assets with a net book value of approximately $30,000, $5,000for a non-competition clause prohibiting us from indirectly contacting ormarketing data conversion or data maintenance services in the continentalUnited States for a period of three years, and $145,000 for transitionalconsulting services to assist RAMTeCH with the operation of the productioncenter until December 31, 2006. There are no direct costs related to theconsulting agreement.  We transferredseveral ongoing GIS service contracts to RAMTeCH, who assumed the employmentobligations relating to the personnel associated with the productioncenter.  RAMTeCH will be entitled topayment for services rendered pursuant to the assigned contracts after thatdate, and is responsible for all costs related to those contracts as well asthe operation of the production facility located in Waukesha, Wisconsin.

In our GIS business, we engagedin research and development activities; however, associated expenses were notsignificant and represented less than $100,000 per year, or less than 5% of ourtotal operating expense.  The majority ofthese activities occurred as we developed software or designed a product for aparticular contract.  These efforts weretypically included as an integral part of our services for the particularproject and, accordingly, the associated costs were charged to thatproject.  Such custom-designedsoftware could often be applied to projects for other customers, since weretained ownership of such proprietary software or products.

At September 30, 2006, we were ina reconciliation phase of our contract with Worldwide Service, Inc. andIntergraph, (“WWS”), and in the final stages of completion on another contract,which will be completed on or before December 31, 2006.  We completed the production phases of ourcontract with WWS in July 2006, including the field collection phase in PuertoRico as well as the conversion phase. Substantially all of our accounts receivable at September 30, 2006, wererelated to this contract.  In October2006, we collected $1.0 million of the $1.2 million account receivable that wasoutstanding on September 30, 2006.  Thereconciliation process may result in additional billings.  We will continue to perform services on theother contract through December 31, 2006; however, the revenue generated fromthose services will not be material.

In fiscal 2006, we raisedadditional capital to finance several investments in oil and gasinterests.  We issued 760,000 shares ofSeries A Convertible Preferred Stock (convertible into 598,425 shares of ourcommon stock) (the “Convertible Preferred”) accompanied by Class A Warrants(exercisable into 299,212 shares of our common stock at $1.34 per share) andClass B Warrants (exercisable into 299,212 shares of our common stock at $1.49 pershare) with gross proceeds of $760,000. We also issued Senior Notes totaling $2.0 million, which we repaidsubsequent to September 30, 2006, utilizing cash generated from the sale of ourproduction center in Wisconsin and collections of receivables from contractsthat are in final stages of completion. We have made investments in three oil and gas properties which are invarious stages of drilling and completion or recompletion and are notgenerating significant quantities of oil or gas.

AtSeptember 30, 2006, we employed approximately nine full-time employees.  While we have and will continue to reduce ourgeneral and administrative expenses, we are incurring legal and professionalfee expenses related to our initiative into new business ventures.  We also anticipate that compliance with therequirements of the Sarbanes-Oxley Act, as applicable, will require substantialfinancial and management resources and result in additional expenses.

Our traditional GIS dataconversion business has decreased dramatically in the past years, causing us toincur severe operating losses.  Throughcost cutting measures, we have substantially reduced our operating losses infiscal 2006.  We collected approximately$1.0 million subsequent to September 30, 2006, pursuant to the completion ofproduction phases of our contract with WWS. However, such cash flow derived solely from this business may beinsufficient to meet the operating and capital requirements of our businessbeyond the first fiscal quarter of 2007.

Our entry into the oil and natural gasexploration and production business is very recent.  Although several oil and gasinvestments have been made, the Washita County well (the “Adrienne 1-9”) is ourlargest investment to date and therefore significant emphasis has been placedupon this investment. The Adrienne 1-9 offsets a well drilled by Marathon OilCompany, the Folks 1-17, which reported gas volume through May 2006 totalingmore than 2 billion cubic feet of natural gas, with the most current month’sreported production for the well totaling approximately 420 million cubicfeet.  However, there is no assurancethat the Adrienne 1-9 will produce natural gas. There is also no assurance that, upon completion, any of the wells willultimately yield production in amounts necessary to support the financialprojections.  In either case, we may notrealize the revenue expected by us.  Inthe extreme case, where no revenue is realized because the operator is forcedto plug and abandon the wells, our overall business will be significantlyharmed, and we could be forced to liquidate our assets.

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Other than Messrs.Fryhover and Dorfman, we do not have personnel who have experience in oil and natural gas exploration andproduction.  In order to successfullyimplement and manage our entry into the oil and natural gas business, we may have to recruit additional qualifiedpersonnel having experience in the oil and natural gas exploration and production business. Competition inthe oil and natural gas sectorfor qualified individuals is intense.  Wemay not be able to find, attract and retain qualified personnel on acceptableterms.

 

We believe thatour current cash position will be sufficient to meet our share of the operatingexpenses and capital expenditures required to exploit completely the oil and natural gas interests we have acquiredthus far, including the Washita County well. However, in order to fully implement our strategy of transitioning intothe oil and gas sector, we will need to acquire additional oil and natural gas interests and will,therefore, require additional capital. Although we may receive approximately $1.9 million, less expenses, fromthe exercise of the warrants described in Notes 4 and 6, we have no way ofestimating the ultimate amount that we will receive from the exercise ofwarrants.  Also, we do not know ifadditional financing will be available when needed, or if it is available, ifit will be available on acceptable terms. Insufficient funds may prevent us from implementing our businessstrategy.

The oil and natural gas industry is intenselycompetitive and we compete with other companies that have greaterresources.  Many of these companies notonly explore for and produce oil and naturalgas, but also carry on refining operations and market petroleum andother products on a regional, national or global basis.  These companies may be able to pay more forproductive oil and natural gasproperties and exploratory prospects or define, evaluate, bid for and purchasea greater number of properties and prospects than our financial or humanresources permit.  In addition, thesecompanies may have a greater ability to continue exploration activities duringperiods of low oil and natural gasmarket prices.  Our larger competitorsmay be able to absorb the burden of present and future federal, state, localand other laws and regulations more easily than we can, which would adverselyaffect our competitive position.  Ourability to acquire additional properties and to discover reserves in the futurewill be dependent upon our ability to evaluate and select suitable propertiesand to consummate transactions in a highly competitive environment.  In addition, because we have fewer financialand human resources than many companies in our industry, we may be at a disadvantagein bidding for exploratory prospects and producing oil and natural gas properties.

The marketabilityof natural resources that may be acquired or discovered by us will be affectedby numerous factors beyond our control. These factors include market fluctuations in oil and natural gas pricing and demand, theproximity and capacity of natural resource markets and processing equipment,governmental regulations, land tenure, land use, regulations concerning theimporting and exporting of oil and gas and environmental protectionregulations.  The exact effect of thesefactors cannot be accurately predicted, but the combination of these factorsmay result in us not receiving an adequate return on invested capital to beprofitable or viable.

We may not be able to reacha level of operating income from oil and natural gas activities that willgenerate cash flow sufficient to meet the operating and capital requirements ofthat business, plus the shortfall in cash flow arising from our traditionalbusiness.  Given the risks associatedwith this endeavor, there is no assurance that we can achieve the necessarylevel of such operating income in a timely manner.

It must be recognized thatour ultimate objective is a transition from a company providing a specializedservice to that of an independent oil and natural gas producer.  Given the risks associated with thistransition, there is no assurance that such transition will be seamless, orrequire us to undertake a major restructuring. Such undertakings might include a merger with a privately heldindependent oil and natural gas producer or other suitable entity.

**Critical Accounting Policies**

**Revenue Recognition. **We recognize revenue fromGIS services using the percentage of completion method of accounting on acost-to-cost basis.  For each contract,an estimate of total production costs is determined and these estimates arereevaluated monthly.  The estimationprocess requires substantial judgments on the costs over the life of thecontract, 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 which influenceeither the estimate of future productivity or the production cost per hour usedto determine future costs.  Sales andmarketing expenses associated with obtaining contracts are expensed asincurred.  If we underestimate the totalcost to complete a project, we recognize a disproportionately high amount ofrevenue in the earlier stages of the contract, which would result indisproportionately high profit margins in the same

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period. Conversely, if we overestimate the cost to complete a project, a disproportionatelylow amount of revenue is 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.

Oil, natural gas revenues are recognized when deliveryhas occurred and title to the products has transferred to the purchaser.

**Oil and Gas Properties. **We follow the full costmethod of accounting for oil and natural gas properties. Accordingly, all costsassociated with the acquisition, exploration and development of oil and naturalgas properties, including costs of undeveloped leasehold, geological andgeophysical expenses, dry holes, leasehold equipment and legal due diligencecosts directly related to acquisition, exploration and development activities,are capitalized. Capitalized costs of oil and gas properties also includeestimated asset retirement costs recorded based on the fair value of the assetretirement obligation when incurred. Proceeds received from disposals arecredited against accumulated cost except when the sale represents a significantdisposal of reserves, in which case a gain or loss is recognized.

The sum of net capitalized costs and estimated futuredevelopment and dismantlement costs is depleted on the equivalentunit-of-production method, based on proved oil and natural gas reserves asdetermined by independent petroleum engineers.

**Valuation of AccountsReceivable. **Wemaintain allowances for doubtful accounts for estimated losses resulting fromthe inability of our customers to make required payments.  Management routinely assesses the financialcondition of our customers and the markets in which these customersparticipate.  If the financial conditionof our customers were to deteriorate, resulting in an impairment of theirability to make payments, additional allowances might be required.

**Litigation. **We are subject to variousclaims, lawsuits and administrative proceedings that arise from the ordinarycourse of business.  Liabilities andcosts associated with these matters require estimates and judgment based on professionalknowledge and experience of management and our legal counsel.  When estimates of our exposure for claims orpending or threatened litigation matters meet the criteria of SFAS No. 5 “*Accounting for Contingencies*”, amounts are recorded ascharges to operations.  The ultimateresolution of any exposure may change as further facts and circumstances becomeknown.

**Income Taxes. **We reported a net loss infiscal 2006 and 2005.  The current andprior year losses have generated a sizeable federal tax net operating loss, orNOL, carryforward which totals approximately $25.4 million as of September 30,2006.

U.S. generally accepted accounting principles requirethat we record a valuation allowance against the deferred tax asset associatedwith this NOL if it is “more likely than not” that we will not be able toutilize it to offset future taxes.  Dueto the size of the NOL 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 providefor income taxes only to the extent that we expect to pay cash taxes (primarilystate taxes and the federal alternative minimum tax) on current taxable income.

It is possible, however, that we could be profitablein the future at levels which may 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.

**Results Of Operations**

The following table sets forth, for the fiscal yearsended September 30, 2006 and 2005, selected consolidated statement ofoperations data expressed as a percentage of sales:
| Percentage of Sales:   | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Revenues                         |       | 100.0    | %          | 100.0    | %          |
| Costs and  expenses:             |       |     |       |     |       |
| Salaries, wages and benefits     |       | 62.3     |       | 86.8     |       |
| Subcontractor costs              |       | 12.1     |       | 25.1     |       |
| Other general and administrative |       | 28.7     |       | 38.1     |       |
| Depreciation and amortization    |       | 1.5      |       | 2.9      |       |
| Severance and related costs      |       | 0.0      |       | 1.1      |       |
| Loss from  operations            |       | (4.6     | )          | (54.0    | )          |
| Other expense,  net              |       | (3.1     | )          | (1.1     | )          |
| Loss before  income taxes        |       | (7.7     | )          | (55.1    | )          |
| Income taxes                     |       | —   |       | —   |       |
| Net loss                         |       | (7.7     | )%         | (55.1    | )%         |

 

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**Fiscal Years Ended September 30, 2006 and 2005**

 

**Revenues.*** *Werecognize revenues as services are performed. Revenues recorded in a period are reported net of adjustments to reflectchanges in estimated profitability of each project.  Revenues decreased $1.7 million, or 28.7%, to$4.3 million for fiscal 2006 from $6.1 million for fiscal 2005.  The decrease in revenues is due to a lowernumber of active contracts in the fiscal 2006 period and the sale assignment ofseveral ongoing contracts to RAMTeCH on August 1, 2006, which had the effect ofreducing revenue during the fourth quarter of fiscal 2006.  The level of new contracts in each of thepast four fiscal years was lower than in previous years and, as a result,revenues have decreased as well.

**Salaries, Wages and Benefits.** Salaries, wages and benefits include employeecompensation for production, marketing, selling, administrative, and executiveemployees.  Salaries, wages and benefitsdecreased 48.8% to $2.7 million for fiscal 2006 from $5.3 million for fiscal2005.  The decrease was a result ofreductions in our workforce related to reduced revenue volume and feweradministrative employees.

**SubcontractorCosts.** Subcontractorcosts include production costs incurred through the use of third parties forproduction tasks such as data conversion services to meet contract requirementsand field survey services.  Subcontractorcosts decreased 65.7% to $0.5 million for fiscal 2006 from $1.5 million forfiscal 2005.  The decrease was due to ourreduced business volume.

**OtherGeneral and Administrative.** Other general and administrative expenses include rent, maintenance,travel, supplies, utilities, insurance and professional services**. **Suchexpenses decreased 46.3% to $1.2 million for fiscal 2006 from $2.3 million forfiscal 2005.  The decrease wasattributable to decreases in occupancy, travel, and professional fee expenses,as well as the general decrease in personnel and related expenses in fiscal2006 as compared to fiscal 2005.

**Depreciationand Amortization.** Depreciation and amortization for fiscal 2006decreased 63.8% to $63,000 from $175,000 for fiscal 2005 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.

**Severanceand Related Costs.**  Weincurred severance expense of $0 in fiscal 2006 and $67,000 in fiscal2005.  The expense in fiscal 2005 wasincurred as a result of the termination of our former CEO’s employment contractwhich provided for a significant severance payment.

**OtherIncome (Expense).** In fiscal 2006, other expense was principallya result of the amortization of approximately $115,000 of deferred expensesrelated to the Senior Notes, offset by a $43,000 gain on the sale of the assetsrelated to our Wisconsin production center and related consulting fee incometotaling $58,000.  In fiscal 2005, werecorded other income totaling $12,000 as a result of the decrease in the fairmarket value of the derivative features of and amortization of the premium onour $2.0 senior secured note  issuedApril 2, 2002 (“Note”) until it wasconverted on November 10, 2004, and the unamortized balance was reclassified tostockholders’ equity.  Interestexpense increased to $177,000 for fiscal 2006 from $78,000 in fiscal year 2005.The higher interest expense was aresult of the higher 14% rate of interest and amortization of the discount onthe Senior Notes during fiscal 2006 compared to the 7% rate of interest on theNote which was outstanding during fiscal 2005. See Note 4 to the consolidated financial statements.  Other interest expense related to variousother debt instruments was offset by interest income.

**Gainon Extinguishment of Debt.** Werecognized a gain on extinguishment of debt totaling $61,000 related to therelinquishment of accrued dividends by the holders of our Series A RedeemablePreferred Stock (“Preferred Stock”).  OnFebruary 1, 2006, we issued 318,000 shares of Common Stock in exchange for theoutstanding shares of the Preferred Stock, which had a carrying value ofapproximately $269,000 and a current redemption price of $299,583.  The transaction eliminated all of ourobligations related to the

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PreferredStock, including approximately $61,000 of accrued dividends, the right to whichwas relinquished by the holders as part of the transaction.

**IncomeTax Benefit.**  Federal income tax expense for fiscal year2006 is projected to be zero and accordingly, we recorded an effective federalincome tax rate of 0%.  Federal incometax expense for fiscal year 2005 was zero. As a result of the uncertainty that sufficient future taxable income canbe recognized to realize additional deferred tax assets, no income tax benefithas been recognized for fiscal 2006 and 2005.

**NetLoss. **Net lossavailable to common shareholders decreased from $3.3 million fiscal 2005 to$383,000 in fiscal 2006.  The lower netloss in fiscal 2006 was a result of improved management of project cost andschedule performance in 2006, streamlined executive management, reduction ofgeneral and administrative expenses, and the sale of assets related to theWisconsin production center.

**Liquidity And Capital Resources**

**Table ofContractual Obligations. **Belowis a schedule (by period due) of the future payments (in thousands), which weare obligated to make over the next five years based on agreements in place asof September 30, 2006.
|                                       | ** ** | **Fiscal Year Ending September 30** | ** ** |
|---------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                            | ** ** | **2007**                                                | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Operating leases                      |       | $                                                       | 36         |   | 47 |   | 49 |   | 46 |   | 47 |   | 12 |   | $ | 237 |   |
| Capital lease  obligations            |       | 22                                                      |       | 14 |   | — |   | — |   | — |   | — |   | 36 |   |
| Senior secured  convertible notes     |       | 2,012                                                   |       | — |   | — |   | — |   | — |   | — |   | 2,012 |   |
| Interest  payments on preferred stock |       | 20                                                      |       | 12 |   | — |   | — |   | — |   | — |   | 32 |   |
| Total                                 |       | $                                                       | 2,090      |   | 73 |   | 49 |   | 46 |   | 47 |   | 12 |   | $ | 2,317 |   |

 

Historically, the principal source of our liquidityconsisted of cash flow from operations supplemented by funds secured throughissuances of equity and convertible debt. At September 30, 2006, our debt obligations included $2.0 million inSenior Notes, which we paid in full on October 18, 2006.  We do not have a line of credit and there isno assurance that we will be able to obtain additional borrowings should weseek to do so.

Our debt issummarized as follows (in thousands).
|                                           | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Long-Term  Debt**                       |       |                         |       |                         |       |
| Senior secured  convertible notes         |       | $                            | 1,957      |                         | $          | — |   |
| Other debt and  capital lease obligations |       | 29                           |       | 47                           |       |
| Redeemable  preferred stock               |       | —                       |       | 247                          |       |
|                                      |       | 1,986                        |       | 294                          |       |
| Less current  portion                     |       | (1,973                       | )          | (17                          | )          |
|                                      |       | $                            | 13         |                         | $          | 277 |   |

 

On April 2, 2002, we issued to Tonga Partners, LLP (“Tonga”)a $2.0 million Note, which was partially converted into Common Stock on October29, 2003, resulting in a new principal balance of $1.7 million.  On November 10, 2004, Tonga converted theoutstanding principal and accrued interest of the Note into Common Stock at theconversion price of $1.05, representing 90% of the average closing bid pricesfor the three trading days having the lowest closing bid price during the 20trading days immediately prior to November 10, 2004.  The newly issued shares increased our totalcommon shares outstanding from 1,104,173 to 2,805,522.  During the first quarter of fiscal 2005, we recognizedapproximately $12,000 in other income as we amortized the Note’s premiumthrough November 11, 2004.

Pursuant to theexpansion of our business strategy from a GIS services provider into anindependent oil and gas enterprise engaging in non-operating participation indrilling and production prospects of oil and natural gas reserves, on May 30,2006, we issued the Senior Notes to two holders in the principal amount of $1.5million and $0.5 million, respectively, to fund the drilling and completion ofa 12.5% working interest in a natural gas well located in Washita County,Oklahoma.  The Senior Notes had amaturity date of May 31, 2008, and bear interest at the rate of 14%, payablequarterly.  The Holders also receivedClass E Warrants entitling them to purchase,

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in the aggregate,752,072 shares of the Common Stock at an exercise price of $1.186 per share,which was the closing bid price of the Common Stock on May 31, 2006.

Pursuant to the terms of the Senior Notes, we askedour shareholders to approve a provision that would make Senior Notesconvertible into Common Stock at a conversion price equal to $0.95 per share,which represented a 20% discount to the closing bid price of our Common Stockon the date of closing, plus the issuance of additional warrants for thepurchase of an additional 4.75 million shares of our Common Stock.

Shareholders did not approve the conversion terms andthe issuance of additional warrants at our Annual Meeting of Shareholders heldon August 29, 2006.  On September 19, 2006,the Holders exercised their right to accelerate the maturity of the SeniorNotes to October 19, 2006, on which date the principal amount, together withaccrued and unpaid and the issuance interest and all other sums due under theSenior Notes became due and payable in cash.

On October 18, 2006, we paid the outstanding principaland interest due on the Senior Notes, which totaled $2,012,274, utilizing cashreserves and the collection of $1.0 million of accounts receivable subsequentto September 30, 2006.

A Registration Statement on Form S-3, as amended(Registration No. 333-136078), registering the common stock issuable uponexercise of the Class E Warrants, was declared effective by the Securities andExchange Commission on October 13, 2006.

We recorded the Senior Notes at a discount aftergiving effect to the $80,424 estimated fair value of the Class E Warrants,which was credited to equity.  Theeffective rate of interest on the Senior Notes is 20%.  Interest expense is recorded using thiseffective rate of interest.  The carryingvalue of the Senior Notes was accreted to the face amount by charges tointerest expense over the two year term until September 19, 2006, on which datewe accelerated the rate of accretion to reflect the new maturity date of October19, 2006.  The carrying value atSeptember 30, 2006, is $1.957 million and represents the $2.0 millionoutstanding principal less the unearned discount.  The unearned discount of $43,196 as ofSeptember 30, 2006 represents the estimated fair value of the Class E Warrantsof $80,424 less accretion.

We incurred expenses totaling approximately $249,000related to the issuance of the Senior Notes. We recorded these expenses as prepaid or deferred expenses.  These expenses were amortized to otherexpense over the two-year term of the Senior Notes until September 19, 2006, onwhich date we accelerated the rate of amortization to reflect the new maturitydate of October 19, 2006.  At September30, 2006, the unamortized balance of the deferred expense totaled $133,728.

Subsequent to year end, and for the purpose of fundingthe expansion of our Energy Division, we issued three new one-year seniorsecured convertible notes (“Convertible Notes”) totaling $1.65 million,  The Convertible Notes, together with interestthat accrues at the rate of 13% per annum, are convertible into shares of ourCommon Stock at a conversion price of $0.695 per share, which was $0.135 pershare above fair market value of the Common Stock on the trading date precedingthe closing date of November 24, 2006. Upon maturity, any unconverted outstanding principal and interest is dueand payable in cash.  In connection withthe transaction, we also issued warrants to purchase 2,564,029 shares of ourCommon Stock at $0.57 per share, which was $0.01 above the fair market value ofthe Common Stock on the trading date preceding the closing date.  The warrants are exercisable any time afterMay 24, 2007 and before November 24, 2011. Net proceeds after expenses totaled approximately $1.456 million.

At September 30, 2005, 166,435 shares of PreferredStock were outstanding, and which were redeemable at $1.80per share, or $299,583, until December 27, 2006, or at $2.00 per share onDecember 28, 2006, or $332,870.  OnFebruary 1, 2006, we issued 318,000 shares of Common Stock in exchange for theoutstanding shares of the Preferred Stock, which had a carrying value ofapproximately $269,000 and a current redemption price of $299,583.  The transaction eliminated all of ourobligations related to the Preferred Stock, including accrued dividends ofapproximately $61,000, the right to which was relinquished by the holders aspart of the transaction.  We recordedinterest expense totaling approximately $31,000 upon redemption of thePreferred Stock in order to accrete the carrying value to the currentredemption price of $299,583.  We reducedour current liabilities related to the Preferred Stock by $299,583, with acorresponding increase in stockholders’ equity pursuant to the issuance ofCommon Stock in exchange for the elimination of the liability.  We recognized a gain on extinguishment ofdebt totaling approximately $61,000 related to the relinquishment of accrueddividends by the holder.

The accompanying financial statements have beenprepared on a going concern basis, which contemplates the realization of assetsand the satisfaction of liabilities in the normal course of business.  Since fiscal 2000, we have experiencedsignificant operating losses with corresponding reductions in workingcapital.  Our revenues and backlogdecreased significantly during that time. These factors, among others, have resulted in our independent auditorsissuing an audit opinion on the September 30, 2006, financial statements thatexpresses substantial doubt about our ability to continue as a going concern.

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Toaddress the going concern issue, management implemented financial andoperational restructuring plans in past fiscal years designed to improveoperating efficiencies, reduce and eliminate cash losses, and position us forprofitable operations. We ultimately decided to expand our business strategyoutside of our traditional business as a GIS service provider after concludingthat our existing GIS business could not be sustained.  We issued Convertible Preferred and the SeniorNotes to secure the funds that enabled us to invest in non-operating workinginterests in oil and natural gas leasehold interests.  We sold our Wisconsin-based production centerand assigned certain contracts in order to reduce working capital requirementson contracts that required substantial investment in the early stages of thecontracts, realizing $235,000 in cash proceeds. We completed a long-term contract and, as of the date of this report,have collected substantially all of the accounts receivable related to thecontract.  We have reduced our general andadministrative expenses by reducing occupancy costs and streamlining ourmanagement and production teams.

 

The financial statements do not include anyadjustments relating to the recoverability of assets and the classifications ofliabilities that might be necessary should we be unable to continue as a goingconcern.  However, we believe that ourturnaround efforts, if successful, will generate sufficient cash to meet ourobligations in a timely manner.

In the absence of a line of credit and because of ourinability to secure debt on terms that we consider reasonable based on ourrecent operating history, we depend on internal cash flow to sustainoperations.  Internal cash flow isaffected significantly by customer contract terms and progress achieved onprojects.  Fluctuations in internal cashflow are reflected in three contract-related accounts: accountsreceivable; revenues in excess of billings; and billings in excess 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.

Theseaccounts, which represent a significant investment by us in our business,affect our cash flow as projects are signed, performed, billed andcollected.  At September 30, 2006, WWSaccounted for 97% of our total accounts receivable and revenue in excess ofbillings.  Three customers accounted for 70% ofour consolidated revenues in fiscal 2006: WWS, 35%; AGL, 23%; and Michcon, 12%.

Subsequentto September 30, 2006, we have successfully collected substantially all of ouraccounts receivable and revenues in excess of billings.  In fiscal 2007, we will be dependent on cashflow generated from our investments in oil and natural gas properties.

Ouroperating activities provided $47,000 and used $48,000 in cash in fiscal 2006and 2005, respectively.  Contract-relatedaccounts described in the previous paragraph declined $1.4 million and $3.3million in fiscal 2006 and 2005, respectively, due to the completion of activecontracts that were not replaced with new activity.  Accounts payable and other accruedliabilities decreased $641,000 and $376,000 in fiscal 2006 and 2005,respectively, as obligations decreased in accordance with our businessvolume.  Prior to September 30, 2006, wepaid principally all of our obligations related to our GIS contracts.  Accrued payroll and related benefitsdecreased $555,000 in fiscal 2006, respectively, due to the significantly lowernumber of employees.  At September 30,2006, we had nine employees, as compared to 82 employees at September 30,2005.  Prepaid expenses increasedslightly in fiscal 2006 and decreased $102,000 in fiscal 2005.  The decrease in fiscal 2005 was as a resultof lower insurance and maintenance expenses that require prepayment.

Cash usedin investing activities consisted of $1.8 million invested in oil and gasproperties in fiscal 2006, offset by $112,000 received from the sale of assets,which were principally related to our Wisconsin production center.  Additionally, we purchased equipment totaling$0 and $88,000 in fiscal 2006 and fiscal 2005, respectively.

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Cash generated from financingactivities in fiscal 2006 totaled $2.4 million, which included $760,000 fromthe issuance of Convertible Preferred and $2.0 million, for Senior Notes, lessexpenses totaling $329,000.  In fiscal2005, cash used in financing activities totaled $111,000, including $129,450 toredeem 92,465 shares ofour Preferred Stock, $18,000 related to the issuance of Common Stock, as wellas $56,000 in principal payments on our long term debt, offset by the receiptof $92,000 pursuant to the exercise of certain stock options.

 

**Impact of Accounting Pronouncements**

InDecember 2004, the Financial Accounting Standards Board (“FASB”) publishedrevisions to SFAS No. 123.  The revisedSFAS No. 123 (“SFAS No. 123R”), *Share Based Payment*,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 is effectivefor all small business public entities as of the beginning of the first interimor annual reporting period for fiscal years beginning after December 15,2005.  Through September 30, 2006, weelected the disclosure-only provisions of SFAS No. 123R.  We adopted SFAS No. 123R on October 1, 2006.  We believe that the implementation of thisstandard will not have a material effect on our consolidated financial positionor results of operations for options that were granted prior to September 30,2006.  However, future grants will resultin increased expenses, which will be dependent on the terms of the grants.

InDecember 2004, the FASB issued SFAS No. 153, “*Accountingfor Non-monetary Transactions*” (“SFAS No. 153”).  SFAS No. 153 requires non-monetary exchangesto be accounted for at fair value, recognizing any gain or loss, if thetransactions meet a commercial-substance criterion and fair value isdeterminable.  SFAS No. 153 is effectivefor non-monetary transactions occurring in fiscal years beginning after June15, 2005.  The implementation of thisstandard did not have a material effect on our consolidated financial positionor results of operations.

In May2005, the FASB issued SFAS No. 154, “*Accountingfor Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASBStatement No. 3*.”  Thisstatement changes the requirements for the accounting for and reporting of a changein accounting principle.  This statementapplies to all voluntary changes in accounting principle.  It also applies to changes required by anaccounting pronouncement in the unusual instance that the pronouncement doesnot include specific transition provisions. When a pronouncement includes specific transition provisions, thoseprovisions should be followed.  Thisstatement is effective for fiscal years beginning after December 15, 2005, andis not expected to have a material impact on our consolidated financialstatements.

In June2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), *“Accounting for Uncertainty in Income Taxes - aninterpretation of FASB Statement No. 109.”*  FIN 48 clarifies the accounting foruncertainty in income taxes recognized in accordance with SFAS No. 109, *“Accounting for Income Taxes.”*  This interpretation prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a taxreturn.  It also provides guidance onde-recognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition.  FIN48 iseffective for fiscal years beginning after December 15, 2006 and is notexpected to have a material impact on our consolidated financial statements.

In September 2006, the SEC staff issued StaffAccounting Bulletin (“SAB”) Topic 108, *“FinancialStatements - Considering the Effects of Prior Year Misstatements whenQuantifying Misstatements in Current Year Financial Statements”* (“SAB108”).  SAB 108 provides guidance on howprior year misstatements should be taken into consideration when quantifyingmisstatements in current year financial statements for purposes of determiningwhether the current year’s financial statements are materially misstated.  SAB 108 references both the “iron curtain”and “rollover” approaches to quantifying a current year misstatement forpurposes of determining its materiality. The iron curtain approach focuses on how the current year’s balancesheet would be affected in correcting a misstatement without considering theyear(s) in which the misstatement originated. The rollover approach focuses on the amount of the misstatement thatoriginated in the current year’s income statement.  SAB 108 states that registrants must quantifythe impact of correcting all misstatements, including both the carryover andreversing effects of prior year misstatements, on the current year financialstatements.  Both the iron curtainapproach and rollover approach should be used in assessing the materiality of acurrent year misstatement.  SAB 108provides that once a current year misstatement has been quantified, theguidance in SAB Topic 99, “*FinancialStatements - Materiality*,” should be applied to determine whetherthe misstatement is material and should result in an adjustment to thefinancial statements. SAB 108 is effective for fiscal years ending afterNovember 15, 2006.  The adoption of SAB108 is not expected to have a significant impact on our financial position orresults of operations.

In September 2006, FASB issued SFAS No. 157, *“Fair Value Measurements*”.  This statement defines fair value,establishes a framework for measuring fair value under U.S. generally acceptedaccounting principles and expands the disclosures about fair valuemeasurements.  SFAS No. 157 applies toother accounting pronouncements that require or permit fair valuemeasurements.  The

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changes to current practice resulting from theapplication of SFAS No. 157 relate to the definition of fair value, the methodsused to measure fair value and the expanded disclosures about fair valuemeasurements.  The definition focuses onthe price that would be received to sell the asset or paid to transfer theliability at the measurement date (an exit price) and not the price that wouldbe paid to acquire the asset or received to assume the liability at themeasurement date (an entry price).  SFASNo. 157 also emphasizes that fair value is a market-based measurement, not anentity specific measurement and subsequently a fair value measurement should bedetermined based on the assumptions that market participants would use inpricing the asset or liability.  SFAS No.157 also clarifies that the market participant assumptions include assumptionsabout risk, and assumptions about the effect of a restriction on the sale oruse of an asset.  SFAS No. 157 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years.  SFAS No. 157 should be applied prospectivelyas of the beginning of the year in which it is initially applied.  A limited form of retrospective application ofSFAS No. 157 is allowed for certain financial instruments.  We are currently evaluating the provisions ofSFAS No. 157 to determine the potential impact, if any, the adoption will haveon our financial position or results of operations.

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**Item7.  Financial Statements**

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Tothe Board of Directors and Shareholders of

  Analytical Surveys, Inc.

We have auditedthe accompanying consolidated balance sheets of Analytical Surveys, Inc. andSubsidiaries as of September 30, 2006 and 2005, and the related consolidatedstatements of operations, stockholders’ equity and cash flows for each of theyears then ended.  These consolidatedfinancial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Analytical Surveys, Inc. and Subsidiaries as of September 30, 2006and 2005, and the results of their operations and their cash flows for each ofthe years then ended in conformity with U. S. generally accepted accountingprinciples.

The accompanyingconsolidated financial statements have been prepared assuming that the Companywill continue as a going concern.  Asdiscussed in Note 16 to the consolidated financial statements, the Company hassuffered significant operating losses in 2006 and prior years and does notcurrently have external financing in place to fund working capitalrequirements, which raises substantial doubt about the Company’s ability tocontinue as a going concern.  Management’splans in regard to this matter are also described in Note 16.  The consolidated financial statements do notinclude any adjustments that might result from the outcome of this uncertainty.
| /s/ PANNELL KERR FORSTER OF  TEXAS, P.C. |   |
|------------------------------------------|--------|
|                                     |
|                                     |
| December 20,  2006                       |
| Houston, Texas                           |

 

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**ANALYTICALSURVEYS, INC.AND SUBSIDIARIES**

 

Consolidated Balance Sheets

September 30, 2006and 2005

(In thousands)
| ** **                                                                                                                                                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Assets**                                                                                                                                                                          |       |     |       |     |       |
| Current assets:                                                                                                                                                                     |       |     |       |     |       |
| Cash and cash equivalents                                                                                                                                                           |       | $        | 1,357      |     | $          | 622 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $80 and $50 at September 30, 2006 and 2005, respectively                                                            |       | 1,322    |       | 1,529    |       |
| Revenue earned in excess of billings, net                                                                                                                                           |       | 49       |       | 1,612    |       |
| Prepaid expenses and other                                                                                                                                                          |       | 226      |       | 81       |       |
| Total current assets                                                                                                                                                                |       | 2,954    |       | 3,844    |       |
| Oil and natural  gas properties and equipment; full cost method of accounting                                                                                                       |       | 2,019    |       | —   |       |
| Equipment and  leasehold improvements, at cost:                                                                                                                                     |       |     |       |     |       |
| Equipment                                                                                                                                                                           |       | 570      |       | 3,979    |       |
| Furniture and fixtures                                                                                                                                                              |       | 98       |       | 363      |       |
| Leasehold improvements                                                                                                                                                              |       | 1        |       | 75       |       |
|                                                                                                                                                                                |       | 669      |       | 4,417    |       |
| Less accumulated depreciation and amortization                                                                                                                                      |       | (605     | )          | (4,249   | )          |
| Equipment and leasehold improvements, net                                                                                                                                           |       | 64       |       | 168      |       |
| Total assets                                                                                                                                                                        |       | $        | 5,037      |     | $          | 4,012 |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                       |       |     |       |     |       |
| Current  liabilities:                                                                                                                                                               |       |     |       |     |       |
| Current portion of long-term debt and capital lease  obligations                                                                                                                    |       | $        | 1,973      |     | $          | 17 |   |
| Billings in excess of revenue earned                                                                                                                                                |       | 99       |       | 425      |       |
| Accounts payable                                                                                                                                                                    |       | 45       |       | 289      |       |
| Accrued liabilities                                                                                                                                                                 |       | 239      |       | 688      |       |
| Accrued payroll and related benefits                                                                                                                                                |       | 132      |       | 687      |       |
| Total current liabilities                                                                                                                                                           |       | 2,488    |       | 2,106    |       |
| Long-term debt:                                                                                                                                                                     |       |     |       |     |       |
| Capital lease obligations, less current portion                                                                                                                                     |       | 13       |       | 30       |       |
| Redeemable preferred stock, no par value; authorized  2,500 shares; 0 and 166 shares issued and outstanding at September 30, 2006  and 2005, respectively, (liquidation value $266) |       | —   |       | 247      |       |
| Total long-term debt                                                                                                                                                                |       | 13       |       | 277      |       |
| Total liabilities                                                                                                                                                                   |       | 2,501    |       | 2,383    |       |
| Commitments and  contingencies                                                                                                                                                      |       |     |       |     |       |
| Stockholders’  equity:                                                                                                                                                         |       |     |       |     |       |
| Convertible preferred stock, no par value; authorized  2,500 shares; 280 and 0 shares issued and outstanding at September 30, 2006  and September 30, 2005, respectively            |       | 261      |       | —   |       |
| Common stock, no par value; authorized 100,000  shares; 3,779 and 2,869 shares issued and outstanding at September 30, 2006  and 2005, respectively                                 |       | 36,341   |       | 35,312   |       |
| Accumulated deficit                                                                                                                                                                 |       | (34,066  | )          | (33,683  | )          |
| Total stockholders’ equity                                                                                                                                                     |       | 2,536    |       | 1,629    |       |
| Total liabilities and stockholders’ equity                                                                                                                                     |       | $        | 5,037      |     | $          | 4,012 |   |

 

Seeaccompanying notes to consolidated financial statements.

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**ANALYTICALSURVEYS, INC.AND SUBSIDIARIES**

 

Consolidated Statements of Operations

Years ended September 30,2006 and 2005(In thousands, except per share amounts)
| ** **                                                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                              |       |     |       |     |       |
| Revenues                                                                          |       |     |       |     |       |
| GIS services                                                                      |       | $        | 4,313      |     | $          | 6,063 |   |
| Oil and gas                                                                       |       | 7        |       | —   |       |
| Total revenues                                                                    |       | 4,320    |       | 6,063    |       |
|                                                                              |       |     |       |     |       |
| Costs and  expenses:                                                              |       |     |       |     |       |
| Salaries, wages and benefits                                                      |       | 2,694    |       | 5,261    |       |
| Subcontractor costs                                                               |       | 522      |       | 1,524    |       |
| Other general and administrative                                                  |       | 1,240    |       | 2,310    |       |
| Depreciation and amortization                                                     |       | 63       |       | 175      |       |
| Severance and related costs                                                       |       | —   |       | 67       |       |
| Total operating costs                                                             |       | 4,519    |       | 9,337    |       |
| Loss from operations                                                              |       | (199     | )          | (3,274   | )          |
| Other income  (expense):                                                          |       |     |       |     |       |
| Interest expense, net                                                             |       | (177     | )          | (78      | )          |
| Other income (expense), net                                                       |       | (20      | )          | 12       |       |
| Gain on extinguishment of debt                                                    |       | 61       |       | —   |       |
| Total other expense, net                                                          |       | (136     | )          | (66      | )          |
| Loss before income taxes                                                          |       | (335     | )          | (3,340   | )          |
| Provision for  income taxes                                                       |       | —   |       | —   |       |
| Net loss                                                                          |       | (335     | )          | (3,340   | )          |
| Deemed dividend  associated with beneficial conversion feature of preferred stock |       | (30      | )          | —   |       |
| Dividends on  preferred stock                                                     |       | (18      | )          | —   |       |
| Net loss available to common stockholders                                         |       | $        | (383       | )        | $          | (3,340 | ) |
|                                                                              |       |     |       |     |       |
| Basic net loss  per common share                                                  |       | $        | (0.10      | )        | $          | (1.26 | ) |
| Preferred stock  dividends                                                        |       | (0.01    | )          | —   |       |
| Net loss  available to common shareholders                                        |       | $        | (0.11      | )        | $          | (1.26 | ) |
|                                                                              |       |     |       |     |       |
| Diluted net loss  per common share                                                |       | $        | (0.10      | )        | $          | (1.26 | ) |
| Preferred stock  dividends                                                        |       | (0.01    | )          | —   |       |
| Net loss  available to common shareholders                                        |       | $        | (0.11      | )        | $          | (1.26 | ) |
|                                                                              |       |     |       |     |       |
| Weighted average  common shares:                                                  |       |     |       |     |       |
| Basic                                                                             |       | 3,383    |       | 2,644    |       |
| Diluted                                                                           |       | 3,383    |       | 2,644    |       |

 

See accompanying notes toconsolidated financial statements.

23

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**ANALYTICALSURVEYS, INC.AND SUBSIDIARIES**

 

Consolidated Statements of Stockholders’ Equity

Years ended September 30,2006 and 2005(In thousands)
| ** **                                                                                                                                   | ** ** | **Convertible  Preferred Stock** | ** ** | **Common Stock** | ** ** | **Accumulated** | ** ** | **Total  Stockholders’** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------|------------|-----------------|------------|-------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **Shares**                            | ** ** | **Amount**            | ** ** | **Shares**      | ** ** | **Amount**                    | ** ** | **Deficit** | ** ** | **Equity** | ** ** |
| 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 con-vertible 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 |   |
| Common stock  issued in exchange for redeemable preferred stock                                                                              |       | —                                |       | —                |       | 318             |       | 300                           |       | — |   | 300 |   |
| Common stock  issued pursuant to consulting agreement for equity transactions, net of  issuance costs for convertible preferred stock of $88 |       | —                                |       | —                |       | 75              |       | —                        |       | — |   | — |   |
| Common stock  issued for legal services rendered, net of issuance costs for convertible  preferred stock of $15                              |       | —                                |       | —                |       | 10              |       | —                        |       | — |   | — |   |
| Common stock  issued for the purchase of equipment and oil and gas working interests, net  of issuance costs of $9                           |       | —                                |       | —                |       | 129             |       | 191                           |       | — |   | 191 |   |
| Issuance of  convertible preferred stock and warrants, net of issuance costs of $64                                                          |       | 760                                   |       | 678                   |       | —          |       | 18                            |       | — |   | 696 |   |
| Issuance of  Class E warrants, net of issuance costs of $7                                                                                   |       | —                                |       | —                |       | —          |       | 73                            |       | — |   | 73 |   |
| Common stock  issued for the conversion of preferred stock                                                                                   |       | (480                                  | )          | (447                  | )          | 378             |       | 447                           |       | — |   | — |   |
| Deemed dividend  associated with beneficial conversion feature of preferred stock                                                            |       | —                                |       | 30                    |       | —          |       | —                        |       | (30 | ) | — |   |
| Dividends on  convertible preferred stock                                                                                                    |       | —                                |       | —                |       | —          |       | —                        |       | (18 | ) | (18 | ) |
| Net loss                                                                                                                                     |       | —                                |       | —                |       | —          |       | —                        |       | (335 | ) | (335 | ) |
| Balances at  September 30, 2006                                                                                                              |       | 280                                   |       | $                     | 261        |            | 3,779      |                          | $          | 36,341 |   | $ | (34,066 | ) | $ | 2,536 |   |

 

See accompanying notes toconsolidated financial statements.

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**ANALYTICAL SURVEYS, INC.AND SUBSIDIARIES**

Consolidated Statements of Cash Flows

Years ended September 30,2006 and 2005(In thousands)
| ** **                                                                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                       |       |     |       |     |       |
| Cash flows from  operating activities:                                                     |       |     |       |     |       |
| Net loss                                                                                   |       | $        | (335       | )        | $          | (3,340 | ) |
| Adjustments to reconcile net loss to net cash  provided by (used in) operating activities: |       |     |       |     |       |
| Depreciation and amortization                                                              |       | 63       |       | 175      |       |
| Issuance of inducement stock options                                                       |       | —   |       | 22       |       |
| Gain on extinguishment of debt                                                             |       | (61      | )          | —   |       |
| Accretion of interest expense on preferred stock                                           |       | 52       |       | 57       |       |
| Accretion of interest expense on convertible debt –  related party                    |       | 37       |       | 9        |       |
| Change in fair value of derivative instruments –  related party                       |       | —   |       | (12      | )          |
| Amortization of deferred loan costs                                                        |       | 115      |       | —   |       |
| Loss (gain) on sale of assets                                                              |       | (39      | )          | 53       |       |
| Changes in operating assets and liabilities:                                               |       |     |       |     |       |
| Accounts receivable, net                                                                   |       | 207      |       | 1,902    |       |
| Revenue earned in excess of billings, net                                                  |       | 1,542    |       | 1,394    |       |
| Prepaid expenses and other                                                                 |       | (12      | )          | 102      |       |
| Billings in excess of revenue earned                                                       |       | (326     | )          | (43      | )          |
| Accounts payable and other accrued liabilities                                             |       | (641     | )          | (376     | )          |
| Accrued payroll and related benefits                                                       |       | (555     | )          | 9        |       |
| Net cash provided by (used) in operating activities                                        |       | 47       |       | (48      | )          |
| Cash flows from  investing activities:                                                     |       |     |       |     |       |
| Purchase of equipment                                                                      |       | —   |       | (88      | )          |
| Investment in oil and gas properties                                                       |       | (1,819   | )          | —   |       |
| Cash proceeds from sale of assets                                                          |       | 112      |       | 2        |       |
| Net cash used in investing activities                                                      |       | (1,707   | )          | (86      | )          |
| Cash flows from  financing activities:                                                     |       |     |       |     |       |
| Principal payments on long-term debt and capital  lease obligations                        |       | (28      | )          | (56      | )          |
| Issuance of convertible preferred stock and warrants                                       |       | 760      |       | —   |       |
| Issuance of convertible note, net of expenses                                              |       | 1,751    |       | —   |       |
| Redemption of preferred stock                                                              |       | —   |       | (129     | )          |
| Dividends paid on preferred stock                                                          |       | (8       | )          | —   |       |
| Issuance of common stock pursuant to exercise of  options                                  |       | —   |       | 92       |       |
| Fees associated with issuance of common and  preferred stock                               |       | (80      | )          | (18      | )          |
| Net cash provided by (used in) financing activities                                        |       | 2,395    |       | (111     | )          |
| Net increase (decrease) in cash                                                            |       | 735      |       | (245     | )          |
| Cash and cash  equivalents at beginning of year                                            |       | 622      |       | 867      |       |
| Cash and cash  equivalents at end of year                                                  |       | $        | 1,357      |     | $          | 622 |   |
|                                                                                       |       |     |       |     |       |
| Supplemental  disclosures of cash flow information:                                        |       |     |       |     |       |
| Cash paid for interest                                                                     |       | $        | —     |     | $          | 2 |   |
| Equipment acquired under capital leases                                                    |       | $        | 11         |     | $          | 50 |   |
| Non-cash financing activities                                                              |       |     |       |     |       |
| Issuance of common stock in exchange for redeemable  preferred stock                       |       | $        | 300        |     | $          | — |   |
| Issuance of common stock in exchange for convertible  preferred stock                      |       | $        | 447        |     | $          | — |   |
| Issuance of common stock for equipment and oil and  gas working interests                  |       | $        | 200        |     | $          | — |   |
| Issuance of common stock for consulting and legal  services                                |       | $        | 103        |     | $          | — |   |
| Issuance of common stock pursuant to conversion of  debt                                   |       | $        | —     |     | $          | 1,806 |   |
| Accretion of interest on preferred stock                                                   |       | $        | 52         |     | $          | 57 |   |
| Deemed dividend associated with beneficial  conversion feature of preferred stock          |       | $        | 30         |     | $          | — |   |
| Accrual of  dividends on preferred stock                                                   |       | $        | 10         |     | $          | — |   |

 

See accompanying notes toconsolidated financial statements.

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**ANALYTICALSURVEYS, INC.AND SUBSIDIARIES**

**Notesto Consolidated Financial Statements**

**(1)****                 Summary of Significant Accounting Policies**

***(a)******                 Business and Basisof Financial Statement Presentation***

Traditionally, our primary business is the productionof precision computerized maps and information files used in GeographicInformation Systems (“GIS”). State and local governments and utility companiesuse GIS to manage information relating to utilities, natural resources,streets, and land use and property taxation. During 2006, we expanded our business strategy from a GIS servicesprovider to an independent oil and gas enterprise engaging in non-operatingparticipation in drilling and production prospects of oil and natural gasreserves.

Our consolidated financial statements include theaccounts of our majority-owned subsidiaries. All significant intercompanybalances and transactions have been eliminated in consolidation.

The preparation of the financial statements inconformity with U.S. generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenue andexpenses during the reporting period. Actual results could differ from thoseestimates.

***(b)******                 Statement of CashFlows***

For purposes of the statement of cash flows, weconsider all highly liquid debt instruments purchased with an original maturityof three months or less to be cash equivalents

***(c)******                  Equipment andLeasehold Improvements***

Equipment and leasehold improvements are recorded atcost and are depreciated and amortized using the straight-line method overestimated useful lives of three to ten years. Repairs and maintenance are charged directly to operations as incurred.

***(d)******                 Revenue and CostRecognition***

Contract revenues are recognized using the percentageof completion method based on the cost-to-cost method, whereby the percentagecomplete is based on costs incurred in relation to total estimated costs to beincurred.  Costs associated withobtaining new contracts are expensed as incurred.  We generally do not combine or segmentcontracts for purposes of recognizing revenue. Reimbursable out-of-pocket expenses are recorded as revenue.

Customers are billed based on the terms included inthe contracts, which are generally upon delivery of certain products orinformation, or achievement of certain milestones defined in thecontracts.  When billed, such amounts arerecorded as accounts receivable.  Revenueearned in excess of billings represents revenue related to services completedbut not billed, and billings in excess of revenue earned represent billings inadvance of services performed.

Contract costs include all direct material and laborcosts and those indirect costs related to contract performance, such asindirect labor, supplies, tools and depreciation costs.  Losses on contracts are recognized in theperiod such losses are determined.  We donot believe warranty obligations on completed contracts are significant.  Changes in job performance, job conditions,and estimated 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.

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We follow the sales method of accounting for oil andnatural gas revenue recognition and natural gas imbalances, which recognizesover and under lifts of natural gas when sold, to the extent sufficient naturalgas reserves or balancing agreements are in place.  Natural gas sales volumes are notsignificantly different from our share of the production.

 

***(e)******                  Oil and NaturalGas Properties.***

In February and March 2006, we purchased workinginterests in two oil and natural gas properties along with certain fixtures andequipment used in connection with the operation of the wells associated withone of the properties.  In May 2006, wepurchased a 12.5% working interest, in a relatively deep Anadarko Basin naturalgas well known as the Adrienne 1-9, located in Washita County, Oklahoma.  Investments in oil and natural gas propertiesare accounted for using the full-cost method of accounting.  Under this method all costs directlyassociated with the acquisition, exploration and development of oil and naturalgas properties are capitalized.  Suchcosts include lease acquisitions, seismic surveys, and drilling and completionequipment.  We proportionally consolidateour interests in oil and natural gas properties.  Maintenance and repairs are expensed asincurred.

Oil and natural gas properties are amortized based onthe unit-of-production method using estimates of proved reservequantities.  Investments in unprovedproperties are not amortized until proved reserves associated with the projectscan be determined or until they are impaired. Unevaluated properties are evaluated periodically for impairment on aproperty-by-property basis.  If theresults of an assessment indicate that the properties are impaired, the amountof impairment is added to the proved oil and natural gas property costs to beamortized.  The amortizable base includesestimated future development costs and, where significant, dismantlement,restoration and abandonment costs, net of estimated salvage values.

Dispositions of oil and natural gas properties areaccounted for as adjustments to capitalized costs with no gain or lossrecognized, unless such adjustments would significantly alter the relationshipbetween capitalized costs and proved reserves.

The net capitalized costs of proved oil and naturalgas properties are subject to a “ceiling test” which limits such costs to theestimated present value, discounted at a 10% interest rate, of future netrevenues from proved reserves, based on current economic and operatingconditions.  If net capitalized costs exceedthis limit, the excess is charged to operations through depreciation, depletionand amortization.  For the quarter andyear ended September 30, 2006, we did not have any charges associated with ourceiling test analysis.  Depreciation ofother property and equipment is provided using the straight-line method basedon estimated useful lives ranging from five to 10 years.

In June 2001, the Financial Accounting Standards Boardissued Statement of Financial Accounting Standards “(SFAS”) No. 143, *“Accounting for Asset Retirement Obligations.”*  SFAS No. 143 requires that the fair value ofthe liability for asset retirement costs be recognized in an entity’s balancesheet, as both a liability and an increase in the carrying values of suchassets, in the periods in which such liabilities can be reasonablyestimated.  The present value of theestimated future asset retirement obligation “(ARO”), as of the date ofacquisition or the date at which a successful well is drilled, is capitalizedas part of the costs of proved oil and natural gas properties and as anoncurrent liability.  The assetretirement costs are depleted over the useful life of the asset.  The ARO is also recorded at fair value, andaccretion expense recognized as the discounted liability is accreted to itsexpected settlement value.  The fairvalue of the ARO asset and liability is measured using expected future cashoutflows discounted at the Company’s credit adjusted risk free interest rate.

 

Inherentin the fair value calculation of ARO are numerous assumptions and judgmentsincluding the ultimate settlement amounts, inflation factors, credit adjusteddiscount rates, timing of settlement, and changes in the legal, regulatory,environmental and political environments. To the extent future revisions to these assumptions impact the fairvalue of the existing ARO liability, a corresponding adjustment is made to theoil and natural gas property balance. Settlements greater than or less than amounts accrued as ARO arerecovered as a gain or loss upon settlement.

***(f)******                    Income Taxes***

Income taxes are reflected under the liability method,which establishes deferred tax assets and liabilities to be recognized for thefuture tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases. Deferred tax assets and liabilities are measured usingenacted tax rates expected to apply to taxable income in the years in whichthose temporary differences are expected to be recovered or settled. The effecton deferred tax assets and liabilities of a change in tax rates is recognizedin income in the period that includes the enactment date.

U.S. generally accepted accounting principles requirethat we record a valuation allowance against deferred tax assets if it is “morelikely than not” that we will not be able to utilize it to offset futuretaxes.  Due to the size of the netoperating loss carryforward in relation to our recent history of unprofitableoperations and due to the continuing uncertainties surrounding our futureoperations as discussed above, we have not recognized any of this net deferredtax asset.  We currently provide forincome taxes only to the extent that we expect to pay cash taxes (primarilystate taxes and the federal alternative minimum tax) on current taxable income.

27

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***(g)******                 Impairment ofLong-Lived Assets Other Than Goodwill***

Long-lived assets other than goodwill held and usedare reviewed for impairment whenever events or changes in circumstancesindicate that the carrying value of an asset may not be recoverable.  An impairment loss is recognized whenestimated undiscounted future cash flows expected to be generated by an assetare less than its carrying value. Measurement of the impairment loss is based on the fair value of theasset, which is determined using generally accepted valuation techniques suchas discounted present value of expected future cash flows.

***(h)******                 Stock-BasedCompensation***

As permitted by SFAS No.123, we account for ourstock-based compensation utilizing the intrinsic-value method in accordancewith Accounting Principles Board Opinion No. 25, *“Accounting for Stock Issued to Employees*”, and relatedinterpretations.  Pro forma informationregarding net earnings (loss) and earnings (loss) per share is based on thefair value method at the date of the grant as required by SFAS No. 148, “*Accounting for Stock-Based Compensation Transitionand Disclosure”.*

We granted an inducementstock option (“Option”) to our former Chief Executive Officer (“CEO”) on March22, 2004.  The Option was not issuedpursuant to our stock option plans, and would have vested at the end of atwelve-month period.  The Optionoriginally provided for the purchase of 75,000 shares of****ourcommon stock at an exercise price equalto $1.50 per share, which was below the market value of $2.82 per share on thedate of grant.  Upon the formerCEO’s resignation on December 20, 2004, we accelerated his vesting rights on56,250 shares, with a market value of $1.93 per share, and cancelled his rightto purchase the remaining 18,750 shares. The intrinsic value of the vested shares totaled approximately $24,000.Our former CEO exercised his rights under the Option on December 28, 2004, andpurchased 56,250 shares of our Common Stock. During fiscal 2005, we recognized compensation expense of $22,173 relatedto the original grant of the Options as well as the remeasured value of theaccelerated Option.  During the yearended September 30, 2006, 120,000 options were granted to our three newdirectors, and 265,000 options were granted to four members of the managementteam, including 100,000 options to our current CEO.  We also granted 95,000 options to members ofour production staff.  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 increased tothe pro forma amounts indicated below:
|                                                        | ** ** | **Year ended September 30,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                             | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| Net loss  available to common shareholders as reported |       | $                                           | (383       | ) | $ | (3,340 | ) |
| Add: Inducement  stock option expense as recorded      |       | —                                      |       | 22 |   |
| Less: Pro forma  option expense                        |       | (73                                         | )          | (50 | ) |
| Pro forma net  loss                                    |       | $                                           | (456       | ) | $ | (3,368 | ) |
|                                                   |       |                                        |       |   |   |
| Basic loss per  share, as reported                     |       | $                                           | (0.11      | ) | $ | (1.26 | ) |
| Add: Inducement  stock option expense as recorded      |       | 0.00                                        |       | 0.01 |   |
| Less: Pro forma  option expense                        |       | (0.02                                       | )          | (0.02 | ) |
| Pro forma basic  loss per share                        |       | $                                           | (0.13      | ) | $ | (1.27 | ) |
|                                                   |       |                                        |       |   |   |
| Diluted loss per  share, as reported                   |       | $                                           | (0.11      | ) | $ | (1.26 | ) |
| Add: Inducement  stock option expense as recorded      |       | 0.00                                        |       | 0.01 |   |
| Less: Pro forma  option expense                        |       | (0.02                                       | )          | (0.02 | ) |
| Pro forma diluted loss  per share                      |       | $                                           | (0.13      | ) | $ | (1.27 | ) |

 

The weighted average fair value of options grantedduring fiscal 2006 and 2005 was $1.01 per share and $2.11 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 124% and a risk-free interest rateranging from 4% to 6%.

28

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The above pro forma disclosures are not necessarilyrepresentative of the effect on the historical net loss for future periodsbecause options vest over several years, and additional awards are made eachyear.

***(i)******                    Earnings (Loss)Per Share***

Basic earnings (loss) per share are computed bydividing earnings (loss) available to common shareholders by the weightedaverage number of common shares outstanding for the period.  Diluted earnings (loss) per share include theeffects of the potential dilution of outstanding options, warrants, andconvertible debt on our Common Stock, determined using the treasury stockmethod.
|                                                     | ** ** | **Year Ended September 30,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| **Basic**                                           |       |                                        |       |   |   |
| Net loss                                            |       | $                                           | (335       | ) | $ | (3,340 | ) |
| Preferred stock dividends                           |       | (48                                         | )          | — |   |
| Net loss available to common stockholders           |       | $                                           | (383       | ) | $ | (3,340 | ) |
| Weighted average shares                             |       | 3,383                                       |       | 2,644 |   |
| Net loss per share                                  |       | (0.10                                       | )          | (1.26 | ) |
| Preferred stock dividends                           |       | 0.01                                        |       | — |   |
| Net loss per share available to common stockholders |       | $                                           | (0.11      | ) | $ | (1.26 | ) |
| **Diluted**                                         |       |                                        |       |   |   |
| Net loss                                            |       | $                                           | (335       | ) | $ | (3,340 | ) |
| Preferred stock dividends                           |       | (48                                         | )          | — |   |
| Net loss available to common stockholders           |       | $                                           | (383       | ) | $ | (3,340 | ) |
| Weighted average shares                             |       | 3,383                                       |       | 2,644 |   |
| Net loss per share                                  |       | (0.10                                       | )          | (1.26 | ) |
| Preferred stock dividends                           |       | 0.01                                        |       | — |   |
| Net loss per share available to common stockholders |       | $                                           | (0.11      | ) | $ | (1.26 | ) |

 

All dilutive common stock equivalents are reflected inour earnings per share calculation; the conversion of 220,000 shares pursuantto our Convertible Preferred are antidilutive for the year ended September 30,2006, and therefore they have been excluded. Additionally, for the years ended September 30, 2006 and 2005, potentialdilutive common shares under our convertible instruments, warrant agreementsand stock option plans of 2,037,000 and 148,000, respectively, were notincluded in the calculation of diluted earnings per share as they wereantidilutive.

***(j)******                    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. Our $2.0 million senior secured note issued on April 2, 2002 carried aconversion premium totaling $122,000 at September 30, 2004.  We recognized other income totaling $12,000in the year ended September 30, 2005 as we amortized the conversion premium tothe date the note was converted into Common Stock.

***(k)******                 Concentration ofCredit Risk***

We maintain our cash with a major U.S. domesticbank.  The amounts held in this bankexceed the insured limit of $100,000 from time to time.  The terms of these deposits are on demand tominimize risk.  We have not incurredlosses related to these deposits.

***(l)******                    Operating Cycle***

In accordance with industry practice, we include incurrent assets and liabilities amounts relating to long-term contracts, whichgenerally have operating cycles extending beyond one year. Other

29

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assets and liabilities are classified as current andnon-current on the basis of expected realization within or beyond one year.

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

At September 30, 2006, the estimated period tocomplete contracts in process was approximately three months, and we expect tocollect substantially all related accounts receivable and revenue earned inexcess of billings within four months. Reserves on revenue earned in excess of billings total $22,000 and$52,000 for the years ended September 30, 2006 and 2005, which are netted, withrevenue earned in excess of billings. We have written off no reserves againstrevenue earned in excess of billings in the periods covered by this report.  In fiscal 2006, we reclassified $30,000 fromthe reserve on revenue earned in excess of billings to the reserve on accountsreceivable.

The following summarizes contracts in process atSeptember 30 (in thousands):
|                                                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Costs incurred on  uncompleted contracts                              |       | $        | 13,541     |     | $          | 18,463 |   |
| Estimated  earnings                                                   |       | 788      |       | 1,921    |       |
|                                                                  |       | 14,329   |       | 20,384   |       |
| Less billings to  date                                                |       | (14,379  | )          | (19,197  | )          |
|                                                                  |       | $        | (50        | )        | $          | 1,187 |   |
| Included in the  accompanying consolidated balance sheets as follows: |       |     |       |     |       |
| Revenue earned in excess of billings                                  |       | $        | 49         |     | $          | 1,612 |   |
| Billings in excess of revenue earned                                  |       | (99      | )          | (425     | )          |
|                                                                  |       | $        | (50        | )        | $          | 1,187 |   |

 

We have established a reserve (“allowance for doubtfulaccounts”) for estimated 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 a billedor unbilled account receivable related to a completed contract is not probable,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 $80,000and $50,000 for the years ended September 30, 2006 and 2005, respectively,which are netted with accounts receivable. We have written off no reserves against accounts receivable in theperiods covered by this report.  Infiscal 2006, no new reserves were established. In fiscal 2006, we increased the reserve on accounts receivable in theamount of $30,000 and decreased the reserve on revenue earned in excess of billingsby a corresponding amount.

**(3)****                ****Oil andnatural gas properties and equipment**

On February 15, 2006, we purchased a twenty percent(20%) working interest in a well designated as the Welker 1-7, located inPawnee County, Oklahoma for $300,000 in cash. Contemporaneously with such purchase, we entered into an operatingagreement with the seller and owner of the other 80% working interest.  The well was completed in March 2006 and iscurrently producing small amounts of oil from the Prue formation. However, asthe true targets for this well are the Iron Post and Dawson coal bed zones, andas coal beds require a de-watering process, completion of these zones willoccur after the operator drills a water disposal well adjacent to the property.  The operator has indicated that a waterdisposal well will be drilled as part of a separate investment program in thefirst quarter of fiscal 2007. The de-watering process typically requires fourto six months before reaching the full potential gas production from the well.

On March 15, 2006, we completed the purchase of a 50%working interest in three wells designated as Shields No. 1, 2, and 3, locatedin Pawnee County, Oklahoma, plus a 100% interest in certain fixtures andequipment used in connection with the operation of the wells.  We paid $150,000 cash and issued

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129,032 shares of Common Stock having a fair marketvalue (equal to the closing bid on March 14, 2006) of $1.55 per share, or$200,000. In July 2006, we exchanged one-half of our working interest in returnfor a carry of all costs associated with drilling and recompletion activitiesassociated with our remaining working interest in the three wells.  One well has been permitted as a waterdisposal well.  A second well is plannedfor recompletion in the first fiscal quarter of 2007.  We plan to recomplete the third well at alater date.

On May 15, 2006, we purchased a 12.5% working interestwith a 2.5% promote, resulting in a 10% net working interest for $120,000 incash.  Our net revenue interest isproportionately reduced to a 75% net revenue interest, or 7.5%.  This investment was made in a relatively deepAnadarko Basin natural gas well known as the Adrienne 1-9, located in WashitaCounty, Oklahoma.  We purchased theleasehold interest for this well utilizing existing cash reserves.  Our obligation for tangible and intangiblecosts of drilling and completing the well is approximately $1.5 million, ofwhich $1.2 million was funded on May 31, 2006. We funded this obligation through the issuance of a convertible seniorsecured promissory note on May 31, 2006 (see Note 4).  As of the date of this report, the Adrienne1-9 has been drilled to a total depth of approximately 20,450 feet and basedupon the quality of the logs we have elected to participate in completionactivities. The completion process is currently ongoing.

**(4)****                 Debt**

The components of debt at September 30 are summarizedas follows (in thousands):
|                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
| **Long-Term  Debt**                       |       |     |       |     |       |
| Other debt and  capital lease obligations |       | $        | 29         |     | $          | 47 |   |
| Redeemable  preferred stock (See Note 5)  |       | —   |       | 247      |       |
| Senior secured  convertible notes         |       | 1,957    |       | —   |       |
|                                      |       | 1,986    |       | 294      |       |
| Less current  portion                     |       | (1,973   | )          | (17      | )          |
|                                      |       | $        | 13         |     | $          | 277 |   |

 

On April 2, 2002, we issued to Tonga Partners LLP (“Tonga”)a $2.0 million senior secured convertible note (“Note”).  On November 10, 2004, Tonga converted theoutstanding principal and accrued interest into Common Stock at the conversionprice of $1.05, representing 90% of the average closing bid prices for thethree trading days having the lowest closing bid price during the 20 tradingdays immediately prior to November 10, 2004. The newly issued shares increased our total common shares outstandingfrom 1,104,173 to 2,805,522.  During thefirst quarter of fiscal 2005, we recognized approximately $12,000 in otherincome as we amortized the Note’s premium through November 11, 2004.

Pursuant to the expansion of our business strategyfrom a GIS services provider into an independent oil and gas enterpriseengaging in non-operating participation in drilling and production prospects ofoil and natural gas reserves, on May 30, 2006, we issued convertible seniorsecured promissory notes to two holders in the principal amount of $1.5 millionand $0.5 million, respectively, (each, a “Senior Note”, and collectively the “SeniorNotes”), to fund the drilling and completion of a 12.5% working interest in anatural gas well located in Washita County, Oklahoma.  The Senior Notes have a maturity date of May31, 2008, and bear interest at the rate of 14%, payable quarterly.  The holders also received warrants entitlingthem to purchase, in the aggregate, 752,072 shares of the Common Stock at anexercise price of $1.186 per share, which was the closing bid price of theCommon Stock on May 31, 2006 (“Class E Warrants”).

On September 19, 2006, the holders exercised theirright to accelerate the maturity of the Senior Notes to October 19, 2006, dueto the failure of our shareholders to approve certain conversion terms and theissuance of additional warrants at our Annual Meeting of Shareholders held onAugust 29, 2006.

On October 18, 2006, we paid the outstanding principal and interest ofthe Senior Notes, which totaled $2,012,274, utilizing cash reserves and thecollection of $1.0 million of accounts receivable subsequent to September 30,2006.

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A Registration Statement on Form S-3, as amended (Registration No.333-136078), registering the common stock issuable upon exercise of the Class EWarrants, was declared effective by the Securities and Exchange Commission onOctober 13, 2006.

We recorded the Senior Notes at a discount after giving effect to the$80,424 estimated fair value of the Class E Warrants, which was credited toequity.  The effective rate of intereston the Senior Notes is 20%.  Interestexpense is recorded using this effective rate of interest.  The carrying value of the Senior Notes wasaccreted to the face amount by charges to interest expense over the two yearterm until September 19, 2006, on which date we accelerated the rate ofaccretion to reflect the new maturity date of October 19, 2006.  The carrying value at September 30, 2006, is$1.957 million and represents the $2.0 million outstanding principal less theunearned discount.  The unearned discountof $43,196 as of September 30, 2006 represents the estimated fair value of theClass E Warrants of $80,424 less accretion.

We incurred expenses totaling approximately $249,000 related to theissuance of the Senior Notes.  Werecorded these expenses as prepaid or deferred expenses.  These expenses were amortized to otherexpense over the two-year term of the Senior Notes until September 19, 2006, onwhich date we accelerated the rate of amortization to reflect the new maturitydate of October 19, 2006.  At September30, 2006, the unamortized balance of the deferred expense totaled $133,728.

Required principal payments on long-term debt atSeptember 30, 2006 are $2,028,000 for the year ending September 30, 2007;$13,000 for fiscal 2008; and $0 for fiscal 2009.

**(5)****                 RedeemablePreferred Stock**

On December 28, 2001, we issued 1.6 million sharesof no par value Series A Preferred Stock (“Preferred Stock”) with a face valueof $3.2 million, pursuant to the extinguishment of a bank creditagreement.  In fiscal 2004, we redeemed1,341,000 shares of the Preferred Stock. The early redemption reduced the number of preferred shares outstandingto 258,900 shares and reduced a mandatory redemption payment, which wasclassified as a current liability, from $800,000 to $129,450. Pursuant to themandatory redemption term of our Preferred Stock, we redeemed 92,465 shares ofthe 258,900 outstanding shares of Preferred Stock at $1.40 per share inDecember 2004 for $129,450 cash.

We were entitled to redeem the remaining 166,435shares at $1.80 per share, or $299,583, until December 27, 2006, or at $2.00per share on December 28, 2006, or $332,870. On February 1, 2006, we issued 318,000 shares of Common Stock inexchange for the outstanding shares of the Preferred Stock, which had acarrying value of approximately $269,000 and a current redemption price of$299,583.  The transaction eliminated allof our obligations related to the Preferred Stock, including accrued dividendsof approximately $61,000, the right to which was relinquished by the holders aspart of the transaction.  We recordedinterest expense totaling approximately $31,000 upon redemption of thePreferred Stock in order to accrete the carrying value to the currentredemption price of $299,583.  We reducedour current liabilities related to the Preferred Stock by $299,583, with acorresponding increase in stockholders’ equity pursuant to the issuance ofCommon Stock in exchange for the elimination of the liability.  We recognized a gain on extinguishment ofdebt totaling approximately $61,000 related to the relinquishment of accrueddividends by the holder.

**(6)**                 Convertible PreferredStock

**On February 10, 2006, we issued760,000 shares of a Series A Convertible Preferred (“Convertible Preferred”)with gross aggregate proceeds of approximately $760,000.  The two-year Convertible Preferred may beconverted into 598,425 shares of Common Stock at a fixed conversion price of$1.27, which was determined by applying a 10% discount to the 5-day trailingaverage closing price of Common Stock of $1.41 on February 9, 2006.  The holders of the Convertible Preferredreceived Class A Warrants that entitle them to purchase up to 299,212 shares ofCommon Stock at $1.34, or 101% of the closing bid price on February 10, 2006,and an equivalent number of Class B Warrants (collectively, the “FebruaryWarrants”) that carry an exercise price of $1.49, or 112% of the closing bidprice on February 10, 2006.  We alsoissued 82,678 Class A Warrants and 82,678 Class B Warrants to certain partiesas a finder’s fee.  The February Warrantsare exercisable after six months from the date of**

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**closing until their expirationthree years from the date of closing.  ARegistration Statement on Form S-3 to register all shares issuable pursuant tothe Convertible Preferred and related Warrants was declared effective on April12, 2006.  As of September 30, 2006,480,000 shares of Convertible Preferred have been converted into 377,952 shareof Common Stock, and 280,000 shares remain outstanding, which will be convertedinto 220,472 shares of Common Stock on or before February 9, 2008.  If the holders of the Convertible Preferredelect to receive future dividends in the form of Common Stock, we may issue upto an additional 25,500 shares of Common Stock in lieu of cash.**

The Convertible Preferred earns dividends at a rateof 7% per annum.  We recorded theConvertible Preferred at its offering price of $1 per share, net of theestimated $22,171 fair value of the February Warrants.  We used the Black Scholes model to determinethe value of the February Warrants.

The market value of Common Stock on the date thatthe Convertible Preferred was sold was $1.32 per share.  In accordance with EITF 00-27, this created abeneficial conversion feature to the holders of the Convertible Preferred and adeemed dividend to the preferred stockholders totaling approximately $30,000.** **Theintrinsic value of the beneficial conversion feature is the difference in fairmarket value of Common Stock on the grant date of the Convertible Preferredless the conversion price, multiplied by the number of shares that are issuableupon conversion of the Convertible Preferred, or $0.05 for each of 598,425shares of Common Stock.

**The deemed dividend was recordedwith a corresponding amount recorded as convertible preferred stock.  The deemed dividend is calculated as thedifference between the fair value of the underlying Common Stock less theproceeds that have been received for the Convertible Preferred.**

**(7)****                 Leases**

We lease our facilities and certain equipment undernon-cancelable lease agreements.  Certainof the equipment leases are classified as capital leases.  During 2006 and 2005, we acquired equipmenttotaling approximately $11,000 and $50,000, respectively, which is included asa component of our equipment and leasehold improvements.  We sold certain equipment under leasestotaling $11,000 in connection with the sale of our Wisconsin productionfacility and other unrelated miscellaneous transactions.  Accumulated depreciation relating to theseassets was approximately $6,400 at September 30, 2006.  Amounts due under operating and capitalleases at September 30, 2006 are as follows (in thousands):
|                                               | ** ** | **Operating leases** | ** ** | **Capital leases** | ** ** |
|-----------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| Years ending September 30                     |       |                      |       |                    |       |
| 2007                                          |       | $                         | 36         |                    | $          | 22 |   |
| 2008                                          |       | 47                        |       | 14                      |       |
| 2009                                          |       | 49                        |       | —                  |       |
| 2010                                          |       | 46                        |       | —                  |       |
| 2011                                          |       | 47                        |       | —                  |       |
| Thereafter                                    |       | 12                        |       | —                  |       |
|                                          |       | $                         | 237        |                    | 36         |   |
| Less amount  representing interest            |       |                      |       | (7                      | )          |
| Present value of  minimum lease obligations   |       |                      |       | 29                      |       |
| Less current  maturities of lease obligations |       |                      |       | (16                     | )          |
|                                          |       |                      |       | $                       | 13         |   |

 

Facility rent expense totaled $195,000 and $340,000for the years ended September 30, 2006 and 2005, respectively.

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**(8)****                 Income Taxes**

 

Income tax expense (benefit) for the years endedSeptember 30 is as follows (in thousands):
|                 | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| Current:        |       |     |       |     |       |
| Federal         |       | $        | —     |     | $          | — |   |
| State and local |       | —   |       | —   |       |
|            |       | —   |       | —   |       |
| Deferred:       |       |     |       |     |       |
| Federal         |       | —   |       | —   |       |
| State and local |       | —   |       | —   |       |
|            |       | $        | —     |     | $          | — |   |

 

Actual income tax expense(benefit) differs from the amount computed using a blended federal and staterate of 39% for the years ended September 30 as follows (in thousands):
|                                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
|                                              |       |     |       |     |       |
| Computed  “expected” income tax benefit |       | $        | (131       | )        | $          | (1,303 | ) |
| State income  taxes, net of federal tax effect    |       | —   |       | —   |       |
| Change in  deferred tax valuation allowance       |       | 129      |       | 1,297    |       |
| Other, net                                        |       | 2        |       | 6        |       |
| Actual income  tax expense (benefit)              |       | $        | —     |     | $          | — |   |

 

The tax effects oftemporary differences that give rise to significant portions of deferred taxassets and liabilities at September 30 are as follows (in thousands): 
|                                                                                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  assets:                                                                                |       |     |       |     |       |
| Accrued liabilities, primarily due to accrued  compensated absences for financial statement purposes |       | $        | 38         |     | $          | 79 |   |
| Equipment and leasehold improvements, primarily due  to differences in depreciation                  |       | 103      |       | 101      |       |
| Bad debt and revenue earned in excess of billing  allowances                                         |       | 40       |       | 40       |       |
| NOL carryforward                                                                                     |       | 9,906    |       | 11,293   |       |
| Impairment of deductible goodwill                                                                    |       | 1,587    |       | 1,881    |       |
| Accrued marketing incentives                                                                         |       | 6        |       | 83       |       |
| Other, net                                                                                           |       | 34       |       | 207      |       |
| Valuation allowance                                                                                  |       | (11,714  | )          | (13,684  | )          |
| Net deferred tax  assets                                                                             |       | $        | —     |     | $          | — |   |

 

At September 30, 2006, wehad net operating loss carryforwards of approximately $25.4 million that willexpire through September 30, 2026.  Werecorded a valuation allowance to reflect the estimated amount of deferred taxassets that may not be realized due to the uncertainty surrounding our abilityto generate sufficient future taxable income to fully realize the deferred taxassets.  For the year end September 30,2006, the valuation allowance decreased by approximately $1,970,000.

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

We may issue up to 2.6 million shares of preferredstock, no par value, with dividend requirements, voting rights, redemptionprices, liquidation preferences and premiums, conversion rights and other termswithout a vote of the shareholders.  InFebruary 2006, we issued 760,000 shares of Convertible Preferred, together withthe related February Warrants and possible dividends paid in kind.  Terms of the issuance are more fullydiscussed in Note 6.  In May 2006, weissued 752, 072 Class E Warrants to the holders of our Senior Notes.  Terms of the issuance are more fullydiscussed in Note 4.

A summary of the shares issuable pursuant to ourconvertible preferred stock and outstanding warrants at September 30, 2006 isas follows:

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| Exercise  Price                | ** ** | **Number  Outstanding  at  September 30,  2006** | ** ** | **Remaining  Contractual  Life (years)** | ** ** | **Number  Exercisable/Convertible  at September 30,  2006** | ** ** | **Potential  Proceeds** | ** ** |
|--------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------------------------------|------------|-------------------------|------------|
| $  1.186             |       | 752,072                                               |       | 4.7                                           |       | —                                                                |       | $                       | 891,957    |   |
|      1.270 |       | 220,472                                               |       | 1.4                                           |       | 220,472                                                               |       | —                  |       |
|      1.340 |       | 381,890                                               |       | 2.5                                           |       | 381,890                                                               |       | 511,733                 |       |
|      1.490 |       | 381,890                                               |       | 2.5                                           |       | 381,890                                                               |       | 569,016                 |       |
| Total                          |       | 1,736,324                                             |       |                                          |       | 984,252                                                               |       | $                       | 1,972,706  |   |

 

We currently have five nonqualified stock option planswith 174,563 shares available for grant as of September 30, 2006. One of theplans expired on September 30, 2003, and options outstanding under that planwill remain outstanding until exercised or cancelled, but no new options willbe issued under that plan. The exercise price of the options are established bythe Board of Directors on the date of grant and are generally equal to themarket price of the stock on the grant date. Options vest at the end of thefiscal year of grant or equally over a one or two year period from the date ofgrant or at 25% six months from date of grant and 25% on the anniversary datesof the grant thereafter, as determined by the Board of Directors. The optionsare exercisable in whole or in part for a period of up to ten years from thedate of grant. The options may vest earlier under certain circumstances, suchas a change in control.

We also issued inducement options that were not issuedpursuant to our stock option plans.  On March22, 2004, we issued a stock option as an employment inducement to our formerCEO.  The Option was scheduled to vest over atwelve-month period and provided for the purchase of 75,000 shares of ourCommon Stock at an exercise price equal to $1.50 per share, which was below themarket value of $2.82 on the date of grant. Upon his resignation on December 20, 2004, we accelerated his vestingrights on 56,250 shares, and cancelled his right to purchase the remaining 18,750shares of Common Stock.  Our former CEOexercised his rights under the Option on December 28, 2004, and purchased56,250 shares of our Common Stock.

Stock option activity for the plans and the Option forthe years ended September 30 are summarized as follows (shares in thousands):
|                              | ** ** | **Number of  Options** | ** ** | **Weighted  Average   Exercise price  Per share** | ** ** |
|------------------------------|------------|-----------------------------|------------|------------------------------------------------------------------|------------|
| Balance, October  1, 2004    |       | 152                         |       | $                                                                | 5.92       |   |
| Granted                      |       | 145                         |       | 2.11                                                             |       |
| Exercised                    |       | (64                         | )          | 1.50                                                             |       |
| Canceled                     |       | (85                         | )          | 6.40                                                             |       |
| Balance,  September 30, 2005 |       | 148                         |       | $                                                                | 3.84       |   |
|                         |       |                        |       |                                                             |       |
| Granted                      |       | 480                         |       | 1.01                                                             |       |
| Exercised                    |       | —                      |       | —                                                           |       |
| Canceled                     |       | (107                        | )          | 3.05                                                             |       |
| Balance, September 30,  2006 |       | 521                         |       | $                                                                | 1.46       |   |

 

At September 30, 2005 and 2006, approximately 39,000and 483,000 options, respectively, were exercisable.

A summary of the range of exercise prices and theweighted-average contractual life of outstanding stock options at September 30,2006 is as follows:

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| Range of  Exercise  Price | ** **         | **Number  Outstanding  at  September 30,  2006** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Life (years)** | ** ** | **Number  Exercisable  at September 30,  2006** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|--------------------------------|--------------------|-------------------------------------------------------|------------|----------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|----------------------------------------|------------|
| $                              | 0.69 – 1.00   |                                                  |       | 225,000                                |       | $                                                                | 0.69       |                                                      | 9.9        |                                   | 225,000    |   | $ | 0.69 |   |
| 1.01– 2.00                |               |                                                  | 210,000    |                                   | 1.32       |                                                             | 9.4        |                                                      | 193,460    |                                   | 1.31       |   |
| 2.01– 5.00                |               |                                                  | 85,000     |                                   | 2.34       |                                                             | 8.4        |                                                      | 63,750     |                                   | 2.34       |   |
| 5.01 – 20.00              |               |                                                  | 225        |                                   | 20.00      |                                                             | 0.7        |                                                      | 225        |                                   | 20.00      |   |
| 20.01 – 50.00             |               |                                                  | 200        |                                   | 45.90      |                                                             | 0.5        |                                                      | 200        |                                   | 45.90      |   |
| 50.01 – 500.00            |               |                                                  | 573        |                                   | 196.91     |                                                             | 0.1        |                                                      | 574        |                                   | 196.91     |   |
| $                              | 0.69 – 500.00 |                                                  |       | 520,998                                |       | $                                                                | 1.46       |                                                      | 9.4        |                                   | 483,209    |   | $ | 1.42 |   |

 

**(10)****          Employee Benefit Plan**

We sponsor a qualified tax deferred savings plan inaccordance with the provisions of section 401(k) of the Internal Revenue Code.Employees may defer up to 50% of their compensation, subject to certainlimitations. We match 50% of employee contributions up to 4% of theircompensation. We contributed $15,000 and $44,000 to the plan in fiscal 2006 and2005, respectively.

**(11)****          Concentrations of Credit Risk**

At September 30, 2006, one customer accounted for 97%of the total balance of net accounts receivable and revenue in excess ofbillings.  Revenue from this customer andtwo others accounted for 70% (35%, 23%, and 12%) of our consolidated revenuesfor the year ended September 30, 2006. At September 30, 2005, we had contracts with two customers thatrepresented 78% of the total balance of net accounts receivable and revenue inexcess of billings.  Revenues from theseand two other customers for the fiscal year ended September 30, 2005, totaled72% (16%, 17%, 18% and 21%, respectively) of total revenue.  Billing terms are negotiated in a competitiveenvironment and are based on reaching project milestones.  We collected substantially all of ouraccounts receivable and revenue in excess of billings subsequent to September30, 2006.

**(12)****          Litigation and Other Contingencies**

In November 2005, we received an alias summonsnotifying us that we have been named as a party to a suit filed by SycamoreSprings Homeowners Association in the Hamilton Superior Court of the State ofIndiana.  The summons names the developerof the Sycamore Springs neighborhood as well as other firms that may haverendered professional services during the development of the neighborhood.  The claimants allege that the services ofMid-States Engineering, which was a subsidiary of MSE Corporation which weacquired in 1997, affected the drainage system of Sycamore Springsneighborhood, and seek damages from flooding that occurred on September 1,2003.  The summons does not quantify theamount of damages that are being sought nor the period that the allegedwrongful actions occurred.  We soldMid-States Engineering in September 1999. We believe that we have been wrongfully named in the suit and we arediligently pursuing dismissal without prejudice.

We are also subject to various other routinelitigation incidental to our business. Management does not believe that any ofthese routine legal proceedings would have a material adverse effect on ourfinancial condition or results of operations.

**(13)****          Accrued payroll and related benefits**

Our accrued payroll andrelated benefits at September 30 are summarized as follows (in thousands).
|                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Accrued payroll                       |       | $        | 81         |     | $          | 426 |   |
| Accrued health  benefits              |       | 15       |       | 109      |       |
| Accrued vacation                      |       | 36       |       | 152      |       |
| Accrued payroll  and related benefits |       | $        | 132        |     | $          | 687 |   |

 

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**(14)****          Segment Information**

Principally all of our operations for the periodscovered in this report are related to our GIS business.  However, at September 30, 2006, a substantialportion of our assets are related to the energy division.  Segment data includes revenue, operatingincome, including allocated costs charged to each of the operating segments,equipment investment and project investment, which includes net accountsreceivables and revenue earned in excess of billings.  We did not own any assets or have operationsrelated to the energy division in fiscal 2005. We have presented segment data for the year ended September 30, 2006.

We have not allocatedinterest expense and other non-segment specific expenses to individual segmentsto determine our performance measure. Non-segment assets to reconcile to totalassets consist of corporate assets including cash, prepaid expenses anddeferred taxes (in thousands).

| **2006**                                  | ** ** | **GIS  Services** | ** ** | **Energy  Division** | ** ** | **Non-  Segment** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|-------------------|------------|----------------------|------------|-------------------|------------|-----------|------------|
| Operations                                |       |              |       |                 |       |              |       |      |       |
| Revenues                                  |       | $                 | 4,313      |                 | $          | 7                 |       | $         | —     |   | $ | 4,320 |   |
| Loss from operations                      |       | (112              | )          | (87                  | )          | —            |       | (199      | )          |
| Interest expense, net                     |       | —            |       | —               |       | (177              | )          | (177      | )          |
| Other                                     |       | —            |       | —               |       | 41                |       | 41        |       |
| Net loss                                  |       |              |       |                 |       |              |       | $         | (335       | ) |
| Assets                                    |       |              |       |                 |       |              |       |      |       |
| Segment assets                            |       | $                 | 1,431      |                 | $          | 2,022             |       | $         | —     |   | $ | 3,453 |   |
| Non-segment assets                        |       | —            |       | —               |       | 1,584             |       | 1,584     |       |
| Consolidated assets                       |       |              |       |                 |       |              |       | $         | 5,037      |   |
|                                      |       |              |       |                 |       |              |       |      |       |
| Capital Expenditures                      |       | $                 | —     |                 | $          | 2,022             |       | $         | —     |   | $ | 2,022 |   |
| Depreciation, depletion, and amortization |       | $                 | 53         |                 | $          | —            |       | $         | 10         |   | $ | 63 |   |

 

**(15)****          Impact of Accounting Pronouncements**

In December2004, the Financial Accounting Standards Board (“FASB”) published revisions toSFAS No. 123.  The revised SFAS No. 123 (“SFASNo. 123R”), *Share Based Payment*, requires companiesto account for share-based payment transactions using a fair-value based method,thereby eliminating the disclosure-only provisions of SFAS No. 123.  SFAS No. 123R is effective for all smallbusiness public entities as of the beginning of the first interim or annualreporting period for fiscal years beginning after December 15, 2005.  Through September 30, 2006, we elected thedisclosure-only provisions of Statement SFAS No. 123R.  We adopted SFAS No. 123R on October 1, 2006.  We believe that the implementation of thisstandard will not have a material effect on our consolidated financial positionor results of operations for options that were granted prior to September 30,2006.  However, future grants will resultin increased expenses, which will be dependent on the terms of the grants.

InDecember 2004, the FASB issued SFAS No. 153, “*Accountingfor Non-monetary Transactions*” (“SFAS No. 153”).  SFAS No. 153 requires non-monetary exchangesto be accounted for at fair value, recognizing any gain or loss, if thetransactions meet a commercial-substance criterion and fair value is determinable.  SFAS No. 153 is effective for non-monetarytransactions occurring in fiscal years beginning after June 15, 2005.  The implementation of this standard did nothave a material effect on our consolidated financial position or results ofoperations.

In May2005, the FASB issued SFAS No. 154, “*Accountingfor Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASBStatement No. 3*.”  Thisstatement changes the requirements for the accounting for and reporting of achange in accounting principle.  Thisstatement applies to all voluntary changes in accounting principle.  It also applies to changes required by anaccounting pronouncement in the unusual instance that the pronouncement doesnot include specific transition provisions. When a pronouncement includes specific transition provisions, thoseprovisions

 

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should befollowed.  This statement is effectivefor fiscal years beginning after December 15, 2005 and is not expected to havea material impact on our consolidated financial statements.

In June 2006, the FASB issued FASB Interpretation No.48 (“FIN 48”), *“Accounting for Uncertaintyin Income Taxes - an interpretation of FASB Statement No. 109.”*  FIN 48 clarifies the accounting foruncertainty in income taxes recognized in accordance with SFAS No. 109, *“Accounting for Income Taxes.”*  This interpretation prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return.  It also provides guidance on de-recognition,classification, interest and penalties, accounting in interim periods,disclosure and transition.  FIN 48 is effective for fiscal yearsbeginning after December 15, 2006 and is not expected to have a material impacton our consolidated financial statements.

In September 2006, the SEC staff issued StaffAccounting Bulletin (“SAB”) Topic 1N, *“FinancialStatements - Considering the Effects of Prior Year Misstatements whenQuantifying Misstatements in Current Year Financial Statements”* (“SAB108”).  SAB 108 provides guidance on howprior year misstatements should be taken into consideration when quantifyingmisstatements in current year financial statements for purposes of determiningwhether the current year’s financial statements are materially misstated.  SAB 108 references both the “iron curtain”and “rollover” approaches to quantifying a current year misstatement forpurposes of determining its materiality. The iron curtain approach focuses on how the current year’s balancesheet would be affected in correcting a misstatement without considering theyear(s) in which the misstatement originated. The rollover approach focuses on the amount of the misstatement thatoriginated in the current year’s income statement.  SAB 108 states that registrants must quantifythe impact of correcting all misstatements, including both the carryover andreversing effects of prior year misstatements, on the current year financialstatements.  Both the iron curtainapproach and rollover approach should be used in assessing the materiality of acurrent year misstatement.  SAB 108provides that once a current year misstatement has been quantified, theguidance in SAB Topic 1M, “*FinancialStatements - Materiality*,” (“SAB 99”) should be applied to determinewhether the misstatement is material and should result in an adjustment to thefinancial statements. SAB 108 is effective for fiscal years ending afterNovember 15, 2006.  The adoption of SAB108 is not expected to have a significant impact on our financial position orresults of operations.

In September 2006, FASBissued SFAS No. 157, *“Fair ValueMeasurements*”.  This statementdefines fair value, establishes a framework for measuring fair value under U.S.generally accepted accounting principles and expands the disclosures about fairvalue measurements.  SFAS No. 157 appliesto other accounting pronouncements that require or permit fair valuemeasurements.  The changes to currentpractice resulting from the application of SFAS No. 157 relate to thedefinition of fair value, the methods used to measure fair value and theexpanded disclosures about fair value measurements.  The definition focuses on the price thatwould be received to sell the asset or paid to transfer the liability at themeasurement date (an exit price) and not the price that would be paid toacquire the asset or received to assume the liability at the measurement date(an entry price).  SFAS No. 157 alsoemphasizes that fair value is a market-based measurement, not an entityspecific measurement and subsequently a fair value measurement should bedetermined based on the assumptions that market participants would use inpricing the asset or liability.  SFAS No.157 also clarifies that the market participant assumptions include assumptionsabout risk, and assumptions about the effect of a restriction on the sale oruse of an asset.  SFAS No. 157 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years.  SFAS No. 157 should be applied prospectivelyas of the beginning of the year in which it is initially applied.  A limited form of retrospective applicationof SFAS No. 157 is allowed for certain financial instruments.  We are currently evaluating the provisions ofSFAS No. 157 to determine the potential impact, if any, the adoption will haveon our financial position or results of operations.

 

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**(16)****          Liquidity**

The accompanying financial statements have beenprepared on a going concern basis, which contemplates the realization of assetsand the satisfaction of liabilities in the normal course of business. Duringfiscal years 2000 through 2006, we experienced significant operating losseswith corresponding reductions in working capital and net worth, excluding theimpact of debt forgiveness, and do not currently have any external financing inplace to support operating cash flow requirements. Our revenues and backloghave also decreased substantially during the same period.  If wedo not have the cash flow necessary to meet our operating and capitalrequirements, we will be forced to restrict capital and operating expendituresto match available resources or seek additional financing, which may beavailable only at unfavorable interest rates or not available at all.  These factors, among others, raisesubstantial doubt about our ability to continue as a going concern.

To address the going concern issue, managementimplemented financial and operational restructuring plans designed to improveoperating efficiencies, reduce and eliminate cash losses, and position us forprofitable operations. In fiscal 2006, we ultimately decided to expand ourbusiness strategy outside of our traditional business as a GIS service providerafter concluding that our existing GIS business could not be sustained.  We issued the Convertible Preferred and theSenior Notes to secure funds to invest in non-operating working interests inoil and natural gas leasehold interests. We sold our Wisconsin-based production center and assigned certaincontracts in order to reduce working capital requirements on contracts thatrequired substantial investment in the early stages of the contracts, realizing$235,000 in cash proceeds.  We completeda long-term contract and, as of the date of this report, have collected substantiallyall of the accounts receivable related to the contract.  We have reduced our general and administrative expenses byreducing occupancy costs and streamlining our management and productionteams.  Our new business strategyrequires significantly less operational expenses.

We continue to transition our principal businessinto that of an independent oil and gas enterprise focused on leveragingnon-operating participation in drilling and production prospects for thedevelopment of U.S. on-shore oil and natural gas reserves. Our entry into the oil and natural gasexploration and production business is very recent.  ****Although several oil and gas investments have been made, the WashitaCounty well is our largest investment to date and therefore significantemphasis has been placed upon this investment. Although the Adrienne 1-9 is anoffset well to a significant producer of natural gas, there is no assurancethat this well will be a significant producer of natural gas.  There is also no assurance that, upon completion,the well will ultimately yield production in amounts necessary to support thefinancial projections.  In either case,we may not realize the revenue expected by us. In the extreme case, where no revenue is realized because the operatoris forced to plug and abandon the well, our overall business will besignificantly harmed, and we could be forced to liquidate our assets.****

The financial statements do not include anyadjustments relating to the recoverability of assets and the classifications ofliabilities that might be necessary should we be unable to continue as a goingconcern.

**(17)****          Subsequent Events**

On November 24, 2006, weissued three one-year senior secured convertible notes (“Convertible Notes”)totaling $1.65 million pursuant to a Securities Purchase Agreement dated as ofNovember 24, 2006 (the “Purchase Agreement”). The Convertible Notes, together with interest that accrues at the rateof 13% per annum, are convertible into 2,374,101 shares of our Common Stock ata conversion price of $0.695 per share, which was $0.135 per share above fairmarket value of the Common Stock on the trading date preceding the closing dateof November 24, 2006.  Upon maturity, anyunconverted outstanding principal and interest is due and payable in cash.  In connection with the Purchase Agreement, weissued to the investors warrants to purchase 2,374,101 shares of our CommonStock at $0.57 per share, which was $0.01 above the fair market value of theCommon Stock on the trading date preceding the closing date.  The warrants are exercisable any time afterMay 24, 2007 and before

 

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November 24, 2011. Net proceeds after expenses totaled approximately $1.456 million.  We also paid a finder’s fee of $132,000 incash and issued warrants to purchase 189,928 shares of our Common Stock at$0.57 to the placement agent, Palladium Capital Advisors, LLC.  Proceeds will be used to fund additionalinvestments in oil and natural gas non-operating interests by the EnergyDivision.

The sale of the notes and warrants was made pursuantto Section 4(2) of the Securities Act of 1933 as amended, and Rule 506promulgated thereunder.  Pursuant to theterms of the Registration Rights Agreement we agreed to file a series ofregistration statements to register 130% of the total shares issuable under thetransaction.

**Item8.  Changes In And Disagreements WithAccountants On Accounting And Financial Disclosure.**

None.

**Item8A.  Controls and Procedures**

***(a)  Evaluation ofdisclosure controls and procedures***.  We maintain “disclosure controls andprocedures,” as such term is defined in Rule 13a-15(e) under theSecurities Exchange Act of 1934, or the Exchange Act, that are designed toensure that information required to be disclosed by us in reports that we fileor submit under the Exchange Act is recorded, processed, summarized, and reportedwithin the time periods specified in Securities and Exchange Commission rulesand forms, and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Accounting Officer,or persons performing similar functions, as appropriate, to allow timelydecisions regarding required disclosure. In designing and evaluating ourdisclosure controls and procedures, management recognized that disclosurecontrols and procedures, no matter how well conceived and operated, can provideonly reasonable, not absolute, assurance that the objectives of the disclosurecontrols and procedures are met.  Ourdisclosure controls and procedures have been designed to meet reasonable assurancestandards.  Additionally, in designingdisclosure controls and procedures, our management necessarily was required toapply its judgment in evaluating the cost-benefit relationship of possibledisclosure controls and procedures.  Thedesign of any disclosure controls and procedures also is based in part uponcertain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions.

Based on theirevaluation as of the end of the period covered by this Annual Report on Form10-KSB, our Chief Executive Officer and Chief Accounting Officer, or personsperforming similar functions, have concluded that, as of that date, ourdisclosure controls and procedures were effective at the reasonable assurancelevel.

***(b)  Changes in internal control over financialreporting.***  Therehas been no change in our internal control over financial reporting (as definedin Rules 13a-13(f) and 15d-15(f) under the Exchange Act) that occurred duringour fourth fiscal quarter of the fiscal year ended September 30, 2006, that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

Our ChiefAccounting Officer resigned effective November 30, 2006.  His departure was part of our plan tostreamline the management team in accordance with our reduced operationalrequirements.  Our Chief ExecutiveOfficer will continue to perform the role of Chief Financial Officer, supportedby other accounting personnel.

**Item8B.  Other Information**

InAugust 2006, the Compensation Committee of the Board of Directors adopted theIncentive Reward Program (“IRP”) to set forth goals and bonus targets for ourexecutive management in the then remaining months of fiscal 2006 and for fiscal2007.  The IRP establishes revenue andearnings goals, and provides cash incentive payments equal to a percentage ofearnings before interest and taxes, as well as a 1% overriding royaltyinterest that is proportionately reduced to our net interest in all oil and gasdeals.

 

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**PART III.**

 

**Item9.  Directors, Executive Officers,Promoters and Control Persons; Compliance with Section 16(a) of the ExchangeAct**

**Directors**

The followinglists our directors, their ages, and a description of their business experienceand positions held. The Board consists of four directors. Directors are electedto a one-year term. The date the present term of office expires for eachdirector is the date of the annual meeting of our shareholders or untilsuccessors are elected and qualified. Each of our directors, except Ms. Jones, is independent, as such term isused in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.

**R. ThomasRoddy**, 66, has served as one of our directors and as Chairmanof the Board since December 2004.  Mr.Roddy is the chairman of San Antonio, Texas- based Lone Star Capital Bank andis former president of NASDAQ-listed Benson Financial Corp.  His term as a board member of the San AntonioBranch of the Federal Reserve Bank of Dallas was completed on December 31,2004.  Mr. Roddy serves on the AuditCommittee.

**Edward P. Gistaro**, 71, hasserved as one of our directors since December 2004, and as our Chairman of theAudit Committee of the Board since December 20, 2004.  Mr.Gistaro served as the chairman and CEO of Docucon, Inc., a now privately-helddocument-imaging company. In 1973, Mr. Gistaro joined Datapoint Corporation asVP of Marketing. During his tenure at Datapoint, he held various managementpositions, including chief executive officer, chief financial officer,president and chief operating officer. While at Datapoint, Mr. Gistaronegotiated and executed more than $250 million in acquisition and financingtransactions, and took the company from a $350 million company to a $600million company, at which time Datapoint Corporation became a Fortune 500company. He provides us with valuable operating, financial and M&Aexpertise Mr. Gistaro also serves on our Compensation Committee.

**Rad Weaver**, 31, was appointed asone of our directors in August 2005.  Mr.Weaver has served as an investment analyst with McCombs Enterprises in SanAntonio Texas, since March 2000, participating in the asset allocation of itsequity portfolio.  Mr. Weaver is also adirector of privately held Media Excel, Agilight, and Wholesale Clicks,Inc.  Mr. Weaver holds a BBA from theUniversity of Texas at Austin.  Mr.Weaver is a member of the Audit Committee and Compensation Committee.

**Lori A. Jones**, 49, has served asone of our directors and as Chief Executive Officer of the Company sinceDecember 2004 and as our interim Principal Financial Officer since December 1,2006.  Ms. Jones served as our 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.  From May 2000 to March 2001, Ms. Jones servedas the chief financial officer of Worldmerc Incorporated. From January 1999 toMay 2000, Ms. Jones was the chief financial officer of Billserv Inc., an electronicbilling presentation and payment service company.  From May 1990 to December 1998, Ms. Jonesserved 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 atSan Antonio.

**ExecutiveOfficers**

Information concerning Ms. Jones, our chief executiveofficer, appears under the heading “Directors” above.

**LouisDorfman, Jr.**, 43, was appointed Executive Vice President ofASI Energy on September 29, 2006.  FromNovember 2005 until his employment with us, Mr. Dorfman was Vice President ofBusiness Development and a consultant with H&S Production, a Dallasindependent oil and gas company.  FromJanuary 1994 until October 2005, Mr. Dorfman was president of DorfmanProduction Company, a family-owned independent oil and gas venture.

**Donald L. Fryhover**, 53, was appointedSenior Vice President of ASI Energy on April 24, 2006.  Mr. Fryhover served in various capacitieswith us from 1989 until September 2003. From October 2003 until June 2004, Mr. Fryhover served as co-founder ofHamdon Enterprises.  From June 2004 untilrejoining us, Mr. Fryhover served as the director of Professional Services forthe Geospatial Systems Division of Tadpole Technology, a Carlsbad,California-based division of Tadpole Technology PLC, providing distributedenterprise GIS implementation software and service.  Mr. Fryhover was president of PetroleumResearch Company, Inc., a petroleum land service company that provided landmanagement services to the oil and gas industry in the late 1980s.Additionally, Mr. Fryhover served as field land manager for the former TuckerOil and Gas Company.

 

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**Audit Committee**

 

Mr. Gistaro hasserved as chairman and Mr. Roddy has served as a member of the Audit Committeesince their appointments to the Board in December 2004.  Mr. Weaver was appointed to the AuditCommittee in August 2005.  The Board hasdetermined that both Messrs. Roddy and Gistaro are audit committee financialexperts as described in Item 401(h) of Regulation S-B.

The primary purposes of the Audit Committee, which metfour times in fiscal 2006, are to recommend the appointment of our independentaccountants; review the scope and results of the audit plans of the independentaccountants; oversee the scope and adequacy of our internal accounting controland record-keeping systems; review non-audit services to be performed by theindependent accountants; and determine the appropriateness of fees for auditand non-audit services performed by the independent accountants.

**Section 16(a) Beneficial OwnershipReporting Compliance**

Section 16(a) of the Securities Exchange Act of 1934requires our directors and executive officers, and any persons who own morethan 10 percent of a registered class of our equity securities, to file reportsof ownership and changes of ownership on Forms 3, 4 and 5 with the Securitiesand Exchange Commission.  Officers,directors, and greater than 10% shareholders are required to furnish us withcopies of all such forms that they file.

To our knowledge, based solely on review of the copiesof such reports furnished to us during fiscal 2006 all such filing requirementswere met.

**Code of Ethics**

In July 2003 our Board ofDirectors adopted a code of ethics which our senior financial officers,executive officers, and general and project managers are expected to adhere toand promote throughout the organization and which may be found on our websiteat www.asienergy.com.  We intend todisclose on our website any waivers or amendments to our code of ethics withinfive business days of such action.

 

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**Item 10.  Executive Compensation**

 

**Executive Officers**

The following table setsforth a summary of certain information regarding the compensation of our ChiefExecutive Officer and the other executive officers for the three fiscal yearsended September 30, 2006, whose salary and bonus exceeded $100,000 (the “NamedExecutive Officers”).
|                          | ** ** | **Annual Compensation** | ** ** | **Long Term  Compensation  Awards** | ** ** | ** ** | ** ** |
|--------------------------|------------|------------------------------|------------|------------------------------------------|------------|------------|------------|
| **Name and  Title** | ** ** | **Year**                     | ** ** | **Salary**                               | ** ** | **Bonus**  | ** ** | **Other Annual  Compensation  (1)** | ** ** | **Stock  Options  (2)** | ** ** | **All Other  Compensation  (3)** | ** ** |
| ** **               | ** ** | ** **                   | ** ** | **$**                                    | ** ** | **$**      | ** ** | **$** | ** ** | **(#)** | ** ** | **$** | ** ** |
| Lori A. Jones            |       | 2006                         |       | 175,000                                  |       | —     |       | — |   | 100,000 |   | 3,231 |   |
| President and            |       | 2005                         |       | 175,000                                  |       | 60,000     |       | — |   | 40,000 |   | 2,054 |   |
| Chief Executive Officer  |       | 2004                         |       | 142,981                                  |       | —     |       | — |   | — |   | 2,860 |   |
| Don Fryhover(4)          |       | 2006                         |       | 53,480                                   |       | —     |       | — |   | 100,000 |   | __ |   |
| Senior Vice  President   |       |                         |       |                                     |       |       |       |   |   |   |   |   |   |
| Louis Dorfman, Jr.(5)    |       | 2006                         |       | —                                   |       | —     |       |   |   | 50,000 |   | — |   |

 

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(1)             Certain perquisitesand other personal benefits did not exceed the lesser of $50,000 or 10% of thetotal amounts reported in the Salary and Bonus columns in any of the fiscalyears reported, except as indicated.

(2)             Long termcompensation consists only of stock options. There were no grants of restrictedstock or payments from other long-term incentive plans, therefore columns for “RestrictedStock Awards” and “LTIP Payouts” are omitted.

(3)             Other compensationincludes employer’s matching contributions to the 401(k) Incentive SavingsPlan.

(4)             Mr.Fryhover joined us on April 24, 2006. Accordingly, fiscal 2006 compensation information included in the tablerepresents only compensation from that date through September 30, 2006.

(5)             Mr.Dorfman joined us on September 29, 2006. Accordingly, fiscal 2006 compensation information included in the tablerepresents only compensation from that date through September 30, 2006, whichwas comprised solely of a stock option award.

**Options/SAR Grants in Last FiscalYear**

The following table setsforth certain information with respect to grants we made of stock options toour Named Executive Officers during fiscal 2006.  No stock appreciation rights (“SARs”) weregranted to the Named Executive Officers during fiscal 2006.
| Name               | ** ** | **Number of  Securities  Underlying  Options  Granted(1)** | ** ** | **Percent of  Total  Options to  Employees  In Fiscal  Year** | ** ** | **Exercise  Price  ($/sh)** | ** ** | **Expiration  Date** | ** ** | **Potential Realizable  Value(2) at Assumed  Annual Rates of  Stock Appreciation  for  Option Term** | ** ** |
|--------------------|------------|-----------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **         | ** ** | ** **                                                      | ** ** | ** **                                                                   | ** ** | ** **                  | ** ** | ** **           | ** ** | **5% ($)**                                                                                                                         | ** ** | **10% ($)** | ** ** |
| Lori A. Jones      |       | 50,000                                                          |       | 13.33                                                                        | %          | 1.27                        |       | 05/09/16             |       | 39,935                                                                                                                                  |       | 117,673 |   |
|                    |       | 50,000                                                          |       | 13.34                                                                        | %          | 0.69                        |       | 09/28/16             |       | 21,697                                                                                                                                  |       | 63,933 |   |
|               |       |                                                            |       |                                                                         |       |                        |       |                 |       |                                                                                                                                    |       |   |   |
| Don Fryhover       |       | 30,000                                                          |       | 8.00                                                                         | %          | 1.31                        |       | 04/23/16             |       | 24,716                                                                                                                                  |       | 72,827 |   |
|                    |       | 10,000                                                          |       | 2.67                                                                         | %          | 1.37                        |       | 05/01/16             |       | 8,618                                                                                                                                   |       | 25,388 |   |
|                    |       | 60,000                                                          |       | 16.00                                                                        | %          | 0.69                        |       | 09/28/16             |       | 26,036                                                                                                                                  |       | 76,719 |   |
|               |       |                                                            |       |                                                                         |       |                        |       |                 |       |                                                                                                                                    |       |   |   |
| Louis Dorfman, Jr. |       | 50,000                                                          |       | 13.34                                                                        | %          | 0.69                        |       | 09/28/16             |       | 21,697                                                                                                                                  |       | 63,933 |   |

 

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(1)             Optionsvest on September 30, 2006, which is the end our fiscal year.

(2)             “PotentialRealizable Value” is calculated based on the assumption that the price of ourCommon Stock will appreciate at the rates shown. The 5% and 10% assumed ratesare mandated by the rules of the Securities Exchange Commission and do notreflect our estimate or projection of future stock prices. Actual gains, ifany, realized upon future exercise of these options will depend on the actualperformance of our Common Stock and the continued employment of the NamedExecutive Officer through the vesting period of the option.

 

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

The following tableprovides certain information regarding the number and value of unexercisedstock options at September 30, 2006.  Asof that date, no SARs were outstanding.
| ** **         | ** ** | **Shares acquired**      | ** ** | ** **         | ** ** | **Number of Securities Underlying  Unexercised Options at  Fiscal Year End** | ** ** | **Value ($) of Unexercised In-the-  Money Options at  Fiscal Year End** | ** ** |
|--------------------|------------|-------------------------------|------------|--------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|
| **Name**           | ** ** | **on exercise (#)** | ** ** | **Value ($)** | ** ** | **Exercisable**                                                                                                 | ** ** | **Unexercisable**                                                                                               | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
|               |       |                          |       |               |       |                                                                                                            |       |                                                                                                            |       |   |   |   |   |
| Lori A. Jones      |       | —                        |       | —             |       | 140,000                                                                                                         |       | 10,000                                                                                                          |       | — |   | — |   |
| Don Fryhover       |       | —                        |       | —             |       | 100,000                                                                                                         |       | —                                                                                                          |       | — |   | — |   |
| Louis Dorfman, Jr. |       | —                        |       | —             |       | 50,000                                                                                                          |       | —                                                                                                          |       | — |   | — |   |

 

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(1)             The value of theunexercised in-the-money options is calculated using the closing bid price ofour Common Stock on September 29, 2006, at $0.69 per share. Amounts reflectedare based on the assumed value minus the exercise price and do not indicateactual sales or proceeds.

**Compensation of Directors**

Each of our non-employee directors is entitled toreceive quarterly cash compensation of $5,000 for attendance at each Board ofDirectors meeting and each committee meeting. Committee chairmen and the Chairman of the Board are entitled to receiveadditional quarterly cash compensation of $1,250 for service as chairman.  Directors who are also our employees do notreceive any additional compensation for their service on the Board.  During fiscal 2006, each of Messrs. Roddy,Gistaro, and Weaver were granted options to purchase 20,000 shares of CommonStock at an exercise price of $1.27 per share and an additional 20,000 sharesat an exercise price of $.69 per share. Each of these options vest on September 30, 2006.

**Employment Contracts and Terminationof Employment, and Change-in-Control Arrangements**

Chief ExecutiveOfficer

The Board appointed LoriJones as Chief Executive Officer on December 20, 2004.  Ms. Jones had served as our Chief FinancialOfficer since January 2003 (see “Chief Financial Officer”).  Ms. Jones’ employment contract, which iseffective April 1, 2005, provides for a base salary of $175,000 and bonuscompensation of $50,000 for the achievement of certain corporate goals.  Ms. Jones also participates in an incentivereward program, which includes a 1% overriding royalty interest that isproportionately reduced to our net interest in all oil and gas deals.  Upon termination of Ms. Jones’ employmentwithout “cause” or if she resigns her employment for “good reason,” (asdefined, which includes a termination of employment in connection with a changeof control), Ms. Jones will continue to receive salary for a period of twelvemonths.  If we terminate Ms. Jones for “cause”(as defined) or if she terminates her employment voluntarily, she will not beentitled to receive severance pay.

Chief Financial Officer

**Ms. Jones served as Chief Financial Officer fromJanuary 2003 until her appointment as Chief Financial Officer in December2004.  Pursuant to her employmentagreement, amended in August 2004, her base salary was $175,000 per annum.  The employment agreement provided for a$60,000 bonus payment upon the achievement of agreed-upon performance objectivesfor fiscal 2004.  The bonus payment waspaid in January 2005.**

**The position of Chief Financial Officer remains openas of December 1, 2006.**

Presidentand Chief Operating Officer

**We entered into anemployment agreement with Brian Morrow, effective June 5, 2005, under which hewas employed as our President and Chief Operating Officer.  Mr. Morrow resigned effective December 2,2005.  We are not obligated to makeseverance payments to Mr. Morrow, and accordingly no payments were made.  Ms. Jones assumed his duties.**

 

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**Executive Vice President**

Louis Dorfman, Jr.was appointed Executive Vice President of ASI Energy on September 29,2006.  Pursuant to a Letter Agreement,Mr. Dorfman will be paid a base salary equal to $135,000 per annum and will beeligible to participate in incentive reward programs, which include a 1%overriding royalty interest that is proportionately reduced to our net interestin all oil and gas deals. We issued options to Mr. Dorfman for the purchase of50,000 shares of our Common Stock at an exercise price of $.69 per share, whichwas the closing bid price on the date of his employment.

Senior VicePresident

Donald L. Fryhoverwas appointed Senior Vice President of ASI Energy on April 24, 2006.  Mr. Fryhover’s base salary is $135,000 perannum, and he is eligible to participate in an incentive reward program, whichincludes a 1% overriding royalty interest that is proportionately reduced toour net interest in all oil and gas deals. On his employment date, he was granted stock options for the purchase ofup to 30,000 shares of our Common Stock at an exercise price of $1.31 pershare, the fair market value on April 24, 2006. In the event of a termination resulting from a change in control, Mr.Fryhover will continue to receive his base salary for a period of six months.

**Item11.  Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters**

The followingtable sets forth information with respect to the shares of our Common Stock(the only outstanding class of voting securities) owned of record and beneficiallyas of December 1, 2006, unless otherwise specified, by (i) all persons known topossess voting or dispositive power over more than 5% of our Common Stock, (ii)each director and Named Executive Officer, and (iii) all directors andexecutive officers as a group: (Except as otherwise noted in the table, eachperson or group identified possesses sole voting and investment power withrespect to such shares, subject to community property laws, where applicable,and the address of each shareholder is c/o Analytical Surveys, Inc., 8610 N.New Braunfels, Suite 205, San Antonio, Texas 78217).

|                                                                   | ** ** | **Amount and Nature of  Beneficial Ownership (1)** | ** ** | **Percentage  of Class** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------|------------|
| Longview Fund, LLP(2)*                                            |       | 564,054                                            |       |                     | 12.99      | % |   |
| Alpha Capital, AG(3)                                              |       | 569,837                                            |       |                     | 13.14      | % |   |
| Edward P. Gistaro (4)*                                            |       | 55,000                                             |       |                     | 1.43       | % |   |
| Lori A. Jones (5) *                                               |       | 140,340                                            |       |                     | 3.57       | % |   |
| Thomas P. Roddy (4)*                                              |       | 55,000                                             |       |                     | 1.43       | % |   |
| Rad Weaver (6)*                                                   |       | 47,500                                             |       |                     | 1.23       | % |   |
| Don Fryhover (7)                                                  |       | 100,114                                            |       |                     | 2.57       | % |   |
| Louis Dorfman, Jr.(8)                                             |       | 50,000                                             |       |                     | 1.30       | % |   |
|                                                              |       |                                               |       |                     |       |   |   |
| All directors and  executive officers as a group  (6 persons) (9) |       | 447,954                                            |       |                     | 10.57      | % |   |

 

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*                    Director

**             Less than 1%

(1)             Unlessotherwise indicated, all persons have sole voting and investment power withrespect to their shares.  All amountsshown in this column include shares obtainable upon exercise of stock optionscurrently exercisable or exercisable within 60 days of the date of this table.

(2)             Representsshares issuable upon exercise of Class E Warrrants.  Mr. S. Michael Rudolph  holds voting anddispositive powers for Longview Fund, L.P.  Mr. Rudolph is the ChiefFinancial Officer of Viking Management, LLC, investment manager for LongviewFund, L.P.

(3)             Includes12,056 shares held directly, 157,480 shares of common stock issuable uponconversion of 200,000 shares of Convertible Preferred, 15,433 shares of commonstock potentially issuable in lieu of cash for payment of dividends on theConvertible Preferred, 98,425 shares of common stock issuable upon the exerciseof Class A Warrants, 98,425 shares issuable upon the exercise of Class BWarrants, and 188,018 shares of common stock issuable upon exercise of Class EWarrants.  Mr. Konrad Ackerman holdsvoting and dispositive powers for Alpha Capital AG.

(4)             Includes55,000 shares of Common Stock underlying options that are exercisable within 60days of December 1, 2006.

(5)             Includes132,500 shares of Common Stock underlying options that are exercisable within60 days of December 1, 2006.

 

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(6)             Includes 47,500shares of Common Stock underlying options that are exercisable within 60 daysof December 1, 2006.

(7)             Includes 100,000shares of Common Stock underlying options that are exercisable within 60 daysof December 1, 2006.

(8)             Includes 50,000shares of Common Stock underlying options that are exercisable within 60 daysof December 1, 2006.

(9)             Includes440,000 shares of Common Stock underlying options that are exercisable within60 days of December 1, 2006.

**Equity Compensation Plan Information**

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     |       | 513,673                                                                                                                                              |       | $                                                                                                           | 1.46       |                                                                                                                                                                                                             | 96,888     |   |
| Equity compensation  plans not approved by security holders |       | 7,325                                                                                                                                                |       | $                                                                                                           | 1.49       |                                                                                                                                                                                                             | 77,675     |   |
| Total                                                       |       | 520,998                                                                                                                                              |       | $                                                                                                           | 1.46       |                                                                                                                                                                                                             | 174,563    |   |

 

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

**2000 Stock Incentive Plan**

In September 2000, the Board of Directors adopted the2000 Stock Incentive Plan (the “2000 Plan”). Pursuant to applicable law, the2000 Plan has not been approved by our 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 the 2000Plan*.  The 2000 Planauthorizes the grant of options relating to an aggregate of 50,000 shares ofCommon Stock.  If any corporatetransaction occurs which causes a change in our capitalization (for example, areorganization, recapitalization, stock split, stock dividend, or the like),the number of shares of stock available and the number of shares of stocksubject to outstanding options granted under the 2000 Plan will be adjustedappropriately and equitably to prevent dilution or enlargement of a participant’srights.

*Eligibility for Participation*.  Individuals eligible to participate in the2000 Plan are our employees and employees of our subsidiaries, but not any ofour or our subsidiaries’ officers.

*Terms of Options*.  Options granted to employees may be eitherincentive stock options (ISOs), which satisfy the requirements of InternalRevenue Code Section 422, or nonstatutory stock options (NSOs), which are notintended to satisfy such requirements. The exercise price for the grant of an NSO under the 2000 Plan may beany price that is greater than or equal to 85% of the fair market value of theCommon Stock on the date the NSO is granted. The exercise price of an ISO must be at least equal to 100% (110% for10%-shareholders) of the fair market value of our Common Stock on the date theISO is granted.  Options expire at thetimes determined by the committee, as specified in the applicable award agreement.However, no option is exercisable later than the tenth anniversary of the grantdate, and any ISO granted to a 10%-shareholder must be exercisable on or beforethe fifth anniversary of the grant date.

*Vestingand 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 our change in control.  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 our complete liquidation ordissolution, or the sale of all or substantially all of our assets, if approvalof our shareholders is required for the transaction.

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*Deduction to ASI*.  We will be entitled to an income taxdeduction equal to the amount of ordinary income recognized by aparticipant.  The deduction generallywill be allowed for our taxable year in which occurs the last day of thecalendar year in which the participant recognizes ordinary income.

*Term*.  The 2000 Plan expires on September 8, 2010.

**2000 Officer and Employee Recruitment Stock Incentive Plan**

In September 2000, the Board of Directors adopted the2000 Officer and Employee Recruitment Stock Incentive Plan (the “2000Recruitment Plan”).  Pursuant toapplicable law, the 2000 Recruitment Plan has not been approved by ourshareholders.  The 2000 Recruitment Planprovides for the granting of ISOs and NSOs, as determined by a committeeappointed by the Board of Directors.

*Number of Shares Subject to the 2000Recruitment Plan*.  The2000 Recruitment Plan authorizes the grant of options relating to an aggregateof 50,000 shares of Common Stock, subject to adjustment in the case of a changein our capitalization in the same manner as is provided in the 2000 Plan(described above).

*Eligibility for Participation*.  An individual is eligible for participationin the 2000 Recruitment Plan if such individual has not been previouslyemployed by us and the award of options is made in connection with the entryinto an employment contract with such individual.

*Terms of Options*.  The options granted under the 2000Recruitment Plan have the same terms as are described above with respect to the2000 Plan.

*Vesting and Acceleration*.  The options granted under the 2000Recruitment Plan are subject to the same vesting and acceleration provisions asare described above with respect to the 2000 Plan.

*Deduction to ASI*.  We will be entitled to deductions for optionsgranted under the 2000 Recruitment Plan as described above with respect to the2000 Plan.

*Term*.  The 2000 Recruitment Plan expires onSeptember 8, 2010.

**Item12.  Certain Relationships and RelatedTransactions**

On April 2, 2002, Tonga Partners LLP (“Tonga”)invested $2.0 million in us in exchange for the issuance of a senior securedconvertible promissory note, the terms of which included the right to appoint amajority of our Board of Directors (the “Change in Control Transaction”). OnNovember 10, 2004, Tonga converted the $1.7 million principal balance of thenote plus accrued interest into shares of our Common Stock.  According to filings made by Tonga underSection 16 of the Exchange Act, Tonga liquidated its holdings of our CommonStock by November 15, 2004.  Tonga simultaneouslyrelinquished its right to appoint directors, which resulted in the appointmentof new independent directors and relinquishment of Tonga’s control.

**Item13.  Exhibits**

The exhibits listed below are required by Item 601 ofRegulation S-B.  Each management contractor compensatory plan or arrangement required to be filed as an exhibit to thisForm 10-KSB has been identified.
| 3.0    |   | Articles of Incorporation and By-Laws                                                                                                                        |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                         |
| 3.1    |   | Articles of Incorporation, as amended (incorporated  by reference to the Company’s Registration Statement on Form S-18,  (Registration No. 2-93108-D)). |
|   |   |                                                                                                                                                         |
| 3.3    |   | By-Laws (incorporated by reference to the Company’s  Registration Statement on Form S-18 (Registration No. 2-93108-D)).                                 |
|   |   |                                                                                                                                                         |
| 3.3    |   | Amendment to By-laws (incorporated by reference to  the Company’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 the Company’s Registration Statement on Form S-18                                              |

 

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|        |   | (Registration No. 2-93108-D)).                                                                                                                                                                                                                           |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                     |
| 4.2    |   | Subscription Agreement dated May 31, 2006,  (incorporated by reference to Exhibit A of the Company’s Proxy Statement  filed June 29, 2006).                                                                                                         |
|   |   |                                                                                                                                                                                                                                                     |
| 4.3    |   | Form of Class E Warrant dated May 31, 2006,  (incorporated by reference to Exhibit D of the Company’s Proxy Statement,  filed June 29, 2006).                                                                                                       |
|   |   |                                                                                                                                                                                                                                                     |
| 4.4    |   | Securities Purchase Agreement dated as of November  24, 2006, among the Company and the Purchasers named therein, (incorporated  by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated  November 30, 2006).                 |
|   |   |                                                                                                                                                                                                                                                     |
| 4.5    |   | 13% Secured Convertible Debenture due November 24,  2007, issued to Monarch Capital Fund, (incorporated by reference to Exhibit  4.2 to the Company’s Current Report on Form 8-K dated November 30, 2006).                                          |
|   |   |                                                                                                                                                                                                                                                     |
| 4.6    |   | 13% Secured Convertible Debenture due November 24,  2007, issued to Harborview Master Fund LP, (incorporated by reference to  Exhibit 4.3 to the Company’s Current Report on Form 8-K dated November 30,  2006).                                    |
|   |   |                                                                                                                                                                                                                                                     |
| 4.7    |   | 13% Secured Convertible Debenture due November 24,  2007, issued to DKR SoundShore Oasis Holding Fund LTD, (incorporated by  reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K dated  November 30, 2006).                        |
|   |   |                                                                                                                                                                                                                                                     |
| 4.8    |   | Common Stock Purchase Warrant dated November 24,  2006, issued to Monarch Capital Fund (incorporated by reference to Exhibit  4.5 to the Company’s Current Report on Form 8-K dated November 30, 2006).                                             |
|   |   |                                                                                                                                                                                                                                                     |
| 4.9    |   | Common Stock Purchase Warrant dated November 24,  2006, issued to Harborview Master Fund LP (incorporated by reference to  Exhibit 4.6 to the Company’s Current Report on Form 8-K dated November 30,  2006)                                        |
|   |   |                                                                                                                                                                                                                                                     |
| 4.10   |   | Common Stock Purchase Warrant dated November 24,  2006, issued to DKR SoundShore Oasis Holding Fund LTD (incorporated by  reference to Exhibit 4.7 to the Company’s Current Report on Form 8-K dated  November 30, 2006).                           |
|   |   |                                                                                                                                                                                                                                                     |
| 4.11   |   | Registration Rights Agreement entered into as of  November 24, 2006, among the Company and the Purchasers,  (incorporated by reference to Exhibit 4.8  to the Company’s Current Report on Form 8-K dated November 30, 2006).                   |
|   |   |                                                                                                                                                                                                                                                     |
| 10.0   |   | Material Contracts                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                     |
| 10.1   |   | 1993 Non-Qualified Stock Option Plan dated December  11, 1992 (incorporated by reference to the Company’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 the Company’s  Proxy Statement dated January 8, 1998).                                                                            |
|   |   |                                                                                                                                                                                                                                                     |
| 10.3   |   | Analytical Surveys, Inc. Officer and Employee  Recruitment Stock Incentive Plan and Form of Stock Option Agreement  (incorporated by reference to the Company’s Annual Report on Form 10-K/A for  the year ended September 30, 2000). (1)           |
|   |   |                                                                                                                                                                                                                                                     |
| 10.4   |   | Analytical Surveys, Inc. Year 2000 Stock Incentive  Plan and form of agreement (incorporated by reference to the Company’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 the Company’s Proxy  Statement dated July 21, 2003). (1)                                                                                  |
|   |   |                                                                                                                                                                                                                                                     |
| 10.6   |   | Employment Agreement dated April 1, 2005, by and between  Analytical Surveys, Inc. and Lori Jones (incorporated by reference to Exhibit  10.8 to the Company’s Current Report on Form 8-K dated June 28, 2005). (1)                                 |
|   |   |                                                                                                                                                                                                                                                     |
| 10.7   |   | Employment Agreement dated June 5, 2005, by and  between Analytical Surveys, Inc. and Brian Morrow (incorporated by reference  to Exhibit 10.8 to the Company’s Current Report on Form 8-K dated June 28,  2005). (1)                               |
|   |   |                                                                                                                                                                                                                                                     |
| 10.8   |   | 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 the Company’s Current Report on  Form 8-K dated October 13, 2005). |
|   |   |                                                                                                                                                                                                                                                     |
| 10.9   |   | Consulting Agreement dated December 7, 2005, by and  between Analytical Surveys, Inc. and Pluris Partners, Inc. (incorporated by  reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K dated  December 13, 2005).                  |
|   |   |                                                                                                                                                                                                                                                     |
| 10.10  |   | Incentive Reward Program for fiscal 2006 and 2007  dated August 29, 2006. (1)                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                     |
| 10.11  |   | Letter Agreement dated September 29, 2006 between  Analytical Surveys, Inc. and Louis Dorfman, Jr. (incorporated by reference to  Exhibit 10.8 to the Company’s Current Report on Form 8-K dated October 4,  2006) (1).                             |

 

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| 22.1   |   | Subsidiaries of the Company                                |
|--------|--------|------------------------------------------------------------|
|   |   |                                                       |
| 23.1   |   | *Consent of Pannell Kerr Forster of Texas, P.C.            |
|   |   |                                                       |
| 24.1   |   | Power of Attorney (included on signature page)             |
|   |   |                                                       |
| 31.1   |   | *Section 302 Certification of Chief Executive  Officer     |
|   |   |                                                       |
| 31.2   |   | *Section 302 Certification of Principal Financial  Officer |
|   |   |                                                       |
| 32.1   |   | *Section 906 Certification of Chief Executive  Officer     |
|   |   |                                                       |
| 32.2   |   | *Section 906 Certification of Principal Financial  Officer |

 

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|        |   | *Filed herein                                                          |
|--------|--------|------------------------------------------------------------------------|
|   |   | (1) indicates management contract of compensatory  plan or arrangement |

 

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

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

As of December 1, 2006, audit fees billed by PannellKerr Forster of Texas, P.C. for the audit of our annual financial statementsfor the fiscal year ended September 30, 2006 and 2005, and for the review ofthe financial statements included in our Quarterly Reports on Form 10-QSB filedwith the Securities and Exchange Commission (“SEC”) for these years were$167,500 and $127,308, respectively.

**(b)****                      Audit-RelatedFees.**

The aggregate fees billed for professional servicesrendered by Pannell Kerr Forster of Texas, P.C., for assurance and relatedservices in each of the fiscal years ended September 30, 2006 and September 30,2005, were $23,852 and $15,551, respectively. Audit-Related Fees in both fiscal 2006 and fiscal 2005 were related toaudits of our operations in Puerto Rico, multiple Registration Statements onForm S-3 filed with the SEC, and various research matters.

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

The aggregate fees billed for professional servicesrendered 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, 2006 andSeptember 30, 2005, were $29,884 and $17,000, respectively.  Tax fees in fiscal 2006 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 proposed transactionand Puerto Rican tax compliance services.

**(d)****                      All OtherFees.**

**There were no other fees billed in either of the fiscalyears ended September 30, 2006 or September 30, 2005 for services rendered byPannell Kerr Forster of Texas, P.C. or not reportable as Audit Fees,Audit-Related Fees or Tax Fees.**

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

TheAudit Committee has established a policy intended to clearly define the scopeof services performed by our independent auditors for non-audit services.  This policy relates to audit services,audit-related services, tax and all other services which may be provided by ourindependent auditor and is intended to assure that such services do not impairthe auditor’s independence.  The policyrequires the pre-approval by the Audit Committee of all services to be providedby our independent auditor.  Under thepolicy, the Audit Committee will annually review and pre-approve the servicesthat may be provided by the independent auditor without obtaining specificpre-approval from the Audit Committee or its designee.  In addition, the Audit Committee may delegatepre-approval authority to one or more of its members.  The member or members to whom such authorityis delegated is required to report to the Audit Committee at its next meetingany 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 by our independent registered publicaccounting firm described above under the captions Audit Fees, Audit-RelatedFees, Tax Fees and All Other Fees were approved by the Audit Committee and theAudit Committee has determined that the auditor independence has not beencompromised as a result of providing these services and receiving the fees forsuch services as noted above.

 

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**SIGNATURES**

** **

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 
|        | **ANALYTICAL SURVEYS, INC.** |
|--------|------------------------------|
|   |                         |   |
|   | By:                          | /s/ Lori A. Jones |   |
|   |                         | **Lori A. Jones** |
|   |                         | **Chief Executive Officer** |
|   |                         | **(Principal Executive Officer)** |
|   | Date:                        | December 22, 2006 |

 

KNOW ALL MEN BYTHESE PRESENTS, that each person whose signature appears below constitutes andappoints Lori A. Jones, her true and lawful attorney-in-fact, each with fullpower of substitution, for him or her in any and all capacities, to sign anyamendments to this report on Form 10-KSB and to file the same, with exhibitsthereto and other documents in connection therewith, with the Securities andExchange Commission, hereby ratifying and confirming all that each of saidattorney-in-fact or her substitute or substitutes may do or cause to be done byvirtue hereof.

In accordance with theExchange Act, this report has been signed below by the following persons onbehalf of the registrant and in the capacities and on the dates indicated.
| Name                  | ** ** | **Title**                                   | ** ** | **Date**           |
|-----------------------|------------|---------------------------------------------|------------|--------------------|
| /s/ Lori A. Jones     |       | Chief Executive  Officer                    |       | December 22,  2006 |
| Lori A. Jones         |       | (Principal  Executive Officer and Principal |       |               |
|                  |       | Accounting  Officer) and Director           |       |               |
|                  |       |                                        |       |               |
| /s/ R. Thomas Roddy   |       | Chairman of the  Board of Directors         |       | December 22,  2006 |
| R. Thomas Roddy       |       |                                        |       |               |
|                  |       |                                        |       |               |
|                  |       |                                        |       |               |
| /s/ Edward P. Gistaro |       | Director                                    |       | December 22,  2006 |
| Edward P. Gistaro     |       |                                        |       |               |
|                  |       |                                        |       |               |
|                  |       |                                        |       |               |
| /s/ Rad Weaver        |       | Director                                    |       | December 22,  2006 |
| Rad Weaver            |       |                                        |       |               |

 

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