----

** UNITED STATESSECURITIES AND EXCHANGE COMMISSION  Washington, DC 20549**

----

**FORM 10-Q**

| [ X ] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

 

OR

 

[    ]

TRANSITION REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 0-14488

 

**SEITEL, INC.**

(Exact name of registrant as specified in its charter)
   
Delaware

76-0025431

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)
      
10811 S. Westview Circle Drive
   
Building C, Suite 100

Houston, Texas

77043

(Address of principal executive offices)

(Zip Code)
      
Registrant's telephone  number, including area code:

(713) 881-8900

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes

[  ]

No

[X]

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of "accelerated filer and largeaccelerated filer" in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer

[  ]

Accelerated filer

[  ]

Non-accelerated filer

[X]

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

 

Yes

[  ]

No

[X]

Indicate by check mark whether theregistrant has filed all documents and reports required to be filed by Section12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to thedistribution of securities under a plan confirmed by a court.

 

Yes

[X]

No

[  ]

Asof September 4, 2007, there were 100 shares of the Company's commonstock, par value $.0001 per share outstanding.

 

Page 1 of 50

 

 
**INDEX** 

Page
PART I.

FINANCIAL INFORMATION

 

Item 1.       	Financial Statements...........................................................................................................	

3

 

Condensed Consolidated Balance Sheets (Unaudited)......................................................	

3

 

Condensed  Consolidated Statements of Operations (Unaudited)......................................	

4

 

Condensed  Consolidated Statements of Comprehensive Income(Loss) (Unaudited)......	

6

 

Condensed Consolidated Statements of Stockholders'  Equity (Unaudited)....................... 

7

 

Condensed Consolidated Statements of Cash Flows (Unaudited)....................................

8

 

Notes to Condensed Consolidated Interim  Financial Statements (Unaudited)................... 

10

 

Item 2.        Management's Discussion and Analysis of Financial  Condition 

                  	and Results of  Operations...................................................................................................

 

35

 

Item 3.        Controls and Procedures....................................................................................................

47

 

Item 6.        Exhibits................................................................................................................................

47

 

Signatures ..............................................................................................................................................	

49
 
Page 2 of 50

*(Index)*
**PART I - FINANCIAL INFORMATION****Item 1.     FINANCIAL STATEMENTS**
**SEITEL, INC. ANDSUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS**

*(In thousands,except share and per share amounts)*

 
      
(Unaudited)
            
* *

SUCCESSOR

PREDECESSOR

* *

PERIOD

PERIOD

June 30,

December 31,

2007

2006
                     
ASSETS

     Cash and  cash equivalents

$

25,261

$

107,390

     Restricted  cash

107

105

     Receivables

         Trade,  net of allowance for doubtful accounts of

            $710  and $316, respectively

45,864

52,144

         Notes and other, net of  allowance for doubtful accounts

            of $275 and $275,  respectively

443

895

     Net  seismic data library, net of accumulated amortization

         of $56,869  and $961,549, respectively

378,148

123,123

     Net property and equipment, net of  accumulated depreciation

         and amortization of $1,048 and $26,439,  respectively

7,520

7,628

     Prepaid  expenses, deferred charges and other 

17,853

9,169

     Deferred  income taxes

-

4,981

     Intangible  assets, net

53,779

-

     Goodwill

199,324

-
                     
     TOTAL  ASSETS

$

728,299

$

305,435

     

LIABILITIES  AND STOCKHOLDER'S EQUITY

     LIABILITIES

         Accounts  payable and accrued liabilities

$

40,944

$

30,837

         Income  taxes payable

1,300

659

         Debt

            Senior  Notes

402,375

185,788

            Notes  payable

317

337

         Obligations  under capital leases

3,636

2,913

         Deferred  revenue

27,170

47,410

         Deferred  income taxes

16,170

-

     TOTAL  LIABILITIES

491,912

267,944

    	

COMMITMENTS AND CONTINGENCIES	

    	

STOCKHOLDER'S EQUITY

         Preferred  stock, par value $.01 per share; authorized

            5,000,000  shares; none issued (Predecessor)

-

-

         Common  stock, par value $.01 per share; authorized 400,000,000

            shares;  issued and outstanding 155,184,084 shares

            at  December 31, 2006 (Predecessor)

-

1,552

         Common  stock, par value $.001 per share; 100 shares authorized,

            issued  and outstanding at June 30, 2007 (Successor)

-

-

         Additional  paid-in capital

259,781

240,431

         Retained  deficit

(39,077

)

(209,539

)

         Accumulated  other comprehensive income

15,683

5,047

     TOTAL STOCKHOLDER'S EQUITY

236,387

37,491
                     
TOTAL LIABILITIES AND STOCKHOLDER'S  EQUITY

$

728,299

$

305,435

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

Page 3 of 50

*(Index)*

**SEITEL, INC.AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**(Unaudited)*(In thousands)*

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

Three Months  Ended

June 30,

2007

2006
                     
REVENUE

$

30,371

$

48,542
                     
EXPENSES:

       Depreciation and amortization

37,770

23,034

       Loss on sale of seismic data

-

26

       Cost of sales

32

55

       Selling, general and administrative	

9,489

8,906

       Merger

835

-

48,126

32,021
                     
INCOME (LOSS) FROM OPERATIONS

(17,755

)

16,521
                     
Interest expense, net

(9,938

)

(4,989

)

Foreign currency exchange gains	

1,478

1,295
                     
Income (loss) from continuing operations before income  taxes

(26,215

)

12,827

Provision (benefit) for income taxes

(1,970

)

199

Income (loss) from continuing operations	

(24,245

)

12,628

Loss from discontinued operations, net of tax

-

(9

)
                     
NET INCOME (LOSS)

$

(24,245

)

$

12,619

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

Page 4 of 50

*(Index)*

**SEITEL, INC.AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**(Unaudited)*(In thousands)*

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

February 14,  2007 -

January 1,  2007 -

Six Months  Ended

June 30, 2007

February 13,  2007

June 30, 2006
                              
REVENUE

$

47,669

$

19,010

$

93,240
                              
EXPENSES:

       Depreciation and amortization

60,003

11,485

46,812

       Gain on sale of seismic data

-

-

(231

)

       Cost of sales

41

8

163

       Selling, general and administrative	

13,923

3,577

17,936

       Merger

1,280

17,457

-

75,247

32,527

64,680
                              
INCOME (LOSS) FROM OPERATIONS

(27,578

)

(13,517

)

28,560
                              
Interest expense, net

(19,123

)

(2,284

)

(9,897

)

Foreign currency exchange gains (losses)

1,657

(102

)

1,134

Other income

-

12

-
                              
Income (loss) from continuing operations

       before income taxes

(45,044

)

(15,891

)

19,797

Provision (benefit) for income taxes

(5,967

)

452

383

Income (loss) from continuing operations	

(39,077

)

(16,343

)

19,414

Income from discontinued operations, net of tax

-

-

4
                              
NET INCOME (LOSS)

$

(39,077

)

$

(16,343

)

$

19,418

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

Page 5 of 50

*(Index)*

**SEITEL, INC.AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME (LOSS)**(Unaudited)*(In thousands)*

SUCCESSOR

PREDECESSOR

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

PERIOD

PERIOD

Three Months 

February 14, 

January 1, 

Six Months 

Ended

2007 -

2007 -

Ended 

June 30,

June 30,

February 13,

June 30,

2007

2006

2007

2007

2006
                                                
Net income (loss)

$

(24,245

)

$

12,619

$

(39,077

)

$

(16,343

)

$

19,418
                                                
Unrealized gains (losses)

    on securities held

    as available for sale

-

(15

)

-

-

19
                                                
Foreign currency translation

    adjustments

13,820

924

15,683

7

975
                                                
Comprehensive 

    income (loss)

$

(10,425

)

$

13,528

$

(23,394

)

$

(16,336

)

$

20,412

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

Page 6 of 50

*(Index)*

**SEITEL,INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY**(Unaudited)****

(In thousands,except share amounts)

** **

Accumu-

lated 

Other 

PREDECESSOR

SUCCESSOR

Additional

Retained

Compre- 

Common Stock

Common Stock

Paid-In

Earnings

hensive 

Shares

Amount

Shares

Amount

Capital

(Deficit)

Income 
                                                         
Predecessor Period:

     Balance, December  31, 2006 

155,184,084

$

1,552

-

$

-

$

240,431

$

(209,539

)

$

5,047

          Cumulative  effect of adoption

              of FIN 48

-

-

-

-

-

(3,082

)

-

          Issuance of  restricted stock

1,032,615

10

-

-

(10

)

-

-

          Issuance of  common stock to

              employees

25,504

-

-

-

-

-

-

          Amortization  of stock-based 

              compensation  costs

-

-

-

-

379

-

-

          Accrual for  restricted stock issuance

              for performance  equity awards

-

-

-

-

32

-

-

          Retirement of  stock to satisfy 

              employee  tax withholding

(109,149

)

(1

)

-

-

(287

)

(112

)

-

          Vesting of  restricted stock due to

              change in  control

-

-

-

-

6,294

-

-

          Net loss

-

-

-

-

-

(16,343

)

-

          Foreign currency  translation

              adjustments

-

-

-

-

-

-

7

     Balance, February  13, 2007 

156,133,054

$

1,561

-

$

-

$

246,839

$

(229,076

)

$

5,054
                                                         
Successor Period:

          Investment by  Parent

-

$

-

100

$

-

$

256,234

$

-

$

-

          Amortization  of stock-based 

              compensation  costs

-

-

-

-

3,547

-

-

          Net loss

-

-

-

-

-

(39,077

)

-

          Foreign  currency translation

              adjustments

-

-

-

-

-

-

15,683

     Balance, June 30,  2007 

-

$

-

100

$

-

$

259,781

$

(39,077

)

$

15,683

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

Page 7 of 50

*(Index)*

**SEITEL, INC.AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**(Unaudited)

*(In thousands)*

 

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

February 14,  2007 -

January 1,  2007 -

Six Months  Ended

June 30, 2007

February 13,  2007

June 30, 2006

                              
Cash flows from operating  activities:

Reconciliation of net income  (loss) to net cash provided 

     by operating activities  of continuing operations:

     Net income (loss)

$

(39,077

)
$

(16,343

)
$

19,418

     Income from discontinued  operations, net of tax

-

-

(4

)
     Depreciation and  amortization

60,003

11,485

46,812

     Deferred income tax  provision (benefit)

(7,451

)
204

509

     Amortization of deferred  financing costs

4,532

99

593

     Amortization of debt  discount (premium)

(30

)
70

250

     Amortization of  stock-based compensation

3,547

6,673

848

     Amortization of favorable  facility lease

97

-

-

     Allowance for collection  of trade receivables

391

-

160

     Reversal of allowance for  notes receivable

-

(274

)
-

     Non-cash compensation  expense

-

32

550

     Non-cash revenue

(1,109

)
(88

)
(7,627

)
     Gain on sale of property  and equipment

-

-

(4

)
     Gain on sale of seismic  data

-

    

-

(231

)
     Decrease (increase) in  receivables

(3,798

)
9,074

(16,332

)

     Decrease (increase) in  other assets

495

(472

)
(44

)
     Increase (decrease) in  deferred revenue

14,154

(7,767

)
5,692

     Increase (decrease) in  accounts payable

         and other liabilities

49

2,917

(371

)
         Net cash provided by  operating activities

           of continuing  operations

31,803

5,610

50,219

                              
Cash flows from investing  activities:

     Cash invested in seismic  data 

(25,780

)

(8,369

)

(37,987

)

     Cash paid to acquire  property and equipment

(134

)

(60

)

(485

)

     Cash from disposal of  property and equipment

-

-

3

     Increase in restricted  cash

(2

)

-

(17

)

         Net cash used in  investing activities of continuing

             operations

(25,916

)

(8,429

)

(38,486

)

                              
Cash flows from financing  activities:

     Issuance of 9.75% Senior  Notes

400,000

-

-

     Repayment of 11.75%  Senior Notes

(233,352

)

-

-

     Purchase of Seitel stock

(386,556

)

-

-

     Principal payments on  notes payable

(17

)

(3

)

(17

)

     Principal payments on  capital lease obligations

(32

)

(6

)

(19

)

     Borrowings on line of  credit

88

119

25

     Payments on line of  credit

(88

)

(119

)

(25

)

     Payment of financing fees

(16,982

)

-

-

     Contributed capital

153,473

-

-

     Purchase of common stock  subsequently retired

-

(400

)

(422

)

     Payments on notes  receivable from officers

         and employees

274

-

13

         Net cash used in  financing activities

             of continuing  operations

$

(83,192

)

$

(409

)

$

(445

)

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

Page 8 of 50

*(Index)*

**SEITEL, INC.AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**(Unaudited)**- continued**

*(In thousands)*

 

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

February 14,  2007 -

January 1,  2007 -

Six Months  Ended

June 30, 2007

February 13,  2007

June 30, 2006

                              
Effect of exchange rate  changes 

$

(1,642

)

$

46

$

(1,005

)

Net cash used in discontinued  operations:

     Cash used in operating  activities

-

-

(6

)

     Cash used in investing  activities

-

-

(46

)

Net increase (decrease) in  cash and equivalents

(78,947

)

(3,182

)

10,231

Cash and cash equivalents at  beginning of period

104,208

107,390

78,097

Cash and cash equivalents at  end of period

$

25,261

$

104,208

$

88,328

                              
Supplemental disclosure of  cash flow information:

     Cash paid during the  period for:

         Interest

$

1,913

$

11,207

$

11,250

         Income taxes

$

547

$

1

$

279

     Income tax refunds  received

$

-

$

-

$

137

Supplemental schedule of  non-cash investing activities:

     Additions to seismic data  library

$

2,162

$

(7

)

$

6,812

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

Page 9 of 50
****
*(Index)*

**SEITEL, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS****(Unaudited)****June 30, 2007**

****

**NOTE A-BUSINESSCOMBINATION**

 

On February 14, 2007, Seitel Acquisition Corp. ("AcquisitionCorp.") was merged with and into Seitel, Inc. (the "Company") (the"Merger"), pursuant to a merger agreement between the Company,Acquisition Corp. and Seitel Holdings, Inc. ("Holdings") dated October 31,2006.  Pursuant to the merger agreement, the Company continued as the survivingcorporation and became a privately owned corporation and wholly-ownedsubsidiary of Holdings.  Holdings is an investment entity controlled byValueAct Capital Master Fund, L.P. ("ValueAct Capital").

In connection with the Merger, Acquisition Corp. commenced acash tender offer and consent solicitation related to all of the $189.0 millionaggregate principal amount of the Company's 11.75% senior notes due 2011 (the"11.75% Senior Notes").  On February 14, 2007, the Company paid $187.0million aggregate principal amount of such notes representing all of the notestendered.  In connection with the tender offer and consentsolicitation, the Company entered into a supplementalindenture for the 11.75% Senior Notes. The supplemental indentureeffected certain amendments to the original indenture,primarily to eliminate substantially all of the restrictive covenants andcertain events of default triggered or implicated by the Merger.

In addition, on February 14, 2007, the Company issued $400.0million aggregate principal amount of 9.75% senior notes due 2014 (the "9.75%Senior Notes") pursuantto an indenture by and among the Company, certain subsidiary guarantors andLaSalle Bank National Association, as trustee.  

The Company also entered into an Amended and Restated Loan and Security Agreement for anew senior secured credit facility with Wells Fargo Foothill, Inc. with amaximum credit amount of $25.0 million, subject to certain borrowing baselimitations. All obligations are unconditionally guaranteed by the Company'sdomestic subsidiaries that are not borrowers under the new facility, subject tocustomary exceptions, exclusions and releasemechanisms. The new facility is secured by a lien on substantially all of theCompany's domestic assets.

Pursuantto the Merger, all of the Company's outstanding common stock (other than sharesowned by ValueAct Capital and management investors, which were contributed forownership in Holdings) was exchanged for $3.70 per share.  The aggregatepurchase price in connection with the Merger was approximately $387.9 million,comprised of $386.6 million for the acquisition of the outstanding shares and$1.3 million for rollover shares by the management investors.  In connectionwith the Merger, the warrants held by ValueAct totaling 15,037,568 werecancelled.  In addition, prior to the Merger, ValueAct Capital had invested$127.2 million in acquiring stock of the Company.

TheMerger has been accounted for in accordance with the provisions of Statement ofFinancial Standards ("SFAS") No. 141, "Business Combinations." The total purchase price was allocated to the Company's net tangible andidentifiable intangible assets based on their estimated fair valuesestablished, in part, by an independent appraisal firm as of March 1, 2006 andFebruary 14, 2007 as set forth below.  The excess of the purchase price overthe net tangible and identifiable intangible assets was recorded as goodwill. The preliminary allocation of the purchase price for seismic data library, propertyand equipment, intangible assets and deferred income taxes was based upon valuationdata at the date of the Merger and the estimates and assumptions are subject tochange.  The initial purchase price allocation may be adjusted within one yearof the effective date of the Merger (February 14, 2007) for changes inestimates of the fair value of assets acquired and liabilities assumed based onthe results of the purchase price allocation process.

During thesecond quarter ended June 30, 2007, the Company recorded an additional step-upto its seismic data library of $0.7 million with an offsetting adjustment togoodwill of approximately $0.5 million and deferred income tax liability of $0.2million resulting from the finalization of adjusting the seismic data libraryto fair value.  The Company also recorded additional expense of approximately$64,000 representing the additional amortization of the additional seismic datalibrary step-up for the period February 14, 2007 through June 30, 2007.  Duringthe second quarter ended June 30, 2007, the Company also recorded adjustments ofapproximately $0.2 million to increase goodwill and deferred income taxliability, resulting from a recalculation of deferred tax liabilities inconnection with the Merger.  

Page 10 of 50

*(Index)*

Thefollowing table summarizes the preliminary estimated fair values of the assetsacquired and liabilities assumed (in thousands):

Cash and receivables

$

145,106

Property and equipment

8,159

Seismic data library 

395,560

Identifiable intangibles 

54,101

Goodwill 

191,421

Prepaids and other assets 

7,410

Accounts payable and accrued  liabilities

(37,642

)

Debt 

(231,253

)

Deferred revenue 

(13,031

)

Deferred income tax

(22,305

)

     Net assets acquired

$

497,526

Asummary of the preliminary allocation of purchase price to identifiableintangible assets, other than goodwill is as follows (in thousands):

Intangible assets: 

     Trade name 

$

900 

     Customer relationships	

42,848 

     Internally developed software	

7,989 

     Favorable facility leases

2,184 

     Covenants not to compete	

180 

         Total	

$

54,101

Thevaluations are based on information that is available as of the date of theMerger and the expectations and assumptions that have been deemed reasonable bymanagement.  No assurance can be given, however, that the underlyingassumptions of events associated with such assets will occur as projected.  Forthese reasons, among others, the actual results may vary from the projectedresults.

The following unaudited pro formaconsolidated financial information has been prepared as if the Merger had takenplace at the beginning of each year presented.  The following unaudited proforma information is not necessarily indicative of the results of operations infuture periods or results that would have been achieved had the Merger takenplace at the beginning of the years presented (in thousands):

 

Three Months

Six Months

Ended

Ended

June 30,

June 30,

June 30,

2006

2007

2006
                              
Revenue

$

41,138

$

58,109

$

77,455

Operating loss

(9,442

)

(40,105

)

(24,382

)

Net loss

(15,530

)

(56,174

)

(37,977

)

Thepro forma financial information reflects the decreased revenue from selectionsof previously deferred revenue, additional amortization and depreciation expenseand increased interest expense.  The pro forma financial information alsoreflects the elimination of merger expenses.

 

Page 11 of 50

*(Index)*

**NOTE B-BASIS OF PRESENTATION**The accompanying condensed financial statements of Seitel, Inc. and itssubsidiaries have been prepared in accordance with generally accepted accountingprinciples for interim financial information and with the instructions ofRegulation S-X.  Accordingly, they do not include all of the informationand notes required by accounting principles generally accepted in the UnitedStates for complete financial statements.  In the opinion of management,all adjustments (consisting of normal recurring adjustments)considered necessary for a fair presentation have been included.  In preparingthe Company's financial statements, a number of estimates and assumptions aremade by management that affect the accounting for and recognition of assets,liabilities, revenues and expenses.  The condensed consolidated balance sheetof the Company as of December 31, 2006, has been derived from the auditedbalance sheet of the Company as of that date.  These financial statementsshould be read in conjunction with the financial statements and notes theretofor the year ended December 31, 2006 contained in the Company's Annual Report.

Although the Company continues as the same legal entityafter the Merger, the consolidated financial statements for the first sixmonths of 2007 are presented for two periods:  January 1, 2007 through February13, 2007 (the "Predecessor Period" or "Predecessor," as context requires) andFebruary 14, 2007 through June 30, 2007 (the "Successor Period" or "Successor,"as context requires), which relate to the period preceding the Merger and theperiod succeeding the Merger, respectively.  The consolidated financialstatements for the Successor Period (including for the three months ended June30, 2007) reflect the acquisition of the Company under the purchase method ofaccounting in accordance with SFAS No. 141.  The results between these periodsare not comparable to the Predecessor due to the difference in the basis ofpresentation of purchase accounting as compared to historical cost.  Theconsolidated financial statements as of December 31, 2006 and for the three andsix months ended June 30, 2006 are also presented as Predecessor.
NOTE C-REVENUE RECOGNITION*Revenue from DataAcquisition*
The Company generates revenuewhen it creates a new seismic survey that is initially licensed by one or moreof its customers to use the resulting data.  The initial licenses usuallyprovide the customer with a limited exclusivity period, which will normallylast for six months after final delivery of the processed data.  The paymentsfor the initial exclusive licenses are sometimes referred to as underwriting orprefunding.  Customers make periodic payments throughout the creation period,which generally correspond to costs incurred and work performed.  Thesepayments are non-refundable.

Revenue from the creation of newseismic data is recognized throughout the creation period using theproportional performance method based upon costs incurred and work performed todate as a percentage of total estimated costs and work required.  Managementbelieves that this method is the most reliable and representative measure ofprogress for its data creation projects.  The duration of most data creationprojects is generally less than one year.  Under these contracts, the Companycreates new seismic data designed in conjunction with its customers andspecifically suited to the geology of the area using the most appropriatetechnology available. 

The Company outsources thesubstantial majority of the work required to complete data acquisition projectsto third party contractors.  The Company's payments to these third partycontractors comprise the substantial majority of the total estimated costs ofthe project and are paid throughout the creation period.  A typical survey includesspecific activities required to complete the survey; each activity has value tothe customers.  Typical activities, that often occur concurrently, include:
-  permitting for landaccess, mineral rights, and regulatory approval;
-  surveying;
-  drilling for theplacement of energy sources;
-  recording the datain the field; and
-  processing thedata.

The customers paying for theinitial exclusive licenses receive legally enforceable rights to any resultingproduct of each activity described above.  The customers also receive access toand use of the newly acquired, processed data.  

The customers' access to and useof the results of the work performed and of the newly acquired, processed datais governed by a license agreement, which is a separate agreement from theacquisition contract. The Company's acquisition contracts require the customereither to have a license agreement in place or to execute one at the time theacquisition contract is signed. The Company maintains sole ownership of thenewly acquired data, which is added to its library, and is free to license thedata to other customers when the original customers' exclusivity period ends. 

Page 12 of 50

*(Index)*
*Revenue fromNon-Exclusive Data Licenses*
 

TheCompany recognizes a substantial portion of its revenue from data licenses soldafter any exclusive license period.  These are sometimes referred to as resalelicensing revenue, post acquisition license sales or shelf sales. 

These sales fall under thefollowing four basic forms of non-exclusive license contracts.
-  Specific license contract - The customer	licenses and selects data from the data library at the time the contract is	entered into and holds this license for a long-term period.-  Library card license contract - The customer initially     receives only access to data. The customer may then select specific data,     from the collection of data to which it has access, to hold long-term     under its license agreement. The length of the selection periods under the     library card contracts is limited in time and varies from customer to     customer.-  Review and possession license contract - The customer     obtains the right to review a certain quantity of data for a limited     period of time. During the review period, the customer may select specific     data from that available for review to hold long-term under its license     agreement. Any data not selected for long-term licensing must be returned     to the Company at the end of the review period.-  Review only license contract - The customer obtains rights     to review a certain quantity of data for a limited period of time, but     does not obtain the right to select specific data to hold long-term.
TheCompany's non-exclusive license contracts specify the following:
-  that all customers mustalso execute a master license agreement that governs the use of all datareceived under the Company's non-exclusive license contracts;
-  the specific paymentterms, generally ranging from 30 days to 18 months, and that such payments arenon-cancelable and non-refundable;
-  the actual data that isaccessible to the customer; and
-  that the data is licensed in its present form, where is     and as is and the Company is under no obligation to make any enhancements,     modifications or additions to the data unless specific terms to the contrary     are included.  

Revenuefrom the non-exclusive licensing of seismic data is recognized when thefollowing criteria are met:
-  the Company has anarrangement with the customer that is validated by a signed contract; 
-  the sales price is fixedand determinable;
-  collection is reasonablyassured;
-  the customer hasselected the specific data or the contract has expired without full selection;and
-  the license term hasbegun.

Copies of the data are availableto the customer immediately upon request.

For licenses that have beeninvoiced but have not met the aforementioned criteria, the revenue is deferredalong with the related direct costs (primarily sales commissions).  Thisnormally occurs under the library card license contracts, review and possessionlicense contracts or review only license contracts because the data selectionmay occur over time.  Additionally, if the contract allows licensing of datathat is not currently available or enhancements, modifications or additions tothe data are required per the contract, revenue is deferred until such timethat the data is available.
  
Page 13 of 50

(Index)

***Revenue from Non-MonetaryExchanges***

In certain cases, the Companywill take ownership of a customer's seismic data or revenue interest(collectively referred to as "data") in exchange for a non-exclusivelicense to selected seismic data from the Company's library.  Occasionally, inconnection with specific data acquisition contracts, the Company receives bothcash and ownership of seismic data from the customer as consideration for theunderwriting of new data acquisition.  These exchanges are referred to asnon-monetary exchanges.  A non-monetary exchange always complies with thefollowing criteria:
-  the data licensedelivered is always distinct from the data received;
-  the customerforfeits ownership of its data; and
-  the Company retainsownership in its data.

In non-monetary exchangetransactions, the Company records a data library asset for the seismic datareceived at the time the contract is entered into and recognizes revenue on thetransaction in equal value in accordance with its policy on revenue from datalicenses, which is, when the data is selected by the customer, or revenue fromdata acquisition, as applicable.  The data license to the customer is in theform of one of the four basic forms of contracts discussed above.  Thesetransactions are valued at the fair value of the data received or delivered,whichever is more readily determinable.

Fairvalue of the data exchanged is determined using a multi-step process asfollows.
-  First, the Company considers the value of the data     received from the customer. In determining the value of the data received,     the Company considers the age, quality, current demand and future     marketability of the data and, in the case of 3D seismic data, the cost     that would be required to create the data.  In addition, the Company     applies a limitation on the value it assigns per square mile on the data     received.  -  Second, the Company determines the value of the license     granted to the customer.  The range of cash transactions by the Company     for licenses of similar data during the prior six months are evaluated. In     evaluating the range of cash transactions, the Company does not consider     transactions that are disproportionately high or low.-  Third, the Company obtains concurrence from an     independent third party on the portfolio of all non-monetary exchanges of     $500,000 or more in order to support the Company's valuation of the data     received.  The Company obtains this concurrence on an annual basis,     usually in connection with the preparation of its annual financial     statements.
Page 14 of 50

(Index)

Dueto the Company's revenue recognition policies, revenue recognized onnon-monetary exchange transactions may not occur at the same time the seismicdata acquired is recorded as an asset.  The activity related to non-monetaryexchanges was as follows (in thousands):

SUCCESSOR

PREDECESSOR

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

PERIOD

PERIOD

Three Months

February 14, 

January 1, 

Six Months 

Ended

2007 -

2007 -

Ended

June 30,

June 30,

February 13,

June 30,

2007

2006

2007

2007

2006
                                                
Seismic data library additions

$

600

$

4,753

$

2,162

$

(7

)

$

6,812
                                                
Revenue recognized on 

    specific data licenses

    and selections of data

461

3,011

1,082

71

5,084
                                                
Revenue recognized related	

    to acquisition contracts

12

701

27

11

2,536
                                                
Revenue recognized 

    related to data

    management services

-

7

-

6

7
*Revenue from Seitel Solutions*
Revenue from Seitel Solutions ("Solutions") isrecognized as the services for reproduction and delivery of seismic data areprovided to customers.

**NOTE D-SEISMIC DATA LIBRARY**

The Company's seismic datalibrary consists of seismic surveys that are offered for license to customerson a non-exclusive basis. Costs associated with creating, acquiring orpurchasing the seismic data library are capitalized and amortized principallyon the income forecast method subject to a straight-line amortization period offour years, applied on a quarterly basis at the individual survey level. * *

 

***Costs of Seismic Data Library* **

For purchased seismic data, the Company capitalizes the purchase price of theacquired data.  

For data received through a non-monetary exchange, the Company capitalizes anamount equal to the fair value of the data received by the Company or the fairvalue of the license granted to the customer, whichever is more readilydeterminable.  See Note C for discussion of the process used to determine fairvalue.

For internally created data, the capitalized costs include costs paid to thirdparties for the acquisition of data and related permitting, surveying and otheractivities associated with the data creation activity.  In addition, theCompany capitalizes certain internal costs related to processing the createddata.  Such costs include salaries and benefits of the Company's processingpersonnel and certain other costs incurred for the benefit of the processingactivity.  The Company believes that the internal processing costs capitalizedare not greater than, and generally are less than, those that would be incurredand capitalized if such activity were performed by a third party.  Capitalizedcosts for internal data processing were $476,000 and $473,000 for the threemonths ended June 30, 2007 and 2006, respectively and $712,000, $265,000 and $905,000for the period February 14, 2007 to June 30, 2007 (Successor Period), for theperiod January 1, 2007 to February 13, 2007 (Predecessor Period) and for the sixmonths ended June 30, 2006 (Predecessor Period), respectively.  

Page 15 of 50

*(Index)*

***Data Library Amortization***

The Company amortizes its seismic data library using the greater of theamortization that would result from the application of the income forecastmethod subject to a minimum amortization rate or a straight-line basis over theuseful life of the data.  With respect to each survey in the data library, theuseful life policy is applied from the time such survey is available forlicensing to customers on a non-exclusive basis, since some data in the librarymay not be licensed until an exclusivity period (usually six months) haslapsed.

The Company applies the income forecast method by forecasting the ultimaterevenue expected to be derived from a particular data library component overthe estimated useful life of each survey comprising part of such component. This forecast is made by the Company annually and reviewed quarterly.  If,during any such review, the Company determines that the ultimate revenue for alibrary component is expected to be significantly different than the originalestimate of total revenue for such library component, the Company revises theamortization rate attributable to future revenue from each survey in suchcomponent.  The lowest amortization rate the Company applies using the incomeforecast method is 70%.  In addition, in connection with the forecast reviewsand updates, the Company evaluates the recoverability of its seismic datalibrary, and if required under SFAS No. 144, "Accounting for theImpairment and Disposal of Long-Lived Assets," records an impairmentcharge with respect to such data.  See discussion on *"Seismic DataLibrary Impairment"* below.

The actual rate of amortization depends on the specific seismic surveyslicensed and selected by the Company's customers during the period.  As of July1, 2007, the amortization rate utilized under the income forecast method forall components is 70%.  

The greater of the income forecast or straight-line amortization policy isapplied quarterly on a cumulative basis at the individual survey level. Inconnection with the Merger, the greater of the income forecast or straight-lineamortization policy was applied at February 13, 2007 (for the Predecessor Period),March 31, 2007 and June 30, 2007 (for the Successor Period).  Under thispolicy, the Company first records amortization using the income forecastmethod.  The cumulative amortization recorded for each survey is then comparedwith the cumulative straight-line amortization. If the cumulative straight-lineamortization is higher for any specific survey, additional amortization expenseis recorded, resulting in accumulated amortization being equal to thecumulative straight-line amortization for such survey.  This requirement isapplied regardless of future-year revenue estimates for the library componentof which the survey is a part and does not consider the existence of deferredrevenue with respect to the library component or to any survey.  

*** ***

***Seismic Data Library Impairment***

******TheCompany evaluates its seismic data library investment by grouping individualsurveys into components based on its operations and geological and geographicaltrends, resulting in the following data library segments for purposes ofevaluating impairments:  (I) Gulf of Mexico offshore comprised of the followingcomponents:  (a) multi-component data, (b) ocean bottom cable data, (c) shelfdata, (d) deep water data, and (e) value-added products; (II) North Americaonshore comprised of the following components: (a) Texas Gulf Coast, (b)Northern, Eastern and Western Texas, (c) Southern Louisiana/Mississippi, (d)Northern Louisiana, (e) Rocky Mountains, (f) North Dakota, (g) other UnitedStates, (h) Canada and (i) value-added products, and (III) international dataoutside North America.  The Company believes that these library componentsconstitute the lowest levels of independently identifiable cash flows.

 

As events or conditions require, the Companyevaluates the recoverability of its seismic data library investment inaccordance with SFAS No. 144.  The Company evaluates its seismic data libraryinvestment for impairment whenever events or changes in circumstances indicatethat the carrying amounts may not be recoverable.  The Company considers thelevel of sales performance in each component compared to projected sales, aswell as industry conditions, among others, to be key factors in determiningwhen its seismic data investment should be evaluated for impairment.  Inevaluating sales performance of each component, the Company generally considers fiveconsecutive quarters of actual performance below forecasted sales to be anindicator of potential impairment.

Page 16 of 50

*(Index)*

In accordance with SFAS No. 144, the impairment evaluationis based first on a comparison of the undiscounted future cash flows over eachcomponent's remaining estimated useful life with the carrying value of eachlibrary component.  If the undiscounted cash flows are equal to or greater thanthe carrying value of such component, no impairment is recorded.  Ifundiscounted cash flows are less than the carrying value of any component, theforecast of future cash flows related to such component is discounted to fairvalue and compared with such component's carrying amount. The differencebetween the library component's carrying amount and the discounted future valueof the expected revenue stream is recorded as an impairment charge.

For purposes of evaluating potential impairment losses, the Company estimatesthe future cash flows attributable to a library component by evaluating, amongother factors, historical and recent revenue trends, oil and gas prospectivityin particular regions, general economic conditions affecting its customer baseand expected changes in technology and other factors that the Company deemsrelevant. The cash flow estimates exclude expected future revenues attributableto non-monetary data exchanges and future data creation projects.

The estimation of future cash flows and fair value is highly subjective andinherently imprecise.  Estimates can change materially from period to periodbased on many factors, including those described in the preceding paragraph.Accordingly, if conditions change in the future, the Company may record furtherimpairment losses relative to its seismic data library, which could be materialto any particular reporting period.

 

The Company did not have any impairment charges during the period February 14, 2007 to June 30, 2007 (SuccessorPeriod), for the period January 1, 2007 to February 13, 2007 (Predecessor Period)or during the six months ended June 30, 2006(Predecessor Period).

 

**NOTE E-INTANGIBLES**

** **

In connection with theMerger, the Company recorded intangible assets both in the U.S. and Canada.  The recorded gross carrying amount of intangible assets changed since the Mergerdue to the impact of foreign currency fluctuations.  The following is a summaryof the Company's intangible assets other than goodwill as of June 30, 2007 (inthousands): 

 

SUCCESSOR PERIOD

JUNE 30, 2007

Weighted

Average

Gross

Amortization

Carrying

Accumulated

Net Book

Period

Amount

Amortization

Value
                                    
Intangible assets with determinable

     useful lives:

          Favorable facility leases

9 years

$

2,391

$

(116

)

$

2,275

          Customer relationships

10 years

43,861

(1,645

)

42,216

          Covenants not to compete

1 year

180

(68

)

112

          Internally developed software

7 years

8,744

(468

)

8,276

$

55,176

$

(2,297

)

$

52,879

Trade names with indefinite lives

900

-

900

Total identifiable intangible assets

$

56,076

$

(2,297

)

$

53,779

 

Amortization expense for theCompany's intangible assets was $1.5 million for the three months ended June30, 2007 and $2.2 million during the period from February 14, 2007 to June 30,2007.  Estimated future amortization expense is as follows:  remainder of fiscalyear end 2007 - $3.1 million, fiscal year ended 2008 - $6.0 million, fiscalyear ended 2009 - $6.0 million, fiscal year ended 2010 - $6.0 million, fiscalyear ended 2011 - $6.0 million, and thereafter - $25.9 million.
NOTE F-INCOME TAXES 
***FASBInterpretation No. 48***

EffectiveJanuary 1, 2007, the Company adopted FASB Interpretation No. 48, "Accountingfor Uncertainty in Income Taxes" ("FIN 48"). FIN 48 prescribes amore-likely-than-not threshold for financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return. FIN48 also provides guidance on derecognition of income tax assets andliabilities, classification of current and deferred income tax assets andliabilities, accounting for interest and penalties associated with taxpositions, accounting for income taxes in interim periods and income taxdisclosures.  

Page 17 of 50

*(Index)*

As ofJanuary 1, 2007, the Company recorded the cumulative effect of adopting FIN 48 of$3.1 million as an increase to the balance of retained deficit.  The Companyhas unrecognized tax benefits of approximately $8.8 million, of which $1.5million would impact the effective income tax rate if recognized.

Inconjunction with the adoption of FIN 48, uncertain tax positions are reflectedas income tax assets and liabilities. Income tax-related interest and penaltyexpenses are recorded as a component of income tax expense. As of June 30, 2007and January 1, 2007, the total amount of accrued income tax-related interestand penalties included in the Consolidated Balance Sheets was $2.0 million and$1.6 million, respectively.  Income tax expense for the three months ended June30, 2007, for the period from January 1, 2007 to February 13, 2007 and for theperiod from February 14, 2007 to June 30, 2007 included $0.2 million, $0.1 millionand $0.3 million, respectively, related to interest on unrecognized taxbenefits. 

The Companybelieves it is reasonably possible that, within the next 12 months, the amountof previously unrecognized tax benefits could decrease by approximately $3.0million primarily as a result of the resolution of tax audits.

With fewexceptions, the Company is no longer subject to U.S. federal, state and local,or non-U.S. income tax examinations by tax authorities for years prior to 2003,2002 and 1999, respectively. 

***IncomeTax Expense (Benefit)***

Thefollowing is the detail of income tax expense (benefit) recorded in 2007 forthe periods indicated (in thousands):

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

February 14,  2007 -

January 1,  2007 -

June 30, 2007

February 13,  2007

U.S.

Canada

Total

U.S.

Canada

Total
                                                         
Tax expense (benefit) resulting from:
                                                         
     Current operations

$

(13,088

)

$

(2,005

)

$

(15,093

)

$

(5,051

)

$

354

$

(4,697

)

     Change in Valuation Allowance

9,126

-

9,126

5,149

-

5,149
                                                         
     Total tax expense (benefit)

$

(3,962

)

$

(2,005

)

$

(5,967

)

$

98

$

354

$

452

In thePredecessor Period, the Company provided a full valuation allowance against theFederal tax benefit generated from its U.S. operations as it was more likelythan not that such benefit would not be realized.  At the Merger date, theCompany recorded a step-up in deferred tax liabilities of $26.7 million due tothe step-up in its U.S. and Canadian net asset values as a result of theMerger.  Consequently, in the Successor Period, a portion of the Federal taxbenefit generated from the Company's U.S. operations was recognized as a taxbenefit up to the amount of the U.S. deferred tax liability recorded.  Theremaining U.S. Federal tax benefit of $9.1 million was offset by a valuationallowance because it was more likely than not that such benefit would not berealized.  

***DeferredTax Liability***

As of June30, 2007, the Company had a net deferred tax liability of $16.2 million, all ofwhich was attributable to its Canadian operations.  In the U.S., the Company had a net deferred tax asset of $9.1 million, all of which was offset by avaluation allowance, except for $2,000 related to state deferred taxliabilities.  The recognition of the U.S. tax asset will not occur until suchtime that it is more likely than not that some portion or all of the deferredtax asset will be realized.

Page 18 of 50

*(Index)*
NOTE G-DEBT
The following is a summary of the Company's debt (in thousands):

 

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

June 30,

December 31,

2007

2006
                     
9.75% Senior Notes

$

400,000

$

-

11.75% Senior Notes

2,000

189,000

Revolving Credit Facility

-

-

Subsidiary revolving line of  credit

-

-

Note payable to former executive

317

337

402,317

189,337

Plus:  Premium on debt

375

-

Less:  Debt discount

-

(3,212

)

$

402,692

$

186,125

 

***9.75% Senior Unsecured Notes**** *

 

On February 14, 2007, the Company issued, in a private placement,$400.0 million aggregate principal amount of 9.75% Senior Notes.  The proceedsfrom the 9.75% Senior Notes were used to partially fund the transactions inconnection with the Merger. These notes mature on February 15, 2014. Interest is payable in cash, semi-annually in arrears on February 15 and August15 of each year, commencing on August 15, 2007.  The 9.75% Senior Notes areunsecured and are guaranteed by substantially all of the Company's domesticsubsidiaries on a senior basis. The 9.75% Senior Notes contain restrictivecovenants which limit the Company's ability to, among other things, incuradditional indebtedness, pay dividends and complete mergers, acquisitions andsales of assets. 

 

Fromtime to time on or before February 15, 2010, the Company may redeem up to 35%of the aggregate principal amount of the 9.75% Senior Notes with the netproceeds of equity offerings at a redemption price equal to 109.75% of theprincipal amount, plus accrued and unpaid interest.  Upon a change of control(as defined in the indenture), each holder of the 9.75% Senior Notes will havethe right to require the Company to offer to purchase all of such holder'snotes at a price equal to 101% of the principal amount, plus accrued and unpaidinterest.

** **

***11.75%Senior Unsecured Notes***

 

On July 2,2004, the Company issued, in a private placement, $193.0 million aggregateprincipal amount of 11.75% Senior Notes.  As required by their terms, the11.75% Senior Notes were exchanged for senior notes of like amounts and termsin a publicly registered exchange offer in February 2005.  In connection withthe 2004 excess cash flow offer in March 2005, $4.0 million aggregate principalamount of these notes was tendered and accepted.  In connection with the Mergerand related transactions, $187.0 million aggregate principal amount of thesenotes was tendered and accepted on February 14, 2007.  Thefair value of these notes was higher than the face value on the date of theMerger; consequently, a premium has been reflected in the Successor financialstatements related to these notes.  Interest on the remaining notes ispayable semi-annually in arrears on January 15 and July 15 of each year.  Theremaining notes mature on July 15, 2011.  The 11.75% Senior Notes are unsecuredand are guaranteed by substantially all of the Company's U.S. subsidiaries on a senior basis.

Page 19 of 50

*(Index)*

As a result of the tender and consentoffer, effective February 14, 2007, the 11.75% Senior Notes no longer containany restrictive covenants, other than the requirement to make excess cash flowoffers.  Subject to certain conditions, if at the end of each fiscal year theCompany has excess cash flow (as defined in the indenture) in excess of $5.0million, the Company is required to use 50% of the excess cash flow to fund anoffer to repurchase the 11.75% Senior Notes on a pro rata basis at 100% of itsprincipal amount, plus accrued and unpaid interest.  If the Company has lessthan $5.0 million in excess cash flow at the end of any fiscal year, such excesscash flow will be carried forward to succeeding years, and such repurchaseoffer is required to be made in the first year in which the cumulative excesscash flow for all years in which there has not been an offer is at least $5.0million.  Such repurchase offer is required only if there is no event ofdefault under the Company's revolving credit facilities prior to and aftergiving effect to the repurchase payment.  Because of excess cash flow generatedfor the year ended December 31, 2006, in the first quarter of 2007, the Companymade a repurchase offer for the remaining notes.  No 11.75% Senior Notes weretendered in the 2006 excess cash flow offer.  Upon a change of control (asdefined in the indenture), each holder of the 11.75% Senior Notes will have theright to require the Company to offer to purchase all of such holder's notes ata price equal to 101% of the principal amount, plus accrued and unpaidinterest.

***Revolving Credit Facility**** *

On February 14, 2007, the Company entered into an amended andrestated U.S. revolving credit facility with Wells Fargo Foothill, Inc., aslender, which provides for up to $25.0 million, subject to borrowing baselimitations.  Interest is payable at an applicable margin above either LIBOR orthe prime rate.  The facility is secured by a first priority, perfectedsecurity interest in and lien on substantially all of the Company's U.S. assets and a pledge of all of the issued and outstanding capital stock of the Company's U.S. subsidiaries.  The facility expires on February 14, 2010.  The revolving creditfacility contains covenants requiring the Company to achieve and maintaincertain financial results, and restricts, among other things, the amount ofcapital expenditures, the ability to incur additional indebtedness, paydividends, and complete mergers, acquisitions and sales of assets.  Therevolving credit facility requires the payment of an unused line fee of .25%per annum payable in arrears.

***SubsidiaryRevolving******Line of Credit*** 

TheCompany's wholly owned subsidiary, Olympic Seismic Ltd. ("Olympic"),has a revolving credit facility, which allows it to borrow up to $5.0 million(Canadian) subject to an availability formula by way of prime-based loans,bankers' acceptances or letters of credit. The interest rate applicable toborrowings is the bank's prime rate plus 0.35% per annum and 1.50% per annum forbankers' acceptances.  Letter of credit fees are based on scheduled rates ineffect at the time of issuance. The facility is secured by the assets ofOlympic, SEIC Trust Administration Ltd. (as sole trustee of, and for and onbehalf of, SEIC Business Trust) and SEIC Holdings, Ltd., but is not guaranteedby the Company or any of its other U.S. subsidiaries.  However, allintercompany debt owing by Olympic, SEIC Trust Administration Ltd., SEICBusiness Trust or SEIC Holdings, Ltd. to the Company, SEIC Partners' LimitedPartnership or to any other U.S. subsidiary of the Company (approximately $29.8million (Canadian) at June 30, 2007) has beensubordinated to the repayment of Olympic's obligations under the revolvingcredit facility.  Available borrowings under the facility are equivalent to amaximum of $5.0 million (Canadian), subject to a requirement that suchborrowings may not exceed 75% of good accounts receivable (as defined in theagreement) of SEIC Trust Administration, less prior-ranking claims, if any,relating to inventory or accounts. The facility is subject to repayment upondemand and is available from time to time at the bank's sole discretion.

***NotePayable to Former Executive***

Inconnection with the settlement of certain litigation, the Company entered intoa note payable to a former executive with remaining payments of $6,000 permonth until May 2013.  The note is non-interest bearing.  The note is guaranteedby Olympic.  

Page 20 of 50

*(Index)*

**NOTE H-CONTRACTUAL OBLIGATIONS**

** **

As of June 30, 2007, the Companyhad approximately $688.3 million of outstanding debt and lease obligations,with aggregate contractual cash obligations summarized as follows (inthousands):

 

Payments due by period

Remainder

of

2013 and

Contractual cash obligations

Total

2007

2008-2010

2011-2012

thereafter
                                 
Debt obligations (1)(2)

$

676,478

$

19,648

$

117,921

$

80,379

$

458,530

Capital lease obligations (2)

5,738

174

1,047

722

3,795

Operating lease obligations

6,038

578

3,416

1,782

262

Total contractual cash obligations

$

688,254

$

20,400

$

122,384

$

82,883

$

462,587

 

(1)    Debtobligations include the face amount of the 9.75% Senior Notes totaling $400.0million and the 11.75% Senior Notes totaling $2.0 million.

(2)    Amountsinclude interest related to debt and capital lease obligations.

**NOTE I-STOCK-BASEDCOMPENSATION**

Prior to the closing of the Merger, the Company had a stock optionplan (the "2004 Stock Option Plan") which provided for the grant ofstock-based awards, including stock options, restricted stock or otherstock-based awards to eligible employees and directors.  In connection with theMerger, Holdings, the Company's parent, adopted a stock-based compensation plan(the "2007 Non-Qualified Stock Option Plan") for the benefit of theCompany's key employees and non-employee directors.

The amounts of stock-basedcompensation expense recognized in the periods presented are as follows (inthousands):

 

SUCCESSOR

PREDECESSOR

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

PERIOD

PERIOD

Three Months

February 14, 

January 1, 

Six Months 

Ended

2007 -

2007 -

Ended

June 30,

June 30,

February 13,

June 30,

2007

2006

 2007

2007

2006
                                                
*Included in  reported*

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

*       selling,  general and*

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

*       administrative  expenses*

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *
                                                
Restricted stock

$

-

$

794

$

-

$

412

$

1,398

Stock options

2,369

-

3,547

-

-

       Total

$

2,369

$

794

$

3,547

$

412

$

1,398
                                                
*Included in merger  expenses*
                                                
Restricted stock

$

-

$

-

$

-

$

6,294

$

-

       Total

$

-

$

-

$

-

$

6,294

$

-
                                                
Stock-based compensation

       expense

$

2,369

$

794

$

3,547

$

6,706

$

1,398

Page 21 of 50

*(Index)*

***Stock and Equity-Based Compensation Plans***

 

**Successor**

 

*Non-qualified Options*

 

The 2007 Non-QualifiedStock Option Plan ("the Plan") was adopted effective February 14,2007, and authorizes stock options to be granted to the Company's key employeesand non-employee directors for up to 92,898 shares of Holdings' common stock.On June 15, 2007, the Board of Directors of Holdings approved an increase of1,347 shares for issuance under the Plan.  Since adoption of the Plan, 92,059 totalnon-qualified stock options ("Options"), with an exercise price of $389.42 pershare have been issued.  The Options vest 25 percent on each of the first,second, third and fourth anniversaries of each grant date. 

 

The fair value of theOptions was estimated on each grant date using the Black-Scholes option pricingmethod. The assumptions used in the model are outlined in the following table:

SUCCESSOR

PERIOD

February 14,  2007- 

June 30, 2007
            
Weighted average grant date fair value  per share 

$

           197.95	

Weighted average assumptions used: 

     Expected volatility	

                  45 %	

     Expected life (in years)	

               6.25	

     Risk free interest rate	

               4.69 %	

     Expected dividend yield	

                 0.0 %

 

The computation of theexpected volatility assumptions used in the Black-Scholes calculations forgrants was based on historical volatilities and implied volatilities of peercompanies. The Company utilized the volatilities of peer companies due to itslack of extensive history. When establishing its expected life assumptions, theCompany used the "simplified" method prescribed in Staff Accounting BulletinNo. 107, "Shared-Based Payment," for companies that do not have adequatehistorical data. 

The following table summarizes stock option activityduring the Successor Period:

SUCCESSOR

Weighted

Weighted

Average

Average

Remaining

Exercise

Contractual

Options

Price

Life in Years
                        
Outstanding  at February 14, 2007

-

-

       Granted

92,059

$389.42

       Exercised

-

-

       Cancelled

-

-

Outstanding  at June 30, 2007

92,059

$389.42

Options  exercisable at June 30, 2007

-

-

-

Options  vested or expected to vest at

       June  30, 2007

-

-

-

 

As of July 1, 2007, thetotal future compensation cost related to non-vested options, not yetrecognized in the Statement of Operations, was $14.7 million and will berecognized using graded vesting over a weighted average period of 3.6 years.

Page 22 of 50

*(Index)*

**Predecessor**

 

*Restricted Stock and Common Stock*

* *

In accordance with the 2004 StockOption Plan, 7,500,000 shares of its common stock were initially reserved andavailable for stock-based awards, including options, restricted stock or otherstock-based awards. The exercise price, term and other conditions applicable toeach award granted under the 2004 Stock Option Plan were generally determinedby the Compensation Committee at the time of grant and varied with each awardgranted.

 

As a result of theMerger, any and all unvested restricted stock outstanding at February 13, 2007immediately vested.  The Company recorded in merger expenses a non-cash chargefor stock compensation expense of approximately $6.3 million in the PredecessorPeriod as a result of this accelerated vesting.  

Thefollowing table summarizes the activity of non-vested restricted stock duringthe Predecessor Period (shares in thousands):

Weighted

Average Grant

Date Fair

Shares

Value
               
Non-vested  at January 1, 2007

3,692

$2.14 

       Granted

1,033

$3.56 

       Vested

(4,725

)

$2.45 

       Forfeited

-

- 

Non-vested  at February 13, 2007

-

-

Thefollowing table summarizes the activity of non-vested restricted stock duringthe six months ended June 30, 2006 (shares in thousands):

Weighted

Average Grant

Date Fair

Shares

Value
               
Non-vested  at January 1, 2006

2,965

$1.36 

       Granted

1,841

$2.92 

       Vested

(259

)

$1.39 

       Forfeited

(17

)

$1.86 

Non-vested  at June 30, 2006

4,530

$1.99

During the PredecessorPeriod and the six months ended June 30, 2006, 25,504 and 108,327 shares,respectively, of common stock were awarded to employees at an average fairvalue of $3.56 and $2.99, respectively.

*Stock Options*

 

On July 2, 2004, the Company grantedits then chairman options to purchase 100,000 shares of its common stock at anexercise price of $1.30, the market price of the common stock on such date.Such options became exercisable on July 2, 2005. Such options were not grantedunder the 2004 Stock Option Plan.  As a result of theMerger, the outstanding stock options were purchased at the Mergerconsideration price of $3.70 per share, less the exercise price of $1.30 pershare.  

Page 23 of 50

*(Index)*

The following table summarizes stock option activityduring the Predecessor Period (shares inthousands):

PREDECESSOR

Weighted

Weighted

Average

Aggregate

Average

Remaining

Intrinsic

Exercise

Contractual

Value

Options

Price

Life in Years

(000's)
                                 
Outstanding  at January 1, 2007

100

$1.30

       Granted

-

-

       Exercised

-

-

       Cancelled

-

-

       Paid  out at Merger closing

(100)

$1.30

-

-

Outstanding  at February 13, 2007

-

-

-

-

The following table summarizes stock option activityduring the six months ended June 30, 2006 (shares in thousands):

Weighted

Weighted

Average

Aggregate

Average

Remaining

Intrinsic

Exercise

Contractual

Value

Options

Price

Life in Years

(000's)
                                 
Outstanding  at January 1, 2006

100

$1.30

       Granted

-

-

       Exercised

-

-

       Cancelled

-

-

Outstanding  at June 30, 2006

100

$1.30

8.0

$226

Options  exercisable at June 30, 2006

100

$1.30

8.0

$226

Options  vested or expected to vest at

       June  30, 2006

100

$1.30

8.0

$226

 

**NOTE J-STATEMENT OF CASH FLOWINFORMATION**

 

The Companyhad restricted cash at June 30, 2007 and December 31, 2006 of $107,000 and $105,000,respectively, related to collateral on a seismic operations bond.

 

Page 24 of 50

*(Index)*

 

The Company had non-cash additions to its seismic data library comprised of the following for the periods indicated (inthousands):  

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

February 14,  2007- 

January 1,  2007-

Six Months  Ended

June 30, 2007

February 13,  2007

June 30, 2006
                              
Non-monetary exchanges related to  resale

       licensing revenue

$

2,738

$

(7

)

$

4,279

Non-monetary exchanges from  underwriting

       of new data acquisition

-

-

1,430

Non-monetary exchanges related to  data

       management services

-

-

52

Completion of data in progress from  prior

       non-monetary exchanges

600

-

1,238

Less:  Non-monetary exchanges

       for data in progress

(1,176

)

-

(187

)

Total non-cash additions to seismic  data library

$

2,162

$

(7

)

$

6,812

Non-cash revenue consisted of the following for the periods indicated(in thousands):

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

February 14,  2007- 

January 1,  2007-

Six Months  Ended

June 30, 2007

February 13,  2007

June 30, 2006
                              
Acquisition  revenue on underwriting from 

       non-monetary  exchange contracts

$

27

$

11

$

2,536

Licensing  revenue from specific data 

       licenses  and selections on

       non-monetary  exchange contracts

1,082

71

5,084

Data  management revenue

-

6

7

Total  non-cash revenue

$

1,109

$

88

$

7,627

 

**NOTEK-COMMITMENTS AND CONTINGENCIES**
*Litigation*
 

OnJuly 18, 2002, Paul Frame, the Company's former chief executive officer, suedthe Company in the 113th Judicial District Court of Harris County, No. 2002-35891. Mr. Frame alleged a breach of his employment contract anddefamation. He also sought a declaratory judgment that certain funds hereceived from the Company were proper and do not have to be repaid.  Mr. Framefiled claims totaling $20.2 million in the Company's Chapter 11 Cases, whichhave been disallowed by order of the Bankruptcy Court.  On April 1, 2005, theCompany filed a motion for summary judgment seeking dismissal of Mr. Frame'scomplaint in the District Court.  In late April 2005, Mr. Frame filed a motionfor leave to file an amended complaint in the District Court.  Hearing dateshave not been set for these April 2005 motions.  In 2002, the Company filed acounter suit to recover approximately $4.2 million in corporate funds that theCompany believes Mr. Frame inappropriately caused the Company to pay him or forhis benefit plus over $800,000 due on two notes that were accelerated pursuantto their respective terms. The Company also holds a judgment against Mr. Framein the amount of at least $590,000 relating to a loan made to Mr. Frame by BankOne N.A. and guaranteed by the Company.  The Company has requested and isinvestigating information with respect to Mr. Frame and the nature and extentof his assets for purposes of analyzing whether to continue pursuit of thecivil litigation described above and potential debt collection.  The partiesfiled a joint motion to abate the above proceedings.  The case continues toremain in abatement.

OnNovember 6, 2006, a purported class action complaint was filed in theDistrict Court of Harris County, Texas, 189th Judicial District (No.2006-71302) by Todd Augenbaum, an alleged stockholder of the Company. Theplaintiff filed an amended complaint on January 22, 2007. The amended complaintnames as defendants the Company and each member of its Board of Directors aswell as ValueAct Capital Master Fund, L.P. ("ValueAct Capital"),Seitel Holdings, Inc. ("Holdings") and Seitel Acquisition Corp.("Acquisition Corp.") The amended complaint is a purported classaction that alleges, among other things, that (i) the defendants havebreached fiduciary duties they assertedly owed to the Company's stockholders inconnection with the Company entering into the Agreement and Plan of Merger,dated as of October 31, 2006, with Holdings and Acquisition Corp. (see Note R to Notes toConsolidated Financial Statements for discussion on subsequent events), or aided and abetted in the breachthereof, (ii) the defendants have breached their duty of candor to theCompany's stockholders by failing to disclose material information, or aidedand abetted in the breach thereof, and (iii) the merger consideration isunfair and inadequate. The plaintiff seeks, among other things, certificationof a class, an injunction against the consummation of the merger, and the costsand disbursements of the action. On February 1, 2007, the court denied theplaintiff's motion for a temporary restraining order and/or preliminaryinjunction of the shareholder vote, which then occurred as scheduled onFebruary 9, 2007. The Company believes that the lawsuit is without merit andintends to defend against it vigorously. 

Page 25 of 50

*(Index)*

In addition to the lawsuits described above, the Company isinvolved from time to time in ordinary, routine claims and lawsuits incidentalto its business. In the opinion of management, uninsured losses, if any,resulting from the ultimate resolutions of these matters should not be materialto the Company's financial position or results of operation.  However, it isnot possible to predict or determine the outcomes of the legal actions broughtagainst it or by it, or to provide an estimate of all additional losses, ifany, that may arise. At June30, 2007, the Company did not have any amountsaccrued related to the claims set forth above, as the Company believes it isnot probable that any amounts will be paid relative to such litigation andclaims.  If one or more of the parties were to prevail against the Company inone or more of the cases described above that have not been settled, theamounts of any judgments against the Company or settlements that the Companymay enter into, could be material to the Company's financial statements for anyparticular reporting period.

**NOTEL-SUPPLEMENTAL GUARANTORS CONSOLIDATING CONDENSED FINANCIAL INFORMATION**

On February 14, 2007, theCompany completed a private placement of 9.75% Senior Notes in the aggregateprincipal amount of $400.0 million. Seitel, Inc.'s (the "Parent") paymentobligations under the 9.75% Senior Notes are jointly and severally guaranteedby certain of its 100% owned U.S. subsidiaries ("GuarantorSubsidiaries"). All subsidiaries of Seitel, Inc. that do not guaranty the 9.75%Senior Notes are referred to as Non-Guarantor Subsidiaries. 

The consolidating condensedfinancial statements are presented below and should be read in connection withthe Condensed Consolidated Financial Statements of the Company. Separatefinancial statements of the Guarantors are not presented because (i) theGuarantors are wholly-owned and have fully and unconditionally guaranteed the 9.75%Senior Notes on a joint and several basis, and (ii) the Company's managementhas determined such separate financial statements are not material to investors.

The following consolidatingcondensed financial information presents the consolidating condensed balancesheets as of June 30, 2007 (Successor Period) and December 31, 2006(Predecessor Period), and the consolidating condensed statements of operationsand statements of cash flows for the period from February 14, 2007 to June 30,2007 (Successor Period), from January 1, 2007 to February 13, 2007 (PredecessorPeriod) and for the six months ended June 30, 2006 (Predecessor Period) of (a)the Parent; (b) the Guarantor Subsidiaries; (c) the Non-Guarantor Subsidiaries;(d) elimination entries; and (e) the Parent, the Guarantor Subsidiaries and theNon-Guarantor Subsidiaries on a consolidated basis. 

Investments in subsidiaries areaccounted for on the equity method. The principal elimination entries eliminateinvestments in subsidiaries, intercompany balances, intercompany transactionsand intercompany sales. 

Page 26 of 50

*(Index)*

**  **

**CONSOLIDATING CONDENSED BALANCESHEET**

**SUCCESSOR PERIOD**

**As of June 30, 2007**

(In thousands)

** **

** **

** **

** **

** **

** **

** **

** **

**Non-**

** **

** **

** **

** **

** **

** **

** **
   
** **

** **

** **

**Guarantor**

** **

** **

**Guarantor**

** **

** **

**Consolidating**

** **

** **

**Consolidated**
      
**Parent**

** **

** **

**Subsidiaries**

** **

** **

**Subsidiaries**

** **

** **

**Eliminations**

** **

** **

**Total**
      
ASSETS

    Cash and cash equivalents

$

-

$

24,120

$

1,141

$

-

$

25,261

    Restricted cash

-

107

-

-

107

    Receivables

      Trade, net

-

36,863

9,001

-

45,864

      Notes and other, net

46

35

362

-

443

    Intercompany receivables (payables)

181,373

(168,771

)

(12,602

)

-

-

    Investment in subsidiaries

443,586

464,626

252,177

(1,160,389

)

-

    Net seismic data library

-

276,059

102,089

378,148

    Net property and equipment

-

4,537

2,983

-

7,520

    Prepaid expenses, deferred charges

      and other	

13,649

3,730

474

-

17,853

    Intangible assets, net	

1,012

30,917

21,850

53,779

    Goodwill

-

107,108

92,216

-

199,324
                                                
    TOTAL ASSETS

$

639,666

$

779,331

$

469,691

$

(1,160,389

)

$

728,299
                                                
LIABILITIES AND STOCKHOLDER'S

    EQUITY

    Accounts payable and accrued liabilities

$

15,803

$

15,727

$

9,414

$

-

$

40,944

    Income taxes payable

465

-

835

-

1,300

    Senior Notes

402,375

-

-

-

402,375

    Notes payable

317

-

-

-

317

    Obligations under capital leases

-

-

3,636

-

3,636

    Deferred revenue

-

22,428

4,742

-

27,170

    Deferred income taxes

2

-

16,168

-

16,170

TOTAL LIABILITIES

418,962

38,155

34,795

-

491,912
                                                
STOCKHOLDER'S EQUITY

    Common stock

-

-

-

-

-

    Additional paid-in capital

259,781

-

-

-

259,781

    Parent investment

-

764,762

424,082

(1,188,844

)

-

    Retained deficit

(39,077

)

(23,586

)

(4,869

)

28,455

(39,077

)

    Accumulated other comprehensive income	

-

-

15,683

-

15,683

TOTAL STOCKHOLDER'S

    EQUITY (DEFICIT)

220,704

741,176

434,896

(1,160,389

)

236,387
                                                
TOTAL LIABILITIES AND

    STOCKHOLDER'S EQUITY	

$

639,666

$

779,331

$

469,691

$

(1,160,389

)

$

728,299

Page 27 of 50

*(Index)*

 

**CONSOLIDATING CONDENSEDBALANCE SHEET**

**PREDECESSOR PERIOD**

**As of December 31, 2006**

(In thousands)

** **

** **

** **

** **

** **

** **

** **

** **

**Non-**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Guarantor**

** **

** **

**Guarantor**

** **

** **

**Consolidating**

** **

** **

**Consolidated**

** **

** **

**Parent**

** **

** **

**Subsidiaries**

** **

** **

**Subsidiaries**

** **

** **

**Eliminations**

** **

** **

**Total**

** **
                                                
ASSETS

    Cash and equivalents

$

-

$

101,043

$

6,347

$

-

$

107,390

    Restricted cash

-

105

-

-

105

    Receivables

      Trade, net

-

40,786

11,358

-

52,144

      Notes and other, net

59

213

623

-

895

    Intercompany receivables (payables)

284,395

(268,346

)

(15,780

)

(269

)

-

    Investment in subsidiaries

(59,599

)

318,146

59,498

(318,045

)

-

    Net seismic data library

-

84,718

41,636

(3,231

)

123,123

    Net property and equipment

-

4,122

3,506

-

7,628

    Prepaid expenses, deferred charges

      and other assets

4,651

3,902

616

-

9,169

    Deferred income taxes

-

-

4,981

-

4,981
                                                
    TOTAL ASSETS

$

229,506

$

284,689

$

112,785

$

(321,545

)

$

305,435
                                                
LIABILITIES AND STOCKHOLDERS'

    EQUITY

      Accounts payable and accrued  liabilities

$

10,288

$

15,732

$

4,817

$

-

$

30,837

      Income taxes payable

659

-

-

-

659

      Senior Notes

185,788

-

-

-

185,788

      Notes payable

337

-

-

-

337

      Obligations under capital leases

-

-

2,913

-

2,913

      Deferred revenue

-

35,974

11,436

-

47,410

TOTAL LIABILITIES

197,072

51,706

19,166

-

267,944
                                                
STOCKHOLDERS' EQUITY

    Common stock

1,552

-

-

-

1,552

    Additional paid-in capital

240,431

-

-

-

240,431

    Parent investment

-

209,770

21,242

(231,012

)

-

    Retained earnings (deficit)

(209,539

)

23,222

67,316

(90,538

)

(209,539

)

    Accumulated other comprehensive

      income (loss)

(10

)

(9

)

5,061

5

5,047

TOTAL STOCKHOLDERS' EQUITY

32,434

232,983

93,619

(321,545

)

37,491
                                                
TOTAL LIABILITIES AND 

    STOCKHOLDERS' EQUITY	

$

229,506

$

284,689

$

112,785

$

(321,545

)

$

305,435

Page 28 of 50

*(Index)*

 

**CONSOLIDATING CONDENSED STATEMENT OFOPERATIONS**

**SUCCESSOR PERIOD**

**February 14, 2007 - June 30, 2007**

 (In thousands)

** **

** **

** **

** **

** **

** **

** **

** **

**Non-**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Guarantor**

** **

** **

**Guarantor**

** **

** **

**Consolidating**

** **

** **

**Consolidated**

** **
   
**Parent**

** **

** **

**Subsidiaries**

** **

** **

**Subsidiaries**

** **

** **

**Eliminations**

** **

** **

**Total**
         
REVENUE

$

-

$

35,778

$

12,734

$

(843

)

$

47,669
                                                
EXPENSES:

    Depreciation and amortization

67

44,131

15,805

-

60,003

    Cost of sales

-

38

3

-

41

    Selling, general and administrative

3,328

6,423

5,015

(843

)

13,923

    Merger

-

1,254

26

-

1,280

3,395

51,846

20,849

(843

)

75,247
                                                
LOSS FROM OPERATIONS

(3,395

)

(16,068

)

(8,115

)

-

(27,578

)
                                                
Interest expense, net

(8,389

)

(10,318

)

(416

)

-

(19,123

)

Foreign currency exchange gains	

-

-

1,657

-

1,657
                                                
Loss before income taxes and equity

    in income (loss) of subsidiaries	

(11,784

)

(26,386

)

(6,874

)

-

(45,044

)

Benefit for income taxes

-

(3,962

)

(2,005

)

-

(5,967

)

Equity in income (loss) of subsidiaries

(27,293

)

(1,162

)

-

28,455

-
                                                
NET LOSS

$

(39,077

)

$

(23,586

)

$

(4,869

)

$

28,455

$

(39,077

)

Page 29 of 50

*(Index)*

 

**CONSOLIDATING CONDENSED STATEMENT OFOPERATIONS**

**PREDECESSOR PERIOD**

**January 1, 2007 - February 13, 2007**

(In thousands)

** **

** **

** **

** **

** **

** **

** **

** **

**Non-**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Guarantor**

** **

** **

**Guarantor**

** **

** **

**Consolidating**

** **

** **

**Consolidated**

** **
   
**Parent**

** **

** **

**Subsidiaries**

** **

** **

**Subsidiaries**

** **

** **

**Eliminations**

** **

** **

**Total**
         
REVENUE

$

-

$

13,346

$

6,055

$

(391

)

$

19,010
                                                
EXPENSES:

    Depreciation and amortization

-

6,989

4,669

(173

)

11,485

    Cost of sales

-

7

1

-

8

    Selling, general and administrative	

240

1,871

1,857

(391

)

3,577

    Merger

1,054

15,823

580

-

17,457

1,294

24,690

7,107

(564

)

32,527
                                                
LOSS FROM OPERATIONS

(1,294

)

(11,344

)

(1,052

)

173

(13,517

)
                                                
Interest expense, net

(236

)

(1,878

)

(170

)

-

(2,284

)

Foreign currency exchange losses

-

-

(102

)

-

(102

)

Other income

12

-

-

-

12
                                                
Loss before income taxes and equity

(1,518

)

(13,222

)

(1,324

)

173

(15,891

)

    in loss of subsidiaries	

Provision for income taxes

-

99

353

-

452

Equity in loss of subsidiaries

(14,825

)

(1,677

)

-

16,502

-
                                                
NET LOSS

$

(16,343

)

$

(14,998

)

$

(1,677

)

$

16,675

$

(16,343

)

Page 30 of 50

*(Index)*

**CONSOLIDATING CONDENSED STATEMENT OFOPERATIONS**

**For the Six Months Ended June 30,2006**

(In thousands)

 

** **

** **

** **

** **

** **

** **

** **

** **

**Non-**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Guarantor**

** **

** **

**Guarantor**

** **

** **

**Consolidating**

** **

** **

**Consolidated**

** **
   
**Parent**

** **

** **

**Subsidiaries**

** **

** **

**Subsidiaries**

** **

** **

**Eliminations**

** **

** **

**Total**
         
REVENUE

$

-

$

69,837

$

24,713

$

(1,310

)

$

93,240
                                                
EXPENSES:

    Depreciation and amortization

-

29,422

17,705

(315

)

46,812

    Gain on sale of seismic data

-

(2,377

)

-

2,146

(231

)

    Cost of sales

-

148

15

-

163

    Selling, general and administrative	

1,038

11,114

7,094

(1,310

)

17,936

1,038

38,307

24,814

521

64,680
                                                
INCOME (LOSS) FROM OPERATIONS

(1,038

)

31,530

(101

)

(1,831

)

28,560
                                                
Interest expense, net

(862

)

(8,357

)

(678

)

-

(9,897

)

Foreign currency exchange gains	

-

53

1,081

-

1,134
                                                
Income (loss) from continuing operations	

    before income taxes and equity in	

    income of subsidiaries	

(1,900

)

23,226

302

(1,831

)

19,797

Provision for income taxes

-

54

329

-

383

Equity in income (loss) of subsidiaries

21,318

(27

)

-

(21,291

)

-
                                                
Income (loss) from continuing operations	

19,418

23,145

(27

)

(23,122

)

19,414
                                                
Income from discontinued operations,

    net of tax

-

4

-

-

4
                                                
NET INCOME (LOSS)

$

19,418

$

23,149

$

(27

)

$

(23,122

)

$

19,418

Page 31 of 50

*(Index)*

**CONSOLIDATING CONDENSED STATEMENT OFCASH FLOWS**

**SUCCESSOR PERIOD**

**February 14, 2007 - June 30, 2007**

(In thousands)

** **

** **

** **

** **

** **

** **

** **

** **

**Non-**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Guarantor**

** **

** **

**Guarantor**

** **

** **

**Consolidating**

** **

** **

**Consolidated**

** **
   
**Parent**

** **

** **

**Subsidiaries**

** **

** **

**Subsidiaries**

** **

** **

**Eliminations**

** **

** **

**Total**
         
Cash flows from operating  activities:

              Net cash provided by  (used in) 

                    operating  activities 

$

(1,209

)

$

16,979

$

16,033

$

-

$

31,803
                                                
Cash  flows from investing activities:

        Cash invested in seismic  data

-

(11,171

)

(14,609

)

-

(25,780

)

        Cash paid to acquire  property

              and equipment

-

(105

)

(29

)

-

(134

)

        Increase in restricted  cash

-

(2

)

-

-

(2

)

        Net  cash used in investing activities

-

(11,278

)

(14,638

)

-

(25,916

)
                                                
Cash  flows from financing activities:

        Issuance of 9.75% Senior  Notes

400,000

-

-

-

400,000

        Repayment of 11.75% Senior  Notes

(233,352

)

-

-

-

(233,352

)

        Purchase of Seitel stock

(386,556

)

-

-

-

(386,556

)

        Principal payments on  notes payable

(17

)

-

-

-

(17

)

        Principal payments on  capital

              lease obligations

-

-

(32

)

-

(32

)

        Borrowings on line of  credit

-

-

88

-

88

        Payments on line of credit

-

-

(88

)

-

(88

)

        Payment of financing fees

(16,982

)

-

-

-

(16,982

)

        Contributed capital

153,473

-

-

-

153,473

        Payments on notes  receivable from 

              officers and  employees 

-

274

-

-

274

        Intercompany transfers

84,643

(84,643

)

-

-

-

              Net cash provided by  (used in) 

                    financing  activities 

1,209

(84,369

)

(32

)

-

(83,192

)
                                                
Effect of exchange rate changes

-

-

(1,642

)

-

(1,642

)

Net decrease in cash

        and cash equivalents

-

(78,668

)

(279

)

-

(78,947

)

Cash and cash equivalents at

        beginning of period

-

102,788

1,420

-

104,208

Cash and cash equivalents at end  of period

$

-

$

24,120

$

1,141

$

-

$

25,261

Page 32 of 50

*(Index)*

**CONSOLIDATING CONDENSED STATEMENT OFCASH FLOWS**

**PREDECESSOR PERIOD**

**January 1, 2007 - February 13, 2007**

(In thousands)

** **

** **

** **

** **

** **

** **

** **

** **

**Non-**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Guarantor**

** **

** **

**Guarantor**

** **

** **

**Consolidating**

** **

** **

**Consolidated**

** **
   
**Parent**

** **

** **

**Subsidiaries**

** **

** **

**Subsidiaries**

** **

** **

**Eliminations**

** **

** **

**Total**
         
Cash flows from operating  activities:
   
              Net cash provided by  (used in) 

                    operating  activities 

$

(11,821

)

$

19,894

$

(2,463

)

$

-

$

5,610
                                                
Cash  flows from investing activities:

        Cash invested in seismic  data

-

(7,500

)

(869

)

-

(8,369

)

        Cash paid to acquire  property

              and equipment

-

(27

)

(33

)

-

(60

)

        Net  cash used in investing activities

-

(7,527

)

(902

)

-

(8,429

)
                                                
Cash  flows from financing activities:

        Principal payments on  notes payable

(3

)

-

-

-

(3

)

        Principal payments on  capital

              lease obligations

-

-

(6

)

-

(6

)

        Borrowings on line of  credit

-

-

119

-

119

        Payments on line of credit

-

-

(119

)

-

(119

)

        Purchase of common stock

              subsequently retired

(400

)

-

-

-

(400

)

        Intercompany transfers

12,224

(10,622

)

(1,602

)

-

-

              Net cash provided by  (used in) 

                    financing  activities 

11,821

(10,622

)

(1,608

)

-

(409

)
                                                
Effect of exchange rate changes

-

-

46

-

46

Net increase (decrease) in cash

        and cash equivalents

-

1,745

(4,927

)

-

(3,182

)

Cash and cash equivalents at

        beginning of period

-

101,043

6,347

-

107,390

Cash and cash equivalents at end  of period

$

-

$

102,788

$

1,420

$

-

$

104,208

Page 33 of 50

*(Index)*

**CONSOLIDATING CONDENSED STATEMENT OFCASH FLOWS**

**For the Six Months Ended June 30,2006**

(In thousands)

** **

** **

** **

** **

** **

** **

** **

** **

**Non-**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Guarantor**

** **

** **

**Guarantor**

** **

** **

**Consolidating**

** **

** **

**Consolidated**

** **
   
**Parent**

** **

** **

**Subsidiaries**

** **

** **

**Subsidiaries**

** **

** **

**Eliminations**

** **

** **

**Total**

** **
   
Cash flows from operating  activities:

              Net cash provided by  (used in) 

                    operating  activities of

                    continuing  operations

$

(12,175

)

$

45,930

$

16,464

$

-

$

50,219
                                                
Cash  flows from investing activities:

        Cash invested in seismic  data

-

(27,875

)

(12,258

)

2,146

(37,987

)

        Cash paid to acquire  property

              and equipment

-

(290

)

(195

)

-

(485

)

        Cash from sale of seismic  data

-

2,146

-

(2,146

)

-

        Cash received from  disposal of property

              and equipment

-

3

-

-

3

        Increase in restricted  cash

-

(17

)

-

-

(17

)

              Net cash used in investing  activities of 

              continuing  operations

-

(26,033

)

(12,453

)

-

(38,486

)
                                                
Cash  flows from financing activities:

        Principal payments on  notes payable

(17

)

-

-

-

(17

)

        Principal payments on  capital

              lease obligations

-

-

(19

)

-

(19

)

        Borrowings on line of  credit

-

-

25

-

25

        Payments on line of credit

-

-

(25

)

-

(25

)

        Purchases of common stock	

              subsequently retired

(422

)

-

-

-

(422

)

        Payments on notes  receivable from 

              officers and  employees 

-

13

-

-

13

        Intercompany transfers

12,614

(9,728

)

(2,886

)

-

-

              Net cash provided by  (used in) 

                    financing  activities of

                    continuing  operations

12,175

(9,715

)

(2,905

)

-

(445

)
                                                
Effect of exchange rate changes

-

-

(1,005

)

-

(1,005

)

Net cash used in discontinued

        operations:

              Cash used in  operating activities

-

(6

)

-

-

(6

)

              Cash used in  investing activities

-

(46

)

-

-

(46

)

    Net increase in cash and  equivalents

-

10,130

101

-

10,231

Cash and equivalents at beginning  of period

-

71,430

6,667

-

78,097

Cash and equivalents at end of  period

$

-

$

81,560

$

6,768

$

-

$

88,328

Page 34 of 50

*(Index)*

**NOTE M-RECENTACCOUNTING PRONOUNCEMENTS**

In September 2006, the FASB issued SFAS No. 157, "Fair ValueMeasurements." SFAS No. 157 defines fair value, establishes a frameworkfor measuring fair value in accordance with generally accepted accountingprinciples, and expands disclosure about fair value measurements. SFASNo. 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007 and interim periods within those fiscalyears. The Company is currently assessing the impact of adopting SFASNo. 157 but does not expect that it will have a material effect on itsconsolidated financial position, results of operations or cash flows. 

InFebruary 2007, the FASB issued SFAS No. 159, "The Fair Value Option forFinancial Assets and Financial Liabilities - Including an amendment of FASBNo. 115", which provides a fair value measurement option for eligiblefinancial assets and liabilities. Under SFAS No. 159, an entity ispermitted to elect to apply fair value accounting to a single eligible item,subject to certain exceptions, without electing it for other identical itemsand include unrealized gains and losses in earnings. The fair value optionestablished by this Statement is irrevocable, unless a new election dateoccurs. This standard reduces the complexity in accounting for financialinstruments and mitigates volatility in earnings caused by measuring relatedassets and liabilities differently. SFAS No. 159 is effective as of thebeginning of an entity's first fiscal year beginning after November 15,2007.  Management is currently evaluating the impact the adoption of SFASNo. 159 will have on the Company's financial statements, but does notpresently anticipate it will have a material effect on its consolidatedfinancial position, results of operations or cash flows. 

**NOTE N-RELATED PARTY TRANSACTIONS**

The Company reimbursed ValueAct Capital approximately $1.1million in the second quarter of 2007 for expenses incurred and paid byValueAct Capital in connection with the Merger.  This amount due to ValueActCapital was recorded as a purchase price adjustment.  There were no amountspayable to ValueAct Capital as of June 30, 2007.

 
Item 2.   MANAGEMENT'S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
** **

*The following discussionshould be read in conjunction with our consolidated financial statements andthe related notes to the financial statements included elsewhere in thisdocument.*

 

**Overview**

** **

***General***

** **

Our products and services are used by oil and gas companies toassist in the exploration for, and development and management of, oil andgas reserves. We have ownership in an extensive library of onshore and offshoreseismic data that we offer for license to oil and gas companies. Oil and gascompanies use seismic data in oil and gas exploration and development effortsto increase the probability of drilling success. We believe that our library ofonshore seismic data is one of the largest libraries available for licensing inthe United States and Canada. Our library of offshore data covers parts of theU.S. Gulf of Mexico shelf and certain deep water areas in the Western andCentral U.S. Gulf of Mexico. We generate revenue primarily by licensing datafrom our data library and from new data creation products, which aresubstantially underwritten or paid for by clients.  By participating inunderwritten, nonexclusive surveys or purchasing licenses to existing data, oiland gas companies can obtain access to surveys at reduced costs as compared toacquiring seismic data on a proprietary basis.

Our primary areas of focus are onshore United States and Canada and, to a lesser extent, offshore U.S. Gulf of Mexico.  These markets continue toexperience major changes.  Having spent several years increasing their focus oninternational exploration opportunities, several major oil companies havebecome more active in the U.S. market than in the past few years.  Independentoil and gas companies continue to be responsible for a significant portion ofcurrent U.S. drilling activity.  Production decline rates are accelerating worldwideand are pronounced in mature fields of North America, while commodity pricesfor oil and natural gas remain a positive driver.  We expect demand for naturalgas to continue to increase exploration activity over the next two to threeyears in the United States and Canada.

Page 35 of 50

*(Index)*

Over the last two years, we haveachieved an average return on historical investment in excess of 40% on newlycreated data.  In addition, during 2006, we added significant amounts of datathrough purchases and trades as compared to recent years. We believe that thisdata will meet our expected returns for purchased data.  We determine return oninvestment by dividing the amount of non-exclusive data license revenue earnedon data added to our library by the amount of the gross investment in the data,net of cash underwriting.  This percentage is useful because it reflects ourability to recover the capital investment on data added to our library, butshould not be considered as an alternative to net income, as an indicator ofour operating performance or as a measure of liquidity, including as analternative to cash flows from operating activities.  We believe that we willbe able to sustain the improvement of our return on investment over the nextyear provided the overall demand for seismic data remains strong.  

Our clients continue to seek ourservices to create data in the United States and Canada.  Our commitment forunderwriting on new data creation projects was $30.5 million on June 30, 2007.  Licensing data "off the shelf" does notrequire the longer planning and lead times like new data creation and thus ismore likely to fluctuate quarter to quarter.

***Effect of the Merger andRelated Transactions on Future Periods***

On February 14, 2007, Seitel Acquisition Corp. ("AcquisitionCorp.") was merged with and into Seitel, Inc. ("Seitel") (the"Merger"), pursuant to a merger agreement between Seitel, AcquisitionCorp. and Seitel Holdings, Inc. ("Holdings") dated October 31, 2006. Pursuant to the merger agreement, Seitel continued as the surviving corporationand became a privately owned corporation and wholly-owned subsidiary ofHoldings.    

In connection with the Merger, we paid $187.0 million aggregateprincipal amount of our 11.75% senior notes due 2011 (the "11.75% SeniorNotes"), issued $400.0 million aggregate principal amount of 9.75% seniornotes due 2014 (the "9.75% Senior Notes") and entered into anagreement with Wells Fargo Foothill, Inc. to amend and restate our existingU.S. revolving credit facility.  Accordingly, as a result of the increase inour indebtedness our interest expense will be significantly higher in periodsfollowing the Merger. 

The Merger was accounted for as a business combination inaccordance with Statements of Financial Accounting Standards ("SFAS")No. 141, "Business Combinations," on a step acquisitionbasis. ValueAct Capital Master Fund L.P. ("ValueAct Capital") progressivelyincreased its interest in Seitel in a series of transactions with the mostsignificant acquisitions occurring on March 1, 2006 and February 14, 2007.  Therefore,the assets and liabilities of Seitel for financial reporting purposes wererecorded at the closing of the Merger based on the proportional fair values asof March 1, 2006 and February 14, 2007. For income tax purposes, these assetsand liabilities remained at their historic tax basis. This resulted inrecording deferred tax liabilities at the closing of the Merger. 

The adjustments to our assets and liabilities as a result of theMerger will impact future net income.  The significant effects expected on our2007 financial results are as follows.  The book value of our seismic datalibrary was increased by approximately $275.2 million to its estimated fairmarket value of $395.6 million.  As a result of this step up in value and ofour maximum four-year straight-line amortization of seismic data, we estimatethat our data amortization expense will increase by approximately $60.0 millionfor the period from February 14, 2007 to December 31, 2007.  In addition, werecorded identifiable intangible assets with an estimated fair value of $54.1 millionof which $53.2 million is amortizable over their useful lives ranging from 1 to15 years.  As a result of this step up in value, we estimate that amortizationexpense of acquired intangible assets will total approximately $5.2 million forthe period from February 14, 2007 to December 31, 2007.  Our deferred revenueliability was reduced by $26.5 million primarily associated with data licensingcontracts for which the data was not fully selected as of February 13, 2007. We expect this reduction in deferred revenue to reduce non-cash revenue fromselections from February 14, 2007 to December 31, 2007 by approximately $18.7 million. 

Page 36 of 50

*(Index)*

Although Seitel continues as the same legal entity after theMerger, the accompanying financial information for the first six months of 2007is presented for two periods:  January 1, 2007 through February 13, 2007 (the"Predecessor Period" or "Predecessor," as context requires) and February 14,2007 through June 30, 2007 (the "SuccessorPeriod" or "Successor," as context requires), which relate to the periodpreceding the Merger and the period succeeding the Merger, respectively.  Thecombined results for the six months ended June 30, 2007 represent the addition of the Predecessor andSuccessor Periods ("Combined").  This combination does not comply with U.S.GAAP or with the rules for pro forma presentation but is presented because webelieve it provides a meaningful comparison of our results.  The results of theSuccessor are not comparable to the results of the Predecessor due to thedifference in the basis of presentation of purchase accounting as compared tohistorical costs.  The accompanying consolidated financial information for thethree and six months ended June 30, 2006 are also presented as Predecessor.  The Combined results donot reflect the actual results we would have achieved absent the Merger and arenot indicative of our future results of operations.

***Principal Factors Affecting Our Business* **

Our business is dependent upon a varietyof factors, many of which are beyond our control. The following are those thatwe consider to be principal factors affecting our business.

**Demand for Seismic Data:**  Demand for ourproducts and services is cyclical due to the nature of the oil and gasindustry.  In particular, demand for our seismic data services depends uponexploration, production, development and field management spending by oil andgas companies and, in the case of new data creation, their willingness to forgoownership in the seismic data. Capital expenditures by oil and gas companiesdepend upon several factors, including actual and forecasted oil and naturalgas commodity prices, prospect availability and the companies' own short-termand strategic plans. These capital expenditures may also be affected byworldwide economic or industry-wide conditions. Demand for our seismic data ismore likely to be influenced by natural gas prices rather than crude oil pricesdue to the geographic location of our seismic data. 

**Availability of Capital for Our Customers:**  Many of our customersconsist of independent oil and gas companies and private prospect-generatingcompanies that rely primarily on private capital markets to fund theirexploration, production, development and field management activities.Significant changes in the private capital market and the availability ofcapital could have a material impact on the ability of such companies to obtainfunding necessary to purchase our seismic data.

**Merger and Acquisition Activity:** In recent years, therehas been an increase in the level of merger and acquisition activity within ourclient base. This activity could have a negative impact on seismic companiesthat operate in markets with a limited number of participating clients.However, we believe that, over time, this activity could have a positive impacton our business, as it should generate re-licensing fees, result in increasedvitality in the trading of mineral interests and result in the creation of newindependent customers through the rationalization of staff within thosecompanies affected by this activity.

**Natural Gas Reserve Replacement:**  Gas reserves in the United States and Canada are currently expected to decline at a rate of 1.9% per year between 2006and 2010.  During that period, gas consumption in the United States and Canada is expected to increase at a rate of 2.9% per year.  As a result, webelieve there is an increasing need in the oil and gas industry to replacethese reserves, which we anticipate will increase the demand for our seismicdata.

**Government Regulation:**  Our operations aresubject to a variety of federal, provincial, state, foreign and local laws andregulations, including environmental and health and safety laws. We investfinancial and managerial resources to comply with these laws and related permitrequirements. Modification of existing laws or regulations and the adoption ofnew laws or regulations limiting or increasing exploration or productionactivities by oil and gas companies may have a material effect on our businessoperations.** **

**Non-GAAP Key PerformanceMeasures **

Management considers certain performancemeasures in evaluating and managing our financial condition and operatingperformance at various times and from time to time. Some of these performancemeasures are non-GAAP financial measures. Generally, a non-GAAP financialmeasure is a numerical measure of a company's performance, financial positionor cash flows that either excludes or includes amounts that are not normallyexcluded or included in the most directly comparable measure calculated andpresented in accordance with United States generally accepted accountingprinciples, or GAAP. These non-GAAP measures are not in accordance with, norare they a substitute for, GAAP measures. These non-GAAP measures are intendedto supplement our presentation of our financial results that are prepared inaccordance with GAAP.

 

Page 37 of 50

*(Index)*

The following are the key performance measures considered bymanagement.

**Cash Resales: **Cash resales representnew contracts for data licenses from our library, payable in cash.  We believethis measure is important in gauging new business activity.  We expect cashresales to generally follow a consistent trend over several quarters, whileconsidering our normal seasonality. Volatility in this trend over severalconsecutive quarters could indicate changing market conditions.  The followingis a reconciliation of this non-GAAP financial measure to the most directlycomparable GAAP financial measure, total revenue (in thousands):

SUCCESSOR

PREDECESSOR

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

COMBINED(1)

PERIOD

PERIOD

Three Months

Six Months 

February 14, 

January 1, 

Six Months 

Ended

Ended

2007 -

2007 -

Ended

June 30,

June 30,

June 30,

February 13,

June 30,

2007

2006

2007

2007

2007

2006
                                                         
Cash resales

$

27,794

$

26,958

$

49,506

$

43,521

$

5,985

$

60,584

Other revenue components:

    Acquisition revenue

8,909

13,350

21,294

15,196

6,098

23,994

    Non-monetary exchanges

1,176

2,242

2,731

2,738

(7

)

4,279

    Revenue deferred

(13,577

)

(13,095

)

(23,954

)

(21,318

)

(2,636

)

(27,978

)

    Recognition of revenue

       previously deferred

4,598

16,543

14,459

5,513

8,946

27,547

    Solutions and other

1,471

2,544

2,643

2,019

624

4,814

Total revenue, as reported

$

30,371

$

48,542

$

66,679

$

47,669

$

19,010

$

93,240

(1)    Our combinedresults for the six months ended June 30, 2007 represent the addition of thePredecessor Period from January 1, 2007 through February 13, 2007 and theSuccessor Period from February 14, 2007 to June 30, 2007.  This combinationdoes not comply with U.S. GAAP or with the rules for pro forma presentation,but is presented because we believe it provides a meaningful comparison of ourresults.

Page 38 of 50

*(Index)*

**Cash Margin: **Cash margin includes cash resales plus all other cash revenuesother than from data acquisitions, plus gain on seismic data, less cashselling, general and administrative expenses (excluding merger expenses) andcost of goods sold.  We believe this measure is helpful in determining thelevel of cash from operations we have available for debt service and funding ofcapital expenditures (net of the portion funded or underwritten by ourcustomers).  The following is a quantitative reconciliation of this non-GAAPfinancial measure to the most directly comparable GAAP financial measure, operatingincome (in thousands):

 

SUCCESSOR

PREDECESSOR

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

COMBINED(1)

PERIOD

PERIOD

Three Months

Six Months 

February 14, 

January 1, 

Six Months 

Ended

Ended

2007 -

2007 -

Ended

June 30,

June 30,

June 30,

February 13,

June 30,

2007

2006

2007

2007

2007

2006
                                                         
Cash margin	

$

22,179

$

21,302

$

38,650

$

35,220

$

3,430

$

48,921

Add (subtract) other	

       revenue components

       not included in

       cash margin:

           Acquisition revenue

8,909

13,350

21,294

15,196

6,098

23,994

           Non-monetary

              exchanges

1,176

2,242

2,731

2,738

(7

)

4,279

           Revenue deferred

(13,577

)

(13,095

)

(23,954

)

(21,318

)

(2,636

)

(27,978

)

           Recognition of revenue

              previously deferred

4,598

16,543

14,459

5,513

8,946

27,547

           Non-cash Solutions	

              revenue

-

7

6

-

6

7
                                                         
Less:

       Depreciation  and

           amortization

(37,770

)

(23,034

)

(71,488

)

(60,003

)

(11,485

)

(46,812

)

       Merger  expenses

(835

)

-

(18,737

)

(1,280

)

(17,457

)

-

       Non-cash  operating

           expenses

(2,435

)

(794

)

(4,056

)

(3,644

)

(412

)

(1,398

)

Operating  income (loss),

       as  reported

$

(17,755

)

$

16,521

$

(41,095

)

$

(27,578

)

$

(13,517

)

$

28,560

                                                                                                                   

(1)    Our combinedresults for the six months ended June 30, 2007 represent the addition of thePredecessor Period from January 1, 2007 through February 13, 2007 and theSuccessor Period from February 14, 2007 to June 30, 2007.  This combinationdoes not comply with U.S. GAAP or with the rules for pro forma presentation,but is presented because we believe it provides a meaningful comparison of ourresults.

 

**Growth of Our Seismic Data Library:**  We regularly add to our seismicdata library through four different methods: (1) recording new data; (2) buyingownership of existing data for cash; (3) obtaining ownership of existing datasets through non-monetary exchanges; and (4) creating new value-added productsfrom existing data within our library.  For the period from January 1, 2007 to June30, 2007, we completed the addition of approximately 540 square miles ofseismic data to our library.  As of June 30, 2007, we had approximately 670 squaremiles of seismic data in progress.  For the year ended December 31, 2006, wecompleted the addition of approximately 2,600 square miles of seismic data toour library.  

 

**CriticalAccounting Policies**

We operate in one business segment, which is made up of seismic dataacquisition, seismic data licensing, seismic data processing and seismicreproduction services.  

 

As of January 1, 2007, we adopted FASBInterpretation No. 48, "Accounting for Uncertainty in Income Taxes"("FIN 48").  Therehave not been any other changes in our critical accounting policies sinceDecember 31, 2006.

Page 39 of 50

*(Index)*

 

**Results of Operations**

** **

***Revenue***

****The following tablesummarizes the components of our revenue for the periods indicated (inthousands):

 

SUCCESSOR

PREDECESSOR

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

COMBINED(1)

PERIOD

PERIOD

Three Months

Six Months 

February 14, 

January 1, 

Six Months 

Ended

Ended

2007 -

2007 -

Ended

June 30,

June 30,

June 30,

February 13,

June 30,

2007

2006

2007

2007

2007

2006
                                                         
Acquisition revenue:

       Cash underwriting

$

8,897

$

12,649

$

21,256

$

15,169

$

6,087

$

21,458

       Underwriting from

           non-monetary

           exchanges

12

701

38

27

11

2,536

       Total acquisition revenue

8,909

13,350

21,294

15,196

6,098

23,994

Licensing revenue:

       Cash resales

27,794

26,958

49,506

43,521

5,985

60,584

       Non-monetary exchanges

1,176

2,242

2,731

2,738

(7

)

4,279

       Revenue deferred

(13,577

)

(13,095

)

(23,954

)

(21,318

)

(2,636

)

(27,978

)

       Recognition of revenue

           previously deferred

4,598

16,543

14,459

5,513

8,946

27,547

       Total resale revenue

19,991

32,648

42,742

30,454

12,288

64,432

Total seismic revenue

28,900

45,998

64,036

45,650

18,386

88,426

Solutions and other

1,471

2,544

2,643

2,019

624

4,814

Total revenue

$

30,371

$

48,542

$

66,679

$

47,669

$

19,010

$

93,240

(1)    Our combinedresults for the six months ended June 30, 2007 represent the addition of thePredecessor Period from January 1, 2007 through February 13, 2007 and theSuccessor Period from February 14, 2007 to June 30, 2007.  This combinationdoes not comply with U.S. GAAP or with the rules for pro forma presentation,but is presented because we believe it provides a meaningful comparison of ourresults.

Totalrevenue decreased $18.2 million or 37.4% between the second quarters of 2006and 2007.  Acquisition revenue decreased 33.3% from $13.4 million in the secondquarter of 2006 to $8.9 million in the second quarter of 2007.  This decreasewas primarily due to weather related delays on U.S. seismic surveys during thesecond quarter of 2007.  In addition, the acquisition revenue was lower onCanadian seismic surveys in the 2007 second quarter as compared to the sameperiod in 2006 due to the majority of the acquisition projects being completedin the first quarter of 2007.  Total resale revenue decreased 38.8% from $32.6million in the second quarter of 2006 to $20.0 million in the second quarter of2007 and was the result of various changes in the components of resalerevenue.  Cash resales increased $0.8 million or 3.1% during this period.  Revenuedeferred increased by a similar percentage (3.7%) corresponding to the higher levelof cash resales.  Revenue recognized from previously deferred contracts, orselections, decreased $11.9 million, or 72.2% between the quarters.  This decreasewas partially a result of the purchase accounting adjustments related to datalicensing contracts for which the data was not fully selected as of the Mergerdate (February 14, 2007); for these contracts, selections made after the Mergerdate are not recognizable as revenue.  During the second quarter of 2007,selections from these contracts totaled $5.0 million.  The remaining decreaseis primarily due to the timing of expiration of the selection period forlibrary card contracts.  Solutions and other revenue decreased from $2.5 millionin the second quarter of 2006 to $1.5 million in the second quarter of 2007primarily due to the lower level of seismic revenue.

Page 40 of 50

*(Index)*

Totalrevenue for the first six months of 2007 decreased 28.5% compared to the 2006period.  Acquisition revenue decreased 11.3% from $24.0 million to $21.3million primarily due to weather related delays on U.S. seismic surveysexperienced during the second quarter of 2007.  Cash resales decreased 18.3%between the six month periods primarily due to a slowdown in spending by ourcustomers in the first quarter of 2007 due to uncertainty in commodity pricesduring the 2007 first quarter.  In addition, the slowdown in Canadian drillingand delayed licensing rounds in the Gulf of Mexico also had an impact on cashresales.  Revenue deferred decreased by a similar percentage (14.4%)corresponding to the lower level of cash resales.  Revenue recognized frompreviously deferred contracts, or selections, decreased $13.1 million, or47.5%, partially due to selection revenue totaling $9.4 million that could notbe recognized in the 2007 period as a result of the purchase accountingadjustments, as well as the timing of expiration of the selection period forlibrary card contracts.  Solutions and other revenue decreased by 45.1% duringthe six month periods primarily resulting from the lower level of seismicrevenue and the types of products delivered.

At June 30, 2007, we had a deferred revenue balance of $27.2 million,compared to the December 31, 2006 balance of $47.4 million.  The deferredrevenue will be recognized when selection of the data is made by the customeror upon expiration of the selection period, whichever occurs first.

***Depreciation andAmortization***

Depreciation and amortization was comprised of the following (in thousands):

 

SUCCESSOR

PREDECESSOR

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

COMBINED(1)

PERIOD

PERIOD

Three Months

Six Months 

February 14, 

January 1, 

Six Months 

Ended

Ended

2007 -

2007 -

Ended

June 30,

June 30,

June 30,

February 13,

June 30,

2007

2006

2007

2007

2007

2006
                                                         
Amortization of seismic data

$

35,690

$

22,356

$

68,100

$

56,893

$

11,207

$

45,470

Depreciation of property

    and equipment

624

678

1,226

948

278

1,342

Amortization of acquired

    intangibles

1,456

-

2,162

2,162

-

-

Total

$

37,770

$

23,034

$

71,488

$

60,003

$

11,485

$

46,812

(1)    Our combinedresults for the six months ended June 30, 2007 represent the addition of thePredecessor Period from January 1, 2007 through February 13, 2007 and theSuccessor Period from February 14, 2007 to June 30, 2007.  This combinationdoes not comply with U.S. GAAP or with the rules for pro forma presentation,but is presented because we believe it provides a meaningful comparison of ourresults.

Seismic data library amortization amounted to $35.7 millionin the second quarter of 2007 compared to $22.4 million in the second quarterof 2006 and $68.1 million for the first half of 2007 compared to $45.5 millionfor the first half of 2006.  The amount of seismic data library amortizationfluctuates based on the level and location of specific seismic surveys licensed(including licensing resulting from new data acquisition) and selected by ourcustomers during any period as well as the amount of straight-line amortizationrequired under our accounting policy.  The Successor Period reflects the higherlevel of amortization as a result of the step-up to fair value of our seismicdata library in connection with the Merger.

Seismic data amortization as of percentage of seismiclicensing revenue is summarized as follows (in thousands):

SUCCESSOR

PREDECESSOR

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

COMBINED(1)

PERIOD

PERIOD

Three Months

Six Months 

February 14, 

January 1, 

Six Months 

Ended

Ended

2007 -

2007 -

Ended

June 30,

June 30,

June 30,

February 13,

June 30,

Components of Amortization

2007

2006

2007

2007

2007

2006
                                                         
Income  forecast

$

19,321

$

15,556

$

38,054

$

31,143

$

6,911

$

31,456

Straight-line

16,369

6,800

30,046

25,750

4,296

14,014

Total

$

35,690

$

22,356

$

68,100

$

56,893

$

11,207

$

45,470

(1)    Our combinedresults for the six months ended June 30, 2007 represent the addition of thePredecessor Period from January 1, 2007 through February 13, 2007 and theSuccessor Period from February 14, 2007 to June 30, 2007.  This combinationdoes not comply with U.S. GAAP or with the rules for pro forma presentation,but is presented because we believe it provides a meaningful comparison of ourresults.

Page 41 of 50

*(Index)*

SUCCESSOR

PREDECESSOR

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

COMBINED(1)

PERIOD

PERIOD

Three Months

Six Months 

February 14, 

January 1, 

Six Months 

Ended

Ended

2007 -

2007 -

Ended

June 30,

June 30,

June 30,

February 13,

June 30,

Components of Amortization

2007

2006

2007

2007

2007

2006
                                                   
Income  forecast

66.9

%

33.8

%

59.4

%

68.2

%

37.6

%

35.6

%

Straight-line

56.6

%

14.8

%

46.9

%

56.4

%

23.4

%

15.8

%

Total

123.5

%

48.6

%

106.3

%

124.6

%

61.0

%

51.4

%

(1)    Our combinedresults for the six months ended June 30, 2007 represent the addition of thePredecessor Period from January 1, 2007 through February 13, 2007 and theSuccessor Period from February 14, 2007 to June 30, 2007.  This combinationdoes not comply with U.S. GAAP or with the rules for pro forma presentation,but is presented because we believe it provides a meaningful comparison of ourresults.

The increase in the percentageof income forecast amortization to total seismic revenue in 2007 was due to anincrease in income forecast amortization recorded in the Successor Period.  Asa result of the Merger, our data whose costs had been previously fullyamortized now have net book value as a result of being stepped up to fairvalue.  Consequently, the majority of resale revenue attracted income forecastamortization compared to the second quarter of 2006 when 72% of our resalerevenue was attributable to data whose costs had been fully amortized.  Suchpercentage was 67% in the first six months of 2006.  The increase in the amountof straight-line amortization was due to the step up to fair value of ourseismic data library in connection with the Merger.

In connection with the Merger, we recorded acquired intangible assets of $54.1million of which $53.2 million are amortizable over their useful lives rangingfrom 1 to 15 years.  The Successor Period included amortization related tocustomer relationships, internally developed software, favorable capital leaseand covenants not to compete of $1.5 million and $2.2 million for the three andsix months ended June 30, 2007, respectively.

***Selling, General and AdministrativeExpenses***

Selling,general and administrative ("SG&A") expenses were $9.5 million inthe second quarter of 2007 compared to $8.9 million in the second quarter of 2006and $17.5 million in the first six months of 2007 compared to $17.9 million inthe first six months of 2006.  SG&A expense is made up of the followingcash and non-cash expenses (in thousands):

SUCCESSOR

PREDECESSOR

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

COMBINED(1)

PERIOD

PERIOD

Three Months

Six Months 

February 14, 

January 1, 

Six Months 

Ended

Ended

2007 -

2007 -

Ended

June 30,

June 30,

June 30,

February 13,

June 30,

2007

2006

2007

2007

2007

2006
                                                         
Cash SG&A expenses

$

7,054

$

8,112

$

13,444

$

10,279

$

3,165

$

16,538

Non-cash compensation

    expense

2,369

794

3,959

3,547

412

1,398

Non-cash rent expense

66

-

97

97

-

-

Total

$

9,489

$

8,906

$

17,500

$

13,923

$

3,577

$

17,936

(1)    Our combinedresults for the six months ended June 30, 2007 represent the addition of thePredecessor Period from January 1, 2007 through February 13, 2007 and theSuccessor Period from February 14, 2007 to June 30, 2007.  This combinationdoes not comply with U.S. GAAP or with the rules for pro forma presentation,but is presented because we believe it provides a meaningful comparison of ourresults.

Page 42 of 50

*(Index)*

The decrease in cash SG&A expenses of $1.0 million fromthe second quarter of 2006 to the second quarter 2007 was primarily due to (1)a reduction in commission expense of $0.4 million due to lower revenue recognizedin the second quarter of 2007; (2) a decrease of $0.5 million in performancebased compensation expense associated with the Company's incentive compensationplan; (3) a reduction of $0.5 million in professional fees and director fees asa result of such fees incurred in the 2006 second quarter related to evaluationof strategic alternatives.  These decreases were partially offset by anincrease in our allowance for doubtful accounts of $0.4 million in the 2007second quarter.

The decreasein cash SG&A expenses of $3.1 million from the first six months of 2006 tothe first six months of 2007 was primarily due to (1) a reduction in commissionexpense of $0.6 million due to lower revenue recognized in the first six monthsof 2007; (2) a decrease of $1.0 million in performance based compensationexpense associated with the Company's incentive compensation plan; (3)settlement of litigation resulting in a payment of $0.6 million to us; (4)partial collection of a previously reserved receivable from one of our formerofficers resulting in a payment to us of $0.3 million; (5) a reduction of $0.8million in professional fees and director fees as a result of such feesincurred in the 2006 period related to evaluation of strategic alternatives.

Theincrease in non-cash compensation expense between the 2007 and 2006 periods wasprimarily due to the expense related to stock options granted to certain key employeesand non-employee directors in the Successor Period. 

Thenon-cash rent expense in the Successor Period related to amortization of afavorable facility lease that was recorded as an intangible asset in connectionwith the Merger and will be amortized over the remaining lease term of 6.25 years.

***MergerExpenses***

Mergerexpense included the following fees and expenses incurred in connection withthe merger transaction for the periods indicated (in thousands):

SUCCESSOR 

PREDECESSOR

PERIOD

PERIOD

Three Months Ended

February 14,  2007 -

January 1,  2007 -

June 30, 2007

June 30, 2007

February 13,  2007
                              
Investment banking fees

$

-

$

-

$

7,789

Legal and advisory fees

218

355

629

Change in control payments

617

925

2,745

Early vesting of restricted stock (non-cash)

-

-

6,294

$

835

$

1,280

$

17,457

***Other Income (Expense)***

Interest expense, net, was $9.9 million and $5.0 millionin the second quarters of 2007 and 2006, respectively, and was $21.4 millionand $9.9 million for the six months ended June 30, 2007 and 2006, respectively. The increase in interest expense between the second quarters of 2007 and 2006was due to the higher level of debt outstanding in the 2007 period compared to2006 and less interest income in the second quarter of 2007 resulting from thelower cash balance post merger.  The increase between the first six months of2007 versus 2006 was due to $4.0 million related to fees from the non-utilizedacquisition financing bridge facility and interest expense on $400.0 million of9.75% Senior Notes issued on February 14, 2007 in connection with the Merger. In addition, on February 14, 2007, $187.0 million of our 11.75% Senior Noteswere paid, leaving only $2.0 million of such notes outstanding.

In thefirst quarter of 2006, we sold certain seismic surveys located in Canada as required by an agreement entered into in 1993.  We recorded a gain of $231,000related to such sale for the six months ended June 30, 2006.

Page 43 of 50

*(Index)*

***Income Taxes***

Tax expense(benefit) was $(2.0) million and $0.2 million in the second quarters of 2007and 2006, respectively.  The benefit in the second quarter of 2007 resultedfrom $0.4 million benefit related to our U.S. operations and $1.6 millionbenefit related to our Canadian operations.  In the U.S., an adjustment wasmade to increase our deferred tax liability resulting from the Merger, allowingus to recognize a partial benefit on our U.S. operating results; the remainderof the benefit from the U.S. book loss was offset by a valuation allowance becauseit was more likely than not that the deferred tax asset would not be realized. The 2006 second quarter expense primarily related to taxes on our Canadianoperations.

Tax expense(benefit) was $(5.5) million and $0.4 million for the six months ended June 30,2007 and 2006, respectively.  The benefit in the 2007 period related to bothour U.S. and Canadian operations.  In the U.S., a deferred tax liability of $4.4million was recorded in connection with the Merger due to the step-up in assetvalue related to the Merger.  In the period from February 14, 2007 to June 30,2007, a U.S. Federal tax benefit was recorded equivalent to the amount ofdeferred tax liability with the remainder of the benefit from the U.S. bookloss being offset by a valuation allowance because it was more likely than notthat the deferred tax asset would not be realized.  In Canada, a tax benefit of $2.2 million was recognized on our Canadian operations in the period fromFebruary 14, 2007 to June 30, 2007.  Additionally, we recorded tax expenserelated to state income tax and FIN 48 totaling approximately $0.5 million inthe period from February 14, 2007 to June 30, 2007.  The period from January 1,2007 to February 13, 2007 and the 2006 six month expense primarily related totaxes on our Canadian operations and, in the period from January 1, 2007 toFebruary 13, 2007, FIN 48.  The Federal income tax expense recorded on our U.S. operations was offset by a reduction in our deferred tax asset valuation allowance resulting inno Federal tax expense in the U.S. for the period from January 1, 2007 toFebruary 13, 2007 or for the first six months of 2006.  
**Liquidity and Capital Resources**
During the first six months of 2007, we used approximately$98.0 million of our existing cash to fund the transactions in connection withthe Merger.  In addition, we issued $400.0 million of 9.75% Senior Notes due2014 and ValueAct Capital made a cash contribution of $153.5 million.  Inconnection with the transactions, we paid $187.0 million principal of our11.75% Senior Notes along with accrued interest and a tender and consent feetotaling $48.1 million, purchased the remaining stock not held by ValueActCapital or management investors for $386.6 million and paid fees and expensesof approximately $29.8 million.  As of June 30, 2007,we had $25.3 million in consolidated cash, cash equivalents and short-terminvestments.  Other sources of liquidityinclude our credit facilities described below.

**U.S. Credit Facility:**  OnFebruary 14, 2007, we entered into an amended and restated U.S. revolving credit facility which provides for up to $25 million,subject to borrowing base limitations.  The borrowing base is determined fromtime to time based on the lesser of:
-  $25 million,-  75% of our trailing twelve months' U.S. cash margin     (defined as cash resales and Solutions revenue, plus gain on sale of     seismic data, less cash cost of sales and cash SG&A expenses, before     depreciation and amortization expense), or-  the sum of (1) 85% of eligible U.S. short term accounts     (defined as accounts that are not long term accounts and within 90 days of     invoice date), plus (2) the lesser of (a) 50% of eligible U.S. long term     accounts (defined as accounts with contracts for periods of performance     from one month to 18 months, where the account debtor makes payments over     the term of the contract) and (b) $7.5 million, plus (3) $15 million.
At June 30, 2007, there was no outstanding balance underthe facility and there was $25.0 million of availability.  

**Canadian Credit Facility:**  Ourwholly owned subsidiary, Olympic Seismic Ltd. ("Olympic"), has in place a revolving credit facility which allows itto borrow up to $5.0 million (Canadian), subject to an availability formula, byway of prime-based loans, bankers' acceptances or letters of credit.  Availableborrowings under the facility are equivalent to a maximum of $5.0 million(Canadian), subject to a requirement that such borrowings may not exceed 75% ofgood accounts receivable (as defined in the agreement) of SEIC Trust Administration,less prior-ranking claims, if any, relating to inventory or accounts.  As of June30, 2007, no amounts were outstanding on this revolving line of credit and $2.8million (Canadian) was available on the line of credit. 

* *

Page 44 of 50

*(Index)*

**9.75%Senior Unsecured Notes:**  On February 14, 2007, we issued, in aprivate placement, $400.0 million aggregate principal amount of our 9.75%Senior Notes.  The proceeds from the notes were used to partially fund thetransactions in connection with the Merger.  Interest on these senior notes ispayable in cash, semi-annually in arrears on February 15 and August 15.

**11.75%Senior Unsecured Notes:**  On July 2, 2004, we issued, in a private placement, $193.0 millionaggregate principal amount of our 11.75% Senior Notes.  In connection with our2004 excess cash flow offer in March 2005, $4.0 million aggregate principalamount of these notes were tendered and accepted.  In connection with theMerger and related transactions, $187.0 million aggregate principal amount ofthese notes was tendered and accepted on February 14, 2007.  As of June 30, 2007,$2.0 million of the 11.75% Senior Notes remain outstanding.  *** ***

**Contractual Obligations:**  As of June 30, 2007, we had outstanding debt andlease obligations, with aggregate contractual cash obligations summarized asfollows (in thousands):

 

Payments due by period

Remainder

of

2013 and

Contractual cash obligations

Total

2007

2008-2010

2011-2012

thereafter
                                 
Debt obligations (1)(2)

$

676,478

$

19,648

$

117,921

$

80,379

$

458,530

Capital lease obligations (2)

5,738

174

1,047

722

3,795

Operating lease obligations

6,038

578

3,416

1,782

262

Total contractual cash obligations

$

688,254

$

20,400

$

122,384

$

82,883

$

462,587

 

(1)             Debt obligationsinclude the face amount of our 9.75% Senior Notes totaling $400.0 million andthe 11.75% Senior Notes totaling $2.0 million.

(2)             Amounts includeinterest related to debt and capital lease obligations.

**Cash Flows from Operating Activities:** Cash flows provided byoperating activities from continuing operations were $31.8 million, $5.6 million and $50.2million for the Successor Period, the Predecessor Period and for the six monthsended June 30, 2006, respectively.  Operating cash flows for the combinedPredecessor and Successor Periods from January 1, 2007 to June 30, 2007 decreasedfrom the first six months of 2006 primarily due to the payment of fees andexpenses totaling approximately $15.7 million related to the Merger and anincrease in interest expense paid of approximately $1.9 million.*** ***

**Cash Flows from Investing Activities:**  Cash flows used in investingactivities from continuing operations were $25.9 million, $8.4 million and $38.5million for the Successor Period, the Predecessor Period and for the six monthsended June 30, 2006, respectively.  Cash expenditures for seismic data were $25.8million, $8.4 million and $38.0 million for the Successor Period, the PredecessorPeriod and for the six months ended June 30, 2006, respectively.  The decrease incash invested in seismic data for the combined Predecessor and SuccessorPeriods from January 1, 2007 to June 30, 2007 compared to the first six monthsof 2006 was primarily due to a decrease in cash purchases of seismic data. *** ***

**Cash Flows from Financing Activities:**  Cash flows used in financingactivities were $83.2 million, $0.4 million and $0.4 million for the Successor Period,the Predecessor Period and for the six months ended June 30, 2006,respectively.  The Successor Period included (i) the issuance of $400.0 millionof our 9.75% Senior Notes, (ii) a cash capital contribution of $153.5 million byValueAct Capital in connection with the Merger, (iii) acquisition of all of ouroutstanding common stock (other than shares owned by ValueAct Capital andmanagement investors) in connection with the Merger for a total of $386.6million, (iv) payment of $233.4 million of principal and tender and consent feeon our 11.75% Senior Notes and (v) payment of $17.0 million of financing feesin connection with the Merger.

** **

Page 45 of 50

*(Index)*

**Anticipated Liquidity:**  Our ability to make required paymentsof principal and interest on borrowings under our revolving credit facilitiesand in respect of our senior notes, incur additional indebtedness, and complywith our various debt covenants, will depend primarily on our ability togenerate substantial operating cash flows. Over the next 12 months, we expect toobtain the funds necessary to pay our operating, capital and other expenses andprincipal and interest on our senior notes, borrowings under our revolvingcredit facilities and our other indebtedness, from our operating cash flows,cash and cash equivalents on hand and, if required, from additional borrowings(to the extent available under our revolving credit facilities and otherwisesubject to the borrowing base). Our ability to satisfy our payment obligationsdepends substantially on our future operating and financial performance, whichnecessarily will be affected by, and subject to, industry, market, economic andother factors. We will not be able to predict or control many of these factors,such as economic conditions in the markets where we operate and competitivepressures. 

 
*Deferred Taxes*
 

As of June 30, 2007, we had a net deferred tax liability of$16.2 million attributable to our Canadian operations.  In the U.S., we had a net deferred tax asset of $9.1 million, all of which was fully offset by avaluation allowance except for $2,000 related to state deferred tax liabilities. The recognition of the U.S. deferred tax asset will not occur until such timethat it is more likely than not that some portion or all of the deferred taxasset will be realized.  As of June 30, 2007, it was more likely than not thatall of the U.S. deferred tax asset will not be realized.

Section 382 of the Internal Revenue Code places a limit oncertain tax attributes which were in existence prior to a greater than 50% changein ownership.  The rules use a rolling three-year period for determination ofsuch change.  At February 14, 2007, we had a change in ownership.  However, anylimitations resulting from the application of the Section 382 rules are not expectedto have a significant effect on us. 

***Off-Balance Sheet Transactions*****

 

Other than operating leases, we donot maintain any off-balance sheet transactions, arrangements, obligations orother relationships with unconsolidated entities or others that are reasonablylikely to have a material current or future effect on our financial condition,changes in financial condition, revenue or expense, results of operations,liquidity, capital expenditures or capital resources.

 

***Capital Expenditures***

****During the PredecessorPeriod and Successor Period,capital expenditures for seismic data and other property and equipment amountedto $8.5 million and $30.7 million, respectively.  Our capitalexpenditures for the remainder of 2007 are presently estimated to be $81.1 million. The actual for the six months ended June 30, 2007 and 2007 estimated remaining capitalexpenditures are comprised of the following (in thousands):  

 

PREDECESSOR

SUCCESSOR

Estimate for

PERIOD

PERIOD

COMBINED(1)

Remainder

Total

January 1,  2007 -

February 14,  2007-

Six Months Ended

of

Estimate 

February 13,  2007

June 30, 2007

June 30, 2007

2007

for 2007
                                                
New data  acquisition

$

7,966

$

23,176

$

31,142

$

41,858

$

73,000

Cash  purchases of

   seismic  data and

   other

526

5,180

5,706

15,594

21,300

Non-monetary  exchanges

(7

)

2,162

2,155

23,345

25,500

Other  property and

   equipment

60

134

194

306

500

Total capital  expenditures

8,545

30,652

39,197

81,103

120,300

Less:  Non-monetary

   exchanges

7

(2,162

)

(2,155

)

(23,345

)

(25,500

)

Changes  in working

   capital

(123

)

(2,576

)

(2,699

)

-

(2,699

)

Cash  investment per

   statement  of cash

   flows

$

8,429

$

25,914

$

34,343

$

57,758

$

92,101

(1)    Our combinedresults for the six months ended June 30, 2007 represent the addition of thePredecessor Period from January 1, 2007 through February 13, 2007 and theSuccessor Period from February 14, 2007 to June 30, 2007.  This combinationdoes not comply with U.S. GAAP or with the rules for pro forma presentation,but is presented because we believe it provides a meaningful comparison of ourresults.

The capital expenditures discussed above are within thecapital expenditure limitations imposed by our U.S. revolving credit facility.

 

Page 46 of 50

*(Index)*

Capital expenditures funded fromoperating cash flow are as follows (in thousands):

PREDECESSOR

SUCCESSOR

Estimate for

PERIOD

PERIOD

COMBINED(1)

Remainder

Total

January 1,  2007 -

February 14,  2007-

Six Months Ended

of

Estimate 

February 13,  2007

June 30, 2007

June 30, 2007

2007

for 2007
                                                
Total  capital expenditures

$

8,545

$

30,652

$

39,197

$

81,103

$

120,300

Less:  Non-cash

   additions

7

(2,162

)

(2,155

)

(23,345

)

(25,500

)

Cash  underwriting

(6,087

)

(15,169

)

(21,256

)

(25,143

)

(46,400

)

Capital  expenditures 

   funded  from operating 

   cash  flow

$

2,465

$

13,321

$

15,786

$

32,615

$

48,400

(1)    Ourcombined results for the six months ended June 30, 2007 represent the additionof the Predecessor Period from January 1, 2007 through February 13, 2007 andthe Successor Period from February 14, 2007 to June 30, 2007.  This combinationdoes not comply with U.S. GAAP or with the rules for pro forma presentation,but is presented because we believe it provides a meaningful comparison of ourresults.

As of June 30, 2007, we had capital expenditurecommitments related to data acquisition projects of approximately $42.9 millionof which we have obtained approximately $30.5 million of cash underwriting.

**Item 3.    CONTROLSAND PROCEDURES**

**(a)**   **Evaluation of Disclosure Controls and Procedures**

       

As of the end of the period covered by this report, ourmanagement carried out an evaluation, under the supervision and with theparticipation of our President and Chief Executive Officer and our ChiefFinancial Officer, of the effectiveness of the design and operation of theCompany's disclosure controls and procedures (as such term is defined in Rules13a-15(e) and 15d-15(e) under the Exchange Act), pursuant to Exchange Act Rule13a-15. Based upon that evaluation, our President and Chief Executive Officeralong with our Chief Financial Officer concluded that the Company's disclosurecontrols and procedures as of June 30, 2007 are effective in ensuring thatinformation required to be disclosed in the reports we file or submit under theExchange Act is recorded, processed, summarized, and reported within the timeperiods specified in the rules and forms of the SEC, and that such informationis accumulated and communicated to our management, including our President andChief Executive Officer and our Chief Financial Officer, as appropriate, toallow timely decisions regarding required disclosures.

 

**(b)**  **Changes in Internal Control Over Financial Reporting**

       

There have been no changes in our internal controls overfinancial reporting during the quarter ended June 30, 2007 that have materially affected, or are reasonablylikely to materially affect, our internal controls over financial reporting.

**Item 4. and 5.     **Not applicable.

 

Page 47 of 50

*(Index)*

 

**Item 6.     EXHIBITS**

3.1

Certificate of  Incorporation of the Company (incorporated by reference from Exhibit 3.1 to the  Registration Statement on Form S-4, No. 333-144844, as filed with the SEC on July  25, 2007).

 

3.2

Bylaws of Seitel, Inc. (incorporated  by reference from Exhibit 3.2 to the Registration Statement on Form S-4, No.  333-144844, as filed with the SEC on July 25, 2007).

 

31.1

*

Certification of  Robert D. Monson pursuant to Rule 13a-14(a)/15d-14(a).

 

31.2

*

Certification of  William J. Restrepo pursuant to Rule 13a-14(a)/15d-14(a).

 

32.1

**

Certification of  Robert D. Monson pursuant to Section 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes−Oxley Act of 2002.

 

32.2

**

Certification of  William J. Restrepo pursuant to Section 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes−Oxley Act of 2002.

_______________

*            Filed herewith.

**           Furnished, not filed, pursuant to 601(b)(32) ofRegulation S-K.

Page 48 of 50

*(Index)*
****
**SIGNATURES**

Pursuant to the requirements of the Securities and  Exchange Act of 1934, the registrant has duly caused this report

to be signed on its behalf by the undersigned thereunto  duly authorized.

**SEITEL, INC.**

Dated: September

4,

2007

/s/

Robert D. Monson

Robert D. Monson

Chief Executive Officer and President

Dated: September 

4,

2007

/s/

William J. Restrepo

William J. Restrepo

Chief Financial Officer

Page 49 of 50

*(Index)*

EXHIBIT

INDEX

	 

	 

Exhibit

 

Title

	 

Page

Number 

	 

	 

31.1

 

*

 

Certification  of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted  Pursuant to Section 302 Of The Sarbanes-Oxley Act of 2002

 

	 

51

31.2

*

Certification  of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted  Pursuant to Section 302 Of The Sarbanes-Oxley Act of 2002

 

53

32.1

**

Certification  of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted  Pursuant to Section 906 Of The Sarbanes-Oxley Act of 2002

 

55

32.2

**

Certification  of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted  Pursuant to Section 906 Of The Sarbanes-Oxley Act of 2002

57

 

_______________

*      Filed herewith.

**    Furnished, notfiled, pursuant to Item 601(b)(32) of Regulation S-K.

Page 50 of 50 |
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