** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-QSB**

** **

**ý****QUARTERLY REPORT PURSUANT TOSECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006**

** **

**OR**

** **

**o****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**COMMISSION FILE NUMBER 0-13111**

 

**ANALYTICAL SURVEYS, INC.**

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

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

 

**9725 DATAPOINT DRIVE, SUITE 300B, SAN ANTONIO, TEXAS78229**

(Address of principalexecutive offices)

** **

**(210) 657-1500**

(Registrant’s telephonenumber, including area code)

 

INDICATEBY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BEFILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THEPAST TWELVE (12) MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WASREQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILINGREQUIREMENTS FOR THE PAST NINETY (90) DAYS. YES ý  NO o

 

INDICATEBY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE12b-2 OF THE EXCHANGE ACT). YES o  NO ý

 

THENUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF MAY 1, 2006, WAS 3,739,886.

 

 

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**TABLE OF CONTENTS**

** **
| ** ** | ** **                                                       | **PAGE** |
|------------|------------------------------------------------------------------|----------|
|       |                                                             |     |
| PART  1    | FINANCIAL INFORMATION                                            |     |
|       |                                                             |     |
| Item 1.    | Financial Statements                                             | 3        |
|       |                                                             |     |
| Item 2.    | Management’s  Discussion and Analysis or Plan of Operations | 17       |
|       |                                                             |     |
| Item 3.    | Controls and Procedures                                          | 28       |
|       |                                                             |     |
| PART 2.    | OTHER INFORMATION                                                |     |
|       |                                                             |     |
| Item 1.    | Legal Proceedings                                                | 29       |
|       |                                                             |     |
| Item 2.    | Unregistered  Sales of Securities and Use of Proceeds            | 29       |
|       |                                                             |     |
| Item 3.    | Defaults Upon Senior Securities                                  | 30       |
|       |                                                             |     |
| Item 4.    | Submissions  of Matters to a Vote of Security Holders            | 30       |
|       |                                                             |     |
| Item 5.    | Other Information                                                | 30       |
|       |                                                             |     |
| Item 6.    | Exhibits                                                         | 30       |
|       |                                                             |     |
| SIGNATURES | 31                                                               |

 

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**Part I**

**Financial Information**

 

**Item 1. Financial Statements**

 

**ANALYTICAL SURVEYS, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(In thousands)**

 
| ** **                                                                                                                                                           | ** ** | **March 31,  2006** | ** ** | **September 30,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|------------------------------|------------|
|                                                                                                                                                                 |       | **(Unaudited)**          |       |                         |       |
| **Assets**                                                                                                                                                           |       | ** **               |       |                         |       |
| Current assets:                                                                                                                                                      |       |                     |       |                         |       |
| Cash and cash equivalents                                                                                                                                            |       | $                        | 553        |                         | $          | 622 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $50 at March 31, 2006 and September 30, 2005                                                         |       | 1,512                    |       | 1,529                        |       |
| Revenue earned in excess of billings                                                                                                                                 |       | 1,232                    |       | 1,612                        |       |
| Prepaid expenses and other                                                                                                                                           |       | 72                       |       | 81                           |       |
| Total current assets                                                                                                                                                 |       | 3,369                    |       | 3,844                        |       |
|                                                                                                                                                                 |       |                     |       |                         |       |
| Oil and natural gas properties and  equipment                                                                                                                        |       | 603                      |       | —                       |       |
|                                                                                                                                                                 |       |                     |       |                         |       |
| Equipment and leasehold improvements, at  cost:                                                                                                                      |       |                     |       |                         |       |
| Equipment                                                                                                                                                            |       | 3,915                    |       | 3,979                        |       |
| Furniture and fixtures                                                                                                                                               |       | 363                      |       | 363                          |       |
| Leasehold improvements                                                                                                                                               |       | 75                       |       | 75                           |       |
|                                                                                                                                                                 |       | 4,353                    |       | 4,417                        |       |
| Less accumulated depreciation and  amortization                                                                                                                      |       | (4,217                   | )          | (4,249                       | )          |
| Net equipment and leasehold improvements                                                                                                                             |       | 136                      |       | 168                          |       |
| Total assets                                                                                                                                                         |       | $                        | 4,108      |                         | $          | 4,012 |   |
|                                                                                                                                                                 |       |                     |       |                         |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                       |       |                     |       |                         |       |
| Current liabilities:                                                                                                                                                 |       |                     |       |                         |       |
| Current portion of long-term debt and  capital lease obligations                                                                                                     |       | $                        | 17         |                         | $          | 17 |   |
| Billings in excess of revenue earned                                                                                                                                 |       | 253                      |       | 425                          |       |
| Accounts payable                                                                                                                                                     |       | 379                      |       | 289                          |       |
| Accrued liabilities                                                                                                                                                  |       | 213                      |       | 688                          |       |
| Accrued payroll and related benefits                                                                                                                                 |       | 433                      |       | 687                          |       |
| Total current liabilities                                                                                                                                            |       | 1,295                    |       | 2,106                        |       |
| Long-term debt:                                                                                                                                                      |       |                     |       |                         |       |
| Capital lease obligations, less current  portion                                                                                                                     |       | 25                       |       | 30                           |       |
| Redeemable preferred stock, no par value;  authorized 2,500 shares; 166 shares issued and outstanding at September 30,  2005 (liquidation value $266)                |       | —                   |       | 247                          |       |
| Total long-term liabilities                                                                                                                                          |       | 25                       |       | 277                          |       |
| Total liabilities                                                                                                                                                    |       | 1,320                    |       | 2,383                        |       |
|                                                                                                                                                                 |       |                     |       |                         |       |
| Commitments and contingencies                                                                                                                                        |       |                     |       |                         |       |
|                                                                                                                                                                 |       |                     |       |                         |       |
| Stockholders’ equity:                                                                                                                                           |       |                     |       |                         |       |
| Convertible preferred stock, no par value:  authorized 2,500 shares; 760 and 0 shares issued and outstanding at March 31,  2006 and September 30, 2005, respectively |       | 708                      |       | —                       |       |
| Common stock, no par value; authorized  100,000 shares; 3,401 and 2,869 shares issued and outstanding at March 31,  2006 and September 30, 2005, respectively        |       | 35,825                   |       | 35,312                       |       |
| Accumulated deficit                                                                                                                                                  |       | (33,745                  | )          | (33,683                      | )          |
| Total stockholders’ equity                                                                                                                                      |       | 2,788                    |       | 1,629                        |       |
| Total liabilities and stockholders’ equity                                                                                                                      |       | $                        | 4,108      |                         | $          | 4,012 |   |

 

 

Seeaccompanying notes to consolidated financial statements.

 

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**ANALYTICAL SURVEYS, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

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

 
| ** **                                                                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                        | ** ** | **March 31**                | ** ** | **March 31**              | ** ** |
| ** **                                                                        | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                        | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                                          |       | $                                | 1,384      |                           | $          | 1,544 |   | $ | 2,743 |   | $ | 3,572 |   |
| ** **                                                                        | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Costs and expenses:                                                               |       |                             |       |                           |       |   |   |   |   |
| Salaries, wages and benefits                                                      |       | 876                              |       | 1,293                          |       | 1,657 |   | 2,849 |   |
| Subcontractor costs                                                               |       | 275                              |       | 434                            |       | 414 |   | 811 |   |
| General and administrative                                                        |       | 218                              |       | 384                            |       | 670 |   | 819 |   |
| Depreciation and amortization                                                     |       | 17                               |       | 48                             |       | 37 |   | 103 |   |
| Severance and related costs                                                       |       | —                           |       | —                         |       | — |   | 67 |   |
| Total operating costs                                                             |       | 1,386                            |       | 2,159                          |       | 2,778 |   | 4,649 |   |
| Loss from operations                                                              |       | (2                               | )          | (615                           | )          | (35 | ) | (1,077 | ) |
| Other income (expense):                                                           |       |                             |       |                           |       |   |   |   |   |
| Interest expense, net                                                             |       | (41                              | )          | (11                            | )          | (54 | ) | (52 | ) |
| Gain on extinguishment of debt                                                    |       | 61                               |       | —                         |       | 61 |   | — |   |
| Other income (expense), net                                                       |       | —                           |       | (53                            | )          | 3 |   | (41 | ) |
| Total other income (expense)                                                      |       | 20                               |       | (64                            | )          | 10 |   | (93 | ) |
| Earnings (loss) before income taxes                                               |       | 18                               |       | (679                           | )          | (25 | ) | (1,170 | ) |
| Provision for income taxes                                                        |       | —                           |       | —                         |       | — |   | — |   |
| Net earnings (loss)                                                               |       | 18                               |       | (679                           | )          | (25 | ) | (1,170 | ) |
| Deemed dividend associated with beneficial conversion  feature of preferred stock |       | (30                              | )          | —                         |       | (30 | ) | — |   |
| Dividends on preferred stock                                                      |       | (7                               | )          | —                         |       | (7 | ) | — |   |
| Net loss available to common stockholders                                         |       | $                                | (19        | )                              | $          | (679 | ) | $ | (62 | ) | $ | (1,170 | ) |
|                                                                              |       |                             |       |                           |       |   |   |   |   |
| Basic net loss per common share available  to common stockholders                 |       | $                                | (0.01      | )                              | $          | (0.24 | ) | $ | (0.02 | ) | $ | (0.48 | ) |
|                                                                              |       |                             |       |                           |       |   |   |   |   |
| Diluted net loss per common share available  to common stockholders               |       | $                                | (0.01      | )                              | $          | (0.24 | ) | $ | (0.02 | ) | $ | (0.48 | ) |
|                                                                              |       |                             |       |                           |       |   |   |   |   |
| Weighted average common shares:                                                   |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                             |       | 3,160                            |       | 2,869                          |       | 3,013 |   | 2,418 |   |
| Diluted                                                                           |       | 3,160                            |       | 2,869                          |       | 3,013 |   | 2,418 |   |

 

See accompanying notes to consolidated financialstatements.

 

4

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**ANALYTICAL SURVEYS, INC.**

**CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY**

**For the Six Months Ended March 31, 2006**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                                                        | ** ** | **Convertible  Preferred Stock** | ** ** | **Common Stock** | ** ** | **Accumulated** | ** ** | **Total  Stockholders’** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------|------------|-----------------|------------|-------------------------------|------------|
| ** **                                                                                                        | ** ** | **Shares**                            | ** ** | **Amount**            | ** ** | **Shares**      | ** ** | **Amount**                    | ** ** | **Deficit** | ** ** | **Equity** | ** ** |
| Balances at September 30, 2005                                                                                    |       | —                                |       | $                     | —     |            | 2,869      |                          | $          | 35,312 |   | $ | (33,683 | ) | $ | 1,629 |   |
| Common stock issued in exchange for  redeemable preferred stock                                                   |       | —                                |       | —                |       | 318             |       | 300                           |       | — |   | 300 |   |
| Common stock issued pursuant to consulting  agreement for equity transactions, net of issuance costs of $88       |       | —                                |       | —                |       | 75              |       | —                        |       | — |   | — |   |
| Common stock issued for legal services  rendered, net of issuance costs of $15                                    |       | —                                |       | —                |       | 10              |       | —                        |       | — |   | — |   |
| Common stock issued for the purchase of  equipment and oil and gas working interests, net of issuance costs of $9 |       | —                                |       | —                |       | 129             |       | 191                           |       | — |   | 191 |   |
| Issuance of convertible preferred stock and  warrants, net of issuance costs of $60                               |       | 760                                   |       | 678                   |       | —          |       | 22                            |       | — |   | 700 |   |
| Deemed dividend associated with beneficial  conversion feature of preferred stock                                 |       | —                                |       | 30                    |       | —          |       | —                        |       | (30 | ) | — |   |
| Dividends on convertible preferred stock                                                                          |       | —                                |       | —                |       | —          |       | —                        |       | (7 | ) | (7 | ) |
| Net loss                                                                                                          |       | —                                |       | —                |       | —          |       | —                        |       | (25 | ) | (25 | ) |
| Balances at March 31, 2006                                                                                        |       | 760                                   |       | $                     | 708        |            | 3,401      |                          | $          | 35,825 |   | $ | (33,745 | ) | $ | 2,788 |   |

 

See accompanying notes to consolidated financialstatements.

 

5

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**ANALYTICAL SURVEYS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                                                           | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                           | ** ** | **March 31,**             | ** ** |
| ** **                                                                                                           | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| Cash flows from operating activities:                                                                                |       |                           |       |   |   |
| Net loss                                                                                                             |       | $                              | (25        | ) | $ | (1,170 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities:                           |       |                           |       |   |   |
| Depreciation and amortization                                                                                        |       | 37                             |       | 103 |   |
| Issuance of inducement stock options                                                                                 |       | —                         |       | 22 |   |
| Accretion of interest expense on redeemable  preferred stock                                                         |       | 52                             |       | 32 |   |
| Accretion of interest expense on  convertible debt – related party                                              |       | —                         |       | 9 |   |
| Gain on extinguishment of debt                                                                                       |       | (61                            | )          | — |   |
| Change in fair value of derivative  instrument or carrying value of premium on convertible debt – related party |       | —                         |       | (12 | ) |
| Loss (gain) on disposal of assets                                                                                    |       | (3                             | )          | 53 |   |
| Changes in operating assets and  liabilities:                                                                        |       |                           |       |   |   |
| Accounts receivable                                                                                                  |       | 17                             |       | 1,468 |   |
| Revenue earned in excess of billings                                                                                 |       | 379                            |       | 428 |   |
| Prepaid expenses and other                                                                                           |       | 9                              |       | (4 | ) |
| Billings in excess of revenue earned                                                                                 |       | (172                           | )          | (106 | ) |
| Accounts payable and other accrued  liabilities                                                                      |       | (329                           | )          | (725 | ) |
| Accrued payroll and related benefits                                                                                 |       | (254                           | )          | (77 | ) |
| Net cash provided by (used in) operating  activities                                                                 |       | (350                           | )          | 21 |   |
| Cash flows from investing activities:                                                                                |       |                           |       |   |   |
| Purchase of equipment and leasehold  improvements                                                                    |       | (6                             | )          | (70 | ) |
| Investment in oil and gas properties                                                                                 |       | (403                           | )          | — |   |
| Proceeds from sale of assets                                                                                         |       | 4                              |       | — |   |
| Net cash used in investing activities                                                                                |       | (405                           | )          | (70 | ) |
| Cash flows from financing activities:                                                                                |       |                           |       |   |   |
| Principal payments on long-term debt                                                                                 |       | (5                             | )          | (40 | ) |
| Issuance of convertible preferred stock and  warrants                                                                |       | 760                            |       | — |   |
| Redemption of redeemable preferred stock                                                                             |       | —                         |       | (129 | ) |
| Fees associated with issuance of common and  preferred stock                                                         |       | (69                            | )          | (18 | ) |
| Proceeds from common stock issued pursuant  to exercise of options                                                   |       | —                         |       | 92 |   |
| Net cash provided by (used in) financing  activities                                                                 |       | 686                            |       | (95 | ) |
| Net decrease in cash                                                                                                 |       | (69                            | )          | (144 | ) |
|                                                                                                                 |       |                           |       |   |   |
| Cash and cash equivalents at beginning of  period                                                                    |       | 622                            |       | 867 |   |
|                                                                                                                 |       |                           |       |   |   |
| Cash and cash equivalents at end of period                                                                           |       | $                              | 553        |   | $ | 723 |   |
|                                                                                                                 |       |                           |       |   |   |
| Supplemental disclosures of cash flow  information:                                                                  |       |                           |       |   |   |
| Cash paid for interest                                                                                               |       | $                              | —     |   | $ | 1 |   |
| Equipment acquired under capital leases                                                                              |       | $                              | 2          |   | $ | — |   |
| Non-cash financing activities:                                                                                       |       |                           |       |   |   |
| Issuance of common stock in exchange for  redeemable preferred stock                                                 |       | $                              | 300        |   | $ | — |   |
| Issuance of common stock for equipment and  services                                                                 |       | $                              | 200        |   | $ | — |   |
| Issuance of common stock for stock issuance  costs                                                                   |       | $                              | 103        |   | $ | — |   |
| Issuance of common stock pursuant to  conversion of debt – related party                                        |       | $                              | —     |   | $ | 1,806 |   |
| Accretion of interest on preferred stock                                                                             |       | $                              | 16         |   | $ | 32 |   |
| Deemed dividend associated with beneficial  conversion feature of preferred stock                                    |       | $                              | 30         |   | $ | — |   |
| Accrual of dividends on preferred stock                                                                              |       | $                              | 7          |   | $ | — |   |

 

See accompanying notes to consolidated financialstatements.

 

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**ANALYTICAL SURVEYS, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**March 31, 2006**

**(Unaudited)**

 

**1.****             ****Summary of SignificantAccounting Policies**

** **

Theaccompanying interim consolidated financial statements have been prepared bymanagement without audit, pursuant to the rules and regulations of theSecurities and Exchange Commission, in accordance with the accounting policiesdescribed in our Annual Report on Form 10-KSB for the year ended September 30,2005, and reflect all adjustments which are, in the opinion of management,necessary to present a fair statement of the results for the interim period ona basis consistent with the annual audited consolidated financial statements.All such adjustments are of a normal recurring nature. The consolidatedfinancial statements include the accounts of Analytical Surveys, Inc. (“ASI”,“we”, “our” or the “Company”) and its subsidiaries. All significantintercompany balances and transactions have been eliminated in consolidation.Certain information and footnote disclosures normally included in consolidatedfinancial statements prepared in accordance with U.S. generally acceptedaccounting principles have been omitted. These consolidated financial statementsshould be read in conjunction with the audited consolidated financialstatements and related notes included in our Annual Report on Form 10-KSB forthe year ended September 30, 2005. All amounts contained herein are presentedin thousands unless indicated.

 

Theaccompanying consolidated financial statements have been prepared on a goingconcern basis, which contemplates the realization of assets and thesatisfaction of liabilities in the normal course of business. During the fiscalyears of 2000 through 2005, and continuing into fiscal 2006, we haveexperienced significant operating losses with corresponding reductions inworking capital and stockholders’ equity, excluding the impact of debtforgiveness. We do not currently have any external financing in place tosupport operating cash flow requirements. Our revenues and backlog have alsodecreased substantially during the same period. If we do not have the cash flownecessary to meet our operating and capital requirements, we will be forced torestrict capital and operating expenditures to match available resources orseek additional financing, which if available, may be available only atunfavorable interest rates, if at all. These factors, among others, raisesubstantial doubt about our ability to continue as a going concern.

 

Toaddress the going concern issue, management implemented financial andoperational restructuring plans designed to improve operating efficiencies,reduce and eliminate cash losses, and position us for profitable operations. Theconversion of our senior secured convertible note into common stock (“CommonStock”) in November 2004 reduced our debt by $1,696,000, eliminated futurerelated interest expense and improved our debt to equity ratio. During February2006, we retired principally all of our debt when we issued 318,000 shares ofour Common Stock in exchange for all outstanding shares of our Series ARedeemable Preferred Stock (“Preferred Stock”), and the holders relinquishedtheir rights to the dividends accrued thereon, eliminating the need to reservecash to meet this obligation. We have reduced our general and administrativeexpenses by reducing occupancy costs and streamlining our executive, senior andmiddle management teams. Ongoing viability as a business compels us to actswiftly and decisively regarding new business pursuits and, as such, we haveengaged Pluris Partners, Inc., to facilitate the expansion of our businessendeavors into the energy sector.

 

OnDecember 30, 2005, we received notice from the NASDAQ Stock Market indicatingwe are not in compliance with one of NASDAQ’s requirements for continuedlisting because we do not have: (i) a minimum of $2,500,000 in stockholders’equity as of September 30, 2005; (ii) at least $35,000,000

 

7

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inmarket value of listed securities, or (iii) at least $500,000 of net incomefrom continuing operations for the most recently completed fiscal year or twoof the three most recently completed fiscal years. NASDAQ requires compliance withone of the foregoing criteria for continued inclusion under NASDAQ MarketplaceRule 4310(c)(2)(B).

** **

Inconnection with attaining NASDAQ compliance, we took the following actions:

 

•                                          We redeemed the outstanding shares ofPreferred Stock in exchange for 318,000 shares of our Common Stock. Thetransaction eliminated all obligations of the Company related to theoutstanding Preferred Stock, including accrued dividends of approximately$61,000, the right to which was relinquished by the holders as part of thetransaction.

 

•                                          On February 10, 2006, we completed theplacement of a new Series A Convertible Preferred Stock (“ConvertiblePreferred”), with gross aggregate proceeds of approximately $760,000 and a netincrease of approximately $700,000 in our stockholders’ equity.

 

•                                          We issued 129,032 shares of our Common Stockat a fair market value (equal to the closing bid on March 14, 2006 of $1.55 pershare), or $200,000, in exchange for the purchase of certain oil and gasworking interests and field equipment

 

Webelieve we regained compliance with the stockholder’s equity requirement basedupon the three transactions described above and with the filing of thisquarterly report.

 

Thefinancial statements do not include any adjustments relating to therecoverability of assets and the classifications of liabilities that might benecessary should we be unable to continue as a going concern. However, webelieve that our continued turnaround efforts, if successful, will improveoperations and generate sufficient cash to meet our obligations in a timelymanner.

 

RevenueRecognition. We recognize revenue related to data conversion and digitalmapping services using the percentage of completion method of accounting on acost-to-cost basis. For each contract, an estimate of total production costs isdetermined, and these estimates are reevaluated monthly. Production costsconsist of internal costs, primarily salaries and wages, and external costs,primarily subcontractor costs. Internal and external production costs may varyconsiderably among projects and during the course of completion of eachproject. At the end of each accounting period, the percentage of completion isbased on production costs incurred to date as a percentage of total estimatedproduction costs for each of our contracts. This percentage is then multipliedby the contract’s total value to calculate the sales revenue to be recognized.The percentage of completion is affected by many factors that influence eitherthe estimate of future productivity or the production cost per hour used todetermine future costs. We recognize losses on contracts in the period suchloss is determined. Sales and marketing expenses associated with obtainingcontracts are expensed as incurred.

 

Oiland Natural Gas Properties. During the quarter ended March 31, 2006, wepurchased working interests in two oil and natural gas wells and certainequipment to be used in the workover and re-completion of one of the wells.Investments in oil and natural gas properties are accounted for using thefull-cost method of accounting. Under this method all costs directly associatedwith the

 

8

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acquisition,exploration and development of oil and natural gas properties are capitalized.Such costs include lease acquisitions, seismic surveys, and drilling andcompletion equipment. The Company proportionally consolidates its interests inoil and natural gas properties. Maintenance and repairs are expensed asincurred.

 

Oiland natural gas properties are amortized based on the unit-of-production methodusing estimates of proved reserve quantities. Investments in unprovedproperties are not amortized until proved reserves associated with the projectscan be determined or until they are impaired. Unevaluated properties areevaluated periodically for impairment on a property-by-property basis. If theresults of an assessment indicate that the properties are impaired, the amountof impairment is added to the proved oil and natural gas property costs to beamortized. The amortizable base includes estimated future development costsand, where significant, dismantlement, restoration and abandonment costs, netof estimated salvage values.

 

Dispositionsof oil and natural gas properties are accounted for as adjustments tocapitalized costs with no gain or loss recognized, unless such adjustmentswould significantly alter the relationship between capitalized costs and provedreserves.

 

Thenet capitalized costs of proved oil and natural gas properties are subject to a“ceiling test” which limits such costs to the estimated present value,discounted at a 10% interest rate, of future net revenues from proved reserves,based on current economic and operating conditions. If net capitalized costsexceed this limit, the excess is charged to operations through depreciation,depletion and amortization. For the three months ended March 31, 2006, theCompany did not have any charges associated with its ceiling test analysis.

 

Depreciationof other property and equipment is provided using the straight-line methodbased on estimated useful lives ranging from five to 10 years.

 

StockBased Compensation. As permitted by Statement of Financial Accounting Standards(“SFAS”) No. 123 “*Accounting for Stock-BasedCompensation*,” we account for our stock-based compensation utilizingthe intrinsic-value method in accordance with Accounting Principles BoardOpinion No. 25, “*Accounting for Stock Issuedto Employees*,” and related interpretations. No stock-based employeecompensation expense related to our stock option plans is reflected in netloss, as all options granted under those plans had an exercise price equal tothe market value of the underlying common stock on the date of grant. Pro formainformation regarding net loss and net loss per share is required by SFAS No.148 “*Accounting for Stock-BasedCompensation—Transition and Disclosures.*”  This information has been estimated at thedate of grant using the fair value method.

 

Wegranted inducement stock options (“Option”) to our former Chief ExecutiveOfficer (“CEO”) on March 22, 2004. The Option was not issued pursuant to ourstock option plans, and would have vested at the end of a twelve-month period.The Option originally provided for the purchase of 75,000 shares of CommonStock at an exercise price equal to $1.50 per share, which was below the marketvalue of $2.82 on the date of grant. Upon his resignation on December 20, 2004,we accelerated his vesting rights on 56,250 shares, with a market value of$1.93 per share, and cancelled his right to purchase the remaining 18,750shares. The intrinsic value of the vested shares totaled approximately $24,000.Our former CEO exercised his rights under the Option on December 28, 2004, andpurchased 56,250 shares of our Common Stock. Compensation expense for the sixmonths

 

9

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endedMarch 31, 2005, included $22,173 related to the original grant of the Optionsas well as the remeasured value of the accelerated Options.

 

Duringthe quarter ended December 31, 2005, and six months ended March 31, 2006,90,000 options were granted to members of our workforce as incentive to sustainproject performance. These options have an exercise price of $1.34, which wasthe market price of the underlying common stock on the date of grant.

 

Hadcompensation costs for our stock based compensation been determined at thegrant date consistent with the provisions of SFAS No. 123, our net loss and netloss per share would have increased to the pro forma amounts indicated below:

 
| ** **                                                           | ** ** | **Three Months Ended**   | ** ** | **Six Months Ended**     | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| ** **                                                           | ** ** | **March 31**                  | ** ** | **March 31**                  | ** ** |
| ** **                                                           | ** ** | **2006**                           | ** ** | **2005**                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                           | ** ** | **(in thousands except** | ** ** | **(in thousands except** | ** ** |
| ** **                                                           | ** ** | **per share earnings)**  | ** ** | **per share earnings)**  | ** ** |
| Net loss available to common stockholders  as reported               |       | $                                  | (19        | )                                  | $          | (679 | ) | $ | (62 | ) | $ | (1,170 | ) |
| Add: Stock-based employee compensation included in reported net loss |       | —                             |       | —                             |       | — |   | 22 |   |
| Less: Pro forma option expense                                       |       | (14                                | )          | (9                                 | )          | (21 | ) | (39 | ) |
| Pro forma net loss                                                   |       | $                                  | (33        | )                                  | $          | (688 | ) | $ | (83 | ) | $ | (1,187 | ) |
|                                                                 |       |                               |       |                               |       |   |   |   |   |
| Basic net loss per share, as reported                                |       | $                                  | (0.01      | )                                  | $          | (0.24 | ) | $ | (0.02 | ) | $ | (0.48 | ) |
| Less: Pro forma option expense                                       |       | —                             |       | —                             |       | (0.01 | ) | (0.01 | ) |
| Pro forma basic net loss per share                                   |       | $                                  | (0.01      | )                                  | $          | (0.24 | ) | $ | (0.03 | ) | $ | (0.49 | ) |
|                                                                 |       |                               |       |                               |       |   |   |   |   |
| Diluted net loss per share, as reported                              |       | $                                  | (0.01      | )                                  | $          | (0.24 | ) | $ | (0.02 | ) | $ | (0.48 | ) |
| Less: Pro forma option expense                                       |       | —                             |       | —                             |       | (0.01 | ) | (0.01 | ) |
| Pro forma diluted net loss per share                                 |       | $                                  | 0.01       | )                                  | $          | (0.24 | ) | $ | (0.03 | ) | $ | (0.49 | ) |

 

**2.****             ****Earnings Per Share**

 

Basicnet earnings (loss) per share are computed by dividing earnings (loss)available to common stockholders by the weighted average number of commonshares outstanding for the period. Diluted net earnings (loss) per shareinclude the effects of the potential dilution of outstanding options andwarrants determined using the treasury stock method, as well as convertibledebt on our Common Stock, determined using the if-converted method. We do notpresent diluted net earnings (loss) per share for periods in which we incurredlosses, as the effect of potentially dilutive shares is anti-dilutive. Netearnings (loss) per share for the three and six-month periods ended March 31,2006 and 2005 is provided below:

 

10

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| ** **                                           | ** ** | **Three Months Ended**   | ** ** | **Six Months Ended**     | ** ** |
|------------------------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| ** **                                           | ** ** | **March 31**                  | ** ** | **March 31**                  | ** ** |
| ** **                                           | ** ** | **2006**                           | ** ** | **2005**                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | **(in thousands except** | ** ** | **(in thousands except** | ** ** |
| ** **                                           | ** ** | **per share earnings)**  | ** ** | **per share earnings)**  | ** ** |
| **Basic**                                            |       |                               |       |                               |       |   |   |   |   |
| Net loss available to common stockholders            |       | $                                  | (19        | )                                  | $          | (679 | ) | $ | (62 | ) | $ | (1,170 | ) |
| Weighted average shares                              |       | 3,160                              |       | 2,869                              |       | 3,013 |   | 2,418 |   |
| Net loss per share available to common  stockholders |       | $                                  | (0.01      | )                                  | $          | (0.24 | ) | $ | (0.02 | ) | $ | (0.48 | ) |
| **Diluted**                                          |       |                               |       |                               |       |   |   |   |   |
| Net loss available to common stockholders            |       | $                                  | (19        | )                                  | $          | (679 | ) | $ | (62 | ) | $ | (1,170 | ) |
| Weighted average shares                              |       | 3,160                              |       | 2,869                              |       | 3,013 |   | 2,418 |   |
| Net loss per share available to common  stockholders |       | $                                  | (0.01      | )                                  | $          | (0.24 | ) | $ | (0.02 | ) | $ | (0.48 | ) |

 

**3.****             ****Impact of Recently IssuedAccounting Pronouncements**

 

InDecember 2004, the Financial Accounting Standards Board (“FASB”) publishedrevisions to SFAS No. 123. The revised SFAS No. 123 (“SFAS No. 123R”) requirescompanies to account for share-based payment transactions using a fair-valuebased method, thereby eliminating the disclosure-only provisions of SFAS No.123. SFAS No. 123R is effective for all small business public entities as ofthe beginning of the first interim or annual reporting period for fiscal yearsbeginning after December 15, 2005. We are currently evaluating the impact onour financial condition and the results of operations. We currently elect thedisclosure-only provisions of SFAS No. 123.

 

InDecember 2004, the FASB issued SFAS No. 153, “*Accountingfor Non-monetary Transactions*” (“SFAS No. 153”). SFAS No. 153requires non-monetary exchanges to be accounted for at fair value, recognizingany gain or loss, if the transactions meet a commercial-substance criterion andfair value is determinable. SFAS No. 153 is effective for non-monetarytransactions occurring in fiscal years beginning after June 15, 2005. Theimplementation of this standard did not have a material effect on the Company’sconsolidated financial position or results of operations.

 

InMay 2005, the FASB issued Statement of Financial Accounting Standards No. 154(“SFAS No. 154”), “*Accounting for Changesand Error Corrections—a replacement of APB Opinion No. 20 and FASB StatementNo. 3*.”  This statementchanges the requirements for the accounting for and reporting of a change inaccounting principle. This statement applies to all voluntary changes inaccounting principle. It also applies to changes required by an accountingpronouncement in the unusual instance that the pronouncement does not includespecific transition provisions. When a pronouncement includes specifictransition provisions, those provisions should be followed. This statement iseffective for fiscal years beginning after December 15, 2005 and is notexpected to have a material impact on the Company’s consolidated financialstatements.

 

InFebruary 2006, the FASB issued Statement of Financial Accounting Standards No.155 (“SFAS No. 155”), “*Accounting forCertain Hybrid Financial Instruments — an amendment of FASB Statement No. 133and 140*.”  This statementamends SFAS No. 133, “*Accounting forDerivative Instruments and hedging Activities*,” and SFAS No. 140, “*Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities*.”  This Statement resolves issues addressed inSFAS No. 133 Implementation Issue No. D1, “*Applicationof Statement 133 to Beneficial Interests in Securitized Financial Assets.*”  When a pronouncement includes specifictransition provisions, those provisions

 

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shouldbe followed. This statement is effective for fiscal years beginning afterSeptember 15, 2006 and is currently not expected to have a material impact onthe Company’s consolidated financial statements.

 

InMarch 2006, the FASB issued Statement of Financial Accounting Standards No. 156(“SFAS No. 156”), “*Accounting for Servicingof Financial Assets — an amendment of FASB Statement No. 140*.”  This statement amends SFAS No. 140, “*Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities*,” with respect to theaccounting for separately recognized servicing assets and servicingliabilities. When a pronouncement includes specific transition provisions,those provisions should be followed. This statement is effective for fiscalyears beginning after September 15, 2006 and is currently not expected to havea material impact on the Company’s consolidated financial statements.

 

**4.****             ****Oil and natural gasproperties and equipment**

 

OnFebruary 15, 2006, we purchased, for $300,000 in cash, a twenty percent (20%)working interest (with a 16.7% net revenue interest) in an oil well designatedas Welker 1-7, located in Pawnee County, Oklahoma. Contemporaneously with suchpurchase, we entered into an operating agreement with the seller and owner ofthe other 80% working interest. Effective March 15, 2006, we completed thepurchase of certain oil and gas working interests and field equipment for whichwe will have issued 129,032 shares of our Common Stock having a fair marketvalue (equal to the closing bid on March 14, 2006) of $1.55 per share, or$200,000, and have paid $100,000 in cash during March and an additional $50,000in April. This second transaction involves a fifty percent (50%) workinginterest (with a 41.0% net revenue interest) in three oil wells designated asShields No. 1, 2, and 3, located in Pawnee County, Oklahoma.

 

**5.****             ****Accrued Payroll and RelatedBenefits**

 

Ouraccrued payroll and related benefits are summarized as follows.

 
| ** **                           | ** ** | **March 31,  2006** | ** ** | **September 30,  2005** | ** ** |
|--------------------------------------|------------|--------------------------|------------|------------------------------|------------|
|                                 |       |                     |       |                         |       |
| Accrued payroll                      |       | $                        | 233        |                         | $          | 426 |   |
| Accrued health benefits              |       | 59                       |       | 109                          |       |
| Accrued vacation                     |       | 141                      |       | 152                          |       |
| Accrued payroll and related benefits |       | $                        | 433        |                         | $          | 687 |   |

 

**6.****             ****Debt**

 

Thecomponents of debt are summarized as follows.

** **
| **Long-Term Debt**                  | ** ** | **March 31,  2006** | ** ** | **September 30,  2005** | ** ** |
|------------------------------------------|------------|--------------------------|------------|------------------------------|------------|
|                                     |       |                     |       |                         |       |
| Other debt and capital lease obligations |       | $                        | 42         |                         | $          | 47 |   |
| Redeemable preferred stock (See Note 7)  |       | —                   |       | 247                          |       |
|                                     |       | 42                       |       | 294                          |       |
| Less current portion                     |       | (17                      | )          | (17                          | )          |
|                                     |       | $                        | 25         |                         | $          | 277 |   |

 

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OnApril 2, 2002, we completed the sale of a $2.0 million senior securedconvertible note (“Old Note”) and a warrant (“Warrant”) to purchase 500,000 ofour Common Stock to Tonga. We used the proceeds to repay $700,000 to seniorlenders, pay transaction expenses of approximately $95,000 and fund operations.

 

TheOld Note, which carried a face value of $2.0 million, had a maturity date ofApril 2, 2005, and accrued interest on its face value at an annual rate of5.00%. Accrued interest was not payable in cash but was to be converted intoCommon Stock upon the Old Note’s voluntary conversion date or maturity. We recordedthe Old Note at $1.664 million reflecting a discount after giving effect to the$200,000 and $136,000 estimated fair value of the Warrant and the conversionfeature, respectively (“derivative features”), which were recorded as currentliabilities. This $336,000 current liability was increased or decreased toreflect the fair value of the derivatives at the end of each quarter.

 

OnOctober 29, 2003, Tonga converted $300,000 in principal of the Old Note, and weissued 241,936 shares at a conversion price equal to $1.24, which represented90% of the average closing bid prices for the three trading days having thelowest closing bid price during the 20 trading days immediately prior toOctober 29, 2003. We also issued 19,522 shares at the same conversion price for$24,208 of accrued interest on the converted principal. The Old Note wasexchanged for the shares and a $1.7 million debenture (“Second Note”) bearingthe same terms. The carrying value of the Second Note was accreted to its facevalue as we recorded interest expense over its three-year term at an effectiverate of interest of 12.5%.

 

OnMay 28, 2004, an event of default was triggered under the Second Note when ourRegistration Statement on Form S-3 filed with the SEC on December 30, 2003, toregister shares of our Common Stock that were issued or are issuable pursuantto the Old Note, the Second Note, and the Warrant was not declared effective bythe SEC.

 

OnJune 30, 2004, the event of default was cured when we restructured the SecondNote. The restructured $1.7 million senior secured convertible promissory note(the “Restructured Note”) bore interest at a rate of 5% per annum with suchinterest accruing beginning on November 4, 2003. The principal amount of theRestructured Note, together with accrued and unpaid interest, was due andpayable at Tonga’s option in cash or shares of our Common Stock on January 2,2006. Tonga retained the right to convert the Restructured Note for shares ofour Common Stock at any time. Tonga waived accrued interest on the Second Notethrough November 3, 2004, which totaled $134,000. Tonga also waived its rightsto assess liquidated damages pursuant to the Second Note, relinquished itsrights under the Warrant, and canceled the Warrant.

 

Thecarrying value of the Second Note immediately prior to execution of theRestructured Note was $1.616 million, which reflected the $1.7 million facevalue less the $84,000 unamortized discount. Additionally, immediately prior tothe execution of the Restructured Note, the fair value of the Warrant totaledapproximately $67,000, and the fair value of the conversion feature of theSecond Note totaled approximately $62,000. As a result of the extended term ofthe Restructured Note, the estimated fair value of the conversion feature increasedto approximately $119,000, which was recorded as a current liability. Werecorded the Restructured Note at $1.581 million, to be accreted to its facevalue at an effective interest rate of 12.14%. This transaction resulted in anet decrease in total liabilities of approximately $180,000. The decreaseconsisted of $134,000 of waived interest,

 

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the$68,000 fair value of the canceled Warrant, and a $35,000 decrease in thecarrying value of the Restructured Note, offset by a $57,000 increase in thefair value of the conversion feature. We recorded the $180,000 decrease inliabilities as a capital contribution pursuant to Staff Accounting BulletinTopic 1:B.

 

Theestimated fair value of the derivative feature of the Second Note totaledapproximately $129,000 on September 7, 2004, when the SEC declared our amendedRegistration Statement on Form S-3/A effective. Simultaneous to theeffectiveness of the registration, the net cash settlement provisions in the RestructuredNote that effected the derivative classification of the conversion feature wereextinguished. We revalued and reclassified the conversion feature as aconversion premium (“Premium”) with an estimated value of $129,000, which wouldbe amortized to income over the remaining term of the Restructured Note. Duringthe first quarter of fiscal 2005, we recognized approximately $12,000 in otherincome as we amortized the premium through November 11, 2004. We received anotice of conversion dated November 10, 2004, from Tonga to convert theoutstanding principal and accrued interest into our Common Stock at theconversion price set forth in the Restructured Note. The conversion price was$1.05, and was equal to 90% of the average closing bid prices for the threetrading days having the lowest closing bid price during the 20 trading daysimmediately prior to November 10, 2004. The newly issued shares increased ourtotal common shares outstanding from 1,104,173 to 2,805,522. Tonga owned 67% ofour outstanding shares immediately after the conversion. According to filingsmade by Tonga under Section 16 of the Exchange Act, Tonga liquidated itsholdings of our Common Stock by November 15, 2004.

 

Wewere generally restricted from issuing additional equity securities withoutTonga’s consent, and Tonga had a right of first refusal as to certainsubsequent financings. The Restructured Note was secured by all of our assets.As part of the transaction, for a period of three years from the date of theOld Note, Tonga had the right to appoint a majority of our board of directors.Tonga appointed three members to the Board and as a result, controlled ASI.However, the conversion of the Restructured Note released all of our assets ascollateral. Upon Tonga’s disposal of its holdings of our Common Stock, Tongarelinquished its right to appoint directors. In December 2004, we appointed twonew independent directors in conjunction with the resignation of the threeTonga-appointed directors. As a result, Tonga relinquished control of ASI.

 

**7.****             ****Redeemable Preferred Stock**

 

OnDecember 28, 2001, we issued 1.6 million shares of no par value Series ARedeemable Preferred Stock with a face value of $3.2 million, pursuant to theextinguishment of a bank credit agreement (“Agreement”). We recorded thisPreferred Stock at a fair market value of $300,000 as described below. In June2004, we redeemed 1,341,100 shares of our Preferred Stock (“Shares”), or 84%,of the outstanding Shares. We paid the holders of the Shares $251,456 to redeemthe Shares, which, on the redemption dates, were carried at approximately$1,535,000 plus accrued dividends totaling approximately $191,000, resulting ina gain of approximately $1,475,000. The early redemption reduced the number ofpreferred shares outstanding to 258,900 shares and reduced a mandatoryredemption payment, which was classified as a current liability, from $800,000to $129,450. We paid this obligation in December 2004 and redeemed 92,465shares of Preferred Stock at $1.40 per share.

 

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ThePreferred Stock earned a dividend at the annual rate of 5.00% of the thenapplicable redemption price on a cumulative, non-participating basis and had aliquidation preference equal to the then applicable redemption value of sharesoutstanding at the time of liquidation. The carrying value represents theestimated fair market value of the stock on the date of issuance plus issuancecosts, adjusted for accretion of the difference between fair market value atthe date of issuance and the redemption value at the mandatory redemptiondates. The accretion of Preferred Stock is recorded as interest expense. Thefair market value was based on the present value of required cash flows using adiscount rate of 80%. We selected the discount rate based on discussions withthird parties that factored in market conditions for similar securities, thecurrent economic climate and our financial condition and performance.

** **

OnFebruary 1, 2006, 166,435 shares of Preferred Stock were outstanding which wereredeemable on or before December 28, 2006. Until December 27, 2006, we wereentitled to redeem these shares at $1.80 per share, or $299,583, and which weremandatorily redeemable on December 28, 2006 at $2.00 per share or $332,870. On February1, 2006, we issued 318,000 shares of Common Stock in exchange for theoutstanding shares of the Preferred Stock, which had a carrying value ofapproximately $259,000 and a current redemption price of $299,583. Thetransaction eliminated all obligations of the Company related to the PreferredStock, including accrued dividends of approximately $61,000, the right to whichwas relinquished by the holders as part of the transaction. We recordedinterest expense totaling $37,000 upon redemption of the Preferred Stock inorder to accrete the carrying value to the current redemption price of$299,583. We reduced our current liabilities related to the Preferred Stock by$299,583, with a corresponding increasing in stockholders’ equity pursuant tothe issuance of our Common Stock in exchange for the elimination of theliability. We recognized gain on extinguishment of debt totaling $61,000related to the relinquishment of accrued dividends by the holder.

 

**8.****             ****Convertible Preferred Stock**

** **

OnFebruary 10, 2006, we issued 760,000 shares of a new Series A ConvertiblePreferred Stock (“Convertible Preferred”) with gross aggregate proceeds ofapproximately $760,000. The two-year Convertible Preferred may be convertedinto 598,425 shares of our Common Stock at a fixed conversion price of $1.27,which was determined by applying a 10% discount to the 5-day trailing averageclosing price of ASI Common Stock of $1.41 as of the Nasdaq Stock Market closeon February 9, 2006. The holders of the Convertible Preferred received Class AWarrants that entitle them to purchase up to 299,212 shares of our Common Stockat $1.34, or 101% of the closing bid price on February 10, 2006, and anequivalent number of Class B Warrants (collectively, the “Warrants”) that carryan exercise price of $1.49, or 112% of the closing bid price on February 10,2006. We also issued 82,678 Class A Warrants and 82,678 Class B Warrants tocertain parties as a finder’s fee. The Warrants will be exercisable after sixmonths from the date of closing until their expiration three years from thedate of closing. We filed a Registration Statement on Form S-3 to register allshares issuable pursuant to the Convertible Preferred and related Warrants,which was declared effective on April 12, 2006. As of the date of this filing,480,000 shares have been converted into 377,952 share of Common Stock, and wewill be issuing approximately 4,500 shares of Common Stock for dividendsaccrued on the Convertible Preferred submitted for conversion.

** **

TheConvertible Preferred earns dividends at a rate of 7% per annum. We recordedthe Convertible Preferred at its offering price of $1 per share, net of theestimated $22,171 fair value of the Warrants

 

15

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andthe $29,921 intrinsic value of the beneficial conversion feature of theConvertible Preferred. We used the Black Scholes model to determine the valueof the Warrants. The intrinsic value of the beneficial conversion feature isthe difference in fair market value of our Common Stock on the grant date ofthe Preferred Convertible less the conversion price, multiplied by the numberof shares that are issuable upon conversion of the Preferred Convertible, or$.05 for each of 598,425 shares of Common Stock.

 

Themarket value of our Common Stock on the date that the Convertible Preferred wassold was $1.32 per common share. In accordance with EITF 00-27, this created abeneficial conversion feature to the holders of the Convertible Preferred and adeemed dividend to the preferred stockholders totaling $30,000 was recordedwith a corresponding amount recorded as convertible preferred stock. The deemeddividend is calculated as the difference between the fair value of theunderlying Common Stock less the proceeds that have been received for theConvertible Preferred.

 

**9.****             ****Litigation**

 

InNovember 2005, we received an alias summons notifying us that we have beennamed as a party to a suit filed by Sycamore Springs Homeowners Association.The summons names the developer of the Sycamore Springs neighborhood as well asother firms that may have rendered professional services during the developmentof the neighborhood. The claimants allege that the services of Mid-StatesEngineering, which was a subsidiary of MSE Corporation when we acquired MSE in1997, affected the drainage system of Sycamore Springs neighborhood, and seekdamages from flooding that occurred on September 1, 2003. The summons does notquantify the amount of damages that are being sought nor the period that thealleged wrongful actions occurred. We sold Mid-States Engineering on September30, 1999. We believe that we have been wrongfully named in the suit and we arediligently pursuing dismissal without prejudice.

** **

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

** **

**10.****      ****Concentration of Credit Risk**

** **

AtMarch 31, 2006, we had multiple contracts with three customers, the aggregateof which accounted for 71% of our consolidated revenues during the three monthsending March 31, 2006 (Worldwide Services, Inc, and Intergraph (“WWS”), 24%;AGL Resources (“AGL”), 35%; and MWH Americas, Inc., 12%.)  Two of these customers (WWS and AGL)accounted for 70% and 27%, respectively, of our total accounts receivable atMarch 31, 2006. At March 31, 2005, we had multiple contracts with fourcustomers, the aggregate of which accounted for 73% of our consolidated revenuesduring the three months ending March 31, 2005 (WWS, 14%; Michigan ConsolidatedGas Company (“MichCon”), 16%; British Telecommunications PLC (“BT”), 24%; andMWH Americas, Inc., 19%). One of these customers accounted for 80% of our totalaccounts receivable at March 31, 2005 (WWS, 80%). Billing terms are negotiatedin a competitive environment and are based on reaching project milestones. Weanticipate that sufficient billing milestones or contract completion will beachieved during fiscal 2006 such that the majority of revenue in excess ofbillings for these customer contracts will be collected.

 

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**11.**       **Subsequent Events**

 

OnApril 12, 2006, the registration statement we filed on Form S-3 to register allshares issuable pursuant to the Convertible Preferred and related Warrants wasdeclared effective by the SEC. As of the date of this filing, 480,000 shareshave been converted into 377,952 shares of Common Stock, and we will be issuingapproximately 4,500 additional shares of common stock for dividends accrued onthe Convertible Preferred submitted for conversion**.**

 

OnApril 24, 2006, we appointed Mr. Don Fryhover as senior vice president. Mr.Fryhover served in various capacities with ASI (and formerly Cartotech) from1989 through 2003. We will draw upon his expertise in the GIS industry as wecomplete the transition from a traditional GIS service provider into an energycompany. Mr. Fryhover’s principal focus as senior vice president will be in theoil and gas industry. Mr. Fryhover co-founded Petroleum Research Company, Inc.,a petroleum land service company that provided land management services to theoil and gas industry in the late 1980’s. Additionally, he served as field landmanager for the former Tucker Oil and Gas Company where he negotiated oil andgas deals, managed contracts, acquired leases and helped ensure compliance withgovernmental agencies.

 

**Item 2. Management’s Discussion and Analysis or Plan ofOperations**

 

THEDISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANYSET FORTH BELOW SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIALSTATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS FORM 10-QSB.THIS FORM 10-QSB CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS ANDUNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS FORM 10-QSB THAT ARE NOT PURELYHISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OFTHE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. WHEN USED IN THIS FORM10-QSB, OR IN THE DOCUMENTS INCORPORATED BY REFERENCE INTO THIS FORM 10-QSB,THE WORDS “ANTICIPATE,” “BELIEVE,” “ESTIMATE,” “INTEND” AND “EXPECT” ANDSIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS.SUCH FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, THE STATEMENTSREGARDING THE COMPANY’S STRATEGY, FUTURE SALES, FUTURE EXPENSES, FUTURELIQUIDITY AND CAPITAL RESOURCES. ALL FORWARD-LOOKING STATEMENTS IN THIS FORM10-QSB ARE BASED UPON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE OF THISFORM 10-QSB, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCHFORWARD-LOOKING STATEMENTS. THE COMPANY’S ACTUAL RESULTS COULD DIFFERMATERIALLY FROM THOSE DISCUSSED IN THIS FORM 10-QSB. FACTORS THAT COULD CAUSEOR CONTRIBUTE TO SUCH DIFFERENCES (“CAUTIONARY STATEMENTS”) INCLUDE, BUT ARENOT LIMITED TO, THOSE DISCUSSED IN ITEM 1. BUSINESS—”RISK FACTORS” ANDELSEWHERE IN THE COMPANY’S ANNUAL REPORT ON FORM 10-KSB, WHICH ARE INCORPORATEDBY REFERENCE HEREIN AND IN THIS REPORT. ALL SUBSEQUENT WRITTEN AND ORALFORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY, OR PERSONS ACTING ONTHE COMPANY’S BEHALF, ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THECAUTIONARY STATEMENTS.

 

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**Overview**

 

Foundedin 1981, we are a provider of data conversion and digital mapping services tousers of customized geographic information systems. We help customers bytransforming or updating raw, often confusing information from multiple sources(maps, blueprints, construction drawings, databases, aerial photography, fieldinventory of asset attributes, satellite imagery, etc.) into a high-resolution,large-scale, richly detailed digital and visual representation on whichorganizations can rely to make better decisions with speed and confidence. Wehave historically targeted our services to utilities and state and localgovernments. While there seems to have been an increase in demands for GISsolutions in response to catastrophic events and homeland security initiativesin 2004 and 2005, we have not experienced a corresponding increase in demandsfor GIS data conversion services. As noted in the 2005 Geospatial TechnologyReport published by the Geospatial Information and Technology Association(“GITA”), the federal government has shifted increased responsibilities to thestate and local levels without a corresponding shift in funding. The result iscritically tight budgets driven by these economics adversely impacting serviceproviders. We believe that many of the new GIS software solutions reduce theneed for data conversion services.

 

Ourindependent auditors, Pannell Kerr Forster of Texas, P.C., issued a goingconcern qualification on our financial statements for the fiscal years endedSeptember 30, 2005 and 2004. The going-concern qualification, which expressedsubstantial doubt about our ability to continue as a going concern, is based onthe significant operating losses reported in fiscal 2005 and 2004, and a lackof external financing.

 

Weexperience yearly and quarterly fluctuations in production costs, salaries,wages and related benefits and subcontractor costs. These costs may vary as apercentage of sales from period to period. We have historically utilizedoffshore subcontractors for a large percentage of certain data entry productionwork to reduce production costs and develop new services, and we will continueto do so in fiscal 2006. We do not have a long-term contract with an offshoreservice provider, but we do not anticipate that we will encounter difficulty inobtaining such services in sufficient quantities and at acceptable prices.

 

Backlogincreases when new contracts are signed and decreases as revenues arerecognized. As of March 31, 2006, our backlog was $1.4 million, which we expectto earn during the remaining six months of fiscal 2006. Backlog totaled $4.0million at September 30, 2005. We believe backlog levels reflect changesspecific to GIS industry market conditions, and lower demands for dataconversion services.

 

Wecurrently have two projects that have a contract value greater than $1 millionor longer than one year in duration, which can increase risk due to inflation,as well as changes in customer expectations and funding availability. Ourcontracts are generally terminable on short notice, and while we rarelyexperience such termination, there is no assurance that we will receive all ofthe revenue anticipated under signed contracts.

 

Weengage in research and development activities; however, associated expenses arenot significant and represent less than $100,000 per year, or less than 5% ofour total operating expense. The

 

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majorityof these activities occur as we develop software or design a product for aparticular contract. These efforts are typically included as an integral partof our services for the particular project and, accordingly, the associatedcosts are charged to that project. Such custom-designed software can often beapplied to projects for other customers, since we retain ownership of suchproprietary software or products.

 

Oursales and marketing efforts have not been successful. We have acquired four newcustomers with material contracts during the past two and one half years, andthe majority of our current contracts are ongoing services from past customers.We reduced our staff in 2005 to meet the lower demands of our existingbusiness, and we experienced additional loss of personnel in fiscal 2005 due tothe uncertainty of the acquisition of new GIS contracts. To address concerncreated by this loss of personnel on the part of our customers, partners, andemployees, we engaged Wind Lake Solutions, Inc. (“WLS”), to manage ourWisconsin-based personnel in October 2005. We believe this strategy hasstabilized our Wisconsin office and satisfied our customer’s concerns regardingour ability to provide consistent service to them. We are negotiating with WLSto execute its exclusive option to purchase the Wisconsin-based operations thatmay include a non-compete in the US-based utility market.

** **

Duringfiscal 2005, we evaluated a broad spectrum of business opportunities. Weengaged a consultant and evaluated acquisitions that would facilitate ourentrance into the federal markets, and we also evaluated various opportunities,including software and service solutions for location based services, state andlocal GIS initiatives. We were unable to identify an acceptable acquisitionserving the GIS marketplace that produced suitable margins or sufficientreturns on acquisition costs.

** **

OnDecember 7, 2005, we engaged Pluris Partners, Inc., a merchant banking firmspecializing in merger and acquisition, private equity placement and financialadvisory services, to facilitate the expansion of our service offering into theenergy sector, including the acquisition of oil and gas exploration andproduction rights. We intend to acquire working interests of oil and gasproperties in a series of drilling programs. We will evaluate other acquisitionopportunities in the energy sector, including both exploration and productionoperations and technology solutions, as well as any other sector that presentsattractive opportunities for our shareholders. We intend to finance thisexpansion through private placement of equity supplemented by issuance of debt,which is dependent on the terms on which we are able to negotiate, if any.

 

EffectiveDecember 2, 2005, Brian Morrow resigned as president and chief operatingofficer to pursue other opportunities. Mr. Morrow joined the Company on June 9,2005. Our chief executive officer assumed Mr. Morrow’s duties.

 

OnApril 24, 2006, we appointed Mr. Don Fryhover as senior vice president. Mr.Fryhover served in various capacities with ASI (and formerly Cartotech) from1989 through 2003. We will draw upon his expertise in the GIS industry as wecomplete the transition from a traditional GIS service provider into an energycompany. Mr. Fryhover’s principal focus as senior vice president will be in theoil and gas industry. Mr. Fryhover co-founded Petroleum Research Company, Inc.,a petroleum land service company that provided land management services to theoil and gas industry in the late 1980’s. Additionally, he served as field landmanager for the former Tucker Oil and Gas Company where he negotiated oil andgas deals, managed contracts, acquired leases and helped ensure

 

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compliancewith governmental agencies. We will seek additional executive team membersappropriately as we expand our business as described in the precedingparagraph.

 

Wecurrently employ approximately 62 full-time employees. While we have reducedour legal and professional fees as we settled litigation against the Companyand completed our obligations under the Restructured Note and Series ARedeemable Preferred Stock, we are incurring legal and professional feeexpenses related to our initiative into new business ventures. We alsoanticipate that compliance with the requirements of Sarbanes-Oxley, ifapplicable, will require substantial financial and management resources andresult in additional expenses.

 

Toput matter in perspective, we are at a critical crossroads in our existence.For the last several years, our traditional GIS data conversion business hasbeen shrinking dramatically, causing us to incur severe operating losses. Eventhough, due to cost cutting measures, we have substantially reduced ouroperating losses in the current periods covered by this report, the cost ofperforming our existing contracts and the lack of progress in obtaining any newsignificant contracts, we do not believe that we can return to profitability byrelying solely on our traditional business. Indeed, without additional costcutting measures, our cash flow derived solely from this business may beinsufficient to meet the operating and capital requirements of this businessbeyond the fourth fiscal quarter of 2006.

 

Ourentry into the oil and gas exploration and production business is very recent.We may not be able to reach a level of operating income from oil and gasactivities that will generate cash flow sufficient to meet the operating andcapital requirements of that business, plus the shortfall in cash flow arisingfrom our traditional business. Given the risks associated with this endeavor,there is no assurance that we can achieve the necessary level of such operatingincome in a timely manner.

 

Itmust be recognized that our ultimate objective is a transition from a companyproviding a specialized service to that of an independent oil and gas producer.Given the risks associated with this transition, there is no assurance thatsuch transition will be seamless, i.e. without undertaking a majorrestructuring of the Company. One such restructuring scenario may involve asale or spin off of our GIS data conversion business followed by a merger of aprivately held independent oil and gas producer into the Company.

 

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**Results of Operations**

 

Thefollowing table sets forth, for the periods indicated, selected consolidatedstatements of operations data expressed as a percentage of sales:

 
| ** **                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                | ** ** | **March 31**                | ** ** | **March 31**              | ** ** |
| ** **                                | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| **PERCENTAGE OF REVENUES:**               |       |                             |       |                           |       |   |   |   |   |
| Revenues                                  |       | 100.0                            | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |
| Costs and expenses                        |       |                             |       |                           |       |   |   |   |   |
| Salaries, wages and related benefits      |       | 63.3                             |       | 83.8                           |       | 60.4 |   | 79.8 |   |
| Subcontractor costs                       |       | 19.9                             |       | 28.1                           |       | 15.2 |   | 22.7 |   |
| General and administrative                |       | 15.7                             |       | 24.9                           |       | 24.4 |   | 22.9 |   |
| Depreciation and amortization             |       | 1.2                              |       | 3.1                            |       | 1.3 |   | 2.9 |   |
| Severance and related costs               |       | 0.0                              |       | 0.0                            |       | 0.0 |   | 1.9 |   |
|                                      |       |                             |       |                           |       |   |   |   |   |
| Loss from operations                      |       | (0.1                             | )          | (39.9                          | )          | (1.3 | ) | (30.2 | ) |
|                                      |       |                             |       |                           |       |   |   |   |   |
| Other income (expense), net               |       | 1.4                              |       | (4.1                           | )          | 0.4 |   | (2.6 | ) |
|                                      |       |                             |       |                           |       |   |   |   |   |
| Earnings (loss) before income taxes       |       | 1.3                              |       | (44.0                          | )          | (0.9 | ) | (32.8 | ) |
| Provision for income taxes                |       | —                           |       | —                         |       | — |   | — |   |
| Net earnings (loss)                       |       | 1.3                              |       | (44.0                          | )          | (0.9 | ) | (32.8 | ) |
| Dividends on preferred stock              |       | (2.7                             | )          | —                         |       | (1.4 | ) | — |   |
| Net loss available to common stockholders |       | (1.4                             | )%         | (44.0                          | )%         | (2.26 | )% | (32.8 | )% |

** **

**Three and Six Months Ended March 31, 2006 and 2005**

** **

**Revenues**. We recognize revenues related to data conversion and digital mappingservices contracts as services are performed. Our revenues decreased 10.4% forthe three-month period ended March 31, 2006, and totaled $1,384,000 as comparedto $1,544,000 for the same period in fiscal 2005, a decrease of approximately$160,000. Our revenues decreased 23.2% for the six-month period ended March 31,2006, and totaled $2,743,000 as compared to $3,572,000 million for the sameperiod in fiscal 2005, a decrease of $829,000. The decrease in revenues is dueto a lower number of active contracts in the fiscal 2006 first and secondquarters. The level of new contract signings in recent fiscal years, includingfiscal 2004 and 2005, was lower than in previous years and, as a result,revenues have decreased as well. We believe this decrease in contract signings isattributable to lower demand for and reduced spending levels for dataconversion services both in general and specific to the GIS industry.

 

**Salaries, Wages and Benefits.**Salaries, wages and benefits include employeecompensation for production, marketing, selling, and administrative andexecutive employees. Salaries, wages and related benefits decreased $417,000and $1,192,000 for the three and six-month periods ended March 31, 2006,respectively, as compared to the same period in fiscal 2005. The decrease was aresult of reductions in our workforce related to reduced revenue volume, ourdecision to subcontract a portion

 

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ofour production work to offshore subcontractors, and our use of domestic subcontractorsto manage fluctuating labor needs.

 

**Subcontractor Costs.**Subcontractor costs include production costsincurred through the use of third parties for production tasks such as dataconversion services to meet contract requirements, and field survey services.The use of domestic subcontractors enables us to better manage the fluctuationsin labor requirements as we complete and begin new projects as well as duringthe various phases of contracts. Subcontractor costs decreased $159,000 and$397,000 for the three and six-month periods ended March 31, 2006, as comparedto the same periods in fiscal 2005 due to the completion of several contractsin fiscal 2005 that have not been replaced with new contracts.

 

**General and Administrative.**General and administrative costs includerent, maintenance, travel, supplies, utilities, insurance and professionalservices. Such costs decreased $166,000 and $149,000 for the three andsix-month periods ended March 31, 2006, respectively, from the comparableperiods in fiscal 2005. The decrease was a result of the implementation ofcontrols, the reduced cost related to fewer general and administrativeemployees, and lower professional fee expenses.

 

**Depreciation and Amortization.**Depreciation and amortization decreased$31,000 and $66,000 for the three and six-month periods ended March 31, 2006,respectively, from the comparable periods in fiscal 2005 due to some equipmentbecoming fully depreciated. The replacement cost on computer equipment issignificantly lower than the replaced items. Additionally, we have extended thelife of existing equipment and elected to postpone investment in new equipment.Accordingly, depreciation and amortization expense has decreased in recentperiods.

 

**Severance and Related Costs.**We have not incurred severance expense infiscal 2006. We incurred severance expense $67,000 for the six-month period infiscal 2005 a result of the termination of our Chief Executive Officer’semployment contract that provided for payment of the contract through March 21,2005.

 

**Interest Expense, Net.**We incurred interest expense totaling $41,000in the quarter ended March 31, 2006 as compared to $11,000 in the quarter endedMarch 31, 2005. For the six months ended March 31, 2006, interest expensetotaled $54,000 as compared to $52,000 for the corresponding prior year period.The increase in the fiscal 2006 periods was principally a result of theaccretion of the Preferred Stock to the current redemption price of $299,583.

 

**Other Income (Expense).**In fiscal 2006, other income or expense isprincipally a result of the relinquishment of $61,000 of accrued dividends bythe holders of our redeemable Preferred Stock. In fiscal 2005, other income orexpense was principally a result of the change in fair value of the derivativefeatures of the Second Note or Restructured Note, and subsequent to thereclassification of the derivative features, amortization of the Premium on theRestructured Note. The Premium was amortized to other income until theconversion of the Restructured Note on November 10, 2004, and the unamortizedbalance was reclassified to stockholders’ equity.

 

**Income Taxes**. Federal income tax expense for fiscal year 2006 is projected to bezero. Accordingly, an effective federal income tax rate of 0% was recorded forthe three and six months ended March 31, 2006. As a result of the uncertaintythat sufficient future taxable income can be

 

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recognizedto realize additional deferred tax assets, no income tax benefit has beenrecognized for the three and six months ended March 31, 2006 and 2005.

 

**Net Loss.**We recorded a net profit of $18,000 in the second quarter of fiscal2006 as compared to a net loss of $679,000 in the same quarter of fiscal 2005.Our net loss of $25,000 in the first six months of fiscal 2006 was $1,145,000or 98% lower than the $1,170,000 net loss incurred in the six-monthcorresponding period in 2005. The variance was principally business volumerelated due to lower salaries, wages, and benefits, subcontractor costs,general and administrative expenses, lower interest expense, and fluctuationsin other income and expense.

 

**Liquidity and Capital Resources**

** **

**Table of Contractual Obligations.**Below is a schedule (by period due) of thefuture payments that we are obligated to make over the next five years based onagreements in place as of March 31, 2006.

 
| ** **                 | ** ** | **Fiscal Year Ending September 30,** | ** ** |
|----------------------------|------------|----------------------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                                 | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Total** | ** ** |
| Operating leases           |       | $                                                        | 25         |   | — |   | — |   | — |   | — |   | $ | 25 |   |
| Financing leases           |       | 18                                                       |       | 24 |   | 19 |   | — |   | — |   | 61 |   |
| Debt                       |       | —                                                   |       | — |   | — |   | — |   | — |   | — |   |
| Preferred stock redemption |       | —                                                   |       | — |   | — |   | — |   | — |   | — |   |
| Total                      |       | $                                                        | 43         |   | 24 |   | 19 |   | — |   | — |   | $ | 86 |   |

 

Historically,the principal source of our liquidity has consisted of cash flow fromoperations supplemented by secured lines-of-credit and other borrowings. AtDecember 31, 2005, related contractual obligations included Preferred Stockwith a redemption value of approximately $300,000. However, in February 2006,we retired that obligation when we issued 318,000 shares of Common Stock inexchange for all outstanding Preferred Stock and accrued dividends. We do nothave a line of credit and there is no assurance that we will be able to obtainadditional borrowings should we seek to do so.

** **

Ourdebt is summarized as follows.

 
| ** **                               | ** ** | **March 31,  2006** | ** ** | **September 30,  2005** | ** ** |
|------------------------------------------|------------|--------------------------|------------|------------------------------|------------|
|                                     |       |                     |       |                         |       |
| **Long-Term Debt**                       |       |                     |       |                         |       |
| Other debt and capital lease obligations |       | $                        | 42         |                         | $          | 47 |   |
| Redeemable preferred stock               |       | —                   |       | 247                          |       |
|                                     |       | 42                       |       | 294                          |       |
| Less current portion                     |       | (17                      | )          | (17                          | )          |
|                                     |       | $                        | 25         |                         | $          | 277 |   |

 

OnApril 2, 2002, we completed the sale of a $2.0 million senior securedconvertible note (“Old Note”) and a warrant (“Warrant”) to purchase 500,000 ofour common stock (“Common Stock”) to Tonga. We used the proceeds to repay$700,000 to senior lenders, pay transaction expenses of approximately $95,000and fund operations.

 

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TheOld Note, which carried a face value of $2.0 million, had a maturity date ofApril 2, 2005, and accrued interest on its face value at an annual rate of5.00%. Accrued interest was not payable in cash but was to be converted intoCommon Stock upon the Old Note’s voluntary conversion date or maturity. Werecorded the Old Note at $1.664 million reflecting a discount after givingeffect to the $200,000 and $136,000 estimated fair value of the Warrant and theconversion feature, respectively (“derivative features”), which were recordedas current liabilities. This $336,000 current liability was increased ordecreased to reflect the fair value of the derivatives at the end of eachquarter.

 

OnOctober 29, 2003, Tonga converted $300,000 in principal of the Old Note, and weissued 241,936 shares at a conversion price equal to $1.24, which represented90% of the average closing bid prices for the three trading days having thelowest closing bid price during the 20 trading days immediately prior toOctober 29, 2003. We also issued 19,522 shares at the same conversion price for$24,208 of accrued interest on the converted principal. The Old Note wasexchanged for the shares and a $1.7 million debenture (“Second Note”) bearingthe same terms. The carrying value of the Second Note was accreted to its facevalue as we recorded interest expense over its three-year term at an effectiverate of interest of 12.5%.

 

OnMay 28, 2004, an event of default was triggered under the Second Note when ourRegistration Statement on Form S-3 filed with the SEC on December 30, 2003, toregister shares of our Common Stock that were issued or are issuable pursuantto the Old Note, the Second Note, and the Warrant was not declared effective bythe SEC.

 

OnJune 30, 2004, the event of default was cured when we restructured the SecondNote. The restructured $1.7 million senior secured convertible promissory note(the “Restructured Note”) bore interest at a rate of 5% per annum with suchinterest accruing beginning on November 4, 2003. The principal amount of theRestructured Note, together with accrued and unpaid interest, was due andpayable at Tonga’s option in cash or shares of our Common Stock on January 2,2006. Tonga retained the right to convert the Restructured Note for shares ofour Common Stock at any time. Tonga waived accrued interest on the Second Notethrough November 3, 2004, which totaled $134,000. Tonga also waived its rightsto assess liquidated damages pursuant to the Second Note, relinquished itsrights under the Warrant, and canceled the Warrant.

 

Thecarrying value of the Second Note immediately prior to execution of theRestructured Note was $1.616 million, which reflected the $1.7 million facevalue less the $84,000 unamortized discount. Additionally, immediately prior tothe execution of the Restructured Note, the fair value of the Warrant totaledapproximately $67,000, and the fair value of the conversion feature of theSecond Note totaled approximately $62,000. As a result of the extended term ofthe Restructured Note, the estimated fair value of the conversion featureincreased to approximately $119,000, which was recorded as a current liability.We recorded the Restructured Note at $1.581 million, to be accreted to its facevalue at an effective interest rate of 12.14%. This transaction resulted in anet decrease in total liabilities of approximately $180,000. The decreaseconsisted of $134,000 of waived interest, the $68,000 fair value of thecanceled Warrant, and a $35,000 decrease in the carrying value of theRestructured Note, offset by a $57,000 increase in the fair value of theconversion feature. We recorded the $180,000 decrease in liabilities as acapital contribution pursuant to Staff Accounting Bulletin Topic 1:B.

 

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Theestimated fair value of the derivative feature of the Second Note totaledapproximately $129,000 on September 7, 2004, when the SEC declared our amendedRegistration Statement on Form S-3/A effective. Simultaneous to theeffectiveness of the registration, the net cash settlement provisions in theRestructured Note that effected the derivative classification of the conversionfeature were extinguished. We revalued and reclassified the conversion featureas a conversion premium (“Premium”) with an estimated value of $129,000, whichwould be amortized to income over the remaining term of the Restructured Note.During the first quarter of fiscal 2005, we recognized approximately $12,000 inother income as we amortized the premium through November 11, 2004. We receiveda notice of conversion dated November 10, 2004, from Tonga to convert theoutstanding principal and accrued interest into our Common Stock at theconversion price set forth in the Restructured Note. The conversion price was$1.05, and was equal to 90% of the average closing bid prices for the threetrading days having the lowest closing bid price during the 20 trading daysimmediately prior to November 10, 2004. The newly issued shares increased ourtotal common shares outstanding from 1,104,173 to 2,805,522. Tonga owned 67% ofour outstanding shares immediately after the conversion. According to filingsmade by Tonga under Section 16 of the Exchange Act, Tonga liquidated itsholdings of our Common Stock by November 15, 2004.

 

Wewere generally restricted from issuing additional equity securities withoutTonga’s consent, and Tonga had a right of first refusal as to certainsubsequent financings. The Restructured Note was secured by all of our assets.As part of the transaction, for a period of three years from the date of theOld Note, Tonga had the right to appoint a majority of our board of directors.Tonga appointed three members to the Board and as a result, controlled ASI.However, the conversion of the Restructured Note released all of our assets.Upon Tonga’s disposal of its holdings of our Common Stock, Tonga relinquishedits right to appoint directors. In December 2004, we appointed two newindependent directors in conjunction with the resignation of the threeTonga-appointed directors. As a result, Tonga relinquished control of ASI.

 

OnDecember 28, 2001, we issued 1.6 million shares of no par value Series APreferred Stock (“Preferred Stock”) with a face value of $3.2 million, pursuantto the extinguishment of a bank credit agreement (“Agreement”). We recordedthis Preferred Stock at a fair market value of $300,000 as described below. InJune 2004, we redeemed 1,341,100 shares of our Preferred Stock (“Shares”), or84%, of the outstanding Shares. We paid the holders of the Shares $251,456 toredeem the Shares, which, on the redemption dates, were carried atapproximately $1,535,000 plus accrued dividends totaling approximately $191,000,resulting in a gain of approximately $1,475,000. The early redemption reducedthe number of preferred shares outstanding to 258,900 shares and reduced amandatory redemption payment, which was classified as a current liability, from$800,000 to $129,450. We paid this obligation in December 2004 and redeemed92,465 shares of Preferred Stock at $1.40 per share.

 

AtDecember 31, 2005, 166,435 shares of Preferred Stock were outstanding which areredeemable on or before December 28, 2006. Until December 27, 2006, we wereentitled to redeem these shares at $1.80 per share, or $299,583. The PreferredStock carried a mandatory redemption date of December 28, 2006 at $2.00 pershare or $332,870. On February 1, 2006, we exchanged 318,000 shares of CommonStock for all of the outstanding Preferred Stock and accrued dividends thereon.

** **

ThePreferred Stock earned a dividend at the annual rate of 5.00% of the thenapplicable redemption price on a cumulative, non-participating basis and has aliquidation preference equal to the then

 

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applicableredemption value of shares outstanding at the time of liquidation. Dividendswere recorded as interest expense. Accrued dividends at March 31, 2006, and2005, totaled approximately $0 and $50,000, respectively.

 

Theaccompanying financial statements have been prepared on a going concern basis,which contemplates the realization of assets and the satisfaction ofliabilities in the normal course of business. Since fiscal 2000, we haveexperienced significant operating losses with corresponding reductions inworking capital. Our revenues and backlog decreased significantly during thattime. These factors, among others, have resulted in our independent auditorsissuing an audit opinion on the September 30, 2005, financial statements thatexpressed substantial doubt about our ability to continue as a going concern.

 

Toaddress the going concern issue, management implemented financial andoperational restructuring plans designed to improve operating efficiencies,reduce and eliminate cash losses, and position us for profitable operations.The conversion of our senior secured convertible note into common stock inNovember 2004 reduced our debt by $1,696,000, eliminated future related interestexpense and improved our debt to equity ratio. During February 2006 we retiredprincipally all of our debt when we issued 318,000 shares of our common stockin exchange for all outstanding shares of our series A Redeemable PreferredStock (“Preferred Stock”) and dividends accrued thereon, eliminating the needto reserve cash to meet this obligation. We have reduced our general andadministrative expenses by reducing occupancy costs and streamlining ourexecutive, senior and middle management teams. Ongoing viability as a businesscompels us to act swiftly and decisively regarding new business pursuits and,as such, we have engaged Pluris Partners, Inc. to facilitate the expansion ofour business endeavors into the energy sector.

** **

Inthe absence of a line of credit and because of our inability to secure debt onterms that would be considered reasonable based on our recent operatinghistory, we depend on internal cash flow to sustain operations. Internal cashflow is significantly affected by customer contract terms and progress achievedon projects. Fluctuations in internal cash flow are reflected in threecontract-related accounts: accounts receivable; revenue earned in excess ofbillings; and billings in excess of revenue earned. Under the percentage of completionmethod of accounting:

** **

•                  “Accounts receivable” is created when anamount becomes due from a customer, which typically occurs when an eventspecified in the contract triggers a billing.

•                  “Revenue earned in excess of billings” occurwhen we have performed under a contract even though a billing event has notbeen triggered.

•                  “Billings in excess of revenue earned” occurwhen we receive an advance or deposit against work yet to be performed.

 

Theseaccounts, which represent a significant investment by us in our business,affect our cash flow as projects are signed, performed, billed and collected.At March 31, 2006, we had multiple contracts with three customers, theaggregate of which accounted for 71% of our consolidated revenues during thethree months ending March 31, 2006 (Worldwide Services, Inc, and Intergraph(“WWS”), 24%; AGL Resources (“AGL”), 35%; and MWH Americas, Inc., 12%.)  Two of these customers (WWS and AGL)accounted for 70% and 27%, respectively, of our total accounts receivable atMarch 31, 2006. At March 31, 2005, we had multiple contracts with fourcustomers, the aggregate of which accounted for 73% of our consolidatedrevenues during the three months

 

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endingMarch 31, 2005 (WWS, 14%; Michigan Consolidated Gas Company (“MichCon”), 16%;British Telecommunications PLC (“BT”), 24%; and MWH Americas, Inc., 19%). Oneof these customers accounted for 80% of our total accounts receivable at March31, 2005 (WWS, 80%). Billing terms are negotiated in a competitive environmentand are based on reaching project milestones. We anticipate that sufficientbilling milestones or contract completion will be achieved during fiscal 2006such that the majority of revenue earned in excess of billings for thesecustomer contracts will be collected.

 

Inorder to meet our short-term cash requirements we must collect more cash fromour customers than we pay to our employees and suppliers. To meet our short andlong-term cash requirements, we must complete certain projects in fiscal 2006and 2007 that are related to the balance of revenue earned in excess ofbillings at March 31, 2006, in order to generate sufficient cash flow to fundoperations and expenditures. We expect that we will be able to complete a majorityof these contracts by December 31, 2006, but there can be no assurance thatmarket conditions or other factors may prevent us from doing so or that thecash generated will be equal to the amount that we currently anticipate. If weare unable to complete the contracts and generate cash by earning andcollecting our unearned revenues, we will be forced to obtain additionalfinancing and/or restrict capital and operating expenditures to match availableresources.

 

OnDecember 30, 2005, we received notice from the NASDAQ Stock Market indicatingwe are not in compliance with one of NASDAQ’s requirements for continuedlisting because we do not have: (i) a minimum of $2,500,000 in stockholders’equity as of September 30, 2005; (ii) at least $35,000,000 in market value oflisted securities, or (iii) at least $500,000 of net income from continuingoperations for the most recently completed fiscal year or two of the three mostrecently completed fiscal years. NASDAQ requires compliance with one of theforegoing criteria for continued inclusion under NASDAQ Marketplace Rule4310(c)(2)(B). We have implemented a plan to regain compliance by the issuanceof 318,000 shares of our common stock in February 2006, in exchange for ourPreferred Stock, which was classified as debt, and increased our stockholders’equity by approximately $300,000.

** **

OnFebruary 10, 2006, we completed the placement of a new Series A ConvertiblePreferred Stock (“Convertible Preferred”) with aggregate gross proceeds ofapproximately $760,000. The two-year Convertible Preferred, which bearsinterest at 7% annually, may be converted into 598,425 shares of our CommonStock at fixed conversion price of $1.27, which was determined by applying a10% discount to the 5-day trailing average closing price of ASI Common Stock of$1.41 as of the NASDAQ Stock Market close on February 9, 2006. We also issuedwarrants to purchase up to 763,780 shares of our Common Stock pursuant to thistransaction. Our Registration Statement on Form S-3 to register all shares issuablepursuant to the Convertible Preferred and related Warrants was declaredeffective on April 12, 2006. This equity placement is part of a long-term planto expand our service offering into the energy sector.

 

EffectiveMarch 15, 2006, we completed the purchase of certain oil and gas workinginterests and field equipment for which we will have issued 129,032 shares ofour Common Stock having a fair market value (equal to the closing bid on March14, 2006) of $1.55 per share, or $200,000, and will have paid $150,000 in cash.The financial statement impact of this transaction is an increase ofapproximately $200,000 in our stockholders’ equity.

 

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Webelieve that that these three separate transactions have allowed the Company todemonstrate compliance with NASDAQ’s stockholders’ equity test. NASDAQ hasreviewed our plan to regain compliance with Marketplace Rule 4310(c)(2)(B) andhas determined the Company is currently compliant.

 

Thefinancial statements do not include any adjustments relating to therecoverability of assets and the classifications of liabilities that might benecessary should we be unable to continue as a going concern. However, webelieve that our turnaround efforts, if successful, will improve operations andgenerate sufficient cash to meet our obligations in a timely manner.

 

Ouroperating activities used $350,000 and provided $21,000 cash during thesix-months ended March 31, 2006 and 2005, respectively. Contract-relatedaccounts declined $224,000 and $1,790,000 during the respective periods. Wereduced our accounts payable and accrued expense liabilities by $583,000 and$802,000 during the six months ended March 31, 2006 and 2005, respectively.

** **

Wepurchased equipment and leasehold improvements totaling $6,000 and $70,000,during the six months ended March 31, 2006 and 2005. We purchased equipment andmineral interests in oil and gas properties for $603,000 during the threemonths ended March 31, 2006.

** **

**Item 3.Controls and Procedures**

 

Asof the end of the period covered by this report, we carried out an evaluation,under the supervision and with the participation of our management, includingour Chief Executive Officer and Chief Accounting Officer, of the effectivenessof our disclosure controls and procedures (as defined in rules 13(a)-15(e) and15(d)-15(e) of the Securities Exchange Act of 1934, as amended (the “ExchangeAct”)). Based upon that evaluation, the Chief Executive Officer and the ChiefAccounting Officer have concluded that the disclosure controls and proceduresare effective in alerting them on a timely basis to material informationrelating to the Company (including our consolidated subsidiaries) that isrequired to be included in our periodic filings under the Exchange Act.

 

Therehas been no change in our internal control over financial reporting (as definedin Rules 13(a)-13(f) and 15(d)-15(f) under the Exchange Act) that occurredduring the period covered by this quarterly report that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

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**Part II**

**Other Information**

** **

**Item 1.Legal Proceedings**.

 

Informationregarding our legal proceedings can be found under Note 9, “Litigation”, to theConsolidated Financial Statements.

 

**Item 2. Unregistered Sales of Securities and Use of Proceeds.**

 

Allbut the sale to Black Shale Energy, LLC (“Black Shale”) of the unregisteredsales of securities during the period covered by this report were a part of theprivate placement of the Convertible Preferred. All of these sales took placeon February 10, 2006. All but the sale to Daniel D. Dinur were for cash and atan aggregate commission of $50,000. All of these sales were exempt from registrationunder Section 4(2) of the Securities Act of 1933 as amended (the “SecuritiesAct”). The title and amount of securities and the name of the purchaser in eachsuch sale were as follows:

 
| **Name of Purchaser** | ** ** | **Number of  Shares of the  Series A  Convertible  Preferred Stock  Purchased*** | ** ** | **Number of  Each Class A and  Class B Warrants Purchased** | ** ** |
|---------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| Alpha Capital AG                |       | 250,000                                                                                                   |       | 98,425                                                                                         |       |
| Nite Capital, LP                |       | 200,000                                                                                                   |       | 78,740                                                                                         |       |
| Monarch Capital Fund, LTD       |       | 150,000                                                                                                   |       | 59,055                                                                                         |       |
| SCG Capital, LLC                |       | 80,000                                                                                                    |       | 31,496                                                                                         |       |
| Daniel E. Kern                  |       | 80,000                                                                                                    |       | 31,496                                                                                         |       |
| Moshe Hartstein                 |       | 0                                                                                                         |       | 29,527                                                                                         |       |
| Peak Securities Corporation     |       | 0                                                                                                         |       | 27,559                                                                                         |       |
| Pluris Partners, Inc.           |       | 0                                                                                                         |       | 10,551                                                                                         |       |
| Palladium Capital Advisors, LLC |       | 0                                                                                                         |       | 9,843                                                                                          |       |
| Daniel D. Dinur                 |       | 0                                                                                                         |       | 5,198                                                                                          |       |
|                            |       | 760,000                                                                                                   |       | 381,890                                                                                        |       |

 

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*Thepurchase price was $1 per share.

 

DanielD. Dinur received 10,000 shares of Common Stock in exchange for legal services.

 

Eachshare of the Convertible Preferred is convertible on or before February 10,2008, into .7874 shares of Common Stock. All of the Class A and Class BWarrants are exercisable at any time after August 10, 2006, and until April 10,2009. Each Class A Warrant has an exercise price of $1.34 per share of CommonStock and each Class B Warrant has an exercise price of $1.49 per share ofCommon Stock.

 

29

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BlackShale received 129,032 shares of Common Stock effective March 30, 2006, inexchange, in part, for oil and gas working interests and field equipment. Thesale was exempt from registration under Section 4(2) of the Securities Act.

 

**Item 3.Defaults Upon Senior Securities.**

 

None.

 

**Item 4. Submission of Matters to a Vote of Security Holders.**

 

None.

 

**Item 5.Other Information.**

 

None.

 

**Item 6.Exhibits.**

 

**Exhibits:**

 
| 31.1   |   | Section  302 Certification of Chief Executive Officer  |
|--------|--------|--------------------------------------------------------|
|   |   |                                                   |
| 31.2   |   | Section  302 Certification of Chief Accounting Officer |
|   |   |                                                   |
| 32.1   |   | Section  906 Certification of Chief Executive Officer  |
|   |   |                                                   |
| 32.2   |   | Section  906 Certification of Chief Accounting Officer |

 

30

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**SIGNATURES**

** **

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                           |                                            | Analytical Surveys, Inc. |
|--------------------------------|-------------------------------------------------|--------------------------|
|                           |                                            | (Registrant)             |
|                           |                                            |                     |
|                           |                                            |
| Date:  May  15, 2006 | /s/     Lori  A. Jones |                     |
|                           | Lori  A. Jones                                  |
|                           | Chief  Executive Officer                        |
|                           |                                            |
|                           |                                            |
| Date:  May  15, 2006 | /s/     Barry  Golko   |                     |
|                           | Barry  Golko                                    |
|                           | Chief  Accounting Officer                       |
|                                |                                                 |                          |  |  |

 

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