##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



FOR THE QUARTERLY PERIOD ENDED
DECEMBER 31, 2004



OR



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



COMMISSION FILE NUMBER 0-13111



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ANALYTICAL SURVEYS, INC.

(EXACT NAME
OF REGISTRANT AS SPECIFIED IN ITS CHARTER)



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



11900
CROWNPOINT DRIVE, SAN ANTONIO, TEXAS 78233

(Address of principal executive offices)



(210) 657-1500

(Registrants telephone number, including area code)



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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1)
HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PAST TWELVE (12) MONTHS (OR
FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH
REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE
PAST NINETY (90) DAYS.    YES  xNO ̈



INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED
FILER (AS DEFINED IN RULE 12b-2 OF THE EXCHANGE
ACT).    YES ̈NO  x



THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING
AS OF FEBRUARY 1, 2005, WAS 2,869,272.



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##### Table of Contents

TABLE OF CONTENTS



|              |  |                                                                                       |  |     
|------------- |  | ------------------------------------------------------------------------------------- |  | ----
|              |  |                                                                                       |  | PAGE
|PART 1.       |  | FINANCIAL INFORMATION                                                                 |  |     
|              |  |                                                                                      
|Item 1.       |  | Financial Statements                                                                  |  | 3   
|              |  |                                                                                      
|Item 2.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 15  
|              |  |                                                                                      
|Item 3.       |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 23  
|              |  |                                                                                      
|Item 4.       |  | Controls and Procedures                                                               |  | 23  
|              |  |                                                                                      
|PART 2.       |  | OTHER INFORMATION                                                                     |  |     
|              |  |                                                                                      
|Item 1.       |  | Legal Proceedings                                                                     |  | 24  
|              |  |                                                                                      
|Item 2.       |  | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities      |  | 24  
|              |  |                                                                                      
|Item 3.       |  | Defaults Upon Senior Securities                                                       |  | 24  
|              |  |                                                                                      
|Item 4.       |  | Submissions of Matters to a Vote of Security Holders                                  |  | 24  
|              |  |                                                                                      
|Item 5.       |  | Other Information                                                                     |  | 24  
|              |  |                                                                                      
|Item 6.       |  | Exhibits and Reports on Form 8-K                                                      |  | 24  
|              | 
|SIGNATURES    |  | 25                                                                                   
|              | 
|EXHIBIT INDEX |  |                                                                                      
|              |  |                                                                                      
|Exhibit 31.1  |  | Section 302 Certification of Chief Executive Officer                                  |  |     
|              |  |                                                                                      
|Exhibit 31.2  |  | Section 302 Certification of Chief Accounting Officer                                 |  |     
|              |  |                                                                                      
|Exhibit 32.1  |  | Section 906 of the Sarbanes-Oxley Act of 2002                                         |  |     
|              |  |                                                                                      
|Exhibit 32.2  |  | Section 906 of the Sarbanes-Oxley Act of 2002                                         |  |     



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##### Table of Contents

Part I

Financial Information



Item 1. Financial Statements



ANALYTICAL SURVEYS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)



|                                                                                                                                                                                                    |  |                  |         |   |                   |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                                                                    |  | December 31,2004 |         |   | September 30,2004 |  
|                                                                                                                                                                                                    |  | (Unaudited)      |         |   |                   |  
|Assets                                                                                                                                                                                              |  |                  |         |   |                   |   |         |  
|Current assets:                                                                                                                                                                                     |  |                  |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                                                                                                           |  | $                | 1,636   |   |                   | $ | 867     |  
|Accounts receivable, net of allowance for doubtful accounts of $54 and $54 at December 31 and September 30, 2004, respectively                                                                      |  |                  | 2,035   |   |                   |   | 3,431   |  
|Revenue earned in excess of billings                                                                                                                                                                |  |                  | 2,629   |   |                   |   | 3,006   |  
|Prepaid expenses and other                                                                                                                                                                          |  |                  | 168     |   |                   |   | 183     |  
|                                                                                                                                                                                                    |  |                  |         |   |                   |   |         |  
|Total current assets                                                                                                                                                                                |  |                  | 6,468   |   |                   |   | 7,487   |  
|                                                                                                                                                                                                    |  |                  |         |   |                   |   |         |  
|Equipment and leasehold improvements, at cost:                                                                                                                                                      |  |                  |         |   |                   |   |         |  
|Equipment                                                                                                                                                                                           |  |                  | 4,788   |   |                   |   | 4,783   |  
|Furniture and fixtures                                                                                                                                                                              |  |                  | 484     |   |                   |   | 484     |  
|Leasehold improvements                                                                                                                                                                              |  |                  | 267     |   |                   |   | 267     |  
|                                                                                                                                                                                                    |  |                  |         |   |                   |   |         |  
|                                                                                                                                                                                                    |  |                  | 5,539   |   |                   |   | 5,534   |  
|Less accumulated depreciation and amortization                                                                                                                                                      |  |                  | (5,330  | ) |                   |   | (5,274  | )
|                                                                                                                                                                                                    |  |                  |         |   |                   |   |         |  
|Net equipment and leasehold improvements                                                                                                                                                            |  |                  | 209     |   |                   |   | 260     |  
|                                                                                                                                                                                                    |  |                  |         |   |                   |   |         |  
|Total assets                                                                                                                                                                                        |  | $                | 6,677   |   |                   | $ | 7,747   |  
|                                                                                                                                                                                                    |  |                  |         |   |                   |   |         |  
|Liabilities and Stockholders Equity                                                                                                                                                                |  |                  |         |   |                   |   |         |  
|Current liabilities:                                                                                                                                                                                |  |                  |         |   |                   |   |         |  
|Current portion of long-term debt                                                                                                                                                                   |  |                  | 33      |   |                   |   | 53      |  
|Billings in excess of revenue earned                                                                                                                                                                |  |                  | 394     |   |                   |   | 468     |  
|Accounts payable                                                                                                                                                                                    |  |                  | 499     |   |                   |   | 882     |  
|Accrued interest  related party                                                                                                                                                                    |  |                  |        |   |                   |   | 78      |  
|Accrued liabilities                                                                                                                                                                                 |  |                  | 472     |   |                   |   | 479     |  
|Accrued payroll and related benefits                                                                                                                                                                |  |                  | 573     |   |                   |   | 678     |  
|Redeemable preferred stock  current portion                                                                                                                                                        |  |                  |        |   |                   |   | 129     |  
|Fair value of derivative feature  related party                                                                                                                                                    |  |                  |        |   |                   |   | 122     |  
|                                                                                                                                                                                                    |  |                  |         |   |                   |   |         |  
|Total current liabilities                                                                                                                                                                           |  |                  | 1,971   |   |                   |   | 2,889   |  
|                                                                                                                                                                                                    |  |                  |         |   |                   |   |         |  
|Long-term liabilities:                                                                                                                                                                              |  |                  |         |   |                   |   |         |  
|Long-term debt  related party                                                                                                                                                                      |  |                  |        |   |                   |   | 1,601   |  
|Redeemable preferred stock, no par value. Authorized 2,500 shares; 166 and 259 shares issued and outstanding at December 31 and September 30,
2004, (liquidation value $267 and $362), respectively |  |                  | 210     |   |                   |   | 190     |  
|                                                                                                                                                                                                    |  |                  |         |   |                   |   |         |  
|Total long-term liabilities                                                                                                                                                                         |  |                  | 210     |   |                   |   | 1,791   |  
|                                                                                                                                                                                                    |  |                  |         |   |                   |   |         |  
|Total liabilities                                                                                                                                                                                   |  |                  | 2,181   |   |                   |   | 4,680   |  
|                                                                                                                                                                                                    |  |                  |         |   |                   |   |         |  
|Commitments and contingencies                                                                                                                                                                       |  |                  |         |   |                   |   |         |  
|Stockholders equity:                                                                                                                                                                               |  |                  |         |   |                   |   |         |  
|Common stock, no par value. Authorized 10,000 shares; 2,869 and 1,104 shares issued and outstanding at December 31 and September 30, 2004,
respectively                                             |  |                  | 35,330  |   |                   |   | 33,410  |  
|Accumulated deficit                                                                                                                                                                                 |  |                  | (30,834 | ) |                   |   | (30,343 | )
|                                                                                                                                                                                                    |  |                  |         |   |                   |   |         |  
|Total stockholders equity                                                                                                                                                                          |  |                  | 4,496   |   |                   |   | 3,067   |  
|                                                                                                                                                                                                    |  |                  |         |   |                   |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                          |  | $                | 6,677   |   |                   | $ | 7,747   |  
|                                                                                                                                                                                                    |  |                  |         |   |                   |   |         |  



See accompanying notes to consolidated
financial statements.



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##### Table of Contents

ANALYTICAL SURVEYS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share
amounts)

(Unaudited)



|                                                                   |  |                                |       |   |      |   |        |  
|------------------------------------------------------------------ |  | ------------------------------ | ----- | - | ---- | - | ------ | -
|                                                                   |  | Three Months Ended December 31 |      
|                                                                   |  | 2004                           |       |   | 2003 |  
|Revenues                                                           |  | $                              | 2,028 |   |      | $ | 2,554  |  
|                                                                   |  |                               
|Costs and expenses:                                                |  |                                |       |   |      |   |        |  
|Salaries, wages and benefits                                       |  |                                | 1,554 |   |      |   | 1,809  |  
|Subcontractor costs                                                |  |                                | 378   |   |      |   | 796    |  
|Other general and administrative                                   |  |                                | 436   |   |      |   | 864    |  
|Depreciation and amortization                                      |  |                                | 55    |   |      |   | 85     |  
|Severance and related costs                                        |  |                                | 67    |   |      |   | 22     |  
|                                                                   |  |                                |       |   |      |   |        |  
|Total operating costs                                              |  |                                | 2,490 |   |      |   | 3,576  |  
|                                                                   |  |                                |       |   |      |   |        |  
|Loss from operations                                               |  |                                | (462  | ) |      |   | (1,022 | )
|                                                                   |  |                                |       |   |      |   |        |  
|Other income (expense):                                            |  |                                |       |   |      |   |        |  
|Interest expense, net                                              |  |                                | (41   | ) |      |   | (226   | )
|Other income, net                                                  |  |                                | 12    |   |      |   | (53    | )
|                                                                   |  |                                |       |   |      |   |        |  
|Total other income (expense)                                       |  |                                | (29   | ) |      |   | (279   | )
|                                                                   |  |                                |       |   |      |   |        |  
|Loss before income taxes                                           |  |                                | (491  | ) |      |   | (1,301 | )
|Provision for income taxes                                         |  |                                |      |   |      |   |       |  
|                                                                   |  |                                |       |   |      |   |        |  
|Net loss available to common shareholders                          |  | $                              | (491  | ) |      | $ | (1,301 | )
|                                                                   |  |                                |       |   |      |   |        |  
|Basic net loss per common share available to common shareholders   |  | $                              | (0.25 | ) |      | $ | (1.33  | )
|                                                                   |  |                                |       |   |      |   |        |  
|Diluted net loss per common share available to common shareholders |  | $                              | (0.25 | ) |      | $ | (1.33  | )
|                                                                   |  |                                |       |   |      |   |        |  
|Weighted average common shares:                                    |  |                                |       |   |      |   |        |  
|Basic                                                              |  |                                | 1,976 |   |      |   | 980    |  
|                                                                   |  |                                |       |   |      |   |        |  
|Diluted                                                            |  |                                | 1,976 |   |      |   | 980    |  
|                                                                   |  |                                |       |   |      |   |        |  



See accompanying notes to consolidated
financial statements.



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ANALYTICAL SURVEYS, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY

For the Three Months
Ended December 31, 2004

(In thousands)

(Unaudited)



|                                                                              |  |              |  |                    |        |  |                          |         |   |  |   |       |  
|----------------------------------------------------------------------------- |  | ------------ |  | ------------------ | ------ |  | ------------------------ | ------- | - |  | - | ----- | -
|                                                                              |  | Common Stock |  | AccumulatedDeficit |        |  | TotalStockholdersEquity |        
|                                                                              |  | Shares       |  | Amount             |        | 
|Balances at September 30, 2004                                                |  | 1,104        |  | $                  | 33,410 |  | $                        | (30,343 | ) |  | $ | 3,067 |  
|Net loss                                                                      |  |             |  |                    |       |  |                          | (491    | ) |  |   | (491  | )
|Common stock issued pursuant to conversion of senior secured convertible note |  | 1,701        |  |                    | 1,806  |  |                          |        |   |  |   | 1,806 |  
|Issuance of inducement stock options                                          |  |             |  |                    | 22     |  |                          |        |   |  |   | 22    |  
|Common stock issued pursuant to exercise of stock options                     |  | 64           |  |                    | 92     |  |                          |        |   |  |   | 92    |  
|                                                                              |  |              |  |                    |        |  |                          |         |   |  |   |       |  
|Balances at December 31, 2004                                                 |  | 2,869        |  | $                  | 35,330 |  | $                        | (30,834 | ) |  | $ | 4,496 |  
|                                                                              |  |              |  |                    |        |  |                          |         |   |  |   |       |  



See accompanying notes to consolidated
financial statements.



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##### Table of Contents

ANALYTICAL SURVEYS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                                               |  |                               |       |   |      |   |        |  
|-------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | ----- | - | ---- | - | ------ | -
|                                                                                                               |  | Three Months EndedDecember 31 |      
|                                                                                                               |  | 2004                          |       |   | 2003 |  
|Cash flows from operating activities:                                                                          |  |                               |       |   |      |   |        |  
|Net loss                                                                                                       |  | $                             | (491  | ) |      | $ | (1,301 | )
|Adjustments to reconcile net loss to net cash provided by operating activities:                                |  |                               |       |   |      |   |        |  
|Depreciation and amortization                                                                                  |  |                               | 55    |   |      |   | 85     |  
|Issuance of inducement stock options                                                                           |  |                               | 22    |   |      |   |       |  
|Accretion of interest expense on preferred stock                                                               |  |                               | 20    |   |      |   | 150    |  
|Accretion of interest expense on convertible debt  related party                                              |  |                               | 9     |   |      |   | 29     |  
|Change in fair value of derivative instrument or carrying value of premium on convertible debt  related party |  |                               | (12   | ) |      |   | 53     |  
|Changes in operating assets and liabilities:                                                                   |  |                               |       |   |      |   |        |  
|Accounts receivable, net                                                                                       |  |                               | 1,396 |   |      |   | 992    |  
|Revenue earned in excess of billings                                                                           |  |                               | 377   |   |      |   | 399    |  
|Prepaid expenses and other                                                                                     |  |                               | 15    |   |      |   | (142   | )
|Billings in excess of revenue earned                                                                           |  |                               | (75   | ) |      |   | 100    |  
|Accounts payable and other accrued liabilities                                                                 |  |                               | (381  | ) |      |   | (135   | )
|Accrued payroll and related benefits                                                                           |  |                               | (105  | ) |      |   | (128   | )
|                                                                                                               |  |                               |       |   |      |   |        |  
|Net cash provided by operating activities                                                                      |  |                               | 830   |   |      |   | 102    |  
|                                                                                                               |  |                               |       |   |      |   |        |  
|Cash flows from investing activities:                                                                          |  |                               |       |   |      |   |        |  
|Purchase of equipment and leasehold improvements                                                               |  |                               | (5    | ) |      |   | (3     | )
|                                                                                                               |  |                               |       |   |      |   |        |  
|Net cash used in investing activities                                                                          |  |                               | (5    | ) |      |   | (3     | )
|                                                                                                               |  |                               |       |   |      |   |        |  
|Cash flows from financing activities:                                                                          |  |                               |       |   |      |   |        |  
|Principal payments on long-term debt                                                                           |  |                               | (19   | ) |      |   | (19    | )
|Redemption of preferred stock                                                                                  |  |                               | (129  | ) |      |   |       |  
|Proceeds from common stock issued pursuant to exercise of options                                              |  |                               | 92    |   |      |   |       |  
|                                                                                                               |  |                               |       |   |      |   |        |  
|Net cash used in financing activities                                                                          |  |                               | (56   | ) |      |   | (19    | )
|                                                                                                               |  |                               |       |   |      |   |        |  
|Net increase in cash                                                                                           |  |                               | 769   |   |      |   | 80     |  
|                                                                                                               |  |                              
|Cash and cash equivalents at beginning of period                                                               |  |                               | 867   |   |      |   | 1,952  |  
|                                                                                                               |  |                               |       |   |      |   |        |  
|Cash and cash equivalents at end of period                                                                     |  | $                             | 1,636 |   |      | $ | 2,032  |  
|                                                                                                               |  |                               |       |   |      |   |        |  
|Supplemental disclosures of cash flow information:                                                             |  |                               |       |   |      |   |        |  
|Cash paid for interest                                                                                         |  | $                             | 1     |   |      | $ | 2      |  
|                                                                                                               |  |                               |       |   |      |   |        |  
|Non-cash financing activities:                                                                                 |  |                               |       |   |      |   |        |  
|Issuance of common stock pursuant to conversion of debtrelated party                                          |  | $                             | 1,806 |   |      | $ | 324    |  
|                                                                                                               |  |                               |       |   |      |   |        |  
|Accretion of interest on preferred stock                                                                       |  | $                             | 20    |   |      | $ | 150    |  
|                                                                                                               |  |                               |       |   |      |   |        |  



See
accompanying notes to consolidated financial statements.



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##### Table of Contents

ANALYTICAL SURVEYS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004

(Unaudited)



1. Summary of Significant Accounting Policies



The accompanying interim consolidated financial statements have been prepared by management without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission, in accordance with the accounting policies described in our annual report for the year ended September 30, 2004, and reflect all adjustments which are, in the opinion of management, necessary to present a fair statement of the
results for the interim period on a basis consistent with the annual audited consolidated financial statements. All such adjustments are of a normal recurring nature. The consolidated financial statements include the accounts of Analytical Surveys,
Inc. (ASI, we, our or the Company) and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures
normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted. These consolidated financial statements should be read in conjunction with the audited consolidated
financial statements and related notes included in our Annual Report on Form 10-K for the year ended September 30, 2004. All amounts contained herein are presented in thousands unless indicated.



Revenue Recognition. We recognize revenue using the percentage of completion method of
accounting on a cost-to-cost basis. For each contract, an estimate of total production costs is determined and these estimates are reevaluated monthly. Production costs consist of internal costs, primarily salaries and wages, and external costs,
primarily subcontractor costs. Internal and external production costs may vary considerably among projects and during the course of completion of each project. At each accounting period, the percentage of completion is based on production costs
incurred to date as a percentage of total estimated production costs for each of our contracts. This percentage is then multiplied by the contracts total value to calculate the sales revenue to be recognized. The percentage of completion is
affected by many factors that influence either the estimate of future productivity or the production cost per hour used to determine future costs. We recognize losses on contracts in the period such loss is determined. Sales and marketing expenses
associated with obtaining contracts are expensed as incurred.



Stock Based
Compensation. As permitted by Statement of Financial Accounting Standards (SFAS) No. 123 Accounting for Stock-Based Compensation, we account for our stock-based compensation utilizing the intrinsic-value method in accordance
with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation expense related to our stock option plans is reflected in net loss, as all
options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Pro forma information regarding net loss and net loss per share is required by SFAS No. 148 Accounting for
Stock-Based CompensationTransition and Disclosures. This information has been estimated at the date of grant using the fair value method.



We granted inducement stock options (Option) to our former Chief Executive Officer on March 22, 2004. The Option was not issued pursuant to our stock option
plans, and would have vested at



7



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##### Table of Contents

the end of a twelve-month period. The Option originally provided for the purchase of 75,000 shares of common stock at an exercise price equal to $1.50 per
share, which was below the market value of $2.82 on the date 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 18,750 shares. The intrinsic value of the vested shares totaled approximately $24,000. Mr. Fuquay exercised his rights under the Option on December 28, 2004, and purchased 56,250 shares of our common stock. Compensation expense for the
three months ended December 31, 2004, included $22,173 related to the original grant of the Options as well as the remeasured value of the accelerated Options. Had compensation costs for our stock based compensation been determined at the grant date
consistent with the provisions of SFAS No. 123, our net loss and net loss per share would have increased to the pro forma amounts indicated below:



|                                                                     |  |                                         |       |   |      |   |        |  
|-------------------------------------------------------------------- |  | --------------------------------------- | ----- | - | ---- | - | ------ | -
|                                                                     |  | Three Months Ended December 31          |      
|                                                                     |  | 2004                                    |       |   | 2003 |  
|                                                                     |  | (in thousands exceptper share earnings) |      
|Net loss available to common shareholders as reported                |  | $                                       | (491  | ) |      | $ | (1,301 | )
|Add: Stock-based employee compensation included in reported net loss |  |                                         | 22    |   |      |   |       |  
|Less: Pro forma option expense                                       |  |                                         | (30   | ) |      |   | (15    | )
|                                                                     |  |                                         |       |   |      |   |        |  
|Pro forma net loss                                                   |  | $                                       | (499  | ) |      | $ | (1,316 | )
|                                                                     |  |                                         |       |   |      |   |        |  
|Basic net loss per share, as reported                                |  | $                                       | (0.25 | ) |      | $ | (1.33  | )
|Less: Pro forma option expense                                       |  |                                         |      |   |      |   | (0.02  | )
|                                                                     |  |                                         |       |   |      |   |        |  
|Pro forma basic net loss per share                                   |  | $                                       | (0.25 | ) |      | $ | (1.35  | )
|                                                                     |  |                                         |       |   |      |   |        |  
|Diluted net loss per share, as reported                              |  | $                                       | (0.25 | ) |      | $ | (1.33  | )
|Less: Pro forma option expense                                       |  |                                         |      |   |      |   | (0.02  | )
|                                                                     |  |                                         |       |   |      |   |        |  
|Pro forma diluted net loss per share                                 |  | $                                       | (0.25 | ) |      | $ | (1.35  | )
|                                                                     |  |                                         |       |   |      |   |        |  



2. Earnings Per Share



Basic earnings per share is computed by dividing earnings available to
common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share include the effects of the potential dilution of outstanding options and warrants determined using the treasury stock method,
as well as convertible debt on our common stock, determined using the if-converted method. We do not present diluted earnings per share for periods in which we incurred losses, as the effect of potentially dilutive shares is anti-dilutive.



|                                                    |  |                                         |       |   |      |   |        |  
|--------------------------------------------------- |  | --------------------------------------- | ----- | - | ---- | - | ------ | -
|                                                    |  | Three Months EndedDecember 31           |      
|                                                    |  | 2004                                    |       |   | 2003 |  
|                                                    |  | (in thousands exceptper share earnings) |      
|Basic                                               |  |                                         |       |   |      |   |        |  
|Net loss available to common shareholders           |  | $                                       | (491  | ) |      | $ | (1,301 | )
|                                                    |  |                                         |       |   |      |   |        |  
|Weighted average shares                             |  |                                         | 1,976 |   |      |   | 980    |  
|                                                    |  |                                         |       |   |      |   |        |  
|Net loss per share available to common shareholders |  | $                                       | (0.25 | ) |      | $ | (1.33  | )
|                                                    |  |                                         |       |   |      |   |        |  
|Diluted                                             |  |                                         |       |   |      |   |        |  
|Net loss available to common shareholders           |  | $                                       | (491  | ) |      | $ | (1,301 | )
|                                                    |  |                                         |       |   |      |   |        |  
|Weighted average shares                             |  |                                         | 1,976 |   |      |   | 980    |  
|                                                    |  |                                         |       |   |      |   |        |  
|Net loss per share available to common shareholders |  | $                                       | (0.25 | ) |      | $ | (1.33  | )
|                                                    |  |                                         |       |   |      |   |        |  



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3. Impact Of Recently Issued Accounting Pronouncements



In December 2004, the FASB published revisions to SFAS No. 123. The revised SFAS No. 123
requires companies to account for share-based payment transactions using a fair-value based method, thereby eliminating the disclosure-only provisions of SFAS No. 123. The revised SFAS No. 123 is effective for all public entities as of the beginning
of the first interim or annual reporting period beginning after June 14, 2005. We are currently evaluating the impact on our financial condition and the results of operations. We currently elect the disclosure-only provisions of Statement SFAS No.
123.



4. Accrued Payroll and Related Benefits



Our accrued payroll and related benefits are summarized as follows.



|                                     |  |                   |     |                   |   |    
|------------------------------------ |  | ----------------- | --- | ----------------- | - | ---
|                                     |  | December 31, 2004 |     | September 30,2004
|Accrued payroll                      |  | $                 | 306 |                   | $ | 358
|Accrued health benefits              |  |                   | 97  |                   |   | 130
|Accrued vacation                     |  |                   | 170 |                   |   | 190
|                                     |  |                   |     |                   |   |    
|Accrued payroll and related benefits |  | $                 | 573 |                   | $ | 678
|                                     |  |                   |     |                   |   |    



5. Debt



The components of debt are summarized as follows.



|                                              |  |                   |     |   |                   |   |       |  
|--------------------------------------------- |  | ----------------- | --- | - | ----------------- | - | ----- | -
|Long-Term Debt                                |  | December 31, 2004 |     |   | September 30,2004 |  
|Senior secured convertible noterelated party |  | $                 |    |   |                   | $ | 1,601 |  
|Other                                         |  |                   | 33  |   |                   |   | 53    |  
|Redeemable preferred stock (See Note 6)       |  |                   | 210 |   |                   |   | 319   |  
|                                              |  |                   |     |   |                   |   |       |  
|                                              |  |                   | 243 |   |                   |   | 1,973 |  
|Less current portion                          |  |                   | (33 | ) |                   |   | (182  | )
|                                              |  |                   |     |   |                   |   |       |  
|                                              |  | $                 | 210 |   |                   | $ | 1,791 |  
|                                              |  |                   |     |   |                   |   |       |  



On April 2, 2002, we completed the
sale of a $2.0 million senior secured convertible note (Old Note) and a warrant (Warrant) to purchase 500,000 of our common stock (Common Stock) to Tonga Partners, LP (Tonga).



The Old Note, which carried a face value of $2 million, had a maturity date of April 2, 2005,
and accrued interest at an annual rate of 5.00%. Accrued interest was not payable in cash but was to be converted into Common Stock upon the Old Notes voluntary conversion date or maturity. We recorded the 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 conversion feature, respectively (derivative features), which were recorded as current liabilities.



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On October 29, 2003, we received a notice of conversion from Tonga for $300,000 in principal of the Old Note. On November
6, 2003, we issued 241,936 shares at a conversion price equal to $1.24, which represented 90% of the average closing bid prices for the three trading days having the lowest closing bid price during the 20 trading days immediately prior to October
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 was exchanged for the shares and a $1.7 million debenture (Second Note) bearing the same terms.
The newly issued shares increased our total common shares outstanding from 823,965 to 1,085,423. Tonga owned 24% of our outstanding shares immediately after the partial conversion. The carrying value of the Second Note was accreted to its face value
as we recorded interest expense over its three-year term at a rate of $28,000 per quarter. The effective rate of interest on the Second Note was 12.5%. The related $336,000 current liability was increased or decreased to reflect the fair value of
the derivative at the end of each quarter.



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



On June 30, 2004, the event
of default was cured when we restructured the Second Note. The restructured $1.7 million senior secured convertible promissory note (the Restructured Note) bore interest at a rate of 5% per annum with such interest accruing beginning on
November 4, 2003. The principal amount of the Restructured Note, together with accrued and unpaid interest, was due and payable 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 of our Common Stock at any time. Tonga waived accrued interest on the Second Note through November 3, 2003, which totaled $134,000. Tonga also waived its rights to assess liquidated damages pursuant to the Second Note,
relinquished its rights under the Warrant and canceled the Warrant.



The
carrying value of the Second Note immediately prior to execution of the Restructured Note was $1.616 million, which reflected the $1.7 million face value less the $84,000 unamortized discount. Additionally, immediately prior to the execution of the
Restructured Note, the fair value of the Warrant totaled approximately $67,000, and the fair value of the conversion feature of the Second Note totaled approximately $62,000. As a result of the extended term of the Restructured Note, the estimated
fair value of the conversion feature increased to approximately $119,000. We recorded the Restructured Note at $1.581 million reflecting a discount for the $119,000 estimated fair value of the conversion feature, which was recorded as a current
liability. This transaction resulted in a net decrease in total liabilities of approximately $179,000. The decrease consisted of $134,000 of waived interest, the $67,000 fair value of the canceled Warrant, and a $35,000 decrease in the carrying
value of the Restructured Note, offset by a $57,000 increase in the fair value of the conversion feature. We recorded the $179,000 decrease in liabilities as a capital contribution pursuant to Staff Accounting Bulletin Topic 1:B.



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The $1.581 million carrying value of the Restructured Note was being accreted to its face value as we recorded interest
expense over its eighteen-month term at a rate of approximately $20,000 per quarter. The effective interest rate of the Restructured Note was 12.14%. On September 7, 2004, our amended Registration Statement on Form S-3/A was declared effective by
the SEC. On that date, the derivative was extinguished and its fair value, consisting of the conversion feature, was revalued and reclassified as a conversion premium (Premium) to be amortized to income over the remaining term of the
Restructured Note. At September 30, 2004, accrued interest on the Restructured Note totaled approximately $78,000, and the carrying value of the unamortized Premium totaled approximately $122,000.



On November 11, 2004, we received a notice of conversion (Conversion) dated
November 10, 2004, from Tonga to convert the outstanding principal of the Restructured Note and the related accrued interest into our Common Stock at the conversion 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 three trading days having the lowest closing bid price during the 20 trading days immediately prior to November 10, 2004. The newly issued shares increased our total common shares outstanding
from 1,104,173 to 2,805,522. Tonga owned 67% of our outstanding shares immediately after the Conversion. According to filings made by Tonga under Section 16 of the Exchange Act, Tonga liquidated its holdings of our Common Stock by November 15, 2004.



On November 10, 2004, the carrying value of the Restructured Note and accrued
interest thereon totaled approximately $1,719,420 ($1.7 million less unamortized discount of $90,857, plus unamortized Premium of $110,277) and $86,417, respectively. The Conversion resulted in a decrease in related party debt consisting of the
carrying value of the Restructured Note and the related accrued interest, totaling $1,805,837, and a corresponding increase in stockholders equity.



We were generally restricted from issuing additional equity securities without Tongas consent, and Tonga had a right of first refusal as to certain subsequent
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 the Old 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 the security interest in all of our assets. Upon Tongas disposal of its holdings of our Common Stock, Tonga relinquished its right
to appoint directors. In December 2004, we appointed two new independent directors in conjunction with the resignation of the three Tonga-appointed directors. As a result, Tonga relinquished control of ASI.



6. Redeemable Preferred Stock



On December 28, 2001, we issued 1.6 million shares of no par value Series A Preferred Stock
(Preferred Stock) with a face value of $3.2 million, pursuant to the extinguishment of a bank credit agreement (Agreement). We recorded this Preferred Stock at a fair market value of $300,000 as described below. In June 2004,
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 redeem the Shares, which, on the redemption dates, were carried at approximately $1,535,000
plus accrued dividends totaling approximately $191,000, resulting in a gain of approximately $1,475,000. The early redemption reduced the number of preferred shares outstanding to 258,900 shares and reduced a mandatory redemption payment, which was
classified as a current liability, from $800,000 to $129,450. We paid this obligation in December 2004 and redeemed 92,465 shares of Preferred Stock at $1.40 per share.



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At December 31, 2004, 166,435 shares of Preferred Stock are outstanding which are redeemable on or before December 28,
2006. Until December 27, 2005, we are entitled to redeem these shares at $1.60 per share, or $266,296. The redemption price increases by $0.20 per year to $1.80 on December 28, 2005 ($299,583), and to $2.00 on December 28, 2006 ($332,870).



The Preferred Stock earns a dividend at the annual rate of 5.00% of the then
applicable redemption price on a cumulative, non-participating basis and has a liquidation preference equal to the then applicable redemption value of shares outstanding at the time of liquidation. Since its issuance, we have accrued but not
declared or paid dividends on the Preferred Stock. Accrued dividends at December 31, 2004, totaled approximately $46,600.



The carrying value for the outstanding Preferred Stock is approximately $210,000 at December 31, 2004. The carrying value represents the estimated fair market value of
the stock on the date of issuance plus issuance costs, adjusted for accretion of the difference between fair market value at the date of issuance and the redemption value at the mandatory redemption dates. The fair market value was based on the
present value of required cash flows using a discount rate of 80%. We selected the discount rate based on discussions with third parties that factored in market conditions for similar securities, the current economic climate and our financial
condition and performance. The accretion of the Preferred Stock is classified as interest expense.



7. Segment Information



We evaluate
operations and make key strategic and resource decisions based on operating results of our individual production centers. Segment data includes revenue, operating income, including allocated costs charged to each of the operating segments, equipment
investment and project investment, which includes net accounts receivables and revenue earned in excess of billings.



We have not allocated interest expense and other non-segment specific expenses to individual segments to determine our performance measure. Non-segment assets to
reconcile to total assets consist of corporate assets including cash, prepaid expenses and deferred taxes.



|                                     |  |                    |       |   |                    |   |                 |  |   |              |   |  |       |       |   |  |   |       |  
|------------------------------------ |  | ------------------ | ----- | - | ------------------ | - | --------------- |  | - | ------------ | - |  | ----- | ----- | - |  | - | ----- | -
|Three months ended December 31, 2004 |  | Utilities Location |       |   | Utilities Location |   | Total Utilities |  |   | Non- Segment |   |  | Total |      
|                                     |  | A                  |       |   | B                  |   |                 |  |   |              |   |  |       |      
|Operations                           |  |                    |       |   |                    |   |                 |  |   |              |   |  |       |       |   |  |   |       |  
|Revenues                             |  | $                  | 760   |   |                    | $ | 1,268           |  | $ | 2,028        |   |  | $     |      |   |  | $ | 2,028 |  
|                                     |  |                    |       |   |                    |   |                 |  |   |              |   |  |       |       |   |  |   |       |  
|Income/(loss) from operations        |  |                    | (531  | ) |                    |   | 69              |  |   | (462         | ) |  |       |      |   |  |   | (462  | )
|Interest expense, net                |  |                    |      |   |                    |   |                |  |   |             |   |  |       | (41   | ) |  |   | (41   | )
|Other                                |  |                    |      |   |                    |   |                |  |   |             |   |  |       | 12    |   |  |   | 12    |  
|                                     |  |                    |       |   |                    |   |                 |  |   |              |   |  |       |       |   |  |   |       |  
|Net loss                             |  |                    |       |   |                    |   |                 |  |   |              |   |  |       |       |   |  | $ | (491  | )
|                                     |  |                    |       |   |                    |   |                 |  |   |              |   |  |       |       |   |  |   |       |  
|Assets at December 31, 2004          |  |                    |       |   |                    |   |                 |  |   |              |   |  |       |       |   |  |   |       |  
|Segment assets                       |  | $                  | 3,440 |   |                    | $ | 1,049           |  | $ | 4,489        |   |  | $     |      |   |  | $ | 4,489 |  
|Non-segment assets                   |  |                    |      |   |                    |   |                |  |   |             |   |  |       | 2,188 |   |  |   | 2,188 |  
|                                     |  |                    |       |   |                    |   |                 |  |   |              |   |  |       |       |   |  |   |       |  
|Consolidated assets                  |  |                    |      |   |                    |   |                |  |   |             |   |  |       |      |   |  | $ | 6,677 |  
|                                     |  |                    |       |   |                    |   |                 |  |   |              |   |  |       |       |   |  |   |       |  



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|                                     |  |                   |        |   |                   |   |                |  |   |              |   |  |       |       |   |  |   |        |  
|------------------------------------ |  | ----------------- | ------ | - | ----------------- | - | -------------- |  | - | ------------ | - |  | ----- | ----- | - |  | - | ------ | -
|Three months ended December 31, 2003 |  | UtilitiesLocation |        |   | UtilitiesLocation |   | TotalUtilities |  |   | Non- Segment |   |  | Total |      
|                                     |  | A                 |        |   | B                 |   |                |  |   |              |   |  |       |      
|Operations                           |  |                   |        |   |                   |   |                |  |   |              |   |  |       |       |   |  |   |        |  
|Revenues                             |  | $                 | 1,408  |   |                   | $ | 1,146          |  | $ | 2,554        |   |  | $     |      |   |  | $ | 2,554  |  
|                                     |  |                   |        |   |                   |   |                |  |   |              |   |  |       |       |   |  |   |        |  
|Income/(loss) from operations        |  |                   | (1,164 | ) |                   |   | 142            |  |   | (1,022       | ) |  |       |      |   |  |   | (1,022 | )
|Interest expense, net                |  |                   |       |   |                   |   |               |  |   |             |   |  |       | (226  | ) |  |   | (226   | )
|Other                                |  |                   |       |   |                   |   |               |  |   |             |   |  |       | (53   | ) |  |   | (53    | )
|                                     |  |                   |        |   |                   |   |                |  |   |              |   |  |       |       |   |  |   |        |  
|Net loss                             |  |                   |        |   |                   |   |                |  |   |              |   |  |       |       |   |  | $ | (1,301 | )
|                                     |  |                   |        |   |                   |   |                |  |   |              |   |  |       |       |   |  |   |        |  
|Assets at September 30, 2004         |  |                   |        |   |                   |   |                |  |   |              |   |  |       |       |   |  |   |        |  
|Segment assets                       |  | $                 | 5,117  |   |                   | $ | 1,123          |  | $ | 6,240        |   |  | $     |      |   |  | $ | 6,240  |  
|Non-segment assets                   |  |                   |       |   |                   |   |               |  |   |             |   |  |       | 1,507 |   |  |   | 1,507  |  
|                                     |  |                   |        |   |                   |   |                |  |   |              |   |  |       |       |   |  |   |        |  
|Consolidated assets                  |  |                   |       |   |                   |   |               |  |   |             |   |  |       |      |   |  | $ | 7,747  |  
|                                     |  |                   |        |   |                   |   |                |  |   |              |   |  |       |       |   |  |   |        |  



8. Litigation



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



Robert Montgomery, a former officer of ASI, filed suit in Hamilton County Superior Court,
State of Indiana, on July 19, 2002, seeking recovery of unpaid commissions pursuant to the Indiana Wage Payment statute. Mr. Montgomery seeks recovery of $67,611 in unpaid commissions, treble damages, costs interest and attorneys fees. We have
responded to the lawsuit and we are vigorously defending this action.



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



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9. Concentration of Credit Risk



At December 31, 2004, we had multiple contracts with four customers, the aggregate of which accounted for 71% of our consolidated revenues
in the three months ending December 31, 2004 (Worldwide Services, Inc, and Intergraph (WWS), 34%; Michigan Consolidated Gas Company (MichCon), 14%; British Telecommunications PLC (BT), 13%; and MWH Americas, Inc.,
10%.) Two of these customers accounted for 87% of our total accounts receivable at December 31, 2004 (WWS, 77% and BT, 10%). Four customers accounted for 67% of our consolidated revenues for the fiscal quarter ended December 31, 2003 (WWS, 8%;
LogicaCMG, 10%; KeySpan Corporate Services LLC (KeySpan), 19% and MichCon, 30%, respectively) of total revenue. Two customers accounted for 69% of total accounts receivable and revenue in excess of billings at September 30, 2004 (WWS,
58% and KeySpan, 11%). Billing terms are negotiated in a competitive environment and are based on reaching project milestones. We anticipate that sufficient billing milestones or contract completion will be achieved during fiscal 2005 such that the
majority of revenue in excess of billings for these customer contracts will be collected.



10. Liquidity



The accompanying
financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. During the fiscal years of 2000 through 2004, and continuing into
fiscal 2005, we have experienced significant operating losses with corresponding reductions in working capital and net worth, excluding the impact of debt forgiveness. We do not currently have any external financing in place to support operating
cash flow requirements. Our revenues and backlog have also decreased substantially during the same period. If we do not have the cash flow necessary to meet our operating and capital requirements, we will be forced to restrict capital and operating
expenditures to match available resources or seek additional financing, which if available, may be available only at unfavorable interest rates, if at all. These factors, among others, raise substantial doubt about our ability to continue as a going
concern.



To address the going concern issue, management implemented financial
and operational restructuring plans designed to improve operating efficiencies, reduce and eliminate cash losses, and position us for profitable operations. Financial steps included the retirement of 84% of our preferred stock for 12% of its
redemption value and accrued dividends, which also reduced future interest expense incurred on the preferred stock. We restructured our convertible debt by issuing the Restructured Note to cure an event of default and reduced the total interest
payable thereon. The conversion of the Restructured Note by Tonga in November 2004 reduced our debt by $1,696,000 eliminated future related interest expense and improved our debt to equity ratio. We have reduced our general and administrative
expenses by reducing occupancy, streamlining our executive, senior and middle management teams.



The financial statements do not include any adjustments relating to the recoverability of assets and the classifications of liabilities that might be necessary should we be unable to continue as a going concern.
However, we believe that our continued turnaround efforts, if successful, will improve operations and generate sufficient cash to meet our obligations in a timely manner.



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##### Table of Contents

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.



THE DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY SET FORTH BELOW SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS FORM 10-Q. THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS FORM 10-Q THAT ARE NOT PURELY HISTORICAL ARE
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. WHEN USED IN THIS FORM 10-Q, OR IN THE DOCUMENTS INCORPORATED BY REFERENCE INTO THIS FORM 10-Q, THE WORDS ANTICIPATE,
BELIEVE, ESTIMATE, INTEND AND EXPECT AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, THE STATEMENTS
REGARDING THE COMPANYS STRATEGY, FUTURE SALES, FUTURE EXPENSES, FUTURE LIQUIDITY AND CAPITAL RESOURCES. ALL FORWARD-LOOKING STATEMENTS IN THIS FORM 10-Q ARE BASED UPON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE OF THIS FORM 10-Q, AND THE
COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANYS ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS FORM 10-Q. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
(CAUTIONARY STATEMENTS) INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN ITEM 1. BUSINESSRISK FACTORS AND ELSEWHERE IN THE COMPANYS ANNUAL REPORT ON FORM 10-K, WHICH ARE INCORPORATED BY REFERENCE HEREIN AND IN
THIS REPORT. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY, OR PERSONS ACTING ON THE COMPANYS BEHALF, ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.



Overview



Founded in 1981, we are a provider of data conversion and digital mapping services to users of customized geographic information systems.



Our independent auditors, Pannell Kerr Forster of Texas, P.C., issued a going
concern qualification on our financial statements for the fiscal year ended September 30, 2004. The going-concern qualification, which expressed substantial doubt about our ability to continue as a going concern, is based on the significant
operating losses reported in fiscal 2004 and 2003, and a lack of external financing. Our former independent auditors, KPMG, LLP, issued a going concern qualification on our financial statements for the fiscal years ended September 30, 2003, 2002,
2001, and 2000, based on the significant operating losses reported in those fiscal years and a lack of external financing to fund working capital and debt requirements.



We experience yearly and quarterly fluctuations in production costs, salaries, wages and related benefits and subcontractor costs. These
costs may vary as a percentage of sales from period to period.



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##### Table of Contents

In September 2004, our five-year exclusive supply agreement with InfoTech Enterprises, Ltd., an India-based company, to
provide production capacity for data conversion and other related services expired. We utilized InfoTech to provide more than 90% of our offshore subcontractor services (this work constitutes less than 10% of our total production costs). We have
continued to utilize InfoTech for offshore conversion capacity but may also engage alternate sources of offshore subcontractor services in India. This may increase our cost of offshore services in the short term as we train a new supplier. We intend
to continue to utilize offshore subcontractors for a large percentage of certain data entry production work in fiscal 2005 to reduce production costs and develop new services.



Backlog increases when new contracts are signed and decreases as revenues are recognized. As of December 31, 2004, our backlog was $5.4
million, $4.2 million of which we expect to earn during the remaining nine months of fiscal 2005. Backlog totaled $6.5 million at September 30, 2004 and $9.7 million at December 31, 2003. We believe backlog levels reflect changes in macroeconomic
and industry market conditions.



We have been awarded several projects that are
greater than $2 million or longer than two years in duration, which can increase our risk due to inflation, as well as changes in schedule, customer expectations and funding availability. Our contracts are generally terminable on short notice, and
while in our experience such termination is rare, there is no assurance that we will receive all of the revenue anticipated under signed contracts.



We engage in research and development activities; however, associated expenses are not significant and represent less than $100,000 per year, or less than 5% of our total
operating expense. The majority of these activities occur as we develop software or design a product for a particular contract. These efforts are typically included as an integral part of our services for the particular project and, accordingly, the
associated costs are charged to that project. Such custom-designed software can often be applied to projects for other customers, since we retain ownership of such proprietary software or products.



We streamlined our operations throughout fiscal year 2003 and 2004, and consolidated our four
main production centers to two solution centers in Texas and Wisconsin. Beginning in 2003 and through fiscal 2004, we reduced the number of corporate and administrative staff by 40%, including a reduction in the number of highly compensated
administrative personnel. We have made several changes to our management team that are designed to strengthen our focus on operations and future strategies. On December 20, 2004, Wayne Fuquay resigned as director and Chief Executive Officer.
Simultaneously, Lori Jones, who has served as our Chief Financial Officer, was appointed Chief Executive Officer. Our controller, Mr. Barry Golko, will serve as Chief Accounting Officer. Consolidation of these executive functions may result in
further reductions to compensation expense in the final nine months of fiscal 2005. We currently employ approximately 100 full-time employees. While we have reduced our legal and professional fees as we settled litigation against the Company and
completed our obligations under the Restructured Note, we anticipate that compliance with the requirements of Sarbanes Oxley will require substantial financial and management resources and result in additional expenses.



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Results of Operations



The following table sets forth, for the periods indicated, selected consolidated statements of operations data expressed as a percentage of sales:



|                                          |  |                               |    |  |       |   
|----------------------------------------- |  | ----------------------------- | -- |  | ----- | --
|                                          |  | Three Months EndedDecember 31 |   
|                                          |  | 2004                          |    |  | 2003  |   
|PERCENTAGE OF REVENUES:                   |  |                               |    |  |       |   
|Revenues                                  |  | 100.0                         | %  |  | 100.0 | % 
|                                          |  |                               |    |  |       |   
|Costs and expenses                        |  |                               |    |  |       |   
|Salaries, wages and related benefits      |  | 76.6                          |    |  | 70.8  |   
|Subcontractor costs                       |  | 18.6                          |    |  | 31.2  |   
|Other general and administrative          |  | 21.5                          |    |  | 33.8  |   
|Depreciation and amortization             |  | 2.7                           |    |  | 3.3   |   
|Severance and related costs               |  | 3.3                           |    |  | 0.9   |   
|                                          |  |                               |    |  |       |   
|Loss from operations                      |  | (22.7                         | )  |  | (40.0 | ) 
|                                          |  |                              
|Other expense, net                        |  | (1.4                          | )  |  | (10.9 | ) 
|                                          |  |                               |    |  |       |   
|Loss before income taxes                  |  | (24.1                         | )  |  | (50.9 | ) 
|Provision for income taxes                |  |                              |    |  |      |   
|                                          |  |                               |    |  |       |   
|Net loss available to common shareholders |  | (24.1                         | )% |  | (50.9 | )%
|                                          |  |                               |    |  |       |   



Three Months Ended December 31,
2004 and 2003



Revenues. We recognize revenues as services are
performed. Our revenues decreased 20.6% for the three months ended December 31, 2004, and totaled $2,028,000 as compared to $2,554,000 for the same period in fiscal 2004, a decrease of approximately $526,000. The decrease in revenues is due to a
lower number of active contracts in the fiscal 2005 quarter. The level of new contract signings in recent fiscal years, including fiscal 2003 and 2004, was lower than in previous years and, as a result, revenues have decreased as well. We believe
this decrease in contract signings is attributable to lower demand for and reduced spending levels for data conversion services both in general and specific to the GIS industry.



Salaries, Wages and Benefits. Salaries, wages and benefits include employee compensation for production, marketing, selling, and
administrative and executive employees. Salaries, wages and related benefits decreased $255,000 for the first quarter of fiscal 2005 as compared to the same quarter in fiscal 2004. The decrease was a result of reductions in our workforce related to
reduced revenue volume, our decision to subcontract a portion of our production work to offshore subcontractors, and our use of domestic subcontractors to manage fluctuating labor needs.



Subcontractor Costs. Subcontractor costs include production costs incurred through the use of third parties for production tasks such
as data conversion services to meet contract requirements, and field survey services. The use of domestic subcontractors enables us to better manage the fluctuations in labor requirements as we complete and begin new projects as well as during the
various phases of contracts. Subcontractor costs decreased 52.5%, or $418,000, for the three months ended December 31, 2004, as compared to the same period ended December 31, 2003, due to the completion of several contracts in fiscal 2004 that have
not been replaced with new contracts.



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Other General and Administrative.Other general and administrative costs include rent, maintenance, travel,
supplies, utilities, insurance and professional services. Such costs decreased $428,000 for the first quarter of fiscal 2005 from the comparable period in fiscal 2004, a decrease of 49.5%. The decrease was a result of the implementation of controls,
the reduced cost related to fewer general and administrative employees, and lower professional fee expenses.



Depreciation and Amortization.Depreciation and amortization decreased $30,000 in the first three months of fiscal 2005 as compared to the fiscal 2004-quarter due to some equipment becoming fully depreciated.
The replacement cost on computer equipment is significantly lower than the replaced items. Additionally, we have extended the life of existing equipment and elected to postpone investment in new equipment. Accordingly, depreciation and amortization
expense has decreased in recent periods.



Severance and Related Costs.
We incurred severance expense of $67,000 for the three-month period ended December 31, 2004, as compared to $22,000 for the fiscal 2004 quarter. The expense in the fiscal 2005 quarter was incurred as a result of the termination of our Chief
Executive Officers employment contract that provided for payment of the contract through March 21, 2005.



Interest Expense, Net. We incurred interest expense totaling $41,000 in the quarter ending December 31, 2004 as compared to $226,000 in the quarter ending December 31, 2003. The decrease, which totaled
$185,000, was a result of the lower levels of debt outstanding during the quarter ending December 31, 2004, effected by the conversion of the Restructured Note on November 10, 2004 and the early redemption of our Preferred Stock in June 2004. See
Notes 5 and 6 to the Consolidated Financial Statements.



Other Income
(Expense).Other income or expense is principally a result of the change in fair value of the derivative features of the Second Note or Restructured Note, and subsequent to the reclassification of the derivative features, amortization of the
Premium on the Restructured Note. The Premium was amortized to other income until the Conversion date and the unamortized balance was reclassified to stockholders equity upon Conversion of the Restructured Note on November 10, 2004.
Accordingly, we recorded other income totaling $12,000 for the three-month period ended December 31, 2004. The fair value of the derivative features totaled $260,000 and $207,000 on December 31, 2003 and September 30, 2003, respectively.
Accordingly, we recorded other expense totaling $53,000 for the three-month period ended December 31, 2003.



Income Taxes. Federal income tax expense for fiscal year 2005 is projected to be zero. Accordingly, an effective federal income tax rate of 0% was recorded for the three months ended December 31, 2004. As a
result of the uncertainty that sufficient future taxable income can be recognized to realize additional deferred tax assets, no income tax benefit has been recognized for the three months ended December 31, 2004 and 2003.



Net Loss.We recorded a net loss of $491,000 in the first quarter of fiscal 2005 as
compared to a net loss of $1.3 million in the same quarter of fiscal 2004. The variance was principally due to lower salaries, wages, and benefits, subcontractor costs, general and administrative expenses, lower interest expense, and fluctuations in
other income and expense.



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Liquidity and Capital Resources



Table of Contractual Obligations. Below is a schedule (by period due) of the future payments which we are obligated to make over the
next five years based on agreements in place as December 31, 2004.



|                           |  |                                 |     |      |   |      |     |      |   |      |   |       |   |    
|-------------------------- |  | ------------------------------- | --- | ---- | - | ---- | --- | ---- | - | ---- | - | ----- | - | ---
|                           |  | Fiscal Year Ending September 30
|                           |  | 2005                            |     | 2006 |   | 2007 |     | 2008 |   | 2009 |   | Total
|Operating leases           |  | $                               | 104 |      |  |      |    |      |  |      |  |       | $ | 104
|Debt                       |  |                                 | 33  |      |  |      |    |      |  |      |  |       |   | 33 
|Preferred stock redemption |  |                                 |    |      |  |      | 300 |      |  |      |  |       |   | 300
|                           |  |                                 |     |      |   |      |     |      |   |      |   |       |   |    
|Total                      |  | $                               | 137 |      |  |      | 300 |      |  |      |  |       | $ | 437
|                           |  |                                 |     |      |   |      |     |      |   |      |   |       |   |    



Historically, the principal source of
our liquidity consisted of cash flow from operations supplemented by secured lines-of-credit and other borrowings. At December 31, 2004, related contractual obligations included redeemable preferred stock with a redemption value of approximately
$267,000 and other miscellaneous borrowings. We do not have a line of credit and there is no assurance that we will be able to obtain additional borrowings should we seek to do so.



Our debt is summarized as follows.



|                                              |  |                   |     |   |                   |   |       |  
|--------------------------------------------- |  | ----------------- | --- | - | ----------------- | - | ----- | -
|                                              |  | December 31, 2004 |     |   | September 30,2004 |  
|Long-Term Debt                                |  |                   |     |   |                   |   |       |  
|Senior secured convertible noterelated party |  | $                 |    |   |                   | $ | 1,601 |  
|Other                                         |  |                   | 33  |   |                   |   | 53    |  
|Redeemable preferred stock                    |  |                   | 210 |   |                   |   | 319   |  
|                                              |  |                   |     |   |                   |   |       |  
|                                              |  |                   | 243 |   |                   |   | 1,973 |  
|Less current portion                          |  |                   | (33 | ) |                   |   | (182  | )
|                                              |  |                   |     |   |                   |   |       |  
|                                              |  | $                 | 210 |   |                   | $ | 1,791 |  
|                                              |  |                   |     |   |                   |   |       |  



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



On October 29, 2003, we received a notice of conversion from Tonga for $300,000 in principal
of the Old Note. On November 6, 2003, we issued 241,936 shares at a conversion price equal to $1.24, which represented 90% of the average closing bid prices for the three trading days having the lowest closing bid price during the 20 trading days
immediately prior to October 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 was exchanged for the shares and a $1.7 million debenture (Second
Note) bearing the same terms. The newly issued shares increased our total common shares outstanding from 823,965 to 1,085,423. Tonga owned 24% of our outstanding shares immediately after the partial conversion.



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



On June 30, 2004, the event of default was cured when we restructured the Second Note. The
restructured $1.7 million senior secured convertible promissory note (the Restructured Note) bore interest at a rate of 5% per annum with such interest accruing beginning on November 4, 2003. The principal amount of the Restructured
Note, together with accrued and unpaid interest, was due and payable 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 of our Common Stock at any
time. Tonga waived accrued interest on the Second Note through November 3, 2003, which totaled $134,000. Tonga also waived its rights to assess liquidated damages pursuant to the Second Note, relinquished its rights under the Warrant and canceled
the Warrant.



The $1.581 million carrying value of the Restructured Note was
being accreted to its face value as we recorded interest expense over its eighteen-month term at a rate of approximately $20,000 per quarter. The effective interest rate of the Restructured Note was 12.14%. On September 7, 2004, our amended
Registration Statement on Form S-3/A was declared effective by the SEC. On that date, the derivative was extinguished and its fair value, consisting of the conversion feature, was revalued and reclassified as a conversion premium
(Premium) to be amortized to income over the remaining term of the Restructured Note. At September 30, 2004, accrued interest on the Restructured Note totaled approximately $78,000, and the carrying value of the unamortized Premium
totaled approximately $122,000.



On November 11, 2004, we received a notice of
conversion (Conversion) dated November 10, 2004, from Tonga to convert the outstanding principal of the Restructured Note and the related accrued interest into our Common Stock at the conversion 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 three trading days having the lowest closing bid price during the 20 trading days immediately prior to November 10, 2004. The newly issued shares
increased our total common shares outstanding from 1,104,173 to 2,805,522. Tonga owned 67% of our outstanding shares immediately after the Conversion. According to filings made by Tonga under Section 16 of the Exchange Act, Tonga liquidated its
holdings of our Common Stock by November 15, 2004.



On November 10, 2004, the
carrying value of the Restructured Note and accrued interest thereon totaled approximately $1,719,420 ($1.7 million less unamortized discount of $90,857, plus unamortized Premium of $110,277) and $86,417, respectively. The Conversion resulted in a
decrease in related party debt consisting of the carrying value of the Restructured Note and the related accrued interest, totaling $1,805,837, and a corresponding increase in stockholders equity.



We were generally restricted from issuing additional equity securities without Tongas
consent, and Tonga had a right of first refusal as to certain subsequent 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 the Old 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



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Note released the security interest in all of our assets. Upon Tongas disposal of its holdings of our Common Stock, Tonga relinquished its right to
appoint directors. In December 2004, we appointed two new independent directors in conjunction with the resignation of the three Tonga-appointed directors. As a result, Tonga relinquished control of ASI.



At September 30, 2004, 258,900 shares of Preferred Stock were outstanding and which are
redeemable on or before December 28, 2006. In December 2004, we redeemed 92,465 shares pursuant to the terms of the Preferred Stock, which provided for a mandatory redemption payment on December 28, 2004. We paid the holder of the Preferred Stock
$129,450 and redeemed the shares at $1.40 per share. The redemption price increases by $0.20 per year to $1.80 on December 28, 2005 ($299,583), and to $2.00 on December 28, 2006 ($332,870).



The Preferred Stock earns a dividend at the annual rate of 5.00% of the then applicable
redemption price on a cumulative, non-participating basis and has a liquidation preference equal to the then applicable redemption value of shares outstanding at the time of liquidation. Since its issuance, we have accrued but not declared or paid
dividends on the Preferred Stock. Accrued dividends at December 31, 2004, totaled approximately $46,600.



The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Since fiscal 2000,
we have experienced significant operating losses with corresponding reductions in working capital. Our revenues and backlog decreased significantly during that time. These factors, among others, have resulted in our independent auditors issuing an
audit opinion on the September 30, 2004, financial statements that expressed substantial doubt about our ability to continue as a going concern.



To address the going concern issue, management implemented financial and operational restructuring plans designed to improve operating efficiencies, reduce and eliminate
cash losses, and position us for profitable operations. Financial steps included restructuring our bank debt through the issuance of preferred stock and convertible debt, subsequent collection of the federal income tax refund and sale of non-core
assets. Operational steps included the consolidation of production services to two solution centers, reduction of corporate and non-core spending activities, outsourcing certain components of projects, and streamlining our sales and marketing team.
In fiscal 2004, we retired 84% of our preferred stock for 12% of its redemption value and accrued dividends. We also restructured our convertible debt by issuing the Restructured Note to cure an event of default and reduced the total interest
payable thereon. Tongas conversion of the Restructured Note in November 2004 eliminated liabilities totaling approximately $1,806,000. We will further reduce our occupancy expenses in fiscal 2005 when the lease on our corporate headquarters
expires and we are able to relocate to more efficient and appropriate facilities.



The financial statements do not include any adjustments relating to the recoverability of assets and the classifications of liabilities that might be necessary should we be unable to continue as a going concern. However, we believe that our
turnaround efforts, if successful, will improve operations and generate sufficient cash to meet our obligations in a timely manner.



In the absence of a line of credit and because of our inability to secure debt on terms that would be considered reasonable based on our recent operating history, we
depend on internal cash flow to



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sustain operations. Internal cash flow is significantly affected by customer contract terms and progress achieved on projects. Fluctuations in internal cash
flow are reflected in three contract-related accounts: accounts receivable; revenues in excess of billings; and billings in excess of revenues. Under the percentage of completion method of accounting:



| |  |  | Accounts receivable is created when an amount becomes due from a customer, which typically occurs when an event specified in the contract triggers a billing.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Revenues in excess of billings occur when we have performed under a contract even though a billing event has not been triggered.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | Billings in excess of revenues (unearned revenues) occur when we receive an advance or deposit against work yet to be performed.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



These accounts, which represent a significant investment by us in our business, affect our
cash flow as projects are signed, performed, billed and collected. At December 31, 2004, we had multiple contracts with four customers, the aggregate of which accounted for 71% of our consolidated revenues in the three months ending December 31,
2004 (Worldwide Services, Inc, and Intergraph (WWS), 34%; Michigan Consolidated Gas Company (MichCon), 14%; British Telecommunications PLC (BT), 13%; and MWH Americas, Inc., 10%.) Two of these customers accounted
for 87% of our total accounts receivable at December 31, 2004 (WWS, 77% and BT, 10%). Four customers accounted for 67% of our consolidated revenues for the fiscal quarter ended December 31, 2003 (WWS, 8%; LogicaCMG, 10%; KeySpan Corporate Services
LLC (KeySpan), 19% and MichCon, 30%). Two customers accounted for 69% of total accounts receivable and revenue in excess of billings at September 30, 2004 (WWS, 58% and KeySpan, 11%). Billing terms are negotiated in a competitive
environment and, as stated above, are based on reaching project milestones. We anticipate that sufficient billing milestones will be achieved during fiscal 2005 such that revenue in excess of billings for these customer contracts will begin to
decline.



In order to meet our short-term cash requirements we must collect
more cash from our customers than we pay to our employees and suppliers. To meet our long-term cash requirements, we must complete certain projects in fiscal 2005 and 2006 that are related to the balance of revenues earned in excess of billings at
December 31, 2004, in order to generate sufficient cash flow to fund operations and expenditures and to meet our debt requirements. We anticipate that the successful completion of these projects will reduce the balance of unearned revenue and
generate cash sufficient to meet both our short-term and long-term debt obligations. We expect that we will be able to complete a majority of these contracts by September 30, 2005, but there can be no assurance that market conditions or other
factors may prevent us from doing so or that the cash generated will be equal to the amount that we currently anticipate. If we are unable to complete the contracts and generate cash by earning and collecting our unearned revenues, we will be forced
to obtain additional financing and/or restrict capital and operating expenditures to match available resources. If these actions are not sufficient, and we are not able to meet our commitments when due, then we will be forced to liquidate assets and
repay our secured creditors with the proceeds.



Our operating activities
provided $830,000 and $102,000 cash during the three months ended December 31, 2004 and 2003, respectively. Contract-related accounts declined $1.7 million and $1.5 million during the respective periods. We reduced our accounts payable and accrued
expense liabilities by $486,000 and $263,000 during the three months ended December 31, 2004 and 2003, respectively.



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We purchased equipment and leasehold improvements totaling $5,000 and $3,000, during the three months ended December 31,
2004 and 2003. We paid $129,450 in accordance with the mandatory redemption terms of our preferred stock and redeemed 92,465 shares in December 2004.



Item 3. Quantitative and Qualitative Disclosures About Market Risk.



We may from time to time employ risk management techniques such as interest rate swaps and foreign currency hedging transactions. None of these techniques are used for speculative or trading purposes and the amounts
involved are not considered material. We did not utilize any such techniques during the current reporting period, but may employ such techniques in future periods.



Item 4. Controls and Procedures



As of the end of
the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Accounting Officer, of the effectiveness of our disclosure controls
and procedures (as defined in rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based upon that evaluation, the Chief Executive Officer and Chief Accounting Officer have concluded that
the disclosure controls and procedures are effective alerting them on a timely basis to material information relating to the Company (including our consolidated subsidiaries) that is required to be included in our periodic filings under the Exchange
Act.



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



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Part II

Other Information



Item 1. Legal Proceedings.



Information regarding
our legal proceedings can be found under Note 8, Litigation, to the Consolidated Financial Statements.



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



None.



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 and Reports on Form 8-K.



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



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SIGNATURES



Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                        |  |  |  |                         
|----------------------- |  |  |  | ------------------------
|                        |  |  |  | Analytical Surveys, Inc.
|                        |  |  |  | (Registrant)            
|                        |  | 
|Date: February 14, 2005 |  |  |  | /s/ Lori A. Jones       
|                        |  |  |  | Lori A. Jones           
|                        |  |  |  | Chief Executive Officer 
|                        |  | 
|Date: February 14, 2005 |  |  |  | /s/ Barry Golko         
|                        |  |  |  | Barry Golko             
|                        |  |  |  | Chief Accounting Officer



25