**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**WASHINGTON,D.C.   20549

**FORM 10-QSB**

| **x**                                             | **QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------|-----------------------------------------------------------------------------------------------|
| ** **                                        | ** **                                                                                    |
| **For the  quarterly period ended June 30, 2006** |
| ** **                                        | ** **                                                                                    |
| **or**                                            |
| ** **                                        | ** **                                                                                    |
| **o**                                             | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

** **

**COMMISSION FILE NUMBER 0-13111**

**ANALYTICAL SURVEYS, INC.**(Exactname of registrant as specified in its charter)

 

| **Colorado**                                                    |   | ** ** |   | **84-0846389**                 |
|-----------------------------------------------------------------|--------|------------|--------|--------------------------------|
| (*State or other jurisdiction of*                               |   |       |   | (*IRS Employer*                |
| * incorporation or organization*)                          |   |       |   | * Identification Number*) |
|                                                            |
| **9725  DATAPOINT DRIVE, SUITE 300B, SAN ANTONIO, TEXAS 78229** |
| (*Address of principal executive offices*)                      |
|                                                            |
| **(210)  657-1500**                                             |
| (*Registrant’s telephone number, including area  code*)    |

 

INDICATEBY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TOBE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934 DURING THE PAST TWELVE (12) MONTHS (OR FOR SUCH SHORTER PERIOD THATTHE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEENSUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST NINETY (90) DAYS.   YES x   NO o

INDICATE BY CHECK MARKWHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE 12b-2 OFTHE EXCHANGE ACT).  YES o   NO x

THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OFJULY 31, 2006, WAS 3,779,256.

 

----

**TABLE OF CONTENTS**
|            | ** ** | ** **                                                      | ** ** | **PAGE** | ** ** |
|------------|------------|-----------------------------------------------------------------|------------|----------|------------|
|       |       |                                                            |       |     |       |
| PART  I.   |       | FINANCIAL  INFORMATION                                          |       |     |       |
|       |       |                                                            |       |     |       |
| Item  1.   |       | Financial  Statements                                           |       | 3        |       |
|       |       |                                                            |       |     |       |
| Item 2.    |       | Management’s Discussion and Analysis or Plan of Operations |       | 18       |       |
|       |       |                                                            |       |     |       |
| Item 3.    |       | Controls and Procedures                                         |       | 30       |       |
|       |       |                                                            |       |     |       |
| PART  II.  |       | OTHER  INFORMATION                                              |       | 32       |       |
|       |       |                                                            |       |     |       |
| Item  1.   |       | Legal  Proceedings                                              |       | 32       |       |
|       |       |                                                            |       |     |       |
| Item 2.    |       | Unregistered Sales of Securities and Use of Proceeds            |       | 32       |       |
|       |       |                                                            |       |     |       |
| Item 3.    |       | Defaults Upon Senior Securities                                 |       | 33       |       |
|       |       |                                                            |       |     |       |
| Item 4.    |       | Submissions of Matters to a Vote of Security Holders            |       | 33       |       |
|       |       |                                                            |       |     |       |
| Item  5.   |       | Other  Information                                              |       | 33       |       |
|       |       |                                                            |       |     |       |
| Item 6.    |       | Exhibits                                                        |       | 33       |       |
|       |       |                                                            |       |     |       |
| SIGNATURES |       | 34                                                              |       |

 

2

----

**Part IFinancial Information**

**Item 1. Financial Statements**

**ANALYTICAL SURVEYS, INC.CONSOLIDATED BALANCE SHEETS(In thousands)**
| ** **                                                                                                                                                          | ** ** | **June 30,  2006** | ** ** | **September 30,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                                          | ** ** | **(Unaudited)**         | ** ** | ** **                   | ** ** |
| **Assets**                                                                                                                                                          |       |                    |       |                         |       |
| ** **                                                                                                                                                          |       |                    |       |                         |       |
| Current assets:                                                                                                                                                     |       |                    |       |                         |       |
| Cash and cash equivalents                                                                                                                                           |       | $                       | 810        |                         | $          | 622 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $50 at June 30, 2006 and September 30, 2005                                                         |       | 1,572                   |       | 1,529                        |       |
| Revenue earned in excess of billings                                                                                                                                |       | 622                     |       | 1,612                        |       |
| Prepaid expenses and other                                                                                                                                          |       | 208                     |       | 81                           |       |
| Total current assets                                                                                                                                                |       | 3,212                   |       | 3,844                        |       |
|                                                                                                                                                                |       |                    |       |                         |       |
| Oil and natural  gas properties and equipment                                                                                                                       |       | 2,026                   |       | —                       |       |
| Equipment and leasehold  improvements, at cost:                                                                                                                     |       |                    |       |                         |       |
| Equipment                                                                                                                                                           |       | 3,920                   |       | 3,979                        |       |
| Furniture and fixtures                                                                                                                                              |       | 363                     |       | 363                          |       |
| Leasehold improvements                                                                                                                                              |       | 75                      |       | 75                           |       |
|                                                                                                                                                                |       | 4,358                   |       | 4,417                        |       |
| Less accumulated depreciation and amortization                                                                                                                      |       | (4,232                  | )          | (4,249                       | )          |
| Net equipment and leasehold improvements                                                                                                                            |       | 126                     |       | 168                          |       |
| Other  non-current assets                                                                                                                                           |       | 125                     |       | —                       |       |
| Total assets                                                                                                                                                        |       | $                       | 5,489      |                         | $          | 4,012 |   |
|                                                                                                                                                                |       |                    |       |                         |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                      |       |                    |       |                         |       |
| ** **                                                                                                                                                          |       |                    |       |                         |       |
| Current liabilities:                                                                                                                                                |       |                    |       |                         |       |
| Current portion of long-term debt and capital lease  obligations                                                                                                    |       | $                       | 21         |                         | $          | 17 |   |
| Billings in excess of revenue earned                                                                                                                                |       | 218                     |       | 425                          |       |
| Accounts payable                                                                                                                                                    |       | 118                     |       | 289                          |       |
| Interest payable                                                                                                                                                    |       | 23                      |       | —                       |       |
| Accrued liabilities                                                                                                                                                 |       | 64                      |       | 688                          |       |
| Accrued payroll and related benefits                                                                                                                                |       | 320                     |       | 687                          |       |
| Total current liabilities                                                                                                                                           |       | 764                     |       | 2,106                        |       |
|                                                                                                                                                                |       |                    |       |                         |       |
| Long-term debt:                                                                                                                                                     |       |                    |       |                         |       |
| Capital lease obligations, less current portion                                                                                                                     |       | 23                      |       | 30                           |       |
| Senior secured note payable, net of discount                                                                                                                        |       | 1,923                   |       | —                       |       |
| Redeemable preferred stock, no par value; authorized  2,500 shares; 166 shares issued and outstanding at September 30, 2005  (liquidation value $266)               |       | —                  |       | 247                          |       |
| Total long-term liabilities                                                                                                                                         |       | 1,946                   |       | 277                          |       |
| Total liabilities                                                                                                                                                   |       | 2,710                   |       | 2,383                        |       |
| Commitments and  contingencies                                                                                                                                      |       | —                  |       | —                       |       |
|                                                                                                                                                                |       |                    |       |                         |       |
| Stockholders’ equity:                                                                                                                                          |       |                    |       |                         |       |
| Convertible preferred stock, no par value:  authorized 2,500 shares; 280 and 0 shares issued and outstanding at June 30,  2006 and September 30, 2005, respectively |       | 261                     |       | —                       |       |
| Common stock, no par value; authorized 100,000  shares; 3,779 and 2,869 shares issued and outstanding at June 30, 2006 and  September 30, 2005, respectively        |       | 36,345                  |       | 35,312                       |       |
| Accumulated deficit                                                                                                                                                 |       | (33,827                 | )          | (33,683                      | )          |
| Total stockholders’ equity                                                                                                                                     |       | 2,779                   |       | 1,629                        |       |
| Total liabilities and  stockholders’ equity                                                                                                                    |       | $                       | 5,489      |                         | $          | 4,012 |   |

 

Seeaccompanying notes to consolidated financial statements.

3

----

**ANALYTICAL SURVEYS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS****(****In thousands, except per shareamounts)(Unaudited**)
| ** **                                                                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                          | ** ** | **June 30**                 | ** ** | **June 30**                | ** ** |
| ** **                                                                          | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues                                                                            |       | $                                | 1,049      |                            | $          | 1,363 |   | $ | 3,792 |   | $ | 4,935 |   |
|                                                                                |       |                             |       |                            |       |   |   |   |   |
| Costs and expenses:                                                                 |       |                             |       |                            |       |   |   |   |   |
| Salaries, wages and benefits                                                        |       | 748                              |       | 1,206                           |       | 2,405 |   | 4,054 |   |
| Subcontractor costs                                                                 |       | 43                               |       | 395                             |       | 457 |   | 1,206 |   |
| General and administrative                                                          |       | 285                              |       | 506                             |       | 955 |   | 1,325 |   |
| Depreciation and amortization                                                       |       | 15                               |       | 39                              |       | 52 |   | 142 |   |
| Severance and related costs                                                         |       | —                           |       | —                          |       | — |   | 67 |   |
| Total operating costs                                                               |       | 1,091                            |       | 2,146                           |       | 3,869 |   | 6,794 |   |
| Loss from operations                                                                |       | (42                              | )          | (783                            | )          | (77 | ) | (1,859 | ) |
|                                                                                |       |                             |       |                            |       |   |   |   |   |
| Other income (expense):                                                             |       |                             |       |                            |       |   |   |   |   |
| Interest expense, net                                                               |       | (23                              | )          | (12                             | )          | (78 | ) | (64 | ) |
| Gain on extinguishment of debt                                                      |       | —                           |       | —                          |       | 61 |   | — |   |
| Other income (expense), net                                                         |       | (11                              | )          | —                          |       | (7 | ) | (41 | ) |
| Total other income (expense)                                                        |       | (34                              | )          | (12                             | )          | (24 | ) | (105 | ) |
| Loss before income taxes                                                            |       | (76                              | )          | (795                            | )          | (101 | ) | (1,964 | ) |
| Provision for  income taxes                                                         |       | —                           |       | —                          |       | — |   | — |   |
| Net loss                                                                            |       | (76                              | )          | (795                            | )          | (101 | ) | (1,964 | ) |
| Deemed dividend  associated with beneficial conversion feature of   preferred stock |       | —                           |       | —                          |       | (30 | ) | — |   |
| Dividends on  preferred stock                                                       |       | (6                               | )          | —                          |       | (13 | ) | — |   |
| Net loss available to common stockholders                                           |       | $                                | (82        | )                               | $          | (795 | ) | $ | (144 | ) | $ | (1,964 | ) |
|                                                                                |       |                             |       |                            |       |   |   |   |   |
| Basic net loss  per common share                                                    |       | $                                | (0.02      | )                               | $          | (0.28 | ) | $ | (0.03 | ) | $ | (0.76 | ) |
| Preferred stock  dividends                                                          |       | —                           |       | —                          |       | (0.01 | ) | — |   |
| Basic net loss  per common share available to   common stockholders                 |       | $                                | (0.02      | )                               | $          | (0.28 | ) | $ | (0.04 | ) | $ | (0.76 | ) |
|                                                                                |       |                             |       |                            |       |   |   |   |   |
| Diluted net loss  per common share                                                  |       | $                                | (0.02      | )                               | $          | (0.28 | ) | $ | (0.03 | ) | $ | (0.76 | ) |
| Preferred stock  dividends                                                          |       | —                           |       | —                          |       | (0.01 | ) | — |   |
| Diluted net loss  per common share available to   common stockholders               |       | $                                | (0.02      | )                               | $          | (0.28 | ) | $ | (0.04 | ) | $ | (0.76 | ) |
|                                                                                |       |                             |       |                            |       |   |   |   |   |
| Weighted average common  shares:                                                    |       |                             |       |                            |       |   |   |   |   |
| Basic                                                                               |       | 3,724                            |       | 2,869                           |       | 3,250 |   | 2,568 |   |
| Diluted                                                                             |       | 3,724                            |       | 2,869                           |       | 3,250 |   | 2,568 |   |

 

Seeaccompanying notes to consolidated financial statements.

4

----

**ANALYTICAL SURVEYS, INC.CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITYFor the Nine Months Ended June 30, 2006(In thousands)(Unaudited)**
| ** **                                                                                                         | ** ** | **Convertible  Preferred Stock** | ** ** | **Common Stock** | ** ** | **Accumulated** | ** ** | **Total  Stockholders’** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------|------------|-----------------|------------|-------------------------------|------------|
| ** **                                                                                                         | ** ** | **Shares**                            | ** ** | **Amount**            | ** ** | **Shares**      | ** ** | **Amount**                    | ** ** | **Deficit** | ** ** | **Equity** | ** ** |
| Balances at  September 30, 2005                                                                                    |       | —                                |       | $                     | —     |            | 2,869      |                          | $          | 35,312 |   | $ | (33,683 | ) | $ | 1,629 |   |
| Common stock  issued in exchange for redeemable preferred stock                                                    |       | —                                |       | —                |       | 318             |       | 300                           |       | — |   | 300 |   |
| Common stock  issued pursuant to consulting agreement for equity transactions, net of  issuance costs of $88       |       | —                                |       | —                |       | 75              |       | —                        |       | — |   | — |   |
| Common stock  issued for legal services rendered, net of issuance costs of $15                                     |       | —                                |       | —                |       | 10              |       | —                        |       | — |   | — |   |
| Common stock  issued for the purchase of equipment and oil and gas working interests, net  of issuance costs of $9 |       | —                                |       | —                |       | 129             |       | 191                           |       | — |   | 191 |   |
| Issuance of  convertible preferred stock and warrants, net of issuance costs of $60                                |       | 760                                   |       | 678                   |       | —          |       | 22                            |       | — |   | 700 |   |
| Issuance of  Class E warrants, net of issuance costs of $7                                                         |       | —                                |       | —                |       | —          |       | 73                            |       | — |   | 73 |   |
| Common stock  issued for the conversion of preferred stock                                                         |       | (480                                  | )          | (447                  | )          | 378             |       | 447                           |       | — |   | — |   |
| Deemed dividend  associated with beneficial conversion feature of preferred stock                                  |       | —                                |       | 30                    |       | —          |       | —                        |       | (30 | ) | — |   |
| Dividends on  convertible preferred stock                                                                          |       | —                                |       | —                |       | —          |       | —                        |       | (13 | ) | (13 | ) |
| Net loss                                                                                                           |       | —                                |       | —                |       | —          |       | —                        |       | (101 | ) | (101 | ) |
| Balances at June  30, 2006                                                                                         |       | 280                                   |       | $                     | 261        |            | 3,779      |                          | $          | 36,345 |   | $ | (33,827 | ) | $ | 2,779 |   |

 

See accompanying notes to consolidated financialstatements.

5

----

**ANALYTICALSURVEYS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)(Unaudited)**
| ** **                                                                                 | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                 | ** ** | **June 30**                | ** ** |
| ** **                                                                                 | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| Cash flows from operating activities:                                                      |       |                            |       |   |   |
| Net loss                                                                                   |       | $                               | (101       | ) | $ | (1,964 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                            |       |   |   |
| Depreciation and  amortization                                                             |       | 52                              |       | 142 |   |
| Issuance of  inducement stock options                                                      |       | —                          |       | 22 |   |
| Accretion of  interest expense on redeemable preferred stock                               |       | 52                              |       | 44 |   |
| Accretion of  interest expense on convertible debt — related party                    |       | —                          |       | 9 |   |
| Accretion of  interest expense on convertible debt                                         |       | 3                               |       | — |   |
| Amortization of  deferred loan costs                                                       |       | 10                              |       | — |   |
| Gain on  extinguishment of debt                                                            |       | (61                             | )          | — |   |
| Change in  carrying value of premium on convertible debt — related party              |       | —                          |       | (12 | ) |
| Loss (gain) on  disposal of assets                                                         |       | (3                              | )          | 53 |   |
| Changes in operating  assets and liabilities:                                              |       |                            |       |   |   |
| Accounts  receivable                                                                       |       | (43                             | )          | 2,199 |   |
| Revenue earned  in excess of billings                                                      |       | 990                             |       | 548 |   |
| Prepaid expenses  and other                                                                |       | (13                             | )          | 108 |   |
| Billings in  excess of revenue earned                                                      |       | (207                            | )          | (92 | ) |
| Accounts payable  and other accrued liabilities                                            |       | (719                            | )          | (755 | ) |
| Accrued payroll  and related benefits                                                      |       | (367                            | )          | (197 | ) |
| Net cash  provided by (used in) operating activities                                       |       | (407                            | )          | 105 |   |
|                                                                                       |       |                            |       |   |   |
| Cash flows from investing activities:                                                      |       |                            |       |   |   |
| Purchase of  equipment and leasehold improvements                                          |       | (11                             | )          | (81 | ) |
| Investment in  oil and gas properties                                                      |       | (1,826                          | )          | — |   |
| Proceeds from  sale of assets                                                              |       | 4                               |       | — |   |
| Net cash used in  investing activities                                                     |       | (1,833                          | )          | (81 | ) |
|                                                                                       |       |                            |       |   |   |
| Cash flows from financing activities:                                                      |       |                            |       |   |   |
| Principal  payments on long-term debt                                                      |       | (7                              | )          | (53 | ) |
| Issuance of  convertible preferred stock and warrants                                      |       | 760                             |       | — |   |
| Issuance of  convertible note, net of expenses                                             |       | 1,751                           |       | — |   |
| Redemption of  redeemable preferred stock                                                  |       | —                          |       | (129 | ) |
| Fees associated  with issuance of common and preferred stock                               |       | (76                             | )          | (18 | ) |
| Proceeds from  common stock issued pursuant to exercise of options                         |       | —                          |       | 92 |   |
| Net cash  provided by (used in) financing activities                                       |       | 2,428                           |       | (108 | ) |
| Net increase  (decrease) in cash                                                           |       | 188                             |       | (84 | ) |
| Cash and cash  equivalents at beginning of period                                          |       | 622                             |       | 867 |   |
| Cash and cash  equivalents at end of period                                                |       | $                               | 810        |   | $ | 783 |   |
|                                                                                       |       |                            |       |   |   |
| Supplemental disclosures of cash flow information:                                         |       |                            |       |   |   |
| Cash paid for  interest                                                                    |       | $                               | —     |   | $ | 2 |   |
| Equipment  acquired under capital leases                                                   |       | $                               | 11         |   | $ | — |   |
|                                                                                       |       |                            |       |   |   |
| Non-cash financing activities:                                                             |       |                            |       |   |   |
| Issuance of  common stock in exchange for redeemable preferred stock                       |       | $                               | 300        |   | $ | — |   |
| Issuance of  common stock in exchange for convertible preferred stock                      |       | $                               | 447        |   | $ | — |   |
| Issuance of  common stock for equipment and services                                       |       | $                               | 200        |   | $ | — |   |
| Issuance of  common stock for stock issuance costs                                         |       | $                               | 103        |   | $ | — |   |
| Issuance of  common stock pursuant to conversion of debt — related party              |       | $                               | —     |   | $ | 1,806 |   |
| Accretion of  interest on preferred stock                                                  |       | $                               | 16         |   | $ | 44 |   |
| Deemed dividend  associated with beneficial conversion feature of preferred stock          |       | $                               | 30         |   | $ | — |   |
| Accrual of  dividends on preferred stock                                                   |       | $                               | 13         |   | $ | — |   |

 

Seeaccompanying notes to consolidated financial statements.

6

----

**ANALYTICAL SURVEYS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSJune 30, 2006(Unaudited)**

**1. Summary ofSignificant Accounting Policies**

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

The accompanying consolidated financial statementshave been prepared on a going concern basis, which contemplates the realizationof assets and the satisfaction of liabilities in the normal course of business.During the fiscal years of 2000 through 2005, and continuing into fiscal 2006,we have experienced significant operating losses with corresponding reductionsin working capital and stockholders’ equity, excluding the impact of debtforgiveness.  We do not currently haveany external financing in place to support operating cash flow requirements.Our revenues and backlog have also decreased substantially during the sameperiod.  If we do not have the cash flownecessary to meet our operating and capital requirements, we will be forced torestrict capital and operating expenditures to match available resources or seekadditional financing, which if available, May be available only atunfavorable interest rates, if at all.  These factors, among others, raisesubstantial doubt about our ability to continue as a going concern.

To address the going concernissue, management implemented financial and operational restructuring plansdesigned to improve operating efficiencies, reduce and eliminate cash losses,and position us for profitable operations. The conversion of our senior secured convertible note into shares of ourcommon stock (“Common Stock”) in November 2004 reduced our debt by$1,696,000, eliminated future related interest expense and improved our debt toequity ratio.  During February 2006,we retired principally all of our debt when we issued 318,000 shares of CommonStock in exchange for all outstanding shares of our Series A RedeemablePreferred Stock (“Preferred Stock”), and the holders relinquished their rightsto the dividends accrued thereon, eliminating the need to reserve cash to meetthis obligation.  We have reduced ourgeneral and administrative expenses by reducing occupancy costs andstreamlining our executive, senior and middle management teams.  Ongoing viability as a business compels us toact swiftly and decisively regarding new business pursuits and, as such, wehave engaged Pluris Partners, Inc., to facilitate the expansion of ourbusiness endeavors into the energy sector.

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

On February 10,2006, we completed the placement of a new Series A Convertible PreferredStock (“Convertible Preferred”), with gross aggregate proceeds of approximately$760,000 and a net increase of approximately $700,000 in our stockholders’equity.  We issued 129,032 shares of ourCommon Stock at a fair market value (equal to the closing bid on March 14,2006 of $1.55 per share), or $200,000, in exchange for the purchase of certainoil and gas working interests and field equipment.

 

7

----

On July 21, 2006, wereceived a notice from the NASDAQ Stock Market that we were no longer incompliance with the requirements for continued inclusion of our common stock onthe NASDAQ Stock Market pursuant to the NASDAQ’s Marketplace Rule 4310(c)(4)(the “Rule”) because our common stock had closed below $1.00 per share for 30consecutive business days.  We have beengranted 180 calendar days, or until January 17, 2007, to regain compliancewith the Rule.  To regain compliance withthe Rule, the closing bid price of our common stock has to be $1.00 per shareor more for a minimum of 10 consecutive business days before January 17,2007.

If we fail tocomply with the continued listing requirements of the NASDAQ Stock Market,including the minimum bid price per share requirement and the minimumstockholders’ equity requirement, we may be delisted from trading on suchmarket, and thereafter trading in our common stock, if any, would be conductedthrough the over-the-counter market or on the Electronic Bulletin Board of theNational Association of Securities Dealers, Inc.  There is no guarantee that an active tradingmarket for our common stock will be maintained on the NASDAQ Stock Market.  Shareholders may not be able to sellshares quickly at the market price, or at all, if trading in our stock is notactive.

**Revenue Recognition.** Werecognize revenue related to data conversion and digital mapping services usingthe percentage of completion method of accounting on a cost-to-costbasis. For each contract, an estimate of total production costs is determined,and these estimates are reevaluated monthly. Production costs consist ofinternal costs, primarily salaries and wages, and external costs, primarilysubcontractor costs. Internal and external production costs may vary considerablyamong projects and during the course of completion of each project. At the endof each accounting period, the percentage of completion is based on productioncosts incurred to date as a percentage of total estimated production costs foreach of our contracts. This percentage is then multiplied by the contract’stotal value to calculate the sales revenue to be recognized.  The percentage of completion is affected bymany factors that influence either the estimate of future productivity or theproduction cost per hour used to determine future costs.  We recognize losses on contracts in theperiod such loss is determined.  Salesand marketing expenses associated with obtaining contracts are expensed asincurred.

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

Oil and natural gas properties are amortized based on theunit-of-production method using estimates of proved reserve quantities.  Investments in unproved properties are notamortized until proved reserves associated with the projects can be determinedor until they are impaired.  Unevaluatedproperties are evaluated periodically for impairment on a property-by-propertybasis.  If the results of an assessmentindicate that the properties are impaired, the amount of impairment is added tothe 

 

8

----

proved oil and natural gas property costs to be amortized.  The amortizable base includes estimatedfuture development costs and, where significant, dismantlement, restoration andabandonment costs, net of estimated salvage values.

Dispositions of oil and natural gas properties are accounted for asadjustments to capitalized costs with no gain or loss recognized, unless suchadjustments would significantly alter the relationship between capitalizedcosts and proved reserves.

The net capitalized costs of proved oil and natural gas properties aresubject to a “ceiling test” which limits such costs to the estimated presentvalue, discounted at a 10% interest rate, of future net revenues from provedreserves, based on current economic and operating conditions.  If net capitalized costs exceed this limit,the excess is charged to operations through depreciation, depletion and amortization.  For the three and nine months endedJune 30, 2006, the Company did not have any charges associated with itsceiling test analysis.  Depreciation ofother property and equipment is provided using the straight-line method basedon estimated useful lives ranging from five to 10 years.

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

We granted inducement stock options (“Option”) to our former ChiefExecutive Officer (“CEO”) on March 22, 2004.  The Option was not issued pursuant to ourstock option plans, and would have vested at the end of a twelve-monthperiod.  The Option originally providedfor the purchase of 75,000 shares of Common Stock at an exercise price equal to$1.50 per share, which was below the market value of $2.82 on the date of grant.  Upon his resignation on December 20,2004, we accelerated his vesting rights on 56,250 shares, with a market valueof $1.93 per share, and cancelled his right to purchase the remaining 18,750shares.  The intrinsic value of thevested shares totaled approximately $24,000. Our former CEO exercised his rights under the Option on December 28,2004, and purchased 56,250 shares of our Common Stock.  Compensation expense for the nine monthsended June 30, 2005, included $22,173 related to the original grant of theOptions as well as the remeasured value of the accelerated Options.

During the three and nine months ended June 30, 2006, 5,000 and95,000 options, respectively, were granted to members of our workforce asincentive to sustain performance.  Theseoptions have an exercise price ranging from $1.34 to $1.37, which was themarket price of the underlying common stock on the date of grant.  Additionally, during the quarter endedJune 30, 2006, 50,000 options with an exercise price of $1.27 were grantedto our Chief Executive Officer; 30,000 and 10,000 options with exercise pricesof $1.31 and $1.37, respectively, were granted to our Senior Vice President;and 20,000 options with an exercise price of $1.27 were granted to each of themembers of our Board of Directors.

 

9

----

Had compensation costs for our stock based compensation been determinedat the grant date consistent with the provisions of SFAS No. 123, our netloss and net loss per share would have increased to the pro forma amountsindicated below:
| ** **                                                              | ** ** | **Three Months Ended**   | ** ** | **Nine Months Ended**    | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| ** **                                                              | ** ** | **June 30**                   | ** ** | **June 30**                   | ** ** |
| ** **                                                              | ** ** | **2006**                           | ** ** | **2005**                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                              | ** ** | **(in thousands except** | ** ** | **(in thousands except** | ** ** |
| ** **                                                              | ** ** | **per share earnings)**  | ** ** | **per share earnings)**  | ** ** |
|                                                                    |       |                               |       |                               |       |   |   |   |   |
| Net loss  available to common stockholders as reported                  |       | $                                  | (82        | )                                  | $          | (795 | ) | $ | (144 | ) | $ | (1,964 | ) |
|                                                                    |       |                               |       |                               |       |   |   |   |   |
| Add: Stock-based  employee compensation included in   reported net loss |       | —                             |       | —                             |       | — |   | 22 |   |
|                                                                    |       |                               |       |                               |       |   |   |   |   |
| Less: Pro forma  option expense                                         |       | (47                                | )          | (7                                 | )          | (67 | ) | (47 | ) |
| Pro forma net  loss                                                     |       | $                                  | (129       | )                                  | $          | (802 | ) | $ | (211 | ) | $ | (1,989 | ) |
|                                                                    |       |                               |       |                               |       |   |   |   |   |
|                                                                    |       |                               |       |                               |       |   |   |   |   |
| Basic net loss  per share, as reported                                  |       | $                                  | (0.02      | )                                  | $          | (0.28 | ) | $ | (0.04 | ) | $ | (0.76 | ) |
|                                                                    |       |                               |       |                               |       |   |   |   |   |
| Less: Pro forma  option expense                                         |       | (0.01                              | )          | —                             |       | (0.02 | ) | (0.01 | ) |
|                                                                    |       |                               |       |                               |       |   |   |   |   |
| Pro forma basic  net loss per share                                     |       | $                                  | (0.03      | )                                  | $          | (0.28 | ) | $ | (0.06 | ) | $ | (0.77 | ) |
|                                                                    |       |                               |       |                               |       |   |   |   |   |
|                                                                    |       |                               |       |                               |       |   |   |   |   |
| Diluted net loss  per share, as reported                                |       | $                                  | (0.02      | )                                  | $          | (0.28 | ) | $ | (0.04 | ) | $ | (0.76 | ) |
|                                                                    |       |                               |       |                               |       |   |   |   |   |
| Less: Pro forma  option expense                                         |       | (0.01                              | )          | —                             |       | (0.02 | ) | (0.01 | ) |
|                                                                    |       |                               |       |                               |       |   |   |   |   |
| Pro forma diluted net  loss per share                                   |       | $                                  | (0.03      | )                                  | $          | (0.28 | ) | $ | (0.06 | ) | $ | (0.77 | ) |

 

**2.****             ****Earnings (loss) Per Share**

Basic net earnings (loss) per share are computed bydividing earnings (loss) available to common stockholders by the weightedaverage number of common shares outstanding for the period.  Diluted net earnings (loss) per share includethe effects of the potential dilution of outstanding options and warrantsdetermined using the treasury stock method, as well as convertible debt on ourCommon Stock, determined using the if-converted method. We do not present dilutednet earnings (loss) per share for periods in which we incurred losses, as theeffect of potentially dilutive shares is anti-dilutive.  Net loss per share for the three andnine-month periods ended June 30, 2006 and 2005 is provided below:

 

10

----

 
| ** **                                          | ** ** | **Three Months Ended**   | ** ** | **Nine Months Ended**   | ** ** |
|-----------------------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| ** **                                          | ** ** | **June 30**                   | ** ** | **June 30**                  | ** ** |
| ** **                                          | ** ** | **2006**                           | ** ** | **2005**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                          | ** ** | **(in thousands except** | ** ** | **(in thousand except** | ** ** |
| ** **                                          | ** ** | **per share earnings)**  | ** ** | **per share earnings)** | ** ** |
| **Basic**                                           |       |                               |       |                              |       |   |   |   |   |
| Net loss available to common stockholders           |       | $                                  | (82        | )                                 | $          | (795 | ) | $ | (144 | ) | $ | (1,964 | ) |
| Weighted average shares                             |       | 3,724                              |       | 2,869                             |       | 3,250 |   | 2,568 |   |
| Net loss per share                                  |       | (0.02                              | )          | (0.28                             | )          | (0.03 | ) | (0.76 | ) |
| Preferred stock dividends                           |       | —                             |       | —                            |       | (0.01 | ) | — |   |
| Net loss per share available to common stockholders |       | $                                  | (0.02      | )                                 | $          | (0.28 | ) | $ | (0.04 | ) | $ | (0.76 | ) |
| **Diluted**                                         |       |                               |       |                              |       |   |   |   |   |
| Net loss available to common stockholders           |       | $                                  | (82        | )                                 | $          | (795 | ) | $ | (144 | ) | $ | (1,964 | ) |
| Weighted average shares                             |       | 3,724                              |       | 2,869                             |       | 3,250 |   | 2,568 |   |
| Net loss per share                                  |       | (0.02                              | )          | (0.28                             | )          | (0.03 | ) | (0.76 | ) |
| Preferred stock dividends                           |       | —                             |       | —                            |       | (0.01 | ) | — |   |
| Net loss per share available to common stockholders |       | $                                  | (0.02      | )                                 | $          | (0.28 | ) | $ | (0.04 | ) | $ | (0.76 | ) |

 

**3.****             ****Impact of RecentlyIssued Accounting Pronouncements**

In December 2004,the Financial Accounting Standards Board (“FASB”) published revisions to SFASNo. 123.  The revised SFAS No. 123(“SFAS No. 123R”) requires companies to account for share-based paymenttransactions using a fair-value based method, thereby eliminating thedisclosure-only provisions of SFAS No. 123.  SFAS No. 123R is effective for all smallbusiness public entities as of the beginning of the first interim or annualreporting period for fiscal years beginning after December 15, 2005.  We are currently evaluating the impact on ourconsolidated financial condition and the results of operations.  We currently elect the disclosure-onlyprovisions of SFAS No. 123.

In May 2005,the FASB issued SFAS No. 154 “*Accountingfor Changes and Error Corrections—a replacement of APB Opinion No. 20 andFASB Statement No. 3*.” This statement changes the requirements for the accounting for andreporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accountingprinciple.  It also applies to changesrequired by an accounting pronouncement in the unusual instance that the pronouncementdoes not include specific transition provisions.  When a pronouncement includes specifictransition provisions, those provisions should be followed.  This statement is effective for fiscal yearsbeginning after December 15, 2005 and is not expected to have a materialimpact on our consolidated financial statements.

In February 2006,the FASB issued SFAS No. 155 “*Accountingfor Certain Hybrid Financial Instruments — an amendment of FASB StatementNo. 133 and 140*.” This statement amends SFAS No. 133, “*Accounting for Derivative Instruments and hedging Activities*,”and SFAS No. 140, “*Accounting forTransfers and Servicing of Financial Assets and Extinguishments of Liabilities*.”  SFAS No. 155 resolves issues addressedin SFAS No. 133 Implementation Issue No. D1, “*Application of Statement 133 to BeneficialInterests in Securitized Financial Assets.*”  When a pronouncement includes specifictransition provisions, those provisions should be followed.  This statement is effective for fiscal yearsbeginning after September 15, 2006 and is currently not expected to have amaterial impact on our consolidated financial statements.

 

11

----

In March 2006,the FASB issued SFAS No. 156 “*Accountingfor Servicing of Financial Assets—an amendment of FASB Statement No. 140*.” This statement amends SFAS No. 140,“*Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities*,” with respectto the accounting for separately recognized servicing assets and servicingliabilities.  This statement is effectivefor fiscal years beginning after September 15, 2006 and is currently notexpected to have a material impact on our consolidated financial statements.

In July 2006, the FASB issued interpretation (“FIN”)No. 48 *“Accounting for Uncertainty inIncome Taxes—An Interpretation of FASB Statement No. 109”*regarding accounting for, and disclosure of, uncertain tax positions. ThisInterpretation clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance with SFASNo. 109*, “Accounting for Income Taxes”*and prescribes a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. The Interpretation also provides guidanceon derecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. This interpretation is effective forfiscal years beginning after December 15, 2006, and is currently not expected tohave a material impact on our consolidated financial statements.

**4.****             ****Oil andnatural gas properties and equipment**

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

On March 15,2006, we completed the purchase of a 50% working interest in three wellsdesignated as Shields No. 1, 2, and 3, located in Pawnee County,Oklahoma, plus a 100% interest in certain fixtures and equipment used inconnection with the operation of the wells. We paid $150,000 cash and issued 129,032 shares of Common Stock having afair market value (equal to the closing bid on March 14, 2006) of $1.55per share, or $200,000. In July 2006, we exchanged one-half of our workinginterest in return for a carry of all costs associated with drilling andrecompletion activities associated with our remaining working interest in thethree wells.  One well has been permittedas a water disposal well.  A second wellis planned for recompletion in the first fiscal quarter of 2007.  We plan to recomplete the third well at alater date.

On May 15,2006, we purchased a 12.5% working interest with a2.5% promote, resulting in a 10% net working interest.  Our net revenue interest is proportionatelyreduced to a 75% net revenue interest, or 7.5%. This investment was made in a relatively deep Anadarko Basin natural gaswell known as the Adrienne 1-9, located in Washita County, Oklahoma.  We purchased the leasehold interest for thiswell utilizing existing cash reserves. Our obligation for tangible and intangible costs of drilling andcompleting the well is approximately $1.5 million, of which $1.2 millionwas funded 

 

12

----

on May 31,2006.  We funded this obligation throughthe issuance of a convertible senior secured promissory note on May 30,2006 (see Note 6).  As of the dateof this report, the Adrienne 1-9 has drilled through 12,000 feet with a targettotal depth of approximately 20,500 feet. We expect to reach total depth in the first quarter of fiscal 2007 andassuming completion activities are undertaken, we believe the well will befully completed in the first fiscal quarter of 2007. The Adrienne 1-9 offsets awell drilled by Marathon Oil Company, the Folks 1-17, which reported gas volumein May 2006, the most current reported production for the well, ofapproximately 420 million cubic feet.

**5.****             ****Accrued Payrolland Related Benefits**

Our accrued payroll and relatedbenefits are summarized as follows.

|                                       | ** ** | **June 30,  2006** | ** ** | **September 30,  2005** | ** ** |
|---------------------------------------|------------|-------------------------|------------|------------------------------|------------|
|                                  |       |                    |       |                         |       |
| Accrued payroll                       |       | $                       | 158        |                         | $          | 426 |   |
| Accrued health  benefits              |       | 65                      |       | 109                          |       |
| Accrued vacation                      |       | 97                      |       | 152                          |       |
| Accrued payroll  and related benefits |       | $                       | 320        |                         | $          | 687 |   |

 

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

**The componentsof debt are summarized as follows.**
| **Long-Term Debt**                           | ** ** | **June 30,  2006** | ** ** | **September 30,  2005** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|------------------------------|------------|
|                                              |       |                    |       |                         |       |
| Other debt and  capital lease obligations         |       | $                       | 44         |                         | $          | 47 |   |
| Redeemable  preferred stock (See Note 7)          |       | —                  |       | 247                          |       |
| Senior Secured  Convertible Note, net of discount |       | 1,923                   |       | —                       |       |
|                                              |       | 1,967                   |       | 294                          |       |
| Less current  portion                             |       | (21                     | )          | (17                          | )          |
|                                              |       | $                       | 1,946      |                         | $          | 277 |   |

 

On April 2, 2002, we issued to Tonga PartnersLLP (“Tonga”) a $2.0 million senior secured convertible note (“Note”),which was partially converted into Common Stock on October 29, 2003,resulting in a new principal balance of $1.7 million.  On November 10, 2004, Tonga convertedthe outstanding principal and accrued interest into Common Stock at theconversion price of $1.05, representing 90% of the average closing bid pricesfor the three trading days having the lowest closing bid price during the 20 tradingdays immediately prior to November 10, 2004.  The newly issued shares increased our totalcommon shares outstanding from 1,104,173 to 2,805,522.  Tonga owned 67% of our outstanding sharesimmediately after the conversion.  Duringthe first quarter of fiscal 2005, we recognized approximately $12,000 in otherincome as we amortized the Note’s premium through November 11, 2004.

Pursuant to theexpansion of our business strategy from a GIS services provider into anindependent oil and gas enterprise engaging in non-operating participation inhigh quality drilling and production prospects of oil and natural gas reserves,on May 30, 2006, we issued convertible senior secured promissory notes totwo investors (the “Investors”) in the principal amount of $1.5 millionand $0.5 million, respectively, (each, a “Senior Note”, and collectivelythe “Senior Notes”), to fund the drilling 

 

13

----

and completion ofa 12.5% working interest in a natural gas well located in Washita County,Oklahoma.  The Senior Notes have amaturity date of May 31, 2008, and bear interest at the rate of 14%,payable quarterly.  The Investors alsoreceived warrants entitling them to purchase, in the aggregate, 752,072 sharesof the Common Stock at an exercise price of $1.186 per share, which was theclosing bid price of the Common Stock on May 31, 2006 (“Class EWarrants”).  However, the number ofshares that can be issued to any holder pursuant to the exercise of the Class EWarrants cannot cause the Investor to become the beneficial owner of more than9.99% of the then total number of shares of Common Stock outstanding (the “MaximumOne Holder Exercise Limitation”). Limited to these terms, the issuance of the Senior Notes and the Class EWarrants did not require approval by the shareholders under the relevant NASDAQMarketplace rules.

At our annualmeeting of the shareholders to be held on August 29, 2006, ourshareholders will be asked to approve additional terms of the Senior Notes andthe issuance of additional warrants to the Investors (the “Approval”).  If Approval is obtained, the Senior Notes,including interest accrued thereon, will be convertible, in whole or in part,into shares of Common Stock at a conversion price per share of $0.9488, whichis equal to 80% of the closing bid price of the Common Stock on May 30,2006 (the “Conversion Price”).  TheConversion Price May be adjusted pursuant to a ratchet provision if weissue securities at a price lower than the Conversion Price (the “RatchetProvision”).

Additionally, ifshareholders approve the issuance of additional warrants to the Investors, wewill issue: (i) 1,355,853 additional Class E Warrants, bringing theaggregate number of shares of Common Stock issuable upon conversion of the Class EWarrants to 2,107,295; (ii) Class C Warrants entitling the Investorsand Placement Agents of the Senior Notes (the “Placement Agents”) to purchase,in the aggregate, 1,159,359 shares of Common Stock at an exercise price of$1.21 per share, or 102% of the closing bid price of our Common Stock on May 30,2006; and (iii) Class D Warrants entitling the Investors andPlacement Agents to purchase, in the aggregate, 2,318,718 shares of CommonStock at an exercise price of $1.36 per share, or 115% of the closing bid priceof our Common Stock on May 30, 2006. The Class C, D, and E Warrants (collectively, the “Warrants”) areexercisable during the period commencing November 30, 2006 until November 30,2011.  Each Warrant will contain aRatchet Provision and a Maximum One Holder Exercise Limitation.

If Approval isobtained at our annual meeting on August 29, 2006 or otherwise on or before September 28,2006, we may redeem any outstanding portion of the Senior Notes at115% of face value at any time upon 30 days’ written notice, provided there hasnot been an Event of Default (as described below).  IfApproval is not so obtained, theInvestors will have the right, upon 30 days’ written notice, toaccelerate the maturity date of the Senior Notes.

The holders of theSenior Notes have a first lien security interest in all of our assets.  TheSenior Notes contain typical antidilution provisions and are subject, at theInvestors’ election, to mandatory redemption at 120% of the outstandingprincipal and accrued interest (1) if we fail to issue Common Stockpursuant to the conversion of the Senior Notes or exercise of any of theWarrants, (2) if we fail to timely deliver Common Stock pursuant toconversion of the Senior Notes or exercise of the Warrants, (3) upon theoccurrence of an Event of Default, which includes failure to be listed on theNASDAQ Capital Market, or (4) upon a change in control.

On July 27,2006, we filed a Registration Statement on Form S-3 to register all sharesissuable pursuant to the Senior Notes and related Warrants.  If the registration statement is not declared

 

14

----

effectiveon or before October 8, 2006, the Investors may accelerate the maturitydate of the Senior Notes and demand payment at 120% of the face amountof the SeniorNotes.  Until theexpiration of a six-month period after the effective date of the RegistrationStatement, we are prohibited from filing additional registration statementswith the SEC.  Additionally, we areprohibited from issuing additional shares of Common Stock or securitiesconvertible into Common Stock without the consent of the Investors.

The Senior Notes, whichcarry a face value of $2 million, mature on May 31, 2008, and accrueinterest on the face value at an annual rate of 14%.  Accrued interest is payable on September 30,2006, and quarterly thereafter, in cash. We recorded the Senior Notes at a discount after giving effect to the$80,424 estimated fair value of the Warrants, which was charged to equity.  The effective rate of interest on the SeniorNotes is 16.7%.  Interest expense isrecorded using this effective rate of interest. Thecarrying value of the Senior Notes are being accreted to the face amount bycharges to interest expense through the maturity date. The carrying value at June 30,2006, is $1.923 million and represents the $2.0 million outstandingprincipal less the unearned discount. The unearned discount of $77,128 as of June 30, 2006 represents theestimated fair value of the Warrants of $80,424 less accretion.

We incurred expenses totaling approximately $249,000related to the issuance of the Senior Notes. We recorded these expenses as prepaid or deferred expenses.  These expenses will be amortized to otherexpense over the two-year term of the Senior Notes.  If the maturity date of the Senior Notes isaccelerated for any reason, the unamortized portion of the deferred expenseswill be charged to other expense.  If anyportion of the Senior Notes are converted into Common Stock, the applicableportion of these expenses will be charged to equity.

**7.****             ****RedeemablePreferred Stock**

On February 1, 2006, 166,435shares of Series A Redeemable Preferred Stock (“Preferred Stock”) wereoutstanding which were redeemable on or before December 28, 2006.  Until December 27, 2006, we wereentitled to redeem these shares at $1.80 per share, or $299,583, and which weremandatorily redeemable on December 28, 2006 at $2.00 per share, or$332,870.  On February 1,2006, we issued 318,000 shares of Common Stock in exchange for the outstandingshares of the Preferred Stock, which had a carrying value of approximately$259,000 and a current redemption price of $299,583.  The transaction eliminated all of ourobligations related to the Preferred Stock, including accrued dividends ofapproximately $61,000, the right to which was relinquished by the holders aspart of the transaction.  We recordedinterest expense totaling  $37,000 uponredemption of the Preferred Stock in order to accrete the carrying value to thecurrent redemption price of $299,583.  Wereduced our current liabilities related to the Preferred Stock by $299,583,with a corresponding increasing in stockholders’ equity pursuant to theissuance of Common Stock in exchange for the elimination of the liability.  We recognized gain on extinguishment of debttotaling $61,000 related to the relinquishment of accrued dividends by theholder.

**8.**              Convertible Preferred Stock

**On February 10, 2006, we issued 760,000 shares of anew Series A Convertible Preferred Stock (“Convertible Preferred”) withgross aggregate proceeds of approximately $760,000.  The two-year Convertible Preferred may beconverted into 598,425 shares of Common Stock at a fixed conversion**

** **

15

----

**price of $1.27, which was determined by applying a 10%discount to the 5-day trailing average closing price of Common Stock of $1.41as of the NASDAQ Stock Market close on February 9, 2006.  The holders of the Convertible Preferredreceived Class A Warrants that entitle them to purchase up to 299,212shares of Common Stock at $1.34, or 101% of the closing bid price on February 10,2006, and an equivalent number of Class B Warrants (collectively, the “February Warrants”)that carry an exercise price of $1.49, or 112% of the closing bid price on February 10,2006.  We also issued 82,678 Class AWarrants and 82,678 Class B Warrants to certain parties as a finder’s fee.  The February Warrants will beexercisable after six months from the date of closing until their expirationthree years from the date of closing.  ARegistration Statement on Form S-3 to register all shares issuablepursuant to the Convertible Preferred and related Warrants was declaredeffective on April 12, 2006.  As of June 30,2006, 480,000 shares of Convertible Preferred have been converted into 377,952share of Common Stock.  We will beissuing approximately 4,000 shares of Common Stock for dividends accrued on theConvertible Preferred submitted for conversion.**

TheConvertible Preferred earns dividends at a rate of 7% per annum.  We recorded the Convertible Preferred at itsoffering price of $1 per share, net of the estimated $22,171 fair value of theFebruary Warrants and the $29,921 intrinsic value of the beneficialconversion feature of the Convertible Preferred.  We used the Black Scholes model to determinethe value of the February Warrants. The intrinsic value of the beneficial conversion feature is thedifference in fair market value of Common Stock on the grant date of theConvertible Preferred less the conversion price, multiplied by the number ofshares that are issuable upon conversion of the Convertible Preferred, or $.05for each of 598,425 shares of Common Stock.

Themarket value of Common Stock on the date that the Convertible Preferred wassold was $1.32 per common share.  Inaccordance with EITF 00-27, this created a beneficial conversion featureto the holders of the Convertible Preferred and a deemed dividend to thepreferred stockholders totaling $30,000 was recorded with a correspondingamount recorded as convertible preferred stock. The deemed dividend is calculated as the difference between the fairvalue of the underlying Common Stock less the proceeds that have been receivedfor the Convertible Preferred.

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

**In November 2005, we received an alias summonsnotifying us that we have been named as a party to a suit filed by SycamoreSprings Homeowners Association in the Marion County Superior Court in the Stateof Indiana.  The summons names thedeveloper of the Sycamore Springs neighborhood as well as other firms that May haverendered professional services during the development of the neighborhood.  The claimants allege that the services ofMid-States Engineering, which was a subsidiary of MSE Corporation when weacquired MSE in 1997, affected the drainage system of Sycamore Springsneighborhood, and seek damages from flooding that occurred on September 1,2003.  The summons does not quantify theamount of damages that are being sought nor the period that the allegedwrongful actions occurred.  We soldMid-States Engineering on September 30, 1999.   We believe that we have been wrongfullynamed in the suit and we are diligently pursuing dismissal without prejudice.**

**We are also subject to various other routine litigationincidental to our business. Management does not believe that any of theseroutine legal proceedings would have a material adverse effect on our financialcondition or results of operations.**

** **

16

----

**10.          Concentrationof Credit Risk**

At June 30, 2006, wehad multiple contracts with five customers, the aggregate of which accountedfor 75% of our consolidated revenues during the three months ending June 30,2006 (Worldwide Services, Inc. and Intergraph (“WWS”), 30%; AGL Resources(“AGL”), 15%; MWH Americas, Inc., 13%; Keyspan Corporate Services, Inc.,8%; and Niagara Mohawk, 9%.  Two of thesecustomers (WWS and AGL) accounted for 76% and 9%, respectively, of our totalaccounts receivable and revenue in excess of billings at June 30,2006.  At June 30, 2005, we hadmultiple contracts with four customers, the aggregate of which accounted for73% of our consolidated revenues during the three months ending June 30,2005 (WWS, 7%; Michigan Consolidated Gas Company (“MichCon”), 21%; BritishTelecommunications PLC (“BT”), 27%; and MWH Americas, Inc., 18%).  One of these customers, WWS, accounted for72% of our total accounts receivable and revenue in excess of billings at June 30,2005.  Billing terms are negotiated in acompetitive environment and are based on reaching project milestones.  We anticipate that sufficient billingmilestones or contract completion will be achieved during fiscal 2006such that the majority of revenue in excess of billings for these customercontracts will be collected.

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

On July 21,2006, we received notice from the NASDAQ Stock Market indicating that the weare not in compliance with one of NASDAQ’s requirements for continued listingbecause the bid price of our  CommonStock has closed below the minimum $1.00 per share requirement for the previous30 consecutive business days.  NASDAQrequires compliance with the minimum bid price for continued inclusion underNASDAQ Marketplace Rule 4310(c)(4) (the “Rule”).  Such a notice is routinely issued when alisted company does not meet the minimum bid requirement.  We have been granted 180 calendar days, oruntil January 17, 2007, to regain compliance with the Rule.  If at any time before January 17, 2007,the bid price of our Common Stock closes at $1.00 per share or more for aminimum of 10 consecutive business days, NASDAQ may determine that we haveexhibited compliance with the Rule. Until we are able to exhibit compliance with the Rule, NASDAQ and thirdparty providers of market data information will broadcast an indicator of ournon-compliance.

On July 27,2006, we filed a registration statement on Form S-3 to register all sharesissuable pursuant to the Senior Notes and related Warrants.  Among the9,633,220 shares of Common Stock, 8,881,148 are issuable only if approval ofthe issuance of such shares upon conversion of the Senior Notes and exercise ofcertain Warrants is given by the shareholders at our annual meeting scheduledfor August 29, 2006 (see Note 6). If Approval is not obtained and the registration statement is effective,we will de-register 8,881,148 of the shares registered, with the remaining752,072 shares issuable upon the exercise of Warrants.  If all such 752,072 Warrants are exercisedfor cash, we will receive up to $891,957. If such approval is given by our shareholders, among the 9,633,220shares registered, 5,586,002 shares of Common Stock will be issuable upon theexercise of various Warrants.  If allsuch Warrants are exercised for cash, we will receive up to approximately $6.8 million.

17

----

**Item 2.  Management’sDiscussion and Analysis or Plan of Operations**

THE DISCUSSION OF THE FINANCIAL CONDITION AND RESULTSOF OPERATIONS OF THE COMPANY SET FORTH BELOW SHOULD BE READ IN CONJUNCTION WITHTHE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDEDELSEWHERE IN THIS FORM 10-QSB. THIS FORM 10-QSB CONTAINS FORWARD-LOOKINGSTATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE STATEMENTS CONTAINED INTHIS FORM 10-QSB THAT ARE NOT PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTSWITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THEEXCHANGE ACT. WHEN USED IN THIS FORM 10-QSB, OR IN THE DOCUMENTS INCORPORATEDBY REFERENCE INTO THIS FORM 10-QSB, THE WORDS “ANTICIPATE,” “BELIEVE,” “ESTIMATE,”“INTEND” AND “EXPECT” AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCHFORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUTLIMITATION, THE STATEMENTS REGARDING THE COMPANY’S STRATEGY, FUTURE SALES,FUTURE EXPENSES, FUTURE LIQUIDITY AND CAPITAL RESOURCES. ALL FORWARD-LOOKINGSTATEMENTS IN THIS FORM 10-QSB ARE BASED UPON INFORMATION AVAILABLE TO THECOMPANY ON THE DATE OF THIS FORM 10-QSB, AND THE COMPANY ASSUMES NO OBLIGATIONTO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY’S ACTUAL RESULTS COULDDIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS FORM 10-QSB. FACTORS THATCOULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES (“CAUTIONARY STATEMENTS”)INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN ITEM 1. BUSINESS—”RISKFACTORS” AND ELSEWHERE IN THE COMPANY’S ANNUAL REPORT ON FORM 10-KSB,WHICH ARE INCORPORATED BY REFERENCE HEREIN AND IN THIS REPORT.  ALL SUBSEQUENT WRITTEN AND ORALFORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY, OR PERSONS ACTING ONTHE COMPANY’S BEHALF, ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THECAUTIONARY STATEMENTS.

**Overview**

Founded in 1981, we are a provider of dataconversion and digital mapping services to users of customized geographicinformation systems.  We havetraditionally helped customers by transforming or updating raw, often confusinginformation from multiple sources (maps, blueprints, construction drawings,databases, aerial photography, field inventory of asset attributes, satelliteimagery, etc.) into a high-resolution, large-scale, richly detailed digital andvisual representation on which organizations can rely to make better decisionswith speed and confidence.  We havehistorically targeted our services to utilities and state and localgovernments.  While there seems to havebeen an increase in demands for GIS solutions in response to catastrophicevents and homeland security initiatives in 2004 and 2005, we have notexperienced a corresponding increase in demands for GIS data conversionservices.  We believe that the primary reason for suchdecrease is that existing and potential customers have been using newlyemerging technology to reduce the need for outsourcing GIS data conversionservices, which historically accounted for as high as 75% of the total cost ofa typical GIS solution.  Specifically, theemergence in recent years of commercial off-

 

18

----

the-shelf (“COTS”) hardwareand software solutions for gathering satellite remote sensing base data andtopographic, planimetric and cadastral data have given customers increasedcapabilities to replace our services with an in-house, significantly lower costalternative.  This shift to COTS, coupledwith offerings from service firms with large labor content in India, hasresulted in lower margins and increased competition in the industry.  As noted in the 2005 GeospatialTechnology Report published by the Geospatial Information and TechnologyAssociation (“GITA”), the federal government has shifted increasedresponsibilities to the state and local levels without a corresponding shift infunding.  The result is critically tightbudgets driven by these economics adversely impacting service providers.  We believe that many of the new GIS softwaresolutions reduce the need for data conversion services.  Our backlog has decreased substantially ineach of the past five years, and we have been unsuccessful in winning newbusiness at acceptable margins.  We donot believe that we will be able to sustain the operations or our historicalbusiness.  We are therefore in theprocess of transitioning our principal business into that of an independent oiland gas enterprise focused on leveraging non-operating participation in highquality drilling and production prospects for the development of U.S. on-shoreoil and natural gas reserves.

In fiscal 2006, we have raised additional capital tofinance several investments in oil and gas interests.  We issued 760,000 shares of convertiblepreferred stock with gross proceeds of $760,000.  We also issued Senior  Notes totaling $2 million which we havesubmitted to shareholders for  approvalof the conversion thereof. We have made investments in three oil and gasproperties which are in various stages of drilling and completion orrecompletion and are not generating significant quantities of oil or gas.  In May 2006, we announced the formation ofthe ASI Energy Division.  We seek toachieve a balanced growth strategy that includes participation in lower riskdevelopment drilling, combined with higher potential exploratory locations.  In addition, we continue to seek acquisitionsof proven production with upside potential attributable to behind pipereserves, infill drilling locations, deeper reservoirs and/or field extensionopportunities.  We intend to continue to financethese acquisitions through the private placement of equity supplemented byissuance of debt, which is dependent on the terms on which we are able tonegotiate, if any.

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

We experience yearly and quarterly fluctuations inproduction costs, salaries, wages and related benefits and subcontractor costs.These costs may vary as a percentage of sales from period to period.    We have historically utilized offshoresubcontractors for a large percentage of certain data entry production work toreduce production costs and develop new services, and we will continue to do soin fiscal 2006.  We do not have along-term contract with an offshore service provider, but we do not anticipatethat we will encounter difficulty in obtaining such services in sufficientquantities and at acceptable prices.

Backlog increases when new contracts are signed anddecreases as revenues are recognized.  Asof June 30, 2006, our backlog was $1.9 million, the majority of whichis related to one contract that is longer than one year in duration and havinga contract value greater than $1 million. As backlog decreases, and therefore the volume of services delivereddecreases, we are not able to generate a volume of revenue sufficient to coverour variable and fixed costs.  Backlogtotaled  $4 million at

 

19

----

September 30, 2005.  We believe backlog levels reflect changesspecific to GIS industry market conditions, and lower demands for dataconversion services.

At June 30, 2006, we had three projects thathave a contract value greater than $1 million or longer than one year induration, which can increase risk due to inflation, as well as changes incustomer expectations and funding availability. Our contracts are generally terminable on short notice, and while werarely experience such termination, there is no assurance that we will receiveall of the revenue anticipated under signed contracts.

We engage in research anddevelopment activities; however, associated expenses are not significant andrepresent less than $100,000 per year, or less than 5% of our total operatingexpense.  The majority of theseactivities occur as we develop software or design a product for a particularcontract.  These efforts are typicallyincluded 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 oftenbe applied to projects for other customers, since we retain ownership of suchproprietary software or products.

Our sales and marketing effortshave not been successful.  We haveacquired four new customers with material contracts during the past two and onehalf years, and the majority of our current contracts are ongoing services frompast customers.  We reduced our staff infiscal 2005 to meet the lower demands of our existing business, and weexperienced additional loss of personnel in fiscal 2005 due to the uncertaintyof the acquisition of new GIS contracts. To address concern created by this loss of personnel on the part of ourcustomers, partners, and employees, we engaged Wind Lake Solutions, Inc. (“WLS”),to manage our Wisconsin-based personnel in October 2005.  We terminated this management agreement withWLS on June 30, 2006.  While webelieve this strategy temporarily stabilized our Wisconsin office and satisfiedour customer’s concerns regarding our ability to provide consistent service tothem, we were unable to negotiate a long-term arrangement with WLS that wouldenable us to realize a sufficient return for their services.  Therefore, we are evaluating variousalternatives that will enable us to realize the maximum cash flow on ourexisting contracts and relationships residing in our Wisconsin-based operations.  We are in negotiations to sell certain assetsand assign certain contracts and backlog related to those operations.

During fiscal 2005, we evaluateda broad spectrum of business opportunities. We engaged a consultant and evaluated acquisitions that would facilitateour entrance into the federal markets, and we also evaluated variousopportunities, including software and service solutions for location basedservices, state and local GIS initiatives. We were unable to identify an acceptable acquisition serving the GISmarketplace that produced suitable margins or sufficient returns on acquisitioncosts.

Effective December 2, 2005, Brian Morrow resigned as president andchief operating officer to pursue other opportunities.  Mr.  Morrow joined the Company on June 9,2005.  Our chief executive officerassumed Mr.  Morrow’s duties.

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

 

20

----

On April 24, 2006, weappointed Mr.  Don Fryhover as senior vice president.  Mr.  Fryhover served in variouscapacities with ASI (and formerly Cartotech) from 1989 through 2003.  We will draw upon his expertise in the GISindustry as we complete the transition from a traditional GIS service providerinto an energy company.  Mr. Fryhover’s principal focus as senior vice president will be in the oil and gasindustry.  Mr.  Fryhover co-foundedPetroleum Research Company, Inc., a petroleum land service company thatprovided land management services to the oil and gas industry in the late 1980’s.  Additionally, he served as field land managerfor the former Tucker Oil and Gas Company where he negotiated oil and gasdeals, managed contracts, acquired leases and helped ensure compliance withgovernmental agencies.  We are currentlyseeking additional executive team members to facilitate our entry into theenergy sector.

At June 30, 2006, weemployed approximately 40 full-time employees. While we have and will continue to reduce our general and administrativeexpenses, we are incurring legal and professional fee expenses related to ourinitiative into new business ventures. We also anticipate that compliance with the requirements of theSarbanes-Oxley Act, as applicable, will require substantial financial andmanagement resources and result in additional expenses.

Our traditional GIS dataconversion business has decreased dramatically in the past years, causing us toincur severe operating losses.  Throughcost cutting measures, we have substantially reduced our operating losses inthe current periods covered by this report. We anticipate that, subsequent to June 30, 2006, we will collect inexcess of $1 million from one customer upon completion of a contract.  However, such cash flow derived solely fromthis business may be insufficient to meet the operating and capitalrequirements of our business beyond the first fiscal quarter of 2007.

Our entry into the oiland natural gas exploration and production business is very recent.  Although several oil and gas investments havebeen made, the Washita County well is our largest investment to date andtherefore significant emphasis has been placed upon this investment. Althoughthe Adrienne 1-9 is an offset well to a significant producer of natural gas,there is no assurance that this well will be a producer of natural gas.  There is also no assurance that, uponcompletion, the well will ultimately yield production in amounts necessary tosupport the financial projections.  Ineither case, we may not realize the revenue expected by us.  In the extreme case, where no revenue isrealized because the operator is forced to plug and abandon the well, ouroverall business will be significantly harmed, and we could be forced toliquidate our assets.

Other than Mr. Fryhover, we do not have personnel who have experience in oil and natural gasexploration and production.  In order tosuccessfully implement and manage our entry into the oil and natural gasbusiness, we will have to recruit qualified personnel having experience in theoil and natural gas exploration and production business. Competition in the oiland natural gas sector for qualified individuals is intense.  We may not be able to find, attract andretain qualified personnel on acceptable terms.

We believe that ourcurrent cash position will be sufficient to meet our share of the operatingexpenses and capital expenditures required to exploit completely the oil andnatural gas interests we have acquired thus far, including the Washita Countywell.  However, in order to fullyimplement our strategy of transitioning into the oil and gas sector, we willneed to acquire additional oil and natural gas interests and will, therefore,require additional capital.  Although wemay receive approximately $1,080,748 from the exercise of the February Warrantsdescribed in Note 6, and an additional 

 

21

----

approximately $6.8 million(if the Approval is obtained) from the exercise of the Class C, Class Dand Class E Warrants described in Note 6, we have no way of estimating theultimate amount that we will receive from the exercise of warrants.  Also, we do not know if additional financingwill be available when needed, or if it is available, if it will be availableon acceptable terms.  Insufficient fundsmay prevent us from implementing our business strategy.

The oil and natural gasindustry is intensely competitive and we compete with other companies that havegreater resources.  Many of thesecompanies not only explore for and produce oil and natural gas, but also carryon refining operations and market petroleum and other products on a regional,national or worldwide basis.  Thesecompanies may be able to pay more for productive oil and natural gas propertiesand exploratory prospects or define, evaluate, bid for and purchase a greaternumber of properties and prospects than our financial or human resourcespermit.  In addition, these companies mayhave a greater ability to continue exploration activities during periods of lowoil and natural gas market prices.  Our largercompetitors may be able to absorb the burden of present and future federal,state, local and other laws and regulations more easily than we can, whichwould adversely affect our competitive position.  Our ability to acquire additional propertiesand to discover reserves in the future will be dependent upon our ability toevaluate and select suitable properties and to consummate transactions in ahighly competitive environment.  Inaddition, because we have fewer financial and human resources than manycompanies in our industry, we may be at a disadvantage in bidding for exploratoryprospects and producing oil and natural gas properties.

The marketability ofnatural resources that may be acquired or discovered by us will be affected bynumerous factors beyond our control. These factors include market fluctuations in oil and natural gas pricingand demand, the proximity and capacity of natural resource markets andprocessing equipment, governmental regulations, land tenure, land use,regulations concerning the importing and exporting of oil and gas andenvironmental protection regulations. The exact effect of these factors cannot be accurately predicted, butthe combination of these factors may result in us not receiving an adequatereturn on invested capital to be profitable or viable.

Our operations, includingthe Washita County well, are subject to certain hazards inherent in drillingfor oil or natural gas, such as blowouts, reservoir damage, loss of production,loss of well control, punchthroughs, craterings or fires.  The occurrence of these events could resultin the suspension of drilling operations, damage to or destruction of theequipment involved and injury or death to rig personnel.  Operations also may be suspended because ofmachinery breakdowns, abnormal drilling conditions, failure of subcontractorsto perform or supply goods or services or personnel shortages.  Damage to the environment could also resultfrom our operations, particularly through oil spillage or extensiveuncontrolled fires.  We may also besubject to damage claims by other oil and natural gas companies.

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

 

22

----

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

Itmust be recognized that our ultimate objective is a transition from a companyproviding a specialized service to that of an independent oil and natural gasproducer.  Given the risks associatedwith this transition, there is no assurance that such transition will be seamless,or require us to undertake a major restructuring.  Such undertakings might include a merger witha privately held independent oil and natural gas producer.

**Results of Operations**

The following table setsforth, for the periods indicated, selected consolidated statements of operationsdata expressed as a percentage of sales:
| ** **                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                 | ** ** | **June 30**                 | ** ** | **June 30**                | ** ** |
| ** **                                 | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| **PERCENTAGE OF REVENUES:**                |       |                             |       |                            |       |   |   |   |   |
| Revenues                                   |       | 100.0                            | %          | 100.0                           | %          | 100.0 | % | 100.0 | % |
|                                       |       |                             |       |                            |       |   |   |   |   |
| Costs and expenses                         |       |                             |       |                            |       |   |   |   |   |
| Salaries, wages and related benefits       |       | 71.3                             |       | 88.5                            |       | 63.4 |   | 82.1 |   |
| Subcontractor costs                        |       | 4.1                              |       | 29.0                            |       | 12.1 |   | 24.4 |   |
| General and administrative                 |       | 27.2                             |       | 37.1                            |       | 25.2 |   | 26.8 |   |
| Depreciation and amortization              |       | 1.4                              |       | 2.9                             |       | 1.4 |   | 2.9 |   |
| Severance and related costs                |       | 0.0                              |       | 0.0                             |       | 0.0 |   | 1.4 |   |
|                                       |       |                             |       |                            |       |   |   |   |   |
| Loss from  operations                      |       | (4.0                             | )          | (57.5                           | )          | (2.1 | ) | (37.6 | ) |
|                                       |       |                             |       |                            |       |   |   |   |   |
| Other income  (expense), net               |       | (3.2                             | )          | (0.8                            | )          | (0.6 | ) | (2.2 | ) |
|                                       |       |                             |       |                            |       |   |   |   |   |
| Loss before  income taxes                  |       | (7.2                             | )          | (58.3                           | )          | (2.7 | ) | (39.8 | ) |
| Provision for income taxes                 |       | —                           |       | —                          |       | — |   | — |   |
| Net loss                                   |       | (7.2                             | )          | (58.3                           | )          | (2.7 | ) | (39.8 | ) |
| Dividends on preferred stock               |       | (0.6                             | )          | —                          |       | (1.1 | ) | — |   |
| Net loss available to  common stockholders |       | (7.8                             | )%         | (58.3                           | )%         | (3.8 | )% | (39.8 | )% |

** **

**Three and Nine Months Ended June 30, 2006 and2005**

**Revenues**.  We recognize revenues related to dataconversion and digital mapping services contracts as services areperformed.  Our revenues decreased 23.0%for the three-month period ended June 30, 2006, and totaled $1,049,000 ascompared to $1,363,000 for the same period in fiscal 2005, a decrease ofapproximately $314,000.  Ourrevenues decreased 23.0% for the nine-month period ended June 30, 2006,and totaled $3,792,000 as compared to $4,935,000 for the same period in fiscal2005, 

 

23

----

a decrease of$1,143,000. The decreasein revenues is due to a lower number of active contracts in the fiscal2006.  The level of new contract signingsin recent fiscal years, including fiscal 2004 and 2005, was lower than inprevious years and, as a result, revenues have decreased as well.  We believe this decrease in contract signingsis attributable to lower demand for and reduced spending levels for dataconversion services both in general and specific to the GIS industry.

**Salaries, Wages and Benefits.** Salaries, wages and benefits include employee compensation forproduction, marketing, selling, and administrative and executiveemployees.  Salaries, wages andrelated benefits decreased $458,000 and $1,649,000 for the three and nine-monthperiods ended June 30, 2006, respectively, as compared to the same periodsin fiscal 2005.  The decrease was a result of reductions in ourworkforce related to reduced revenue volume.

**Subcontractor Costs.** Subcontractor costs include production costs incurred through the use ofthird parties for production tasks such as data conversion services to meetcontract requirements, and field survey services.  The use of domestic subcontractors enables usto better manage the fluctuations in labor requirements as we complete andbegin new projects as well as during the various phases of contracts.  Subcontractor costs decreased $352,000and $749,000 for the three and nine-month periods ended June 30, 2006, ascompared to the same periods in fiscal 2005 due to the completion of several contracts in fiscal 2006 that have not beenreplaced with new contracts.

**General and Administrative. **General and administrative costs include rent, maintenance, travel,supplies, utilities, insurance and professional services.  Such costs decreased $221,000 and$370,000 for the three and nine-month periods ended June 30, 2006,respectively, from the comparable periods in fiscal 2005.  Thedecrease was a result of the implementation of controls, lower overheadexpenses required to manage and perform fewer contracts, and the reduced costsrelated to fewer general and administrative employees.

**Depreciation and Amortization. **Depreciation and amortization decreased $24,000 and $90,000 forthe three and nine-month periods ended June 30, 2006, respectively, fromthe comparable periods in fiscal 2005 due to some equipment becoming fullydepreciated.  The replacement cost on computer equipment issignificantly lower than the original cost of replaced items.  Additionally, we have extended the life ofexisting equipment and elected to postpone investment in new equipment.  Accordingly, depreciation and amortizationexpense has decreased in recent periods.

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

**Interest Expense, Net.**  Weincurred interest expense totaling $23,000 in the quarter ended June 30, 2006as compared to $12,000 in the quarter ended June 30, 2005.  For the nine months ended June 30, 2006,interest expense totaled $78,000 as compared to $64,000 for the correspondingprior year period.  The increase in thefiscal 2006 periods was principally a result of the accretion of the Series APreferred Stock to the final redemption price of $299,583 resulting in an $8,000increase in interest.  We also incurredinterest expense in June 2006 related to our Convertible Senior SecuredPromissory Notes issued in May 2006. Interest expense in future periods will increase accordingly as a resultof the Senior Notes (see Note 6).

24

----

**Other Income (Expense).** Infiscal 2006, other income or expense is principally a result of therelinquishment of $61,000 of accrued dividends by the holders of our Series ARedeemable PreferredStock.  In fiscal 2005, other income or expense wasprincipally a result of the change in fair value of the derivative features ofthe Tonga Partners LLP Note, and subsequent to the reclassification of thederivative features, amortization of the premium on the Note.  The premium was amortized to other incomeuntil the conversion of the Note on November 10, 2004, and the unamortizedbalance was reclassified to stockholders’ equity.  We recorded other expense of approximately$11,000 in the three months ended June 30, 2006, as we amortized deferredexpenses related to the Senior Note. Other expense in future periods will increase accordingly (seeNote 6).

**Income Taxes**.  Federal income tax expense forfiscal year 2006 is projected to be zero. Accordingly, an effective federal income tax rate of 0% was recorded forthe three and nine-month periods ended June 30, 2006.  As a result of the uncertainty thatsufficient future taxable income can be recognized to realize additionaldeferred tax assets, no income tax benefit has been recognized for the threeand nine-month periods ended June 30, 2006 and 2005.

**Net Loss. **We recorded a net loss of $76,000 in thethird quarter of fiscal 2006 as compared to a net loss of $795,000 in the samequarter of fiscal 2005.  Our netloss of $101,000 in the first nine months of fiscal 2006 was $1,863,000 or 95%lower than the $1,964,000 net loss incurred in the nine-month correspondingperiod in 2005.  The variance was principally business volume related and due to lowersalaries, wages, and benefits, subcontractor costs, general and administrativeexpenses, lower interest expense, and fluctuations in other income and expense.

**Liquidityand Capital Resources**

**Table of Contractual Obligations.**  Belowis a schedule (by period due) of the future payments that we are obligated tomake over the next five years based on agreements in place as of June 30,2006.
| ** **                   | ** ** | **Fiscal Year Ending September 30,** | ** ** |
|------------------------------|------------|----------------------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                                 | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Total** | ** ** |
|                         |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Operating leases             |       | $                                                        | 17         |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 17 |   |
|                         |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Financing leases             |       | 6                                                        |       | 26 |   | 21 |   | 1 |   | — |   | 54 |   |
|                         |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Debt                         |       | 71                                                       |       | 280 |   | 2,209 |   | — |   | — |   | 2,560 |   |
|                         |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Preferred stock  - Dividends |       | 8                                                        |       | 20 |   | 12 |   | — |   | — |   | 40 |   |
|                         |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Total                        |       | $                                                        | 102        |   | $ | 326 |   | $ | 2,242 |   | $ | 1 |   | $ | — |   | $ | 2,671 |   |

 

**Historically, the principal sourceof our liquidity has consisted of cash flow from operations supplemented bysecured lines-of-credit and other borrowings. At June 30, 2006, we had outstanding Senior Notes, face value $2million, with a maturity date of May 31, 2008. The maturity date of the SeniorNotes may be accelerated if we do not receive Approval from our shareholders atour shareholder’s meeting on August 29, 2006, or if our Registration Statementon Form S-3 is not declared**

** **

25

----

**effective on or before October 8,2006.  We do not have a line of creditand there is no assurance that we will be able to obtain additional borrowingsshould we seek to do so.**

Our debt is summarized asfollows:
| **Long-Term Debt**                           | ** ** | **June 30,  2006** | ** ** | **September 30,  2005** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|------------------------------|------------|
|                                              |       |                    |       |                         |       |
| Other debt and  capital lease obligations         |       | $                       | 44         |                         | $          | 47 |   |
| Redeemable preferred  stock (See Note 7)     |       | —                  |       | 247                          |       |
| Senior Secured  Convertible Note, net of discount |       | 1,923                   |       | —                       |       |
|                                              |       | 1,967                   |       | 294                          |       |
| Less current  portion                             |       | (21                     | )          | (17                          | )          |
|                                              |       | $                       | 1,946      |                         | $          | 277 |   |

** **

**On February 1, 2006, 166,435 shares ofPreferred Stock were outstanding which were redeemable before December 28,2006 at $1.80 per share, or $299,583, or on December 28, 2006 at $2.00 pershare, or $332,870.  On February 1,2006, we exchanged 318,000 shares of Common Stock for all of the outstandingPreferred Stock and $61,000 in accrued dividends thereon.**

**On February 10, 2006, we issued 760,000 shares of anew Series A Convertible Preferred Stock (“Convertible Preferred”) withgross aggregate proceeds of approximately $760,000.  The two-year Convertible Preferred may beconverted into 598,425 shares of Common Stock at a fixed conversion price of$1.27 per share which was determined by applying a 10% discount to the 5-daytrailing average closing price of Common Stock of $1.41 per share as of theNASDAQ Stock Market close on February 9, 2006.  The holders of the Convertible Preferredreceived Class A Warrants that entitle them to purchase up to 299,212shares of Common Stock at $1.34 per share and an equivalent number of Class BWarrants (collectively, the “February Warrants”) that carry an exercise priceof $1.49 per share.  We also issued82,678 Class A Warrants and 82,678 Class B Warrants to certainparties as a finder’s fee.  The February Warrantswill be exercisable after six months from the date of closing until theirexpiration three years from the date of closing.  A Registration Statement on Form S-3 toregister all shares issuable pursuant to the Convertible Preferred and relatedFebruary Warrants was declared effective on April 12, 2006.  As of June 30, 2006, 480,000 shares ofConvertible Preferred have been converted into 377,952 shares of CommonStock.  We will be issuing approximately4,000 shares of Common Stock for dividends accrued on the Convertible Preferredsubmitted for conversion.**

TheConvertible Preferred earns dividends at a rate of 7% per annum.  We recorded the Convertible Preferred at itsoffering price of $1 per share, net of the estimated $22,171 fair value of theWarrants and the $29,921 intrinsic value of the beneficial conversion featureof the Convertible Preferred.  We usedthe Black Scholes model to determine the value of the February Warrants.  The intrinsic value of the beneficialconversion feature is the difference in fair market value of our Common Stockon the grant date of the Convertible Preferred less the conversion price,multiplied by the number of shares that are issuable upon conversion of theConvertible Preferred, or $.05 for each of 598,425 

 

26

----

sharesof Common Stock.  Dividends are recorded as interestexpense.  Accrued dividends at June 30,2006, and 2005, totaled approximately $10,233 and $0, respectively.

Themarket value of the Common Stock on the date that the Convertible Preferred wassold was $1.32 per common share.  Inaccordance with EITF 00-27, this created a beneficial conversion feature to theholders of the Convertible Preferred and a deemed dividend to the preferredstockholders totaling $30,000 was recorded with a corresponding amount recordedas convertible preferred stock.  Thedeemed dividend is calculated as the difference between the fair value of theunderlying Common Stock less the proceeds that have been received for theConvertible Preferred.

In May 2006, we acquired a 12.5% working interest in theso-called Adrienne 1-9 natural gas well located in Washita County, Oklahoma, foran amount, including obligations for tangible and intangible costs of drillingand completing the well, of approximately $1.7 million.  We financed these obligations through theissuance of senior secured promissory notes to two investors (the “Investors”)in the principal amount of $1.5 million and $0.5 million, respectively, (each,a “Senior Note”, and collectively the “Senior Notes”), to fund the drilling andcompletion of a 12.5% working interest in a natural gas welllocated in Washita County, Oklahoma.  TheSenior Notes have a maturity date of May 31, 2008, and bear interest at therate of 14%, payable quarterly.

The Investors alsoreceived warrants entitling them to purchase, in the aggregate, 752,072 sharesof the Common Stock at an exercise price of $1.186 per share, which was theclosing bid price of the Common Stock on May 31, 2006 (“Class E Warrants”).  However, the number of shares that can beissued to any holder pursuant to the exercise of the Class E Warrantscannot cause the Investor to become the beneficial owner of more than 9.99% ofthe then total number of shares of Common Stock outstanding (the “Maximum OneHolder Exercise Limitation”).  Limited tothese terms, the issuance of the Senior Notes and the Class E Warrants didnot require approval by the shareholders under the relevant NASDAQ Marketplacerules.

At our annualmeeting of the shareholders to be held on August 29, 2006, our shareholderswill be asked to approve additional terms of the Senior Notes and the issuanceof additional warrants to the Investors (the “Approval”).  If Approval is obtained, the Senior Notes,including interest accrued thereon, will be convertible, in whole or in part,into shares of Common Stock at a conversion price per share of $0.9488, whichis equal to 80% of the closing bid price of the Common Stock on May 30, 2006(the “Conversion Price”).  The ConversionPrice may be adjusted pursuant to a ratchet provision if we issue securities ata price lower than the Conversion Price (the “Ratchet Provision”).

Additionally, ifshareholders approve the issuance of additional warrants to the Investors, wewill issue: (i) 1,355,853 additional Class E Warrants, bringing theaggregate number of shares of Common Stock issuable upon conversion of the Class EWarrants to 2,107,295; (ii) Class C Warrants entitling the Investors andPlacement Agents of the Senior Notes (the “Placement Agents”) to purchase, inthe aggregate, 1,159,359 shares of Common Stock at an exercise price of $1.21per share, or 102% of the closing bid price of our Common Stock on May 30,2006; and (iii) Class D Warrants entitling the Investors and PlacementAgents to purchase, in the aggregate, 2,318,718 shares of Common Stock at anexercise price of $1.36 per share, or 115% of the closing bid price of ourCommon Stock on May 30, 2006.  The Class C,D, and E Warrants (collectively, the “Warrants”) are exercisable during theperiod commencing November 30, 2006 until November 30, 2011.  Each Warrant will contain a Ratchet Provisionand a Maximum One Holder Exercise Limitation.

 

27

----

If Approval isobtained at our annual meeting on August 29, 2006 or otherwise on or before September 28, 2006, we may redeemany outstanding portion of the Senior Notes at 115% of face value at any timeupon 30 days’ written notice, provided there has not been an Event of Default(as described below).  If Approval is not so obtained, the Investors will have theright, upon 30 days’ written notice, to accelerate the maturity date of theSenior Notes.

The holders of theSenior Notes have a first lien security interest in all of our assets.  TheSenior Notes contain typical antidilution provisions and are subject, at theInvestors’ election, to mandatory redemption at 120% of the outstandingprincipal and accrued interest (1) if we fail to issue Common Stock pursuant tothe conversion of the Senior Notes or exercise of any of the Warrants, (2) ifwe fail to timely deliver Common Stock pursuant to conversion of the SeniorNotes or exercise of the Warrants, (3) upon the occurrence of an Event ofDefault, which includes failure to be listed on the NASDAQ Capital Market, or(4) upon a change in control.

OnJuly 27, 2006, we filed a Registration Statement on Form S-3 to register allshares issuable pursuant to the Senior Notes and related Warrants.  If the registration statement is not declaredeffective on or before October 8, 2006, the Investors may accelerate thematurity date of the Senior Notes and demand payment at 120% of the face amountof the SeniorNotes.  Until theexpiration of a six-month period after the effective date of the RegistrationStatement, we are prohibited from filing additional registration statementswith the SEC.  Additionally, we areprohibited from issuing additional shares of Common Stock or securitiesconvertible into Common Stock without the consent of the Investors.

The Senior Notes, whichcarry a face value of $2 million, mature on May 31, 2008, and accrue intereston the face value at an annual rate of 14%. Accrued interest is payable on September 30, 2006, and quarterlythereafter, in cash.  We recorded theSenior Notes at a discount after giving effect to the $80,424 estimated fairvalue of the warrants, which was charged to equity.  The effective rate of interest on the SeniorNotes is 16.7%.  Interest expense isrecorded using this effective rate of interest. Thecarrying value of the Senior Notes is being accreted to the face amount bycharges to interest expense through the maturity date. The carrying value at June 30,2006, is $1.923 million and represents the $2 million outstanding principalless the unearned discount.  The unearneddiscount of $77,128 as of June 30, 2006 represents the estimated fairvalue of the warrants of $80,424 less accretion.

**We incurred coststotaling approximately $249,000 related to the issuance of the SeniorNotes.  We recorded these expenses asprepaid or deferred expenses.  Thesecosts will be amortized to other expense over the two-year term of the SeniorNotes.  If the maturity date of theSenior Notes is accelerated for any reason, the unamortized portion of thedeferred costs will be charged to interest expense.**

Theaccompanying financial statements have been prepared on a going concern basis,which contemplates the realization of assets and the satisfaction ofliabilities in the normal course of business. Since fiscal 2000, we have experienced significant operating losses withcorresponding reductions in working capital. Our revenues and backlog decreased significantly during that time.  These factors, among others, have resulted inour independent auditors issuing an audit opinion on 

 

28

----

theSeptember 30, 2005, financial statements that expressed substantial doubtabout our ability to continue as a going concern.

**To address the going concernissue, management implemented financial and operational restructuring plansdesigned to improve operating efficiencies, and to reduce and eliminate cashlosses.  The conversion of the Note intoCommon Stock in November 2004 reduced our debt by $1,696,000, eliminatedfuture related interest expense and improved our debt to equity ratio.  During February 2006, we retired principallyall of our then existing debt when we issued 318,000 shares of Common Stock inexchange for all outstanding shares of the Preferred Stock and dividendsaccrued thereon, eliminating the need to reserve cash to meet thisobligation.  We have reduced our generaland administrative expenses by reducing occupancy costs and streamlining ourexecutive, senior and middle management teams. We are transitioning our business strategy as described previously, andwe have raised debt and equity capital to facilitate investments in oil andnatural properties.  We are negotiatingthe sale of our Wisconsin-based operations so that we can maximize our greatestreturn from an area of business that is not generating margins sufficient tosustain ongoing operations.  If  successful in our negotiations, we willassign a substantial portion of our contracts and backlog as part of the sale.**

**In the absence of a line of creditand because of our inability to secure debt on terms that would be consideredreasonable based on our recent operating history, we depend on internal cashflow to sustain operations.  Internalcash flow is significantly affected by customer contract terms and progressachieved on projects.  Fluctuations ininternal cash flow are reflected in three contract-related accounts:accounts receivable; revenue earned in excess of billings; and billings inexcess of revenue earned. Under the percentage of completion method of accounting:**

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

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

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

These accounts, whichrepresent a significant investment by us in our business, affect our cash flowas projects are signed, performed, billed and collected.  At June 30, 2006, we had multiplecontracts with five customers, the aggregate of which accounted for 75% of ourconsolidated revenues during the three months ended June 30, 2006(Worldwide Services, Inc. and Intergraph (“WWS”), 30%; AGL Resources (“AGL”),15%; MWH Americas, Inc., 13%; Keyspan Corporate Services, Inc., 8%; and NiagaraMohawk, 9%.  Two of these customers (WWSand AGL) accounted for 76% and 9%, respectively, of our total accountsreceivable and revenue in excess of billings at June 30, 2006.  At June 30, 2005, we had multiplecontracts with four customers, the aggregate of which accounted for 73% of ourconsolidated revenues during the three months ending June 30, 2005 (WWS,7%; Michigan Consolidated Gas Company (“MichCon”), 21%; BritishTelecommunications PLC (“BT”), 27%; and MWH Americas, Inc., 18%).  One of these customers, WWS, accounted for72% of our total accounts receivable and revenue in excess of billings at June 30,2005.  Billing terms are negotiated in acompetitive environment and are based on reaching project milestones.  We anticipate that sufficient billingmilestones or contract completion will be achieved during fiscal 2006such that the majority of revenue in excess of billings for these customercontracts will be collected.

 

29

----

In order to meet our short-term cash requirements wemust collect more cash from our customers than we pay to our employees andsuppliers.  To meet our short andlong-term cash requirements and to generate sufficient cash flow to fundoperations and expenditures, we must complete certain projects in fiscal 2006and 2007 that are related to the balance of revenue earned in excess ofbillings at June 30, 2006, in order to generate sufficient cash flow tofund operations and expenditures.

On July 21, 2006,we received notice from the NASDAQ indicating that we are not in compliancewith one of NASDAQ’s requirements for continued listing because the bid priceof the Common Stock has closed below the minimum $1.00 per share requirementfor the previous 30 consecutive business days. NASDAQ requires compliance with the minimum bid price for continuedinclusion under NASDAQ Marketplace Rule 4310(c)(4) (the “Rule”).  Such a notice is routinely issued when alisted company does not meet the minimum bid requirement.  The notice has no effect on the listing ofthe Common Stock at this time.  Inaccordance with NASDAQ Marketplace Rule 4310(c)(8)(d), we will be provided 180calendar days, or until January 17, 2007, to regain compliance.  If at any time before January 17, 2007,the bid price of the Common Stock closes at $1.00 per share or more for aminimum of 10 consecutive business days, the NASDAQ may determine that we haveexhibited compliance with the Rule.  Ifcompliance with the Rule cannot be demonstrated by January 17, 2007, andwe meet the initial listing criteria of the NASDAQ Capital Market, we will begranted an additional 180-calendar day compliance period.  If we are not eligible for the additionalcompliance period, NASDAQ will notify us that our securities will bedelisted.  We may appeal suchdetermination to NASDAQ’s Listing Qualifications Panel.  Until we exhibit compliance with the Rule,NASDAQ and third party providers of market data information will broadcast anindicator of our non-compliance.

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

**Our operating activities used$407,000 and provided $105,000 cash during the nine-months ended June 30,2006 and 2005, respectively. Contract-related accounts declined $740,000 and $2,655,000 during therespective periods.  We reduced ouraccounts payable and accrued expense liabilities by $706,000 and $755,000during the nine months ended June 30, 2006 and 2005, respectively.**

**We purchased equipment andleasehold improvements totaling $11,000 and $81,000, during the nine monthsended June 30, 2006 and 2005, respectively.  We purchased equipment and mineral interestsin oil and gas properties for $1,826,000 during the nine months ended June 30,2006.**

**Item 3.  Controls andProcedures**

As of the end of the period covered by this report,we carried out an evaluation, under the supervision and with the participationof our management, including our Chief Executive Officer and Chief AccountingOfficer, of the effectiveness of our disclosure controls and procedures (asdefined in rules 13(a)-15(e) and 15(d)-15(e) of the Securities Exchange Act of1934, as amended (the “Exchange Act”)). Based upon that evaluation, the ChiefExecutive Officer and the Chief Accounting

 

30

----

Officer have concluded that the disclosure controlsand procedures are effective in ensuring that the information we arerequired to disclose in reports that we file or submit under the Exchange Actis recorded, processed, summarized and reported within the time periodsspecified in Securities and Exchange Commission rules and forms and isaccumulated and communicated to management, including our Chief Executive Officerand Chief Accounting Officer, as appropriate to allow timely discussionsregarding required disclosure.

There has been no change inour internal control over financial reporting (as defined in Rules 13(a)-13(f)and 15(d)-15(f) under the Exchange Act) that occurred during the period coveredby this quarterly report that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

31

----

**Part IIOther Information**

**Item 1.  Legal Proceedings**.

Information regarding our legal proceedingscan be found under Note 9, “Litigation”, to the Consolidated FinancialStatements.

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

In May2006, the Company financed an acquisition by means of a $2 million privateplacement that closed on May 31, 2006. In connection with the private placement, the Company issued convertiblesenior secured promissory notes, Class E common stock purchase warrants, ClassC common stock purchase warrants, and Class D common stock purchase warrants,all to two investors pursuant to Section 4(2) of the Securities Act.

**Potential Issuance of Shares of Common Stock Pursuant to the Notes andWarrants**

The followingtables set forth the number of shares of Common Stock that could be issued uponconversion of the Senior Notes and exercise of the Warrants, without givingeffect to any antidilution provisions, (1) prior to or if the Approval isobtained and (2) if Approval is not obtained.
| ** **          | ** ** | **Maximum Shares Issuable if the Approval is Obtained (without antidilution provisions)** | ** ** |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **          | ** ** | **Conversion of Senior Note**                                                                                                | ** ** | **Number of Shares of Common Stock   Issuable Upon Exercise of Warrants(1)** | ** ** | **Full Conversion  and Exercise** | ** ** |
| ** **          | ** ** | **Principal(2)**                                                                                                                            | ** ** | **Interest(3)** | ** ** | **Class C** | ** ** | **Class D** | ** ** | **Class E** | ** ** | **# shares** | ** ** | **%  ownership(4)** | ** ** |
| Longview Fund,  LLP |       | 1,580,944                                                                                                                                   |       | 442,664 |   | 790,472 |   | 1,580,944 |   | 1,580,944 |   | 5,975,968 |   | 50 |   |
| Alpha Capital,  AG  |       | 526,981                                                                                                                                     |       | 147,555 |   | 263,491 |   | 526,981 |   | 526,981 |   | 1,991,989 |   | 17 |   |
| Placement Agents    |       | —                                                                                                                                      |       | — |   | 105,396 |   | 210,793 |   | — |   | 316,189 |   | 2 |   |
| Total               |       | 2,107,925                                                                                                                                   |       | 590,219 |   | 1,159,359 |   | 2,318,718 |   | 2,107,925 |   | 8,284,146 |   | 69 |   |

----

(1)             Uponexercise of the Class C, D, and E Warrants, net proceeds to the Company willtotal up to $6.8 million.

(2)             TheRegular Conversion Price with respect to the Senior Notes is equal to $.9488.

(3)             Assumestwo years interest earned at 14% and that all of it is converted into shares ofCommon Stock.

(4)             Ownership percentagebased on 3,779,256 shares outstanding at June 30, 2006, and issuance of8,284,146 shares issuable upon full conversion of Senior Notes and two years ofinterest, and the exercise of all the warrants
| ** **          | ** ** | **Maximum Shares Issuable if the Approval is Not Obtained** | ** ** |
|---------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| ** **          | ** ** | **Conversion of Senior Note**                                                        | ** ** | **Number of Shares of Common Stock  Issuable Upon Exercise of Warrants(1)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **          | ** ** | **Principal**                                                                                       | ** ** | **Interest** | ** ** | **Class C** | ** ** | **Class D** | ** ** | **Class E(1)** | ** ** | **# shares** | ** ** | **%  ownership(2)** | ** ** |
| Longview Fund,  LLP |       | —                                                                                              |       | — |   | — |   | — |   | 564,054 |   | 564,054 |   | 12 |   |
| Alpha Capital,  AG  |       | —                                                                                              |       | — |   | — |   | — |   | 188,018 |   | 188,018 |   | 4 |   |
| Placement Agents    |       | —                                                                                              |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Total               |       | —                                                                                              |       | — |   | — |   | — |   | 752,072 |   | 752,072 |   | 16 |   |

----

(1)             Uponexercise of the Class E Warrants, net proceeds to the Company will total up toapproximately $891,957.

(2)             Ownershippercentage based on a total of 3,779,256 shares issued and outstanding at June30, 2006, and issuance of 752,072 shares issuable upon the exercise of theClass E Warrants.

 

32

----

**Item 3.  Defaults Upon SeniorSecurities.**

None.

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

None.

**Item 5.  Other Information.**

None.

**Item 6.  Exhibits.**

**Exhibits:**

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

 

33

----

**SIGNATURES**

Inaccordance with the requirements of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

|                                  |     | Analytical Surveys, Inc.   |   |
|----------------------------------|----------|----------------------------|--------|
|                             |     | (Registrant)               |   |
|                             |     |                       |
|                             |     |                       |
| Date:  August 14, 2006 |     | /s/ LORI A.  JONES         |
|                             |     | Lori A. Jones              |
| * *                         | * * | *Chief Executive Officer*  |
|                             |     |                       |
|                             |     |                       |
| Date:  August 14, 2006 |     | /s/ BARRY  GOLKO           |
|                             |     | Barry Golko                |
| * *                         | * * | *Chief Accounting Officer* |

 

34

----