Form 10-QSB for Quarter Ending June 30, 2007

10QSB 1 form10-qsb_ending063007.htm FORM 10-QSB FOR QUARTER ENDING JUNE 30, 2007 Form 10-QSB for Quarter Ending June 30, 2007

UNITED STATES

SECURITIES 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, 2007

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

Commission File Number 0-13111

ANALYTICAL SURVEYS, INC.

(Exact name of registrant as specified in its charter)

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

8610 N. NEW BRAUNFELS, SUITE 205, SAN ANTONIO, TEXAS 78217
(Address of principal executive offices)

(210) 657-1500
(Registrant’s telephone number, including area code)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No_____

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ___ No X

The number of shares of common stock outstanding as of August 14, 2007, was 3,789,256.

TABLE OF CONTENTS

		PAGE
PART 1.	FINANCIAL INFORMATION

Item 1.	Financial Statements	3

Item 2.	Management’s Discussion and Analysis or Plan of Operations	14

Item 3.	Controls and Procedures	21

PART 2.	OTHER INFORMATION

Item 1.	Legal Proceedings	22

Item 2.	Unregistered Sales of Securities and Use of Proceeds	22

Item 3.	Defaults Upon Senior Securities	22

Item 4.	Submissions of Matters to a Vote of Security Holders	22

Item 5.	Other Information	22

Item 6.	Exhibits

SIGNATURES		23

Part I

Financial Information

Item 1. Financial Statements

ANALYTICAL SURVEYS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

Assets		June 30, 2007			September 30, 2006
Current assets:		(Unaudited)
Cash and cash equivalents	$	378		$	1,357
Accounts receivable, net of allowance for doubtful accounts of $0 and $50 at June 30, 2007 and September 30, 2006, respectively		218			1,322
Revenue earned in excess of billings, net		—			49
Prepaid expenses and other		40			93
Deferred financing costs		76			133
Total current assets		712			2,954
Oil and natural gas properties and equipment; full cost method of accounting		1,667			2,019
Less accumulated depletion		(54	)		—
Net oil and natural gas properties and equipment		1,613			2,019
Equipment and leasehold improvements, at cost:
Equipment		198			570
Furniture and fixtures		36			98
Leasehold improvements		8			1
		242			669
Less accumulated depreciation and amortization		(212	)		(605	)
Net equipment and leasehold improvements		30			64
Total assets	$	2,355		$	5,037
Liabilities and Stockholders’ Equity
Current liabilities:
Senior secured convertible note, net of discount	$	1,530		$	1,957
Current portion of capital lease obligations		16			16
Billings in excess of revenue earned		—			99
Accounts payable		243			45
Accrued liabilities		165			239
Accrued payroll and related benefits		56			132
Total current liabilities		2,010			2,488
Long-term debt:
Capital lease obligations, less current portion		1			13
Asset retirement obligations		6			—
Total long-term liabilities		7			13
Total liabilities		2,017			2,501
Commitments and contingencies		—			—
Stockholders’ equity:
Convertible preferred stock, no par value; authorized 2,500 shares; 280 issued and outstanding at June 30, 2007, and September 30, 2006, respectively		261			261
Common stock, no par value; authorized 100,000 shares; 3,789 and 3,779 shares issued and outstanding at June 30, 2007, and September 30, 2006, respectively		36,593			36,341
Accumulated deficit		(36,516	)		(34,066	)
Total stockholders’ equity		338			2,536
Total liabilities and stockholders’ equity	$	2,355		$	5,037

See accompanying notes to consolidated financial statements.

ANALYTICAL SURVEYS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended						Nine Months Ended
	June 30,						June 30,
		2007			2006			2007			2006

Revenues:
GIS services	$	48		$	1,044		$	348		$	3,787
Oil and gas		64			5			93			5
Total revenues		112			1,049			441			3,792

Costs and expenses:
Salaries, wages and benefits		129			748			547			2,405
Subcontractor costs		—			43			—			457
Lease operating expenses		14			—			26			—
Impairment of Oil and Gas Properties		1,001			—			1,001			—
General and administrative		159			285			588			955
Depreciation, depletion and amortization		40			15			70			52
Total operating costs		1,343			1,091			2,232			3,869
Loss from operations		(1,231	)		(42	)		(1,791	)		(77	)
Other income (expense):
Interest expense, net		(171	)		(23	)		(428	)		(78	)
Gain (loss) on sale of assets		(3	)		—			(31	)		3
Gain on extinguishment of debt		—			—			—			61
Other expense, net		—			(11	)		(185	)		(10	)
Total other expense, net		(174	)		(34	)		(644	)		(24	)
Loss before income taxes		(1,405	)		(76	)		(2,435	)		(101	)
Provision for income taxes		—			—			—			—
Net loss		(1,405	)		(76	)		(2,435	)		(101	)
Deemed dividend associated with beneficial conversion feature of preferred stock		—			—			—			(30	)
Dividends on preferred stock		(5	)		(6	)		(15	)		(13	)
Net loss available to common stockholders	$	(1,410	)	$	(82	)	$	(2,450	)	$	(144	)

Basic and diluted net loss per common share	$	(0.37	)	$	(0.02	)	$	(0.65	)	$	(0.03	)
Preferred stock dividends		—			—			—			(0.01	)
Basic and diluted net loss per common share available to common shareholders	$	(0.37	)	$	(0.02	)	$	(0.65	)	$	(0.04	)

Weighted average common shares:
Basic		3,789			3,724			3,783			3,250
Diluted		3,789			3,724			3,783			3,250

See accompanying notes to consolidated financial statements.

ANALYTICAL SURVEYS, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the Nine Months Ended June 30, 2007

(In thousands)

(Unaudited)

	Convertible Preferred Stock				Common Stock						Accumulated			Total Stockholders’
		Shares		Amount		Shares		Amount			Deficit			Equity
Balances at September 30, 2006		280	$	261		3,779	$	36,341		$	(34,066	)	$	2,536
Amortization of stock-based compensation		—		—		—		13			—			13
Registration costs for Class E Warrants and Senior Notes		—		—		—		(38	)		—			(38	)
Warrants issued pursuant to Convertible Notes		—		—		—		272			—			272
Partial conversion of Convertible Note, net of discount and preferred financing costs		—		—		10		5			—			5
Dividends on preferred stock		—		—		—		—			(15	)		(15	)
Net loss		—		—		—		—			(2,435	)		(2,435	)
Balances at June 30, 2007		280	$	261		3,789	$	36,593		$	(36,516	)	$	338

See accompanying notes to consolidated financial statements.

ANALYTICAL SURVEYS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended
	June 30,
		2007			2006
Cash flows from operating activities:
Net loss	$	(2,435	)	$	(101	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, depletion and amortization		68			52
Amortization of stock-based compensation expenses		13			—
Accretion of interest on convertible note		202			3
Amortization of deferred financing costs		240			10
Accretion of interest expense on redeemable preferred stock		—			52
Gain on extinguishment of debt		—			(61	)
Gain (loss) on disposal of assets		31			(3	)
Impairment of oil and gas properties		1,001			—
Changes in operating assets and liabilities:
Accounts receivable		1,104			(43	)
Revenue earned in excess of billings, net		49			990
Prepaid expenses and other		53			(13	)
Billings in excess of revenue earned		(99	)		(207	)
Accounts payable and accrued liabilities		124			(719	)
Accrued payroll and related benefits		(76	)		(367	)
Net cash provided by (used in) operating activities		275			(407	)
Cash flows from investing activities:
Purchase of equipment and leasehold improvements		(20	)		(11	)
Investment in oil and gas properties		(912	)		(1,826	)
Cash proceeds from sale of assets		277			4
Net cash used in investing activities		(655	)		(1,833	)
Cash flows from financing activities:
Principal payments on long-term debt		(12	)		(7	)
Issuance of convertible preferred stock and warrants		—			760
Dividends paid on preferred stock		(15	)		—
Principal payment on convertible note		(2,000	)		—
Issuance of convertible note, net of expenses		1,466			1,751
Fees associated with issuance of common and preferred stock		—			(76	)
Fees associated with registration of warrants		(38	)		—
Net cash provided by (used in) financing activities		(599	)		2,428
Net increase (decrease) in cash		(979	)		188
Cash and cash equivalents at beginning of period		1,357			622
Cash and cash equivalents at end of period	$	378		$	810
Supplemental disclosures of cash flow information:
Cash paid for interest	$	119		$	—
Non-cash financing activities:
Issuance of common stock in exchange for redeemable preferred stock	$	—		$	300
Issuance of common stock in exchange for convertible preferred stock	$	—		$	447
Issuance of common stock for equipment and oil and gas working interests	$	—		$	200
Issuance of common stock for consulting and legal services	$	—		$	103
Accretion of interest on redeemable preferred stock	$	—		$	16
Deemed dividend associated with beneficial conversion feature of convertible preferred stock	$	—		$	30
Accrual of dividends on convertible preferred stock	$	15		$	13
Warrants issued related to convertible debt	$	272		$	—
Partial conversion of convertible note	$	5		$	—

See accompanying notes to consolidated financial statements.

ANALYTICAL SURVEYS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

1. Description of Business

Founded in 1981, we have historically served as a provider of data conversion and digital mapping services to users of customized geographic information systems. However, we have experienced a steady decrease in the demand for our services over the past five years; our backlog has decreased substantially in each of the past five years; and we have been unsuccessful in winning new business at acceptable margins. In fiscal 2006, we acted upon our belief that we would not be able to sustain the operations of our historical business. We transitioned our principal business into that of an independent oil and gas enterprise focused on leveraging non-operating participation in drilling and production prospects for the development of U.S. on-shore oil and natural gas reserves.

The accompanying interim consolidated financial statements have been prepared by management without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, in accordance with the accounting policies described in our Annual Report on Form 10-KSB for the year ended September 30, 2006, and reflect all adjustments which are, in the opinion of management, necessary to present a fair statement of the results for the interim period on a basis consistent with the annual audited consolidated financial statements. All such adjustments are of a normal recurring nature. The consolidated financial statements include the accounts of Analytical Surveys, Inc. (“ASI”, “we”, “our” or the “Company”) and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-KSB for the year ended September 30, 2006. All amounts contained herein are presented in thousands unless indicated.

2. Going Concern

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. During the fiscal years of 2000 through 2006, and continuing into fiscal 2007, we have experienced significant operating losses with corresponding reductions in working capital and stockholders’ equity. We do not currently have any external financing in place to support operating cash flow requirements. We are in default under the terms of our Convertible Notes as further described below. If the holders of the Convertible Notes demand immediate cash payment, we will be forced to liquidate our assets to pay our obligations, or the holders may seize our assets at any time.. These factors, among others, raise substantial doubt about our ability to continue as a going concern.

To address the going concern issue, management implemented financial and operational plans designed to reduce overhead and accelerate cash from our GIS service contracts and reduce and eliminate cash losses. We reduced our GIS sales and marketing efforts that were not resulting in new contracts. In August 2006, we sold our Wisconsin-based operations, which would have required working capital to fund ongoing operations. We completed our GIS service contract with Worldwide Services, Inc, and Intergraph (“WWS”) in the first fiscal quarter of 2007, collected accounts receivable and retained amounts, phased out production personnel and management as contracts were completed, and took aggressive steps toward becoming a valid participant within the energy sector. We incurred a significant loss in the three and nine months ended June 30, 2007, totaling $1,405,000 and $2,435,000, respectively. During the period, we devoted our resources to identifying and obtaining funding for the acquisition of various oil and gas properties that would provide current cash flow and future value. As of the date of this report, we have not secured appropriate funding. We have taken steps to further reduce our operating expenses, and effective May 15, 2007, we reduced our executive management from three persons to one person. Lori Jones, our chief executive officer and acting chief financial officer, will continue to serve in such capacities. As there is no assurance that we will be able to obtain additional capital for these efforts, we are also seeking the acquisition of new operations that have potential to provide shareholder value.

The financial statements do not include any adjustments relating to the recoverability of assets and the classifications of liabilities that might be necessary should we be unable to continue as a going concern.

3. Summary of Significant Accounting Policies

Revenue Recognition. As of January 1, 2007, we no longer have long-term GIS contracts. We provide GIS-related services on a time and materials basis. We recognize revenue in the period that the services are rendered.

Oil and natural gas revenues are recognized when delivery has occurred and title to the products has transferred to the purchaser. We estimate revenues based on production reports and estimated market prices when actual results are not available.

Stock Based Compensation. Prior to October 1, 2006, we accounted for employee options under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” ("APB 25"). Accordingly, we would recognize compensation expense only if we granted options with a discounted exercise price. Any resulting compensation expense would then have been recognized ratably over the associated service period. Except for the grant of inducement options to our former chief executive officer in a period not covered by this report, no stock-based employee compensation expense relating to our stock options was reflected in net loss, as all options granted had an exercise price equal to or greater than the market value of the underlying Common Stock on the respective date of grant. Prior to October 1, 2006, we provided pro-forma disclosure amounts in accordance with Statement of Financial Accounting Standard, (“SFAS”) No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure" ("SFAS No. 148"), as if the fair value method defined by SFAS No. 123, “Accounting for Stock-Based Compensation” ("SFAS No. 123"), had been applied to its stock-based compensation.

Effective October 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123R, “Share Based Payment”, using the modified prospective transition method, and therefore we have not restated prior periods' results. Under this transition method, employee stock-based compensation expense for the three and nine months ended June 30, 2007, includes compensation expense for all stock-based compensation awards granted, but not yet fully exercisable, prior to October 1, 2006. The fair value of the options granted was determined at the original grant dates in accordance with the provisions of SFAS No. 123. Stock-based compensation expense for all share-based payment awards granted after September 30, 2006, is based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. We recognize these compensation costs over the requisite service period of the award, which is generally the vesting term of the options.

As a result of adopting SFAS No. 123R, we recorded $3,463 and $12,591 additional compensation expense for the three and nine months ended June 30, 2007, respectively, than would have been recorded if we had continued to account for stock-based compensation under APB 25. There was no impact of the adoption of SFAS No. 123R on either basic or diluted earnings per share for the three and nine months ended June 30, 2007. At June 30, 2007, the unamortized value of employee stock options under SFAS No. 123R was approximately $26,861. The unamortized portion will be expensed at the rate of $4,611 in the fourth quarter of fiscal 2007 and $17,455 and $4,795 in the fiscal years ending September 30, 2008, and 2009, respectively.

Option valuation models require the input of highly subjective assumptions including the expected life of the option. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options.

We granted 135,000 options during the nine-month period ended June 30, 2007. We granted 65,000 options to our CEO an exercise price of $0.53, and 15,000 and 5,000 options to each of two newly appointed directors at exercise prices of $0.59 and $0.52, each of which was the fair market value on the date of grant. We also granted 15,000 options to each of two executive officers at an exercise price of $0.53, which was the fair market value on the date of grant; these options were forfeited on May 15, 2007, as no options were vested when the executive officers’ employment was terminated. The weighted average exercise price of options granted during the nine months ended June 30, 2007 was $0.54.

To compute compensation expense in fiscal 2007, we estimated the fair value of each option award on the date of grant using the Black-Scholes model. The Black-Scholes model incorporates variable assumptions which include: the expected volatility, which is based on the historical volatility of our traded stock. the expected term calculated using the simplified method permitted by the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 107.; the expected dividend yield based on historical patterns and peer group performance; and the risk free rate, based on the U.S. Treasury yield curve at the time of the grant corresponding to the expected term. We have not historically declared a dividend on our common stock and do not anticipate that we will declare a dividend in the foreseeable future and therefore used a dividend yield of zero. We used historical data to estimate option exercise and employee terminations within the valuation model. The fair value of options at the date of grant was estimated using the Black-Scholes option-pricing model with assumptions as follows: volatility, 91.585%, risk-free interest rate, 4.5%, dividend yield, 0.0% and weighted-average expected life of the options, 3 years.

A summary of the status of the outstanding options and the changes during the nine months ended June 30, 2007, is presented in the table below:

	Number of Options (thousands)			Weighted Average Exercise Price	Aggregate Intrinsic Value

Outstanding at September 30, 2006	521		$	1.46
Granted	135			0.54
Exercised	—			—
Forfeited	(71	)		1.22
Outstanding at June 30, 2007	585		$	1.06	0.0

At June 30, 2006, and 2007, approximately 150.000 and 476,000 options, respectively, were exercisable. A summary of our stock options outstanding and exercisable at June 30, 2007, is presented in the table below:

Range of Exercise Price	Number Outstanding at June 30, 2007		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)		Number Exercisable at June 30, 2007		Weighted Average Exercise Price
$0.00 - 0.75		330,000	$	0.64		6.25		225,000	$	0.69
0.76 - 1.50		180,000		1.31		6.82		176,250		1.30
1.51 - 2.25		20,000		2.11		7.18		20,000		2.11
2.26 - 3.00		55,000		2.38		7.67		55,000		2.38
$ 0.00 - 3.00		585,000	$	1.06		6.59		476,250	$	1.17

We have determined that shares of Common Stock for future exercises shall be from authorized but unissued shares of stock.

A summary of non-exercisable options at June 30, 2007, is shown below:

	Non-Vested Shares			Weighted Average Exercise Price
Non-exercisable at September 30, 2006	37,500		$	1.94
Granted	135,000			0.54
Became exercisable	(33,750	)		1.99
Forfeited	(30,000	)		0.58
Non-exercisable at June 30, 2007	108,750		$	0.58

For the three and nine months ended June 30, 2006, under APB 25, no stock-based employee compensation expense relating to our stock options was reflected in net loss, as all options granted under our plans had an exercise price equal to or greater than the market value of the underlying Common Stock on the respective dates of grant.

For our pro forma information for the three and nine months ended June 30, 2006, the fair value of each option grant was estimated on the respective date of grant using the Black-Scholes option pricing model with the following assumptions used:

	Three Months Ended June 30, 2006		Nine Months Ended June 30, 2006
Dividend yield	0	%	0	%
Anticipated volatility	122	%	92 - 122	%
Risk-free interest rate	4.0	%	4.0	%
Expected lives	3.5 years		2 - 3.5 years

The weighted average fair value of the options on the respective dates of grant, using the fair value based method, for the three and nine months ended June 30, 2006, was $0.17 and $0.16, respectively.

During the three and nine months ended June 30, 2006, 5,000 and 95,000 options, respectively, were granted to members of our workforce as incentive to sustain performance. These options have an exercise price ranging from $1.34 to $1.37, which was the market price of the underlying common stock on the date of grant. Additionally, during the three months ended June 30, 2006, 50,000 options with an exercise price of $1.27 were granted to our Chief Executive Officer; 30,000 and 10,000 options with exercise prices of $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 the members of our Board of Directors. The exercise price of the options granted during the three month period was the market price of the underlying Common Stock on the date of grant.

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

		Three Months Ended			Nine Months Ended
		June 30, 2006			June 30, 2006
	(in thousands except per share earnings)
Net loss available to common shareholders as reported	$	(82	)	$	(144	)
Add: Stock-based employee compensation included in reported net loss		—			—
Less: Pro forma option expense		(47	)		(67	)
Pro forma net loss	$	(129	)	$	(211	)

Basic net loss per share, as reported	$	(0.02	)	$	(0.04	)
Less: Pro forma option expense		(0.01	)		(0.02	)
Pro forma basic net loss per share	$	(0.03	)	$	(0.06	)

Diluted net loss per share, as reported	$	(0.02	)	$	(0.04	)
Less: Pro forma option expense		(0.01	)		(0.02	)
Pro forma diluted net loss per share	$	(0.03	)	$	(0.06	)

4. Impact of Accounting Pronouncements

In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“FAS 159”). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value, with the objective of improving financial reporting by mitigating volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The provisions of FAS 159 are effective for the Company’s fiscal year beginning October 1, 2008. We are currently evaluating the impact that the adoption of this statement will have on our consolidated financial position, results of operations and related disclosures.

5. Oil and Natural Gas Properties and Equipment

As of June 30, 2007, we own non-operating working interests in three properties in Oklahoma. Our 10.0% working interest (7.35% net revenue interest) in a relatively deep Anadarko Basin natural gas well known as the Adrienne 1-9, located in Washita County, Oklahoma, is our largest and most significant investment to date. As of June 30, 2007, our total investment in this well totaled $1.92 million, which includes our proportionate share of intangible costs of drilling and completing the well. The Adrienne 1-9 is operated by Range Resources Corporation. The well produced from one zone from January until May 2007, when it was recompleted to additional zones. Gross production has ranged from 500 million cubic feet per day to 3,200 million cubic feet per day.

We own a 20.0% working interest (16.7% net revenue interest) in a well designated as the Welker 1-7, located in Pawnee County, Oklahoma. Our capital investment to date in this property totals $300,000. We entered into an operating agreement with the seller and owner of the remaining 80% working interest. The well was completed in March 2006 and has produced small amounts of oil from the Prue formation. In April 2007, the operator initiated completion to the coal bed zones by perforating and fracturing the Iron Post and Dawson formations. The de-watering process typical to coal bed zones requires four to six months before reaching the full potential gas production from the well. Due to inclement weather delays, we do not anticipate achieving gas production from this well until fiscal 2008.

We own a 25% working interest in three wells designated as Shields No. 1, 2, and 3, located in Pawnee County, Oklahoma, plus a 100% interest in certain fixtures and equipment used in connection with the operation of the wells. One well has been permitted as a water disposal well. The operator plans to re-enter one of the other wells and deepen to a proven structure. If successful, the third well will also be re-entered and deepened. Our investment in these wells included $150,000 cash and 129,032 shares of Common Stock having a fair market value (equal to the closing bid on March 14, 2006) of $1.55 per share, or $200,000. In July 2006, to eliminate additional investment in these wells, we exchanged one-half of our working interest in return for a carry of all costs associated with drilling and recompletion activities associated with our remaining working interest in the three wells.

In January 2007 we entered into an agreement with H&S Production of Dallas, Texas (“H&S”), to participate in the drilling and completion of the Haun #1-A located in Grayson County, Texas, which also included rights and drilling obligations for additional drilling activities in the surrounding field. We also purchased a 5% working interest in a well in Jack County, Texas, through our relationship with H&S. We evaluated these investments in June 2007, which totaled approximately $184,000 with an additional $100,000 drilling obligation payable. Based on initial drilling results, cost overruns, and delays in pipeline availability, we elected to convey the properties to a third party for $120,000 cash and a release from the immediate and future obligations The Company follows the full-cost method of accounting for oil and gas properties and as such, the excess carrying cost of the property sold versus the consideration received was transferred to proven properties subject to amortization.

In January 2007 we entered into an agreement with South Texas Operating Company out of San Antonio, Texas to participate in the drilling and completion of the Stroman-Armstrong #5 located in Webb County, Texas. We purchased 2% working interest in the well that was drilled to a total depth of approximately 14,500 feet to test the 5^th Hennant Sand. In May 2007, and prior to completion of the well, we acted upon an opportunity to sell the working interest and divest ourselves of the interest and all future drilling obligations. The Company follows the full-cost method of accounting for oil and gas properties and as such, the excess carrying cost of the property sold versus the consideration received was transferred to proven properties subject to amortization. The full-cost method of accounting requires that we perform a quarterly ‘ceiling test’ that limits the capitalized cost of proved oil and gas properties, net of accumulated DD&A and deferred income taxes, to the estmated future net cash flows from those properties discounted at 10%, net of related tax effects, plus the lower of cost or fair value of unproved properties included in the costs being amortized. We prepared an internal analysis based on current economic and operating conditions of the estimated present value, discounted at a 10% interest rate, of the future net revenues from our proved reserves as of June 30, 2007. We also analyzed the fair market value of our unproved properties as of June 30, 2007. As a result of this analysis, we recorded an impairment or capital cost reduction to oil and gas properites of approximately $1,001,000.

6. Debt

The components of debt are summarized as follows.

Long-Term Debt		June 30, 2007			September 30, 2006
Senior secured convertible notes, net of discount	$	1,530		$	1,957
Capital lease obligations		17			29
Asset retirement obligations		6			—
		1,553			1,986
Less current portion		(1,546	)		(1,973	)
	$	7		$	13

On November 24, 2006, we issued to three investors, three one-year senior secured convertible notes (“collectively, the Convertible Notes”) totaling $1.65 million pursuant to a Securities Purchase Agreement dated as of November 24, 2006 (the "Purchase Agreement"). The Convertible Notes, together with interest that accrues at the rate of 13% per annum, are convertible into 2,374,101 shares of our Common Stock at a conversion price of $0.695 per share, which was $0.135 per share above fair market value of our Common Stock on the trading date preceding the closing date of November 24, 2006. Upon maturity at November 24, 2007, any unconverted outstanding principal and interest is due and payable in cash. In connection with the Purchase Agreement, we issued to the investors warrants to purchase 2,374,101 shares of our Common Stock at $0.57 per share (“Note Warrants”), which was $0.01 above the fair market value of our Common Stock on the trading date preceding the closing date. The Note Warrants are exercisable any time after May 24, 2007, and before November 24, 2011. Net proceeds after expenses totaled approximately $1.466 million. Proceeds are being used for working capital and to fund additional investments in oil and natural gas non-operating interests. We also paid a cash finder’s fee of $132,000 and issued warrants to purchase 189,928 shares of our Common Stock at an exercise price of $0.57 per share to the placement agent, Palladium Capital Advisors, LLC.

On April 4, 2007, our Common Stock was delisted from the NASDAQ Capital Market. Pursuant to the terms of the Convertible Notes, failure to be listed on a major exchange constitutes an Event of Default. As such, the holders of the Convertible Notes may elect to accelerate the Convertible Notes and demand an immediate cash payment equal to 120% of the outstanding aggregate principal amount of $1,643,050, plus accrued but unpaid interest, liquidated damages and other amounts owing in respect thereof through the date of acceleration. Additionally, commencing five days after the occurrence of any Event of Default that results in the eventual acceleration of the Convertible Notes, the interest rate on the Convertible Notes will accrue at an interest rate equal to the lesser of 18% per annum or the maximum rate permitted under applicable law. The holders of the Convertible Notes have the right to seize and liquidate our assets at any time.

The sale of the Convertible Notes and Note Warrants was made pursuant to Section 4(2) of the Securities Act of 1933 as amended, and Rule 506 promulgated thereunder. Our registration statement on Form S-3/A, registering 1,247,454 shares of Common Stock, which represents 33% our issued and outstanding shares, and which are issuable pursuant to the partial conversion of our Convertible Notes, was declared effective by the SEC on March 14, 2007. Pursuant to the terms of the Registration Rights Agreement, we will file additional registration statements on Form S-3 or other eligible Form to register 130% of the total shares issuable under the transaction.

We recorded the Convertible Notes at a discount after giving effect to the $272,300 estimated fair market value of the Note Warrants, which was credited to equity. The Note Warrants were valued using the Black Scholes Option Pricing model with the following assumptions: dividend yield of 0%, annual volatility of 125%, and risk free interest rate of 4.56%. The carrying value of the Convertible Notes is being accreted to the face amount by charges to interest expense over the one year term until maturity on November 24, 2007.

We incurred financing costs totaling $183,500 pursuant to the Convertible Notes, including the finder’s fee, a 1% due diligence fee paid to the investors, and legal and professional fees. These deferred financing costs are being amortized to interest expense over the one year term of the Convertible Notes. After giving effect to the value of the Note Warrants and the financing costs, the effective rate of interest on the Convertible Notes is 56%.

On March 22, 2007, we issued 10,000 shares of Common Stock pursuant to the conversion of $6,950 in principal of one of the Convertible Notes. In conjunction with the conversion, we reclassified the proportionate (approximately 5%) balance of the deferred financing cost and discount to equity. The carrying value of the Convertible Notes at June 30, 2007, was approximately $1.462 million and represents the $1.64 million outstanding principal less the unearned discount of approximately $181,000.

On May 30, 2006, we issued 14% convertible senior secured promissory notes to two holders in the principal amount of $1.5 million and $0.5 million, respectively, (each, a “Senior Note”, and collectively the “Senior Notes”). The holders also received warrants entitling them to purchase, in the aggregate, 752,072 shares of Common Stock at an exercise price of $1.186 per share, which was the closing bid price of our Common Stock on May 31, 2006 (“Class E Warrants”). On September 19, 2006, the holders exercised their right to accelerate the maturity of the Senior Notes to October 19, 2006, due to the failure of our shareholders to approve certain conversion terms and the issuance of additional warrants at our Annual Meeting of Shareholders held on August 29, 2006. On October 18, 2006, we paid the outstanding principal and interest of the Senior Notes, which totaled $2,012,274, utilizing cash reserves and the collection of $1.0 million of accounts receivable subsequent to September 30, 2006.

We recorded the Senior Notes at a discount after giving effect to the $80,424 estimated fair value of the Class E Warrants, which was credited to equity. We amortized the discount as interest expense over the two-year term of the Senior Notes until September 19, 2006, on which date we accelerated the rate of accretion to reflect the new maturity date of October 19, 2006. The remaining unearned discount of $43,196 as of September 30, 2006, was recorded as interest expense through October 19, 2006.

We incurred expenses totaling approximately $249,000 related to the issuance of the Senior Notes. We recorded these expenses as prepaid or deferred financing costs. These expenses were amortized to other expense over the two-year term of the Senior Notes until September 19, 2006, on which date we accelerated the rate of amortization to reflect the new maturity date of October 19, 2006. The unamortized balance of these deferred costs, which totaled $133,728 on September 30, 2006, was recorded as other expense through October 19, 2006.

7. Convertible Preferred Stock

At June 30, 2007, we had outstanding 280,000 shares of Series A Convertible Preferred (“Convertible Preferred”), which are convertible into 220,472 of Common Stock on or before February 9, 2008.

8. Segment Information

We classify our business operations into two segments: our GIS service business and our oil and gas activities. Segment data includes revenue, operating income, including allocated costs charged to each of the operating segments, equipment investment, net accounts receivable. At June 30, 2006, segment assets also included revenue earned in excess of billings on long-term GIS contracts.

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

		GIS Services			Energy Division			Non- Segment			Total
Three months ended June 30, 2007
Operations
Revenues	$	48		$	64		$	—		$	112
Loss from operations		(66	)		(1,165	)		—			(1,231	)
Interest expense, net		—			—			(171	)		(171	)
Other		—			—			(3	)		(3	)
Net loss										$	(1,405	)
Capital expenditures	$	—		$	240		$	6		$	246
Depreciation, depletion, and amortization	$	4		$	34		$	2		$	40

Three months ended June 30, 2006
Operations
Revenues	$	1,044		$	5		$	—		$	1,049
Loss from operations		(5	)		(37	)		—			(42	)
Interest expense, net		—			—			(23	)		(23	)
Other		—			—			(11	)		(11	)
Net loss										$	(76	)
Capital expenditures	$	5		$	1423		$	—		$	1428
Depreciation, depletion, and amortization	$	—		$	13		$	2		$	15

Nine months ended June 30, 2007
Operations
Revenues	$	348		$	93		$	—		$	441
Loss from operations		(137	)		(1,654	)		—			(1,791	)
Interest expense, net		—			—			(428	)		(428	)
Other		—			—			(216	)		(216	)
Net loss										$	(2,435	)
Capital expenditures	$	—		$	912		$	20		$	942
Depreciation, depletion, and amortization	$	12		$	54		$	12		$	70

Nine months ended June 30, 2006
Operations
Revenues	$	3,782		$	5		$	—		$	3,787
Loss from operations		15			(92	)		—			(77	)
Interest expense, net		—			—			(78	)		(78	)
Gain on extinguishment of debt		—			—			61			61
Other		—			—			(212	)		(7	)
Net loss										$	(101	)
Capital expenditures	$	11		$	1826		$	—		$	1,937
Depreciation, depletion, and amortization	$	—		$	44		$	8		$	52

Assets at June 30, 2007
Segment assets	$	32		$	1,809		$	—		$	1,841
Non-segment assets		—			—			514			514
Consolidated assets										$	2,355

Assets at June 30, 2006
Segment assets	$	2,302		$	2,026		$	—		$	4,328
Non-segment assets		—			—			1,161			1,161
Consolidated assets										$	5,489

9. Litigation and Other Contingencies

In November 2005, we received an alias summons notifying us that we have been named as a party to a suit filed by Sycamore Springs Homeowners Association in the Marion County Superior Court of the State of Indiana. The summons names the developer of the Sycamore Springs neighborhood as well as other firms that may have rendered professional services during the development of the neighborhood. The claimants allege that the services of Mid-States Engineering, which was a subsidiary of MSE Corporation which we acquired in 1997, affected the drainage system of Sycamore Springs neighborhood, and seek damages from flooding that occurred on September 1, 2003. The summons does not quantify the amount of damages that are being sought nor the period that the alleged wrongful actions occurred. We sold Mid-States Engineering in September 1999. We believe that we have been wrongfully named in the suit. Defense actions are being provided by our professional liability insurance carrier.

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

10. Concentration of Credit Risk

Our GIS services have historically been subject to a concentration of credit risk. At June 30, 2007, our accounts receivable related to GIS services, which totaled approximately $21,500, was due from one customer. For the three-month period ending June 30, 2007, our GIS service revenue was earned from services rendered to that customer, Utility Pole Technologies (“UPT”). For the nine-month period ending June 30, 2007, our GIS service revenue was earned from services rendered to two customers, 51% to Worldwide Services, Inc, and Intergraph (“WWS”) and 48% to UPT, respectively.

At June 30, 2006, we had multiple contracts with five customers, the aggregate of which accounted for 75% of our consolidated 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 Niagara Mohawk, 9%. Two of these customers (WWS and AGL) accounted for 76% and 9%, respectively, of our total accounts receivable and revenue in excess of billings at June 30, 2006.

Item 2. Management’s Discussion And Analysis Or Plan Of Operations

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

Overview

On July 21, 2006, we received a notice from the NASDAQ Stock Market (“NASDAQ”) that we were no longer in compliance with the requirements for continued inclusion of our Common Stock on NASDAQ pursuant to the NASDAQ’s Marketplace Rule 4310(c)(4) because our Common Stock had closed below $1.00 per share for 30 consecutive business days. On January 18, 2007, we received notice from NASDAQ that because we had not regained compliance, our stock was subject to delisting from the NASDAQ Capital Market. We were subsequently notified that we failed to comply with NASDAQ Marketplace Rule 4310(c)(2)(B) requiring: (i) a minimum of $2,500,000 in stockholders’ equity as of December 31, 2006; (ii) at least $35,000,000 in market value of listed securities, or (iii) at least $500,000 of net income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years. As reported in our Form 10-QSB for the quarter ending December 31, 2006, our stockholders’ equity totaled $2,448,000 at December 31, 2006. On March 1, 2007, we attended a hearing to request an exception to Rule 4310(c)(4) and Rule 4310(c)(2)(B). The hearings panel did not grant the requested exception.

On April 2, 2007, we received notice from NASDAQ that our Common Stock would be delisted effective at the open of business on April 4, 2007. Since that date, our Common Stock has been traded on the OTC Pink Sheets. Pursuant to the terms of our 13% Secured Convertible Notes due November 24, 2007 (the “Convertible Notes”), failure to be listed on a major exchange constitutes an Event of Default. As such, the holders of the Convertible Notes may elect to accelerate the Convertible Notes and demand an immediate cash payment of 120% of the outstanding aggregate principal amount of $1,643,050, plus accrued but unpaid interest, liquidated damages and other amounts owing in respect thereof through the date of acceleration. Additionally, commencing five days after the occurrence of any Event of Default that results in the eventual acceleration of the Convertible Notes, the interest rate on the Convertible Notes will accrue at an interest rate equal to the lesser of 18% per annum or the maximum rate permitted under applicable law. The holders of the Convertible Notes have the right to seize and liquidate our assets at any time.

Our decision to transition our principal business from our traditional GIS data conversion business to an independent oil and gas enterprise was based on the dramatic decrease of the GIS business in past years and the severe operating losses we have incurred. Effective August 1, 2006, we sold the assets associated with our Wisconsin-based production center to RAMTeCH Software Solutions, Inc. ("RAMTeCH") for $235,000 in cash, which includes $85,000 for fixed assets with a net book value of approximately $30,000, $5,000 for a non-competition clause prohibiting us from indirectly contacting or marketing data conversion or data maintenance services in the continental United States for a period of three years, and $145,000 for transitional consulting services to assist RAMTeCH with the operation of the production center until December 31, 2006. There are no direct costs related to the consulting agreement. We transferred several ongoing GIS service contracts to RAMTeCH, who assumed the employment obligations relating to the personnel associated with the production center. RAMTeCH will be entitled to payment for services rendered pursuant to the assigned contracts after that date, and is responsible for all costs related to those contracts as well as the operation of the production facility located in Waukesha, Wisconsin.

We completed the performance of our contract with Worldwide Services, Inc. and Intergraph, (“WWS”) in fiscal 2006, and delivered and reconciled the final deliverable and billable quantities in the quarter ending December 31, 2006. This reconciliation resulted in additional revenue, after the release of reserves on our accounts receivable and revenues in excess of billings, totaling approximately $163,000. We have elected to continue to perform services for an additional customer in fiscal 2007, although we do not anticipate that revenue generated from these services will be material. Approximately $21,500 of our accounts receivable at June 30, 2007, are related to this customer.

Our oil and gas revenues are principally generated from our investment in the Adrienne 1-9. Revenue from the Adrienne 1-9 totaled $63,000 and $88,000 for the three- and nine-month periods ending June 30, 2007, and was estimated based on reports obtained from the operator of the well. Recompletion efforts were completed in June 2007, after which division orders and other processes enabling payment to joint interest owners were finalized. As of the date of this report, we have not received any cash receipts from the Adrienne 1-9. We anticipate our first cash receipt will be in early September 2007. Approximately $77,000 of our accounts receivable at June 30, 2007, is related to our investment in the Adrienne 1-9.

During the quarter ending June 30, 2007, and prior to completion activities, we acted upon an opportunity to sell our working interests and divest ourselves of our interests in drilling activities in Webb County and Grayson County, Texas. We received $270,000 in exchange for our interest in three properties and eliminated all future drilling obligations. The proceeds were approximately $88,000 less than the amount we invested in the properties.

We prepared an internal analysis based on current economic and operating conditions of the estimated present value, discounted at a 10% interest rate, of the future net revenues from proved reserves as of June 30, 2007. We also analyzed the fair market value of our unproved reserves as of June 30, 2007. As a result of this analysis, we recorded an impairment or capital cost reduction of approximately $1,001,000.

We have issued equity and convertible debt instruments to finance several investments in oil and gas interests. In February 2006, we issued 760,000 shares of Series A Convertible Preferred Stock (convertible into 598,425 shares of our Common Stock) (the “Convertible Preferred”), accompanied by Class A Warrants (exercisable into 299,212 shares of our Common Stock at $1.34 per share) and Class B Warrants (exercisable into 299,212 shares of our Common Stock at $1.49 per share) generating gross proceeds of $760,000. At June 30, 2007, 280,000 shares of Convertible Preferred were outstanding, which are convertible into 220,427 shares of our Common Stock. In October 2006, we repaid 14% convertible senior secured promissory notes in the aggregate principal amount of $2.0 million (the “Senior Notes”), utilizing cash generated from the sale of our production center in Wisconsin and collections of receivables from contracts that are in final stages of completion. On November 24, 2006, we issued three Convertible Notes totaling $1.65 million (convertible into 2,374,101 shares of our Common Stock), accompanied by warrants to purchase 2,374,101 shares of our Common Stock at $0.57 per share. As stated in the preceding paragraphs, we are in default pursuant to the terms of these Convertible Notes as a result of the delisting of our Common Stock on NASDAQ.

We incurred a significant operating loss in the three and nine months ending June 30, 2007, totaling $1,405,000 and 2,435,000, respectively. During the period, we devoted our resources to identifying and obtaining funding for the acquisition of various oil and gas properties that would provide current cash flow and future value. As of the date of this report, we have not secured appropriate funding. Accordingly, we have taken steps to further reduce our operating expenses, and effective May 15, 2007, we reduced our executive management from three persons to one person. Lori Jones, our chief executive officer and acting chief financial officer, will continue to serve in such capacities. We will seek and consider all appropriate transactions that offer potential shareholder value. The departure of Messrs. Fryhover and Dorfman, our executives who have experience in oil and natural gas exploration and production, will severely impact our ability to manage our oil and gas business. We may elect to sell our oil and gas investments and use the proceeds to pay our obligations and fund other transactions, if any.

At June 30, 2007, we employed approximately three full-time and one-part employees. While we have and will continue to reduce our general and administrative expenses, we are incurring legal and professional fee expenses related to our initiative into new business ventures. We also anticipate that compliance with the requirements of the Sarbanes-Oxley Act, as applicable, will require substantial financial and management resources and result in additional expenses.

Our entry into the oil and natural gas exploration and production business is very recent. We have made investments in several oil and gas properties. Our success as an oil and gas company is contingent upon our ability to raise additional funds in order to make additional investments. As of the date of this report, we have not been able to gain access to additional funding. As a result, we conveyed the rights to three of our properties that included future drilling obligations, for amounts less than our investment in the properties. As of June 30, 2007, we own minority working interests in three properties. One property was completed in June 2007, one is currently being recompleted to new zones, and on property is scheduled for recompletion, subject to the operator’s ability to access capital. These properties have not generated any significant revenues. Our investment in the Washita County well (the “Adrienne 1-9”) is our largest investment to date and therefore significant emphasis has been placed upon this investment. The Adrienne 1-9 is operated by Range Resources Corporation, and produced various levels of gas after initial completion in January 2007, with increased production after recompletion in June 2007. However, there is no assurance that any level of production will be sustained and that our interest will ever generate significant revenue. We own a 10% working interest and a 7.35% net revenue interest in the Adrienne 1-9.

In addition to the Adrienne 1-9, we own non-operating interests in two Oklahoma properties. One property is currently being completed to its original target zones, which are coal bed methane sands, and de-watering is currently in progress. We do not anticipate that revenue will be generated from this property until the first fiscal quarter of 2008. We also own a 50% working interest in three wells located in Pawnee County, Oklahoma. One well has been permitted as a water disposal well; the other two wells will be recompleted at a future date.

There is also no assurance that, upon completion, any of the wells will ultimately yield production in amounts necessary to support the financial projections. In either case, we may not realize the revenue expected by us. In the extreme case, where no revenue is realized because the operator is forced to plug and abandon the wells, our overall business will be significantly harmed, and we could be forced to liquidate our assets.

On December 23, 2006, we entered into a Purchase and Sale Agreement for the acquisition of a non-operating working interest in three oil and gas fields located in the South Texas Gulf Coast region. Pursuant to the terms of the agreement, we paid $150,000 to the seller of the property as a non-refundable option fee. On February 14, 2007, we determined the transaction is not in the best interest of the Company or our shareholders as the cost of available capital would have made the transaction only marginally successful. We recorded the option fee as other expense in the quarter ending March 31, 2007.

We must raise additional funds through debt or equity transactions in order to meet our share of the operating expenses and capital expenditures required to exploit completely the oil and natural gas interests we have acquired thus far, including the Adrienne 1-9. Although we may receive approximately $3.4 million, less expenses, from the exercise of the warrants described in Notes 6 and 7, we have no way of estimating the ultimate amount that we will receive from the exercise of warrants. Also, we do not know if additional financing will be available when needed, or if it is available, if it will be available on acceptable terms. Insufficient funds may prevent us from implementing our business strategy.

The oil and natural gas industry is intensely competitive and we compete with other companies that have greater resources. Many of these companies not only explore for and produce oil and natural gas, but also carry on refining operations and market petroleum and other products on a regional, national or global basis. These companies may be able to pay more for productive oil and natural gas properties and exploratory prospects or define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. In addition, these companies may have a greater ability to continue exploration activities during periods of low oil and natural gas market prices. Our larger competitors may be able to absorb the burden of present and future federal, state, local and other laws and regulations more easily than we can, which would adversely affect our competitive position. Our ability to acquire additional properties and to discover reserves in the future will be dependent upon our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. In addition, because we have fewer financial and human resources than many companies in our industry, we may be at a disadvantage in bidding for exploratory prospects and producing oil and natural gas properties.

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

We may not be able to reach a level of operating income from oil and natural gas activities that will generate cash flow sufficient to meet the operating and capital requirements of that business, plus the shortfall in cash flow arising from our traditional business. Given the risks associated with this endeavor, there is no assurance that we can achieve the necessary level of operating income in a timely manner.

It must be recognized that our ultimate objective is a transition from a company providing a specialized service to that of an independent oil and natural gas producer. Given the risks associated with 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 with a privately held independent oil and natural gas producer or other suitable entity.

Critical Accounting Policies

Revenue Recognition. As of January 1, 2007, we no longer have long-term GIS contracts. We provide GIS services on a time and materials basis. We recognize revenue in the period that the services are rendered.

Oil, natural gas revenues are recognized when delivery has occurred and title to the products has transferred to the purchaser. We estimate revenues based on production reports and estimated market prices when actual results are not available.

Oil and Gas Properties. We follow the full cost method of accounting for oil and natural gas properties. Accordingly, all costs associated with the acquisition, exploration and development of oil and natural gas properties, including costs of undeveloped leasehold, geological and geophysical expenses, dry holes, leasehold equipment and legal due diligence costs directly related to acquisition, exploration and development activities, are capitalized. Capitalized costs of oil and gas properties also include estimated asset retirement costs recorded based on the fair value of the asset retirement obligation when incurred. Proceeds received from disposals are credited against accumulated cost except when the sale represents a significant disposal of reserves, in which case a gain or loss is recognized.

The sum of net capitalized costs and estimated future development and dismantlement costs is depleted on the equivalent unit-of-production method, based on proved oil and natural gas reserves as determined by independent petroleum engineers. Oil and natural gas are converted to equivalent units based upon the relative energy content, which is six thousand cubic feet of natural gas to one barrel of oil.

Valuation of Accounts Receivable. We released our allowances for doubtful accounts as of December 31, 2006, as we were able to determine that our customers are able and plan to make required payments on those accounts. Management routinely assesses the financial condition of our customers and the markets in which these customers participate. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required.

Litigation. We are subject to various claims, lawsuits and administrative proceedings that arise from the ordinary course of business. Liabilities and costs associated with these matters require estimates and judgment based on professional knowledge and experience of management and our legal counsel. When estimates of our exposure for claims or pending or threatened litigation matters meet the criteria of SFAS No. 5 “Accounting for Contingencies”, amounts are recorded as charges to operations. The ultimate resolution of any exposure may change as further facts and circumstances become known.

Income Taxes. We reported a net loss in fiscal 2006 and 2005. The current and prior year losses have generated a sizeable federal tax net operating loss, or NOL, carryforward which totals approximately $25.4 million as of September 30, 2006.

U.S. generally accepted accounting principles require that we record a valuation allowance against the deferred tax asset associated with this NOL if it is “more likely than not” that we will not be able to utilize it to offset future taxes. Due to the size of the NOL carryforward in relation to our recent history of unprofitable operations and due to the continuing uncertainties surrounding our future operations as discussed above, we have not recognized any of this net deferred tax asset. We currently provide for income taxes only to the extent that we expect to pay cash taxes (primarily state taxes and the federal alternative minimum tax) on current taxable income.

It is possible, however, that we could be profitable in the future at levels which may cause management to conclude that it is more likely than not that we will realize all or a portion of the NOL carryforward. Upon reaching such a conclusion, we would immediately record the estimated net realizable value of the deferred tax asset at that time and would then provide for income taxes at a rate equal to our combined federal and state effective rates, which would approximate 39% under current tax rates. Subsequent revisions to the estimated net realizable value of the deferred tax asset could cause our provision for income taxes to vary significantly from period to period, although our cash tax payments would remain unaffected until the benefit of the NOL is utilized.

In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“FAS 159”). AS 159 permits entities to choose to measure many financial instruments and certain other items at fair value, with the objective of improving financial reporting by mitigating volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The provisions of FAS 159 are effective for the Company’s fiscal year beginning October 1, 2008. We are currently evaluating the impact that the adoption of this statement will have on our consolidated financial position, results of operations and related disclosures.

Results of Operations

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

	Three Months Ended					Nine Months Ended
	June 30,					June 30,
		2007		2006			2007		2006
PERCENTAGE OF REVENUES:
Revenues		100.0	%	100.0	%		100.0	%	100.0	%
Costs and expenses
Salaries, wages and related benefits		115.2		71.3			124.0		63.4
Lease operating expenses		12.5		—			5.9		—
Impairment of oil and gas properties		893.7		—			227.0		—
Subcontractor costs		—		4.1			—		12.1
General and administrative		142.0		27.2			133.3		25.2
Depreciation, depletion and amortization		35.7		1.4			15.9		1.4

Loss from operations		(1,099.1	)	(4.0	)		(406.1	)	(2.1	)

Other expense, net		(155.4	)	(3.2	)		(146.0	)	(0.6	)

Earnings (loss) before income taxes		(1,254.5	)	(7.2	)		(552.1	)	(2.7	)
Provision for income taxes		—		—			—		—
Net earnings (loss)		(1,254.5	)	(7.2	)		(552.1	)	(2.7	)
Dividends on preferred stock		(4.5	)	(0.6	)		(3.4	)	(1.1	)
Net loss available to common shareholders		(1,259.0	)%	(7.8	)%		(555.5	)%	(3.8	)%

Three and Nine Months Ended June 30, 2007 and 2006

Revenues. We recognize revenues as services are performed. During the three months ended June 30, 2007, our GIS service revenues were earned from only one customer, totaling approximately $48,000 as compared to $1,044,000 for the same period in fiscal 2006, a decrease of approximately $996,000. During the nine months ended June 30, 2007, our GIS service revenues were earned from only two customers, totaling $348,000 as compared to $3,787,000 for the same period in fiscal 2006, a decrease of approximately $3,439,000. This decrease was due to the completion of long-term contracts that were not replaced with new contracts.

We recognize oil and gas revenues when delivery has occurred and title to the products has transferred to the purchaser. For the three- and nine-months ended June 30, 2007, we recognized $64,000 and $93,000, respectively. Principally all of these revenues were generated from our investment in the Adrienne 1-9, and such revenue is calculated based on estimates which are based on reports obtained from the operator of the well. As of the date of this report, we have not received any cash receipts from the Adrienne 1-9, and we anticipate our first cash receipt will be in early September 2007. We estimate revenues based on production reports and estimated market prices when actual results are not available. We generated approximately $5,000 during oil and gas revenues during the three- and nine- months ended June 30, 2006.

Salaries, Wages and Benefits. Salaries, wages and benefits include employee compensation for production, administrative and executive employees. Salaries, wages and related benefits decreased $619,000 to $129,000, or 83%, and $1,858,000 to $547,000, or 77%, in the three- and nine-month periods ended June 30, 2007, respectively, as compared to $748,000 and $2,405,000 in the same fiscal 2006 periods. The reduced level of expense is directly related to the lower headcount required by our current operations.

Subcontractor Costs. Subcontractor costs include production costs incurred through the use of third parties, both domestic and offshore, for production tasks such as data conversion and field survey services to meet contract requirements. No subcontractors were used to perform services during the fiscal 2007 periods, nor do we anticipate subcontractors will be used in future periods to perform GIS services.

Oil and Gas Impairment: We prepared an internal analysis based on current economic and operating conditions of the estimated present value, discounted at a 10% interest rate, of the future net revenues from our proved reserves as of June 30, 2007. We also analyzed the fair market value of our unproved properties as of June 30, 2007. As a result of this analysis, we recorded an impairment or capital cost reduction of approximately $1,001,000

General and Administrative. Other general and administrative costs include rent, maintenance, travel, supplies, utilities, insurance and professional services. Such costs decreased 44% in the third quarter of fiscal 2007 to approximately $159,000 as compared to $285,000 in the same period in fiscal 2006. These costs decreased 70% in the first nine months of fiscal 2007, to approximately $588,000 as compared to $955,000 in the same period in fiscal 2006. The decrease is a result of the elimination of general and administrative costs related to our GIS business.

Depreciation, Depletion and Amortization. Depreciation, depletion and amortization increased $25,000 and $18,000 in the three and nine months ended June 30, 2007, respectively, as compared to the same periods in fiscal 2006. The increase was a result of depletion expense related to oil and gas revenues in the fiscal 2007 periods.

Interest Expense, Net. We incurred net interest expense totaling approximately $171,000 and $428,000 in the three- and nine- month periods ended June 30, 2007, respectively, as compared to $23,000 and $78,000 in the respective periods ended June 30, 2006. The increase is a result of 13% interest on our Convertible Notes, and non-cash interest which includes amortization of the discounts on the Convertible Notes and Senior Notes and amortization of deferred financing costs related to the Convertible Notes. Non-cash interest expense totaled $113,000 and $309,000 in the three and nine months ended June 30, 2007.

Other Income (Expense). Net other expense for the three months ended June 30, 2007, included a loss on the disposal of non-various non-productive assets which totaled approximately $3,000. During the nine months ended June 30, 2007, we sold additional assets including a set of partition cubicles at a loss of approximately $27,000 when we relocated our corporate offices in November 2006, at which time we disposed of additional computer equipment, furniture, and software items that were not being utilized and which had no material net book value. Net other expense for the nine months ended June 30, 2007, totaled approximately $216,000, which included the $31,000 year-to-date loss on disposal of assets, the expiration of a $150,000 option to purchase an oil and gas property in January 2007 and the amortization of approximately $134,000 deferred loan costs related to the Senior Notes, offset by approximately $99,000 in consulting fee income related to the sale of the Wisconsin-based production center. During the three-month period ended June 30, 2006, other income (expense) was comprised of an approximate $3,000 gain on the sale of certain assets and the amortization of deferred expenses related to the Senior Note. During the nine-month period ended June 30, 2006, it also included a gain on extinguishment of debt totaling $61,000 as a result of the relinquishment of accrued dividends by the holders of our redeemable preferred stock.

Income Taxes. Federal income tax expense for fiscal year 2007 is projected to be zero due to continuing losses from operations. Accordingly, an effective federal income tax rate of 0% was recorded for the three and nine months ended June 30, 2007. As a result of the uncertainty that sufficient future taxable income can be recognized to realize additional deferred tax assets, no income tax benefit has been recognized for the three- and nine-month periods ended June 30, 2007 and 2006.

Net Loss Available to Common Shareholders. We recorded a net loss available to commons shareholders of approximately $1,410,000 and $2,435,000 in the three- and nine-month periods ended June 30, 2007. We recorded a net loss $76,000 and $101,000 in the three and nine months ended June 30, 2006, respectively. The fiscal 2007 losses were a result of a $1,001 capital cost reduction which we recorded on our investments in oil and gas properties, as well as the low level revenues from our GIS business which have not been supplemented by revenues from our oil and gas investments, and which have not been sufficient to cover ongoing operational costs.

Liquidity and Capital Resources

Table of Contractual Obligations. Below is a schedule (by period due) of the future payments that we are obligated to make over the next five years based on agreements in place as of June 30, 2007.

			Fiscal Year Ending September 30,
		2007		2008		2009		2010		2011		Thereafter		Total
Operating leases	$	12	$	47	$	49	$	46	$	47	$	12	$	213
Capital lease obligations		5		14		—		—		—		—		19
Senior secured convertible notes		123		1,684		—		—		—		—		1,807
Interest payments on preferred stock		10		7		—		—		—		—		17
Total	$	150	$	1,752	$	49	$	46	$	47	$	12	$	2,056

Historically, the principal source of our liquidity has consisted of cash flow from operations supplemented by secured lines-of-credit and other borrowings. We do not have a line of credit and there is no assurance that we will be able to obtain additional borrowings should we seek to do so.

On April 4, 2007, our Common Stock was delisted from the NASDAQ Capital Market. Pursuant to the terms of our Convertible Notes, failure to be listed on a major exchange constitutes an Event of Default. As such, the holders of the Convertible Notes may elect to accelerate the Convertible Notes and demand an immediate cash payment in an amount equal to 120% of the outstanding aggregate principal amount of $1,643,050, plus accrued but unpaid interest, liquidated damages and other amounts owing in respect thereof through the date of acceleration. Additionally, commencing five days after the occurrence of any Event of Default that results in the eventual acceleration of the Convertible Notes, the interest rate on the Convertible Notes will accrue at an interest rate equal to the lesser of 18% per annum or the maximum rate permitted under applicable law. The holders of the Convertible Notes have the right to seize and liquidate our assets at any time.

Our debt is summarized as follows.

Long-Term Debt	June 30, 2007			September 30, 2006
Senior secured convertible notes, net of discount	$	1,530		$	1,957
Other debt and capital lease obligations		17			29
Asset retirement obligations		6			—
		1,553			1,986
Less current portion		(1,546	)		(1,973	)
	$	7		$	13

On November 24, 2006, we issued three one-year senior Convertible Notes totaling $1.65 million pursuant to a Securities Purchase Agreement dated as of November 24, 2006, (the "Purchase Agreement"). The Convertible Notes, together with interest that accrues at the rate of 13% per annum, are convertible into 2,374,101 shares of our Common Stock at a conversion price of $0.695 per share, which was $0.135 per share above fair market value of our Common Stock on the trading date preceding the closing date of November 24, 2006. Upon maturity at November 23, 2007, any unconverted outstanding principal and interest is due and payable in cash. In connection with the Purchase Agreement, we issued to the investors warrants to purchase 2,374,101 shares of our Common Stock at $0.57 per share (“Note Warrants”), which was $0.01 above the fair market value of our Common Stock on the trading date preceding the closing date. The Note Warrants are exercisable any time after May 24, 2007, and before November 24, 2011. Net proceeds after expenses totaled approximately $1.466 million. Proceeds are being used for working capital and to fund additional investments in oil and natural gas non-operating interests. We also paid a cash finder’s fee of $132,000 and issued Note Warrants to purchase 189,928 shares of our Common Stock at an exercise price of $0.57 per share to the placement agent, Palladium Capital Advisors, LLC.

We incurred financing costs totaling $183,500 pursuant to the Convertible Notes, including the finder’s fee, a 1% due diligence fee paid to the investors, and legal and professional fees. These deferred financing costs are being amortized as interest expense over the one year term of the Convertible Notes. After giving effect to the value of the Note Warrants and the financing costs, the effective rate of interest on the Convertible Notes is 56%.

In May 2006, we issued Senior Notes to two holders totaling $2.0 million, to fund the drilling and completion of a 12.5% working interest in a natural gas well located in Washita County, Oklahoma. The holders also received Class E Warrants entitling them to purchase, in the aggregate, 752,072 shares of our Common Stock at an exercise price of $1.186 per share, which was the closing bid price of our Common Stock on May 31, 2006. Our shareholders did not approve conversion terms of the Senior Notes and the issuance of additional warrants to the holders at our Annual Meeting of Shareholders held on August 29, 2006. Consequently, on September 19, 2006, the holders exercised their right to accelerate the maturity of the Senior Notes to October 19, 2006, on which date the principal amount, together with accrued and unpaid interest and all other sums due under the Senior Notes became due and payable in cash. On October 18, 2006, we paid the outstanding principal and interest due on the Senior Notes, which totaled $2,012,274, utilizing cash reserves and the collection of $1.0 million of accounts receivable subsequent to September 30, 2006.

We recorded the Senior Notes at a discount after giving effect to the $80,424 estimated fair value of the Class E Warrants, which was credited to equity. The carrying value of the Senior Notes was accreted to the face amount by charges to interest expense over the two year term until September 19, 2006, on which date we accelerated the rate of accretion to reflect the new maturity date of October 19, 2006. The unearned discount of $43,196 as of September 30, 2006, was recorded as interest expense during the quarter. We recorded deferred loan costs totaling approximately $249,000 related to the issuance of the Senior Notes, and amortized the costs to other expense over the two-year term of the Senior Notes until September 19, 2006, on which date we accelerated the rate of amortization to reflect the new maturity date. The unamortized balance of the deferred expense at September 30, 2006, of $133,728, was amortized to other expense during the quarter ending December 31, 2006.

On February 10, 2006, we completed the placement of a new Series A Convertible Preferred Stock (“Convertible Preferred”) with aggregate gross proceeds of approximately $760,000. The two-year Convertible Preferred, earns dividends at a rate of 7% per annum which bears interest at 7% annually, may be converted into 598,425 shares of our Common Stock at fixed conversion price of $1.27, which was determined by applying a 10% discount to the 5-day trailing average closing price of our Common Stock of $1.41 as of the NASDAQ Stock Market close on February 9, 2006. We also issued warrants to purchase up to 763,780 shares of our Common Stock pursuant to this transaction.

The following table sets forth the number of shares of Common Stock that are issuable upon conversion of our outstanding preferred stock, convertible debt, and warrants:

			Conversion Price		Common Shares Issuable
Series A Convertible Preferred Stock		280,000	$	1.270		220,472
Class A Warrants		381,890		1.340		381,890
Class B Warrants		381,890		1.490		381,890
Class E Warrants		752,072		1.186		752,072
Note Warrants issued in November 2006		2,564,029		0.580		2,564,029
Convertible Notes	$	1,643,050		0.695		2,367,151
Total shares issuable and weighted average price			$	0.810		6,667,504

Our operating activities provided $275,000 and used $407,000 in cash during nine-month periods ended June 30, 2007 and 2006, respectively. We collected approximately $1,054,000 and $740,000 from contract-related accounts during the respective periods. We reduced our accounts payable and accrued expense liabilities by $48,000 and $1,086,000 during the nine months ended June 30, 2007 and 2006, respectively.

We repaid our $2 million Senior Note and issued new Convertible Notes, receiving approximately $1.466 million in proceeds during the nine months ended June 30, 2007. We invested $912,000 in oil and gas properties, offset by proceeds totaling $270,000 from conveyances of properties, and $20,000 in equipment and leasehold improvements during the nine months ended June 30, 2007.

Item 3. Controls and Procedures

(a) Evaluation of disclosure controls and procedures. We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, who also serves as our Principal Accounting Officer, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on her evaluation as of the end of the period covered by this Quarterly Report on Form 10-QSB, our Chief Executive Officer, who also serves as our Principal Financial Officer, has concluded that, as of that date, our disclosure controls and procedures were effective at the reasonable assurance level.

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

Part II

Other Information

Item 1. Legal Proceedings.

Information regarding our legal proceedings can be found under Note 9, “Litigation and Other Contingencies”, to the Consolidated Financial Statements.

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

None.

Item 3. Defaults Upon Senior Securities.

On April 4, 2007, our Common Stock was delisted from the NASDAQ Capital Market. Pursuant to the terms of our 13% Secured Convertible Notes due November 24, 2007 (the “Convertible Notes”), failure to be listed on a major exchange constitutes an Event of Default. As such, the holders of the Convertible Notes may elect to accelerate the Convertible Notes and demand an immediate cash payment in an amount equal to 120% of the outstanding aggregate principal amount of $1,643,050, plus accrued but unpaid interest, liquidated damages and other amounts owing in respect thereof through the date of acceleration. Additionally, commencing five days after the occurrence of any Event of Default that results in the eventual acceleration of the Convertible Notes, the interest rate on the Convertible Notes will accrue at an interest rate equal to the lesser of 18% per annum or the maximum rate permitted under applicable law. The holders of the Convertible Notes have the right to seize and liquidate our assets at any time.

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

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibits:

31.1 Section 302 Certification of Chief Executive Officer

31.2 Section 302 Certification of Principal Financial Officer

32.1 Section 906 Certification of Principal Executive Officer

32.2 Section 906 Certification of Principal Financial Officer

SIGNATURES

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

Analytical Surveys, Inc.

(Registrant)




Date: August 14, 2007	By:	/s/ Lori A. Jones
		Lori A. Jones
		Chief Executive Officer