Forward Looking Statements
Statements other than statements of historical fact included in this Form 10-Q that relate to forecasts, estimates or other expectations regarding future events, including without limitation, statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding technological advancements and our financial position, business strategy and plans and objectives of our management for future operations, may be deemed to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this Form 10-Q, words such as "anticipate," "believe," "estimate," "expect," "intend," and similar expressions, as they relate to us or our management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of our management as well as assumptions made by and information currently available to management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors, including but not limited to the volatility of oil and natural gas prices, disruptions in the global economy, dependence upon energy industry spending, limited number of customers, credit risk related to our customers, cancellations of service contracts, high fixed cost of operations, weather interruptions, inability to obtain land access rights of way, industry competition, managing growth, the availability of capital resources and operational disruptions. A discussion of these factors, including risks and uncertainties, is set forth under "Risk Factors" in our annual report on Form 10-K for the year ended September 30, 2008 and in our other reports filed from time to time with the SEC. These forward-looking statements reflect our current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategies and liquidity. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this paragraph. We assume no obligation to update any such forward-looking statements.
Overview
We are the leading provider of onshore seismic data acquisition services in the lower 48 states of the United States as measured by the number of active data acquisition crews. Substantially all of our revenues are derived from the seismic data acquisition services we provide to our clients, mainly domestic oil and natural gas companies. Demand for our services depends upon the level of spending by these companies for exploration, production, development and field management activities, which depends, in part, on oil and natural gas prices. Significant fluctuations in domestic oil and natural gas exploration activities and commodity prices have affected the demand for our services and our results of operations in years past and continue to be the single most important factor affecting our business and results of operations. In the past few years, substantially all of our clients have been focused on the exploration for and production of natural gas.
Our return to profitability in fiscal 2004 after several years of losses was directly related to an increase in the level of exploration for domestic oil and natural gas reserves by the petroleum industry since 2003. The increased level of exploration was a function of higher prices for oil and natural gas. As a result of the increase in domestic exploration spending, we experienced an increased demand for our seismic data acquisition and processing services during this period, particularly from entities seeking natural gas reserves. Since August 2008, the price of oil and natural gas has declined significantly due to reduced demand from the global economic slowdown. As a result of declining oil and natural gas prices, many of our customers have reduced their exploration and development activities and with it their capital expenditures. All of these factors have had and continue to have a negative impact on demand for our services and our industry in general, particularly on demand from those clients seeking natural gas. Since the beginning of our 2009 fiscal year, several large projects have been delayed or reduced in size and a number of projects have been cancelled. These demand reductions began to affect data acquisition crew scheduling and utilization in the second fiscal quarter. As a result, we reduced our crew count by four crews during the second fiscal quarter. Due to continued lower demand levels, we anticipate an additional reduction of up to two crews in the third fiscal quarter. After these additional crew reductions, we anticipate that we will operate ten of our sixteen crews through the third quarter.
Due to the previous and currently proposed reductions of data acquisition crews and lower utilization rates, we anticipate a reduction in operating revenues and operating costs in calendar 2009, and possibly beyond, depending on future market prices for oil and natural gas and the level of domestic exploration spending. The markets for oil and natural gas have been very volatile and are likely to continue to be volatile in the future, and we can make no assurances as to future levels of domestic exploration, commodity prices, or demand for our services. A significant sustained drop in oil prices and a continued weakness in natural gas prices or the inability of our clients to secure funding for new exploration projects would have a further negative impact on demand for our services. Because substantially all of our current clients are focused on the exploration for and production of natural gas, continued weakness in the price of natural gas in particular would have a negative effect on the demand for our services.
In light of current market difficulties, we are focusing our efforts on reducing costs, limiting capital expenditures to necessary maintenance requirements, and maintaining our financial strength. Equipment and key personnel from crews taken out of service will be redeployed on remaining crews as needed or otherwise remain available for rapid expansion of crew count as demand and market

conditions dictate in the future. While our revenues are mainly affected by the level of client demand for our services, our revenues are also affected by the pricing for our services that we negotiate with our clients and the productivity of our data acquisition crews, including factors such as crew downtime related to inclement weather, delays in acquiring land access permits, or equipment failure. Consequently, our efforts to negotiate favorable contract terms in our supplemental service agreements, to mitigate access permit delays and to improve overall crew productivity may partially offset the impact of anticipated revenue reductions.
Results of Operations
Operating Revenues. Our operating revenues for the first six months of fiscal 2009 decreased 7.1% to $144,841,000 from $155,962,000 for the first six months of fiscal 2008. For the three months ended March 31, 2009, operating revenues totaled $64,625,000 as compared to $78,363,000 for the same period of fiscal 2008, a 17.5% decrease. The decrease in revenues during the second quarter of fiscal 2009 reflected the result of a reduction in active crew count of four crews along with lower utilization rates for existing crews. Revenues in the second quarter of fiscal 2009 continued to include relatively high third-party charges related to the use of helicopter support services, specialized survey technologies, and dynamite energy sources. The sustained level of these charges is driven by our continued operations in areas with limited access in the Appalachian Basin, Arkansas, Val Verde Basin of Texas and Eastern Oklahoma. We are reimbursed for these charges by our clients.
Operating Costs. Operating expenses for the six months ended March 31, 2009 totaled $104,752,000 as compared to $115,654,000 for the same period of fiscal 2008, a decrease of 9.4%. Operating expenses for the three months ended March 31, 2009 decreased 20.5% to $45,737,000 as compared to $57,529,000 for the same period of fiscal 2008 primarily due to reductions in field personnel and other expenses of operating the four data acquisition crews taken out of service during the second quarter of fiscal 2009. As discussed above, reimbursed expenses have a similar impact on operating costs.
General and administrative expenses were 3.2% of revenues in the first six months of fiscal 2009, as compared to 2.3% of revenues in the same period of 2008. For the quarter ended March 31, 2009, general and administrative expenses were approximately 3.7% of revenues as compared to 2.3% for the comparable quarter of fiscal 2008. The ratio of general and administrative expenses to revenue increased in the first six months and the quarter ended March 31, 2009 due to management's decision to increase the Company's allowance for doubtful accounts. We increased the allowance for doubtful accounts based on management's review of the Company's current past due accounts and client base. During the second quarter, we were made aware that two former clients and one current client with an accounts receivable balance of approximately $1.0 million had filed for reorganization under bankruptcy protection. These facts significantly influenced management's decision to increase the Company's allowance for doubtful accounts. The increase in the allowance for doubtful accounts was partially offset by a release of reserves of approximately $450,000 as a result of a partial payment in connection with the settlement of a previously disputed invoice.
Depreciation for the six months ended March 31, 2009 totaled $13,130,000 compared to $11,405,000 for the six months ended March 31, 2008. We recognized $6,529,000 of depreciation expense in the second quarter of fiscal 2009 as compared to $5,854,000 in the comparable quarter of fiscal 2008. The increase in depreciation expense in both the six month and three month periods is the result of the significant capital expenditures we made during fiscal 2008. Our depreciation expense is expected to continue to increase during fiscal 2009 reflecting our significant capital expenditures in fiscal 2008.
Our total operating costs for the first six months of fiscal 2009 were $122,445,000, a decrease of 6.2% from the first six months of fiscal 2008. For the quarter ended March 31, 2009, our operating expenses were $54,674,000 representing a 16.2% decrease from the comparable quarter of fiscal 2008. These decreases in the first six months and for the second quarter were primarily due to the factors described above.
Taxes. We provide for income taxes during interim periods based on our estimate of the effective tax rate for the year. Discrete items and changes in our estimate of the annual effective tax rate are recorded in the period in which they occur. We recognize interest and penalties related to uncertain tax positions as part of income tax expense.
Income tax expense was $8,942,000 for the six months ended March 31, 2009 and $9,597,000 for the six months ended March 31, 2008. The effective tax rate for the income tax provision for the six months ended March 31, 2009 and 2008 was 39.1% and 37.5%, respectively.
Liquidity and Capital Resources
Introduction. Our principal sources of cash are amounts earned from the seismic data acquisition services we provide to our clients. Our principal uses of cash are the amounts used to provide these services, including expenses related to our operations and

acquiring new equipment. Accordingly, our cash position depends (as do our revenues) on the level of demand for our services. Historically, cash generated from our operations along with cash reserves and short-term borrowings from commercial banks have been sufficient to fund our working capital requirements, and to some extent, our capital expenditures.
Cash Flows. Net cash provided by operating activities was $38,291,000 for the first six months of fiscal 2009 and $16,501,000 for the first six months of fiscal 2008. These amounts primarily reflect our revenues and the effects of depreciation resulting from our significant capital expenditures over the last few years, while the working capital components in fiscal 2009 include a decrease in accounts receivable. The decrease in accounts receivable reflects the decrease in our revenues, as the number of days in receivables has not significantly changed over the last twelve months. Amounts in our accounts receivable that are over ninety days typically represent less than 3% of our total accounts receivables and are generally ultimately collected. The average number of days in accounts receivable is approximately fifty-five.
Net cash used in investing activities was $1,054,000 in the six months ended March 31, 2009 and $27,361,000 in the six months ended March 31, 2008. The net cash used in investing activities in both years primarily represents capital expenditures made with cash generated from operations. In fiscal 2009, we collected proceeds from an insurance claim on our equipment burned in a March 2008 wildfire. See Note 5 to our Notes to Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information regarding the wildfire.
Net cash provided by financing activities for the six months ended March 31, 2008 was $5,129,000 and reflects proceeds from the exercise of stock options, the excess tax benefits from disqualifying dispositions, and $5,000,000 of proceeds drawn during the quarter on our line of credit. We had no cash flows from financing activities for the six months ended March 31, 2009 as we paid the balance of our revolving line of credit at September 30, 2008 and did not have any additional borrowings during the six months ended March 31, 2009.
Capital Expenditures. Capital expenditures during the first six months of fiscal 2009 were $4,242,000. During the first quarter of fiscal 2009, we purchased an ARAM ARIES II recording system equipped with channels from existing crews and replacement vehicles. The ARAM ARIES II system replaced an I/O MRX II recording system on an existing crew. We have maintained the operation of the I/O MRX II system on a small 2-D crew during the second quarter of fiscal 2009.
Our Board of Directors previously approved a fiscal 2009 capital budget of $20,000,000. However, due to current market conditions, we have limited, and plan to continue to limit, our capital expenditures to necessary maintenance capital requirements rather than investing in additional equipment as in the past few years.
We continually strive to supply our clients with technologically advanced 3-D seismic data acquisition recording systems and data processing capabilities. We maintain equipment in and out of service in anticipation of increased future demand for our services.
Capital Resources. Historically, we have primarily relied on cash generated from operations, cash reserves and short-term borrowings from commercial banks to fund our working capital requirements and, to some extent, our capital expenditures. We have also funded our capital expenditures and other financing needs from time to time through public equity offerings.
Our revolving line of credit loan agreement is with Western National Bank. The agreement permits us to borrow, repay and reborrow, from time to time until June 2, 2009, up to $40.0 million based on the borrowing base calculation as defined in the agreement. Our obligations under this agreement are secured by a security interest in our accounts receivable, equipment and related collateral. Interest on the facility accrues at an annual rate equal to either the 30-day London Interbank Offered Rate ("LIBOR"), plus two and one-quarter percent or the Prime Rate, minus three-quarters percent as we direct monthly, subject to an interest rate floor of 4%. Interest on the outstanding amount under the loan agreement is payable monthly. The loan agreement contains customary covenants for credit facilities of this type, including limitations on disposition of assets, mergers and reorganizations. We are also obligated to meet certain financial covenants under the loan agreement, including maintaining specified ratios with respect to cash flow coverage, current assets and liabilities and debt to tangible net worth. We were in compliance with all covenants as of March 31, 2009 and May 8, 2009. We have had preliminary discussions with Western National Bank regarding the renewal of our loan agreement. Based on these discussions, we believe we will renew our loan agreement on substantially the same terms, although it is likely the facility will be reduced in size based on our current assessment of our needs. As of March 31, 2009 and May 8, 2009 no amounts were outstanding under the credit agreement.
On March 31, 2009, we filed a shelf registration statement with the SEC covering the periodic offer and sale of up to $100.0 million in debt securities, preferred and common stock and warrants. The registration statement allows us to sell securities in one or

more separate offerings with the size, price and terms to be determined at the time of sale. The terms of any securities offered would be described in a related prospectus to be filed separately with the SEC at the time of the offering. The filing of the shelf registration statement will enable us to act quickly as opportunities arise.
The following table summarizes payments due in specific periods related to our contractual obligations with initial terms exceeding one year as of March 31, 2009.

                                                             Payments Due by Period (in 000's)
                                                         Within                                                After
                                       Total             1 Year          1-3 Years         3-5 Years          5 Years
Operating lease obligations          $    1,499         $    584        $       875        $       40        $       -

We believe that our capital resources and cash flow from operations are adequate to meet our current operational needs. We believe we will be able to finance our fiscal 2009 capital requirements through cash flow from operations and, if necessary, through borrowings under our revolving line of credit. However, our ability to satisfy our working capital requirements and to fund future capital requirements will depend principally upon our future operating performance, which is subject to the risks inherent in our business including the demand for our seismic services from clients. Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements. Critical Accounting Policies
The preparation of our financial statements in conformity with generally accepted accounting principles requires us to make certain assumptions and estimates that affect the reported amounts of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. Because of the use of assumptions and estimates inherent in the reporting process, actual results could differ from those estimates.
Concentrations of Credit Risk. Financial instruments which potentially expose us to concentrations of credit risk, as defined by SFAS No. 105 ("SFAS 105"), "Disclosure of Information About Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk," at any given time may consist of cash and cash equivalents, money market funds and overnight investment accounts, short-term investments and trade accounts receivable. At March 31, 2009 and 2008, we had deposits in domestic banks in excess of federally insured limits. We believe the credit risk associated with these deposits is minimal. Money market funds seek to preserve the value of the investment, but it is possible to lose money investing in these funds. We invest funds overnight under a repurchase agreement with our bank which is collateralized by securities of the United States Federal agencies. We invest primarily in short-term U.S. Treasury Securities which we believe are a low risk investment. Our sales are to clients whose activities relate to oil and natural gas exploration and production. We generally extend unsecured credit to these clients; therefore, collection of receivables may be affected by the economic conditions of the oil and natural gas industry. We closely monitor extensions of credit and may negotiate payment terms that mitigate risk.
Revenue Recognition. Our services are provided under cancelable service contracts. These contracts are either "turnkey" or "term" agreements. Under both types of agreements, we recognize revenues when revenue is realizable and services are performed. Services are defined as the commencement of data acquisition or processing operations. Revenues are considered realizable when earned according to the terms of the service contracts. Under turnkey agreements, revenue is recognized on a per unit of data acquired rate, as services are performed. Under term agreements, revenue is recognized on a per unit of time worked rate, as services are performed. In the case of a cancelled service contract, we recognize revenue and bill our client for services performed up to the date of cancellation.
We also receive reimbursements for certain out-of-pocket expenses under the terms of our service contracts. We record amounts billed to clients in revenue at the gross amount, including out-of-pocket expenses that are reimbursed by the client.
In some instances, we bill clients in advance of the services performed. In those cases, we recognize the liability as deferred revenue.
Allowance for Doubtful Accounts. We prepare our allowance for doubtful accounts receivable based on our review of past-due accounts, our past experience of historical write-offs and our current customer base. While the collectibility of outstanding client

invoices is continually assessed, the inherent volatility of the energy industry's business cycle can cause swift and unpredictable changes in the financial stability of our customers.
Impairment of Long-Lived Assets. We review long-lived assets for impairment when triggering events occur suggesting deterioration in the assets recoverability or fair value. Recognition of an impairment charge is required if future expected net cash flows are insufficient to recover the carrying value of the assets and fair value of the assets is below the carrying value of the assets. Our forecast of future cash flows used to perform impairment analysis includes estimates of future revenues and expenses based on our anticipated future results while considering anticipated future oil and natural gas prices which is fundamental in assessing demand for our services. If the carrying amount of the assets exceeds the estimated expected undiscounted future cash flows, we measure the amount of possible impairment by comparing the carrying amount of the assets to their fair value.
Depreciable Lives of Property, Plant and Equipment. Our property, plant and equipment are capitalized at historical cost and depreciated over the useful life of the asset. Our estimation of this useful life is based on circumstances that exist in the seismic industry and information available at the time of the purchase of the asset. As circumstances change and new information becomes available, these estimates could change. We amortize these capitalized items using the straight-line method.
Tax Accounting. We account for our income taxes in accordance with SFAS No. 109 ("SFAS 109"), "Accounting for Income Taxes," which requires the recognition of amounts of taxes payable or refundable for the current year and an asset and liability approach in recognizing the amount of deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns. We determine deferred taxes by identifying the types and amounts of existing temporary differences, measuring the total deferred tax asset or liability using the applicable tax rate and reducing the deferred tax asset by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Our methodology for recording income taxes requires judgment regarding assumptions and the use of estimates, including determining our annual effective tax rate and the valuation of deferred tax assets, which can create a variance between actual results and estimates and could have a material impact on our provision or benefit for income taxes.
Stock-Based Compensation. We account for stock based compensation awards in accordance with SFAS No. 123 (R) ("SFAS 123(R)"), "Share-Based Payment." We measure all employee stock-based compensation awards using the fair value method and recognize compensation cost in our financial statements. We record compensation expense as operating or general and administrative expense as appropriate in the Statements of Operations on a straight-line basis over the vesting period.
Recently Issued Accounting Pronouncements In September 2006, the FASB issued SFAS No. 157 ("SFAS 157"), "Fair Value Measurements." SFAS 157 clarifies that fair value is the amount that would be exchanged to sell an asset or transfer a liability in an orderly transaction between market participants. Further, the standard establishes a framework for measuring fair value in generally accepted accounting principles and expands certain disclosures about fair value measurements. SFAS 157 became effective for all financial assets and financial liabilities as of October 1, 2008, and upon adoption, SFAS 157 did not have a material impact on our financial statements. In February 2008, the FASB issued FASB Staff Position 157-2 ("FSP 157-2"), "Effective Date of FASB Statement No. 157," which delays the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We do not expect the adoption of SFAS 157-2 to have a material impact on our financial statements.
In February 2007, the FASB issued SFAS No. 159 ("SFAS 159"), "The Fair Value Option for Financial Assets and Financial Liabilities." SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. As of March 31, 2009, we have not elected the fair value option for any additional financial assets and liabilities beyond those already prescribed by accounting principles generally accepted in the United States.
In May 2008, the FASB issued SFAS No. 162 ("SFAS 162"), "The Hierarchy of Generally Accepted Accounting Principles." Under SFAS 162, the GAAP hierarchy will now reside in the accounting literature established by the FASB. SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements in conformity with GAAP. SFAS 162 was effective November 15, 2008 and did not have a material impact on our financial statements.