The following is management's discussion and analysis of the major elements of our consolidated financial statements. You should read this discussion and analysis together with our consolidated financial statements, including the accompanying notes, and other detailed information appearing elsewhere in this Quarterly Report on Form 10-Q.

This Quarterly Report on Form 10-Q and the documents incorporated by reference herein, if any, contain "forward-looking" statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements can be identified by terminology such as "may", "will", "should", "intend", "expect", "plan", "budget", "forecast", "anticipate", "believe", "estimate", "predict", "potential", "continue", "evaluating" or similar words. Statements that contain these words should be read carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial position or state other forward-looking information. These forward-looking statements reflect our best judgment about future events and trends based on the information currently available to us. However, there will likely be events in the future that we are not able to predict or control. The factors listed under the caption "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2008, as well as other cautionary language in such Annual Report on Form 10-K and this Quarterly Report on Form 10-Q, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. The occurrence of the events described in these risk factors and elsewhere in this Quarterly Report on Form 10-Q could have a material adverse effect on our business, results of operations and financial position, and actual events and results of operations may vary materially from our current expectations.

Industry Overview

OYO Geospace Corporation is a Delaware corporation incorporated on September 13, 1997. Unless otherwise specified, the discussion in this Quarterly Report on Form 10-Q refers to OYO Geospace Corporation and its subsidiaries. We design and manufacture instruments and equipment used in the acquisition and processing of seismic data as well as in the characterization and monitoring of producing oil and gas reservoirs. Demand for our products has been, and will likely continue to be, vulnerable to downturns in the economy and the oil and gas industry in general. During recent months, there has been substantial volatility and a decline in oil and natural gas prices. Please refer to the risks discussed under the heading "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2008 and in Item 1A of this Quarterly Report on Form 10-Q for more information.

We have been in the seismic instrument and equipment business since 1980 and market our products primarily to the oil and gas industry. We also design, manufacture and distribute thermal imaging equipment, and thermal media products targeted at the screen print, point of sale, signage and textile market sectors. We have been manufacturing thermal imaging products since 1995. We report and evaluate financial information for each of these two segments: Seismic and Thermal Solutions.

Seismic Products

The seismic segment of our business accounts for the majority of our sales. Geoscientists use seismic data primarily in connection with the exploration, development and production of oil and gas reserves to map potential and known hydrocarbon bearing formations and the geologic structures that surround them.

Seismic Exploration Products

Seismic data is acquired by combining a seismic energy source and a seismic data recording system. We provide many of the components of seismic data recording systems, including data acquisition systems, geophones, hydrophones, multi-component sensors, seismic leader wire, geophone strings, connectors, seismic telemetry cables and other seismic related products. On land, our customers use our data acquisition systems, geophones, leader

wire, cables and connectors to receive and measure seismic reflections resulting from an energy source to data recording units, which store information for processing and analysis. During fiscal year 2008, we announced the development of a land wireless seismic data acquisition system capable of very large channel configurations. We delivered several of these systems to customers during fiscal year 2008 with the largest of these systems containing 1,000 channels. In the marine environment, large ocean-going vessels tow long seismic cables known as "streamers" containing hydrophones which are used to detect pressure changes. Hydrophones transmit electrical impulses back to the vessel's data recording unit where the seismic data is stored for subsequent processing and analysis. Our marine seismic products help steer streamers while being towed and help recover streamers if they become disconnected from the vessel.

Our seismic sensor, cable and connector products are compatible with most major competitive seismic data acquisition systems currently in use, and sales result primarily from seismic contractors purchasing our products as components of new seismic data acquisition systems or to repair and replace components of seismic data acquisition systems already in use.

Our wholly-owned subsidiary in the Russian Federation manufactures international standard geophones, sensors, seismic leader wire, seismic telemetry cables and related seismic products for customers in the Russian Federation and other international seismic marketplaces. Operating in foreign locations involves certain risks as discussed under the heading "Risk Factors - Our Foreign Subsidiaries and Foreign Marketing Efforts Face Additional Risks and Difficulties" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2008.

Seismic Reservoir Products

We have developed permanently installed high-definition reservoir characterization products for ocean-bottom applications in producing oil and gas fields. We also produce a retrievable version of this ocean-bottom system for use on fields where permanently installed systems are not appropriate or economical. Seismic surveys repeated over selected time intervals show dynamic changes within the reservoir and can be used to monitor the effects of production. Utilizing these tools, producers can enhance the recovery of oil and gas deposits over the life of a reservoir.

In addition, we produce seismic borehole acquisition systems which employ a fiber optic augmented wireline capable of very high data transmission rates. These systems are used for several reservoir characterization applications, including an application pioneered by us allowing operators and service companies to monitor and measure the results of fracturing operations. Our customers are deploying these borehole systems in the United States, Canada, China and the Middle East.

Emerging Technology Products

Our products continue to develop and expand beyond seismic applications through the utilization of our existing engineering experience and manufacturing capabilities. We design and manufacture power and communication transmission cable products for offshore applications and market these products to the offshore oil and gas and offshore construction industries. These products include a variety of specialized cables, primarily used in deepwater applications, such as remotely operated vehicle ("ROV") tethers, umbilicals and electrical control cables. These products also include specially designed and manufactured cables, including armored cables, engineered to withstand harsh offshore operating environments.

In addition, we design and manufacture industrial sensors for the vibration monitoring and earthquake detection markets. We also design and manufacture other specialty cable products, such as those used in connection with global positioning products.

Thermal Solution Products

Our thermal solutions product technologies were originally developed for seismic data processing applications. In 1995, we modified this technology for application in other markets. Our thermal printers include

both thermal imagesetters for graphics applications and thermal plotters for seismic applications. In addition, our thermal solutions products include direct-to-screen systems, thermal printheads, dry thermal film, thermal transfer ribbon, and other thermal media. Our thermal imaging solutions produce images ranging in size from 12 to 54 inches wide and in resolution from 400 to 1,200 dots per inch. We market our thermal imaging solutions to a variety of industries, including the screen printing, point-of-sale, signage, flexographic and textile markets. We also continue to sell these products to our seismic customers.

The quality of thermal imaging is determined primarily by the interrelationship between a thermal printhead and the thermal media, be it film, ribbon, or any other media. We manufacture thermal printheads and thermal film, which we believe will enable us to more effectively match the characteristics of our thermal printers to thermal film, thereby improving print quality, and make us more competitive in markets for these products.

We also distribute private label high-quality dry thermal media for use in our thermal printers and direct-to-screen systems. To fully meet the demands of the interrelationship between the thermal printhead and thermal media, we are attempting to modify our thermal printheads so that they interface optimally with these other thermal media. In addition, we are engaged in efforts to develop a new line of dry thermal film and ribbon in order to improve the image quality of our media for use with our printheads. Both efforts to modify our printheads and to improve our film have been on-going in recent periods, but at this time we are unable to provide any assurance that we can eliminate printhead and film interface issues in the near future or at all. In order to achieve more than marginal growth in our thermal solutions product business in future periods, we believe that it is important to continue our concentration of efforts on both our printhead changes and media improvements.

Worldwide Economic Crisis

Demand for many of our products depends primarily on the level of worldwide oil exploration activity and, to a lesser extent, natural gas exploration activities in North America. That activity, in turn, depends primarily on prevailing oil and gas prices and availability of seismic data. The 2008 escalation of the domestic financial crisis arising out of the meltdown of the subprime lending market has caused significant distress to many global financial lending institutions, leading to a broader global financial crisis and a tightening of the availability of commercial credit. Many economists have predicted a prolonged worldwide economic recession and a slow recovery in the credit markets. These recessionary fears, combined with a recent decline in worldwide demand for energy, have caused energy commodity prices to decline sharply. As expected, these events have led to a decline in energy exploration activities in North America and in certain international markets, and we began to see the effects of this decline on our business during the first fiscal quarter of 2009. We saw revenues decline for each of our seismic product lines, including significant declines in our Russian and Canadian seismic exploration markets. While demand for our seismic reservoir products is often sporadic, lower customer demand for these products created a significant shortfall in our revenues and profits during the first six months of fiscal year 2009. We believe our seismic customers are likely to continue to scale back their activities until financial markets stabilize and demand for exploration activities increases.

The uncertainty of these global economic matters and their ultimate impact on energy exploration activities and on our customers' ability to access credit markets is difficult to forecast, and a decline in the demand for our seismic products is likely to continue for the present time. In the past, we have described our business as "lumpy". In this current environment, we expect our business levels will be even more erratic. Singular events will result in severe swings in our revenues in both positive and negative directions. The lack of usual levels of seismic reservoir product sales in the first and second fiscal quarters of 2009 is one such example. If these economic events continue into the foreseeable future, they could have a material adverse impact on our revenues and profits for the remainder of fiscal year 2009 and in future years.

We continue to monitor the impact that these economic conditions may have on our operations. We believe that our current cash balances, cash flows from operations and cash borrowings available under our credit facility will provide sufficient resources to meet our working capital liquidity needs for the next twelve months.

Incentive Compensation Program

Despite the economic slowdown and the challenges our business will face as a result, we adopted an incentive compensation program for fiscal year 2009 whereby most employees will be eligible to begin earning incentive compensation upon the Company reaching a five percent pretax return on stockholders' equity, determined as of September 30, 2008. We believe that our employees will see the incentive compensation program as a reason to continue to forge ahead. To be eligible to participate in the incentive compensation program, employees must participate in our Core Values Program. Based on our experience in prior years, we expect one hundred percent of our eligible employees to participate in the Core Values Program. The incentive compensation program does not apply to the employees of our Russian subsidiary as such employees participate in a locally administered bonus program. Certain non-executive employees will be required to achieve specific goals to earn a significant portion of their total incentive compensation award. If any bonus awards are earned under this program, such awards will be paid out to eligible employees after the end of fiscal year 2009.

Upon reaching the five percent threshold under this program, an incentive compensation accrual will be established equal to eighteen percent of the amount of any consolidated pretax profits above the five percent pretax return threshold. The maximum aggregate bonus available under the program for fiscal year 2009 is $3.8 million. Under this program, for the six months ended March 31, 2009 and 2008, we had accrued $0.2 million and $1.7 million, respectively, of incentive compensation expense. Should our operating results weaken during the remainder of fiscal year 2009, existing bonus accruals may be reduced or eliminated altogether in accordance with the terms of the incentive compensation program.

Results of Operations

We report and evaluate financial information for two segments: Seismic and
Thermal Solutions. As mentioned above, our fiscal year 2009 results evidence the
economic slowdown and the decline in energy exploration activities worldwide.
Summary financial data by business segment follows (in thousands):



                                              Three Months Ended                            Six Months Ended
                                     March 31, 2009         March 31, 2008        March 31, 2009        March 31, 2008
Seismic
Exploration product revenue         $          15,713       $        24,727       $        34,477       $        45,016
Reservoir product and service
revenue                                         2,687                 3,988                 3,683                 9,508
Industrial product revenue                      1,972                 3,349                 4,138                 6,112


Total seismic revenues                         20,372                32,064                42,298                60,636
Operating income                                3,486                 5,779                 7,631                12,595

Thermal Solutions
Revenue                                         2,931                 4,170                 6,669                 7,453
Operating income (loss)                           (77 )                 920                   180                   825

Corporate
Revenue                                           207                   165                   398                   332
Operating loss                                 (1,653 )              (2,227 )              (3,483 )              (4,134 )

Consolidated Totals
Revenue                                        23,510                36,399                49,365                68,421
Operating income                                1,756                 4,472                 4,328                 9,286

Overview

Three and six months ended March 31, 2009 compared to three and six months ended March 31, 2008

Consolidated sales for the three months ended March 31, 2009 decreased by $12.9 million, or 35.4%, from the corresponding period of the prior fiscal year. Consolidated sales for the six months ended March 31, 2009 decreased by $19.1 million, or 27.9%, from the corresponding period of the prior fiscal year. The decrease in sales for both periods stems from the decline in customer demand for our products as a result of effects of the worldwide economic slowdown and its impact on energy exploration.

Consolidated gross profits decreased by $3.3 million, or 31.4%, from the corresponding period of the prior fiscal year. Consolidated gross profits for the six months ended March 31, 2009 decreased by $6.4 million, or 29.6%, from the corresponding period of the prior fiscal year. The decline in gross profits for both periods was caused by a decline in sales of our products.

Consolidated operating expenses for the three months ended March 31, 2009 decreased by $0.9 million, or 14.5%, from the corresponding period of the prior fiscal year. Consolidated operating expenses for the six months ended March 31, 2009 decreased by $2.1 million, or 16.3%, from the corresponding period of the prior fiscal year. Reduced operating expenses reflect initiatives taken by management in response to a decline in sales, and also reflects the impact of reduced incentive compensation expenses caused by lower consolidated pretax profits.

Other income for the three months ended March 31, 2009 decreased by $0.1 million due to reduced levels of interest income from customer promissory notes and from increased foreign exchange losses. Other income for the six months ended March 31, 2009 decreased by $0.7 million primarily because of a $0.6 million foreign exchange loss incurred by our subsidiaries in Canada and the Russian Federation. Foreign exchange losses occurred in both periods because U.S. dollar denominated intercompany debts at these subsidiaries were revalued due to weakening local currency conditions in both countries.

The United States statutory tax rate for the periods ended March 31, 2009 and 2008 was 34.0% and 35.0%, respectively. Our effective tax rates for the three months ended March 31, 2009 and 2008 was 33.4% and 31.3%, respectively. These slightly lower effective tax rates primarily resulted from the manufacturers'/producers' deduction and research and experimentation tax credits. Our effective rate for the six months ended March 31, 2009 and 2008 was 34.6% and 31.7%, respectively. The slightly higher effective tax rate for the six months ended March 31, 2009 resulted from a tax charge of $85,000 in the quarter ended December 31, 2008 to revalue our U.S. deferred tax assets and liabilities at a lower statutory tax rate in anticipation of lower levels of future taxable income. Offsetting this charge for the six months ended March 31, 2009 and contributing to the lower effective tax rate in the six months ended March 31, 2008 were benefits from the manufacturers'/producers' deduction and research and experimentation tax credits.

Seismic Products

Net Sales

Sales of our seismic products for the three months ended March 31, 2009 decreased by $11.7 million, or 36.5%, from the corresponding period of the prior fiscal year. Sales of our seismic products for the six months ended March 31, 2009 decreased by $18.3 million, or 30.2%, from the corresponding period of the prior fiscal year. All product categories contributed to this sales decline which reflects the significant reduction in oil and gas exploration and development activities precipitated by the global economic crisis and the rapid decline of oil and gas commodity prices in recent months.

Operating Income

Our operating income associated with sales of our seismic products for the three months ended March 31, 2009 decreased by $2.3 million, or 39.7%, from the corresponding period of the prior fiscal year. Our operating income associated with sales of our seismic products for the six months ended March 31, 2009 decreased by $5.0 million, or 39.4%, from the corresponding period of the prior fiscal year. These significant declines in our operating income are directly related to the decline in product sales for both periods.

Thermal Solutions Products

Net Sales

Sales of our thermal solutions products for the three months ended March 31, 2009 decreased by $1.2 million, or 29.7%, from the corresponding period of the prior fiscal year. Sales of our thermal solutions products for the six months ended March 31, 2009 decreased by $0.8 million, or 10.5%, from the corresponding period of the prior fiscal year. The decline in sales for both periods resulted from weaker demand of all thermal product categories due to a weakening economic climate impacting many of our smaller customers in this business segment.

Operating Income (Loss)

Our operating loss associated with sales of our thermal solutions products for the three months ended March 31, 2009 was $0.1 million compared to operating income of $0.9 million from the corresponding period of the prior fiscal year. Our operating income associated with sales of our thermal imaging products for the six months ended March 31, 2009 was $0.2 million compared to operating income of $0.8 million from the prior year. The decline in operating income for both periods is directly related to the significant decline in our thermal product sales.

Liquidity and Capital Resources

At March 31, 2009, we had $1.4 million in cash and cash equivalents. For the six months ended March 31, 2009, we generated approximately $2.1 million of cash from operating activities. Sources of cash generated in our operating activities resulted from net income of $2.6 million. Additional sources of cash include net non-cash charges of $3.4 million for depreciation, amortization, stock-based compensation, inventory obsolescence and bad debts. Other sources of cash included a $10.5 million decrease in accounts and notes receivable due to improved collections and lower levels of product sales, and a $1.4 million increase in deferred revenue resulting from advance payments from customers for future product deliveries. These sources of cash were offset by (i) a $6.1 million increase in inventories resulting from the receipt in our first fiscal quarter of raw materials under purchase commitments and the production of targeted levels of our new wireless data acquisition system, (ii) a $4.9 million decrease in accrued expenses primarily resulting from the annual payment of
(a) real and personal property taxes and (b) accrued incentive compensation for fiscal year 2008 and reduced incentive compensation accruals in fiscal year 2009, and (iii) a $3.6 million decrease in accounts payable due to a recent decline in receipts of raw materials and other expense reductions. Until recent months, we have been in a period of significant demand for our products as well as the development of new product technologies, which has resulted in a build-up of our inventories to be able to continue to meet actual and anticipated future customer demands. Such increases in our inventory levels have resulted in an increase in our inventory obsolescence expense as the level of obsolete and slow moving inventories increase. Although we reduced our levels of inventories during the three months ended March 31, 2009, the increased level of inventories has put greater demands on our management of inventories, and we continue to give substantial attention to this area.

For the six months ended March 31, 2009, we used approximately $1.3 million of cash in investing activities for capital expenditures. We estimate that our total capital expenditures in fiscal year 2009 will be approximately $2.0 million. The process of converting existing finished goods inventories into rental equipment is not considered a capital expenditure in our cash flow statement. During the six months ended March 31, 2009, we converted $1.4 million of inventories into rental equipment.

For the six months ended March 31, 2009, we used approximately $1.2 million of cash in financing activities primarily to reduce our net borrowings under the Credit Agreement, as discussed below.

On November 22, 2004, several of our subsidiaries entered into a credit agreement (the "Original Credit Agreement") with a bank. The Original Credit Agreement has been amended periodically since 2004, and most recently on April 30, 2009 (as so amended, the "Credit Agreement"). Under the Credit Agreement, our borrower subsidiaries can borrow up to $25.0 million principally secured by their accounts receivable, inventories and equipment. The Credit Agreement expires on April 30, 2011. The Credit Agreement limits the incurrence of additional indebtedness, requires the maintenance of certain financial ratios, restricts our and our subsidiaries' ability to pay dividends and contains other covenants customary in agreements of this type. We believe the most restrictive covenants in the Credit Agreement are (i) the fixed charge coverage ratio of EBITDA to certain charges,

and (ii) the cash flow leverage ratio of total borrowings (excluding real estate borrowings) to adjusted EBITDA. We believe these covenants are more restrictive than covenants contained in the Credit Agreement as in effect prior to the April 30, 2009 amendment, and future borrowings available under the Credit Agreement could be limited or completely restricted if future operating results deteriorate. The interest rate for borrowings under the Credit Agreement is a LIBOR based rate with a margin spread of 300-400 basis points depending upon the maintenance of certain ratios. This LIBOR margin spread is larger than the spread that was provided for under the Credit Agreement as in effect prior to the April 30, 2009 amendment, and our interest cost associated with future borrowings will increase accordingly. At March 31, 2009, there were borrowings of $8.8 million under the Credit Agreement, standby letters of credit . . .