Executive Summary
Our Business
We are a technology-focused seismic solutions company that provides planning and seismic processing services, software and advanced acquisition equipment to the global energy industry. Our services, technologies and products are used by oil and gas exploration and production ("E&P") companies and seismic acquisition contractors to generate high-resolution images of the Earth's subsurface during exploration, exploitation, and production operations. Our services and products are intended to measure and interpret seismic data about rock and fluid properties within the Earth's subsurface to enable oil and gas companies to make improved drilling and production decisions.
We acquire and process seismic data from seismic surveys in regional data programs, which then become part of our seismic data library. The seismic surveys for our data library business are pre-funded, or underwritten, in part by our customers, and we contract with third party seismic data acquisition companies to shoot and acquire the seismic data, all of which is intended to minimize our risk exposure. We serve customers in all major energy-producing regions of the world from strategically located offices in 20 cities on five continents.
In 2010, we formed a joint venture with BGP, Inc., China National Petroleum Corporation ("BGP"), a subsidiary of China National Petroleum Corporation, and contributed most of our land seismic equipment businesses to INOVA Geophysical Equipment Limited ("INOVA Geophysical"), the joint venture entity. In a related transaction, we issued to BGP 23.8 million shares of our common stock, which represents approximately 15.2% of our outstanding shares at December 31, 2012. BGP is generally regarded as the world's largest land geophysical service contractor. BGP owns a 51% interest in INOVA Geophysical and we own a 49% interest.
Our services and products include the following:
• Seismic data processing and reservoir imaging services,

• Seismic data libraries,

• Planning services for survey design and optimization,

• Navigation, command & control, and data management software products,

• Marine seismic data acquisition equipment, and

• Land seismic data acquisition equipment (principally through our 49% ownership in INOVA Geophysical).

We operate our company through three business segments: Solutions, Systems, and Software, and through our INOVA Geophysical joint venture.
• Solutions - advanced seismic data processing services for marine and land environments, reservoir solutions, onboard processing and quality control, seismic data libraries, and services by our GeoVentures services group.

• Systems - towed streamer and redeployable ocean bottom cable seismic data acquisition systems and shipboard recorders, streamer positioning and control systems, energy sources and analog geophone sensors.

• Software - software systems and related services for navigation and data management involving towed marine streamer and seabed operations.

• INOVA Geophysical - through our interest in INOVA Geophysical, cable-based, cableless and radio-controlled seismic data acquisition systems, digital sensors, vibroseis vehicles (i.e. vibrator trucks) and source controllers for detonator and energy sources business lines.

Economic Conditions
Demand for our seismic data acquisition services and products has traditionally been cyclical and substantially dependent upon activity levels in the oil and gas industry, particularly our customers' willingness and ability to expend their capital for oil and natural gas exploration and development projects. This demand is sensitive to current and expected future crude oil and natural gas prices. During 2012, WTI spot crude oil prices rose to approximately $110 per barrel in the first quarter, declined to just below $80 per barrel near the end of the second quarter, and then steadily increased to nearly $100 per barrel near the end of the third quarter. During the fourth quarter of 2012, WTI spot crude oil prices traded in a narrower range of $85 to $93 per barrel; finishing the year near $90 per barrel. Brent crude oil prices followed a similar pattern to WTI, initially rising to approximately $126 per barrel in the first quarter, followed by a steady decline to $90 per barrel by the end of the second quarter, then steadily rising to approximately $116 per barrel late in the third quarter; it traded in a narrower range during 2012's fourth quarter of $106 to $114 per barrel, finishing the year near $110 per barrel.

Energy price forecasts are by their nature highly uncertain, but external reports indicate that WTI crude oil prices and Brent crude oil prices are expected to remain in price ranges of $80 to $110 and $100 to $130 per barrel, respectively, for 2013 as demand outpaces supply.
U.S. natural gas prices appeared to reverse their downward trend in 2012. U.S. Henry Hub natural gas prices decreased to approximately $1.90 per MMBtu in April 2012, but during the third quarter, natural gas prices traded in a range from $2.65 to $3.40 per MMBtu, and during the fourth quarter in a higher range of $3.30 to $4.00. While it may be too early to tell if this change in price direction is in fact a trend reversal, demand for natural gas has not deteriorated. We believe demand for natural gas will continue to grow and that industry investment in shale-based gas production will increase and be facilitated by new investment in technologies to locate and extract the reserves.
For 2012, our Solutions segment revenues increased over 2011 results, due to improved data processing revenues and higher sales by our GeoVentures business. During 2012, our participation in oil and gas shale plays continued to expand, with the completion of our second land multi-client new venture project in the Marcellus shale area, and with four other projects underway, including a land project in Poland. In the process, we are increasing our technical understanding of both oil and gas shale plays and we intend to leverage this expertise to broaden our oil and gas shale footprint geographically in both the U.S. and international markets. In addition, customer demand remains high for seismic data acquired by our GeoVentures business in offshore areas around the globe where E&P companies have demonstrated a strong interest for exploration, including frontier basins offshore Latin America, Africa, and in the Arctic, as well as ResSCAN land programs in North America. At December 31, 2012, our Solutions segment backlog, which consists of commitments for (i) data processing work and (ii) both multi-client new venture and proprietary projects by our GeoVentures group that have been underwritten, was $151.3 million compared with $134.2 million at December 31, 2011, an increase of 13%. We anticipate that the majority of this backlog will be recognized as revenue over the first half of 2013.
Revenues for our Systems segment decreased in 2012 compared to 2011. While this segment benefited from healthy marine repair and replacement sales and improved ocean bottom cable sales, we experienced soft streamer positioning sales in 2012, primarily attributable to modest capital spending by our contractor customers. This reduced level of spending was principally related to a lower number of new vessels (on which our Systems equipment and software are often installed) introduced in 2012, compared to the number of new vessels introduced in 2011. In 2011, we also recognized revenue from the sale to BGP of a DigiSTREAMER twelve-streamer system; there was no similar sale of that magnitude in 2012. In January 2013, CGGVeritas closed its acquisition of Fugro's geoscience division, further consolidating the marine towed streamer industry market segment, which could lead to a reduction in the number of our potential customers and vessel outfitting opportunities. Our Software segment revenues increased in 2012 compared to 2011 due to steady subscription sales of Orca and Gator software.
Our land seismic business, particularly INOVA Geophysical's business in North America and Russia, continues to show progress, reporting a sizable increase in revenues and gross profits for the twelve-month period from October 1, 2011 to September 30, 2012, compared to the twelve-month period ended September 30, 2011. With the recent launches of its lower-cost cableless Hawk land system, an improved FireFly system ("FireFly DR31") and a new cabled system (G3i), INOVA has positive momentum heading into the next twelve-month period. It is our view that technologies that add a competitive advantage through improved imaging, cost reductions or improvements in well productivity will continue to be valued in our marketplace. We believe that our newest technologies such as DigiFIN, DigiSTREAMER, Orca, our WiBand data processing technology and INOVA Geophysical's newest technologies (including FireFly DR31, Hawk SN11, UNIVIB, a new VectorSeis ML21 digital sensor, upgrades to its ARIES II product with digital sensor capabilities and its new G3i cabled system), will continue to attract customer interest, because those technologies are designed to deliver improvements in image quality within more productive delivery systems.
We expect the growth in demand for seismic services to continue to remain positive for the foreseeable future, and we remain positioned to achieve year-over-year improvement in both our revenue and profitability for 2013 as compared to 2012. However, in stating these expectations, we are assuming that
(i) the global and U.S. economies will not slip back into a recession, (ii) the prices of WTI and Brent crude oil will remain predominantly above $80 and $100 per barrel, respectively, (iii) the level of exploration and development activities in the US Gulf of Mexico will continue to increase, and (iv) there will be increasing demand for seismic services in the Middle East and North Africa resulting from improved geopolitical stability in those areas. WesternGeco Legal Proceedings
The trial in this lawsuit began on July 23, 2012. A verdict was returned by the jury on August 16, 2012, finding that we willfully infringed the claims contained in four patents and awarding WesternGeco the sum of $105.9 million in damages, consisting of $12.5 million in reasonable royalty and $93.4 million in lost profits. We believe that the verdict is not consistent with applicable law or the facts or evidence in the case and, on September 28, 2012, filed motions with the trial court to overturn all or portions of the verdict. See further discussion at Part I, Item 3. - "Legal Proceedings."

The ultimate outcome of the case in the trial court, and the content of the final judgment as a whole, presently rest with the presiding trial court judge. The next step in the case is for the trial court judge to decide post-verdict motions filed by the parties and enter a judgment. The final judgment will determine the result of the trial prior to appeal. When he enters a judgment in the case, the judge can choose to follow the jury verdict or to take other actions, such as changing to a different result or ordering an entirely new trial. As of the filing date of this Annual Report on Form 10-K, the Court had not yet entered a judgment in the case. If the Court enters a judgment that is adverse to us, we intend to appeal the judgment to the United States Court of Appeals for the Federal Circuit. WesternGeco would also have the right to elect to appeal any final judgment.
Key Financial Metrics
The following table provides an overview of key financial metrics for our company as a whole and our three business segments during 2012, 2011 and 2010. In order to assist with the comparability to our historical results of operations, the financial tables and discussion below for 2010, segregate the results of operations of our disposed legacy land seismic equipment segment (which we refer to below as our "Legacy Land Systems" segment). For tabular information on the operating results of our INOVA Geophysical joint venture, see "Equity in Earnings (Losses) of INOVA Geophysical" in the discussion below. Our "multi-client" business in our Solutions segment includes "New Venture" activities and our "Data Library." "New Venture" activities involve acquiring and processing data in our regional seismic data programs using advanced geophysical technology. Once the data is processed, the program moves into our Data Library category.

                                         Years Ended December 31,
                                  2012               2011             2010
                                 (in thousands, except per share amounts)
Net revenues:
Solutions:
New Venture                 $     147,346       $      98,335     $  81,293
Data Library                       88,085              76,332        87,664
Total multi-client revenues       235,431             174,667       168,957
Data Processing                   115,834              88,783       107,997
Total                       $     351,265       $     263,450     $ 276,954
Systems:
Towed Streamer              $      77,769       $     111,453     $  83,567
Ocean bottom                       14,823                 960         1,876
Other                              39,404              40,591        28,783
Total                       $     131,996       $     153,004     $ 114,226
Software:
Software Systems            $      39,738       $      36,031     $  34,465
Services                            3,318               2,136         2,166
Total                       $      43,056       $      38,167     $  36,631
Legacy Land Systems (INOVA) $           -       $           -     $  16,511
Total                       $     526,317       $     454,621     $ 444,322
Gross profit:
Solutions                   $     132,950       $      84,647     $  93,804
Systems                            50,790              61,109        48,557
Software                           32,061              27,689        24,356
Legacy Land Systems (INOVA)             -                   -          (984 )
Total                       $     215,801       $     173,445     $ 165,733
Gross margin:
Solutions                              38 %                32 %          34  %
Systems                                38 %                40 %          43  %
Software                               74 %                73 %          66  %
Legacy Land Systems (INOVA)             -                   -            (6 )%
Total                                  41 %                38 %          37  %

                                                             Years Ended December 31,
                                                     2012               2011              2010
                                                     (in thousands, except per share amounts)
Income from operations:
Solutions                                       $    88,589        $    50,620        $   60,632
Systems                                              10,132             33,034            27,749
Software                                             28,129             24,463            21,936
Corporate and other                                 (52,323 )          (41,322 )         (47,847 )
Legacy Land Systems (INOVA)                               -                  -            (9,623 )
Total                                           $    74,527        $    66,795        $   52,847
Operating Margin:
Solutions                                                25  %              19  %             22  %
Systems                                                   8  %              22  %             24  %
Software                                                 65  %              64  %             60  %
Corporate and other                                     (10 )%              (9 )%            (11 )%
Legacy Land Systems (INOVA)                               -                  -               (58 )%
Total                                                    14  %              15  %             12  %
Net income (loss) applicable to common shares   $    61,963        $    23,422        $  (38,774 )
Basic net income (loss) per common share        $      0.40        $      0.15        $    (0.27 )
Diluted net income per (loss) common share      $      0.39        $      0.15        $    (0.27 )

We intend that the following discussion of our financial condition and results of operations will provide information that will assist in understanding our consolidated financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes.
We account for our 49% interest in INOVA Geophysical as an equity method investment and record our share of earnings of INOVA Geophysical on a one fiscal quarter lag basis. Thus, for 2012, 2011 and 2010, we recognized in our consolidated results of operations our share of earnings (losses) in INOVA Geophysical of approximately $0.3 million, $(22.9) million, and $(23.7) million, which represent joint venture operations for the periods from October 1, 2011 through September 30, 2012, October 1, 2010 through September 30, 2011, and March 26, 2010 (inception) through September 30, 2010, respectively. We expect to file an amendment on Form 10-K/A to this Annual Report on Form 10-K within the six-month period following December 31, 2012 in order to file separate consolidated financial statements for INOVA Geophysical for the fiscal year ended December 31, 2012, as required under SEC Regulation S-X. For a discussion of factors that could impact our future operating results and financial condition, see Item 1A. "Risk Factors" above. Results of Operations
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

                                                        Years Ended December 31,
                                                          2012             2011
                                                             (In thousands)
Net revenues                                         $    526,317       $ 454,621
Cost of sales                                             310,516         281,176
Gross profit                                              215,801         173,445
Gross margin                                                   41 %            38 %
Operating expenses:
Research, development and engineering                      34,080          24,569
Marketing and sales                                        35,240          31,269
General, administrative and other operating expenses       71,954          50,812
Total operating expenses                                  141,274         106,650
Income from operations                               $     74,527       $  66,795

Our total net revenues of $526.3 million for 2012 increased $71.7 million, or 16%, compared to total net revenues for 2011. Our overall gross profit percentage for 2012 was 41%, compared to 2011's gross profit percentage of 38%. Total operating expenses as a percentage of net revenues for 2012 and 2011 were 27% and 23%, respectively. During 2012, we recorded income from operations of $74.5 million compared to $66.8 million for 2011.

Net Revenues, Gross Profits and Gross Margins Solutions - Net revenues for 2012 increased by $87.8 million, or 33%, to $351.3 million, compared to $263.5 million for 2011. This increase was predominantly driven by improved data processing revenues due to post-Macondo recovery in the Gulf of Mexico and continued international expansion; higher GeoVentures revenue related to growth in new venture activity, including programs offshore Latin America, Africa, and in the Arctic, as well as ResSCAN land programs in North America, and growth in data library sales related to programs offshore Latin America, Africa, Australia and in the Arctic. Gross profit increased by $48.3 million to $133.0 million, representing a 38% gross margin, compared to $84.6 million, or a 32% gross margin, for 2011, primarily attributable to the recovery and expansion of our data processing business during 2012 and a more profitable mix of programs in GeoVentures.
Systems - Net revenues for 2012 decreased by $21.0 million, or 14%, to $132.0 million, compared to $153.0 million for 2011. This decrease was driven primarily by lower volumes of towed marine streamer positioning equipment, and was offset by improved ocean bottom cable sales. In 2011, we recognized revenue from the sale to BGP of a DigiSTREAMER twelve-streamer system, which was not replicated in 2012. Gross profit for 2012 decreased by $10.3 million to $50.8 million, representing a 38% gross margin, compared to $61.1 million, representing a 40% gross margin, for 2011. The decrease in gross margins in our Systems segment was primarily due to reduced sales of towed marine streamer positioning equipment. Software - Net revenues for 2012 increased by $4.9 million, or 13%, to $43.1 million, compared to $38.2 million for 2011. Excluding the effects of foreign currency translation, revenues increased 11% due to continued demand for the Orca and Gator software platforms. Gross profit for 2012 increased by $4.4 million to $32.1 million, representing a 74% gross margin, compared to $27.7 million, for 2011, which represented a 73% gross margin. Gross profit increased in line with revenue while gross margins increased only slightly from 2011 to 2012. Gross margins remained high due to significantly higher software sales, which carry a much higher gross margin than other products and services. Software sales represented 65% of total sales in this segment for 2012 in local currency, compared to 58% of total sales in 2011. Operating Expenses
Research, Development and Engineering - Research, development and engineering expense was $34.1 million, or 6% of net revenues, for 2012, an increase of $9.5 million compared to $24.6 million, or 5% of net revenues, for 2011. This increase in research and development expense was primarily due to increased investment of labor and technology related to product development. Related to this, our Systems and Solutions segments increased expenditures on field tests in 2012 versus 2011.
Marketing and Sales - Marketing and sales expense of $35.2 million, or 7% of net revenues, for 2012, increased $4.0 million compared to $31.3 million, or 7% of net revenues, for 2011. This increase in marketing and sales expense was primarily due to investment in our Solutions sales teams to support the continued growth in the Solutions segment.
General, Administrative and Other Operating Expenses - General, administrative and other operating expenses of $72.0 million for 2012 increased $21.1 million compared to $50.8 million, for the corresponding period of 2011. General, administrative and other operating expenses as a percentage of net revenues for 2012 and 2011 were 14% and 11%, respectively. This increase in expense was primarily due to significantly higher legal fees ($9.0 million) and the write-down of marine equipment and receivables totaling $11.6 million. In 2012, we had experienced increased legal fees and expenses defending the lawsuit brought against us by WesternGeco and pursuing the lawsuit brought by us against Sercel. See further discussion at Part I, Item 3. "Legal Proceedings." Non-operating Items
Interest Expense, net - Interest expense, net, of $5.3 million for 2012 decreased slightly compared to $5.8 million for 2011. For additional information, please refer to "- Liquidity and Capital Resources - Sources of Capital" below.
Equity in Earnings (Losses) of INOVA Geophysical - We account for our 49% interest in INOVA Geophysical as an equity method investment and record our share of earnings and losses of INOVA Geophysical on a one fiscal quarter-lag basis. Thus, our share of INOVA Geophysical's earnings (losses) for the periods from October 1, 2011 to September 30, 2012 ("Fiscal 2012") and from October 1, 2010 to September 30, 2011 ("Fiscal 2011") were included in our consolidated financial results for fiscal 2012 and fiscal 2011, respectively. For 2012 and 2011, we recorded our 49% share of equity (i) earnings of approximately $0.3 million, and (ii) losses of approximately $22.9 million (including $7.7 million that represented our share of a write-down of excess inventory), respectively.

The following table reflects the summarized financial information for INOVA Geophysical for Fiscal 2012 and Fiscal 2011 (in thousands):

                               Fiscal 2012      Fiscal 2011
Total net revenues            $     188,336    $    138,735
Gross profit                  $      39,320    $      5,765
Income (loss) from operations $       3,241    $    (41,836 )
Net income (loss)             $       2,197    $    (46,033 )

Other Income (Expense) - Other income for 2012 was $17.1 million compared to other expense of $3.4 million for 2011. The difference primarily relates to the settlements of litigation. See further discussion at Part 1, Item 3, "Legal Proceedings."
The following table reflects the significant items of other income (expense) is as follows (in thousands):

                                    Years Ended December 31,
                                      2012             2011
Gain on legal settlements, net   $     20,895       $       -
Write-down of investments                (556 )        (1,312 )
Other income (expense)                 (3,215 )        (2,135 )
Total other income (expense)     $     17,124       $  (3,447 )

Income Tax Expense - Income tax expense for 2012 was $23.9 million compared to $10.1 million for 2011. Our effective tax rates for 2012 and 2011 were 27.5% and 29.2%, respectively. The change in our effective tax rate between 2012 and 2011 was due to a reduction in the valuation allowance on U.S. federal net deferred tax assets, partially offset by changes in the distribution of earnings between U.S. and foreign jurisdictions. We continue to maintain a valuation allowance for a portion of our U.S. federal net deferred tax assets that relate to capital losses and basis differences that will create capital losses.
Preferred Stock Dividends - The preferred stock dividend relates to our Series D Preferred Stock. Quarterly dividends must be paid in cash. Dividends are paid at a rate equal to the greater of (i) 5.0% per annum or (ii) the three month LIBOR rate on the last day of the immediately preceding calendar quarter plus 2.5% per annum. The Series D Preferred Stock dividend rate was 5.0% at December 31, 2012. The total amount of dividends paid on our preferred stock in 2012 was the same as in 2011.
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 Revenues, costs and expenses for 2010 that are identified as "adjusted" or "as adjusted" in the discussion below reflect exclusion of the revenues, costs and . . .