GRANT GEOPHYSICAL INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[ ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

or

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the quarter ended June 30, 2002

Commission file number: 333-89863*

GRANT GEOPHYSICAL, INC.
(Exact name of registrant as specified in its charter)

Delaware 76-0548468
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

16850 Park Row, Houston, Texas 77084
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (281) 398-9503

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [ ] No [ ]

As of August 29, 2002, 14,547,055 shares of common stock, par value $.001
per share, were issued and outstanding. As of such date, there was no public
market for the common stock.

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* The Commission file number refers to a Form S-1 registration statement filed
by the registrant under the Securities Act of 1933, which became effective
January 12, 2000.

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GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

QUARTER ENDED JUNE 30, 2002

PAGE
----

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets as of December 31,
2001 and June 30, 2002 3

Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2001 and 2002 4

Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2001 and 2002 5

Notes to Consolidated Financial Statements 6

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14

Item 3. Quantitative and Qualitative Disclosures about
Market Risk 19

PART II. OTHER INFORMATION

Item 1. Legal Proceedings 20

Item 2. Changes in Securities and Use of Proceeds 20

Item 3. Defaults on Senior Securities 20

Item 4. Submission of Matters to a Vote of Security
Holders 21

Item 6. Exhibits and Reports on Form 8-K 21

SIGNATURES 22

2

GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

See accompanying Notes to Consolidated Financial Statements.

3

GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

See accompanying Notes to Consolidated Financial Statements.

4

GRANT GEOPHYSICAL, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

See accompanying Notes to Consolidated Financial Statements.

5

GRANT GEOPHYSICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(1) INDUSTRY CONDITIONS/LIQUIDITY/GOING CONCERN

The liquidity of Grant Geophysical, Inc. and its subsidiaries ("Grant" or
the "Company") should be considered in light of the cyclical nature of demand
for land and transition zone seismic services. These fluctuations have rapidly
impacted the Company's liquidity as supply and demand factors directly affect
pricing.

The Company's ability to meet its debt service and other obligations depends
on its future performance, which in turn is subject to general economic
conditions, activity levels in the oil and gas exploration sector, and other
factors beyond the Company's control. While management believes there has been a
recent improvement in market conditions for seismic services, especially in
Latin America, funds to finance operations are expected to remain limited
through 2002 and may not permit the Company to continue its operations in the
ordinary course of business. The Company has in the past relied on its majority
stockholder, Elliott Associates, L.P. ("Elliott"), to provide credit support and
interim funding. As of August 12, 2002, $11.7 million has been provided by
Elliott to the Company to provide working capital in the form of a factoring
arrangement for certain foreign receivables, which represents the maximum amount
allowed under the agreement and is due and payable no later than September 30,
2002 (see Note 4). Elliott has indicated to the Company that it will not provide
any additional funding to the Company on this basis. The Company does not expect
to be able to retire these amounts from its operating cash flows. In order to
avoid a default under this agreement, either Elliott will, at its sole and
absolute discretion, elect to post $11.7 million in cash collateral to permit an
advance under the supplemental term loan (see Note 4) of the Foothill/Elliott
Credit Facility in a like amount, the proceeds of which are used to repay the
Elliott factoring arrangement or the Company will need to otherwise reach an
accommodation with Elliott about the payment of these amounts or obtain
additional financing to refinance the amount payable to Elliott.

On May 24, 2002, the Company completed further modifications to the
Foothill/Elliott Credit Facility whereby, among other things, the maximum amount
of the Foothill revolving facility was reduced from $10.0 million to $8.0
million (subject to additional borrowing base limitations) and Foothill agreed,
subject to conditions, to fund a $16.5 million supplemental term loan. The
revolving facility and supplemental term loan are in addition to the $7.5
million and $7.3 million ($7.8 million at June 30, 2002) in existing term loans
owing to Elliott and Foothill, respectively, under the Foothill/Elliott Credit
Facility. Advances under the supplemental term loan are conditioned, among other
things, on Elliott having elected, at its sole and absolute discretion, to
deposit cash collateral with Foothill in the amount of such advances to secure
Elliott's guarantee of the supplemental term loan. The supplemental term loan
will bear interest at the 90-day CD rate announced by Wells Fargo. The Foothill
supplemental term loan and all other obligations under the Foothill/Elliott
Credit Facility are secured by substantially all assets of the Company and its
subsidiaries, are guaranteed by Elliott and, except as to the existing Elliott
term loan, may be purchased from Foothill by Elliott at any time on 5 business
days' notice.

On July 8, 2002, the Company completed further modifications to the
Foothill/Elliott Credit Facility whereby, among other things, the maximum amount
of the Foothill supplemental term loan was increased from $16.5 million to $19.5
million. (see Note 9)

Of the $12.7 million remaining undrawn under the supplemental term loan as
of August 12, 2002, the Company expects Elliott to post cash collateral for
$11.7 million thereof in any event only to the extent the Company's obligations
to Elliott under the factoring arrangement will have been reduced by a like
amount at the time of funding. Consequently, the Company expects the
Foothill/Elliott Credit Facility will be available to fund only $1.0 million of
the Company's working capital needs and only to the extent Elliott, in its sole
and absolute discretion, posts sufficient cash collateral. There are currently
no additional committed sources of financing available to the Company and no
availability under existing facilities. Even if business conditions
substantially improve and cost control initiatives are successful during 2002,
the Company will require substantial cash flow to continue operations on a
satisfactory basis, fund capital expenditures and meet its principal and
interest requirements with respect to the 9 3/4% Senior Notes, Foothill/Elliott
Credit Facility and other indebtedness, and its obligations under the Elliott
factoring arrangement, as those amounts become due.

On August 15, 2002, the Company requested Elliott to post cash collateral
for $1.0 million to allow the Company to borrow a like amount under the
supplemental term loan of the Foothill/Elliott Credit Facility. The amount
outstanding under the supplemental term loan at that time was $6.8 million. This
request was not granted at that time, and as of August 19, 2002, the amount
outstanding under the supplemental term loan remains at $6.8 million. Elliott
has the right to review and consider Company requests that Elliott post

6

cash collateral to allow borrowings under the supplemental term loan of the
Foothill/Elliott Credit Facility based upon, among other things, the recent
performance of the Company at the time of each request.

On August 15, 2002, due to insufficient cash on hand, the Company was not
able to make the $2.1 million interest payment on the 9 3/4% Senior Notes due
2008 on that date as required by the indenture. The indenture provides a 30 day
grace period for the Company to make the payment before an event of default
occurs under the indenture. Elliott has not committed to post any additional
cash collateral with respect of the supplemental term loan and may refuse to do
so at its sole and absolute discretion. In addition, the Company does not expect
to be able to fulfill the interest payment obligation through its cash flow from
operations during this grace period. Therefore, unless Elliott, at its sole and
absolute discretion, posts cash collateral to allow the Company to borrow
additional amounts under the supplemental term loan or alternative financing is
obtained, such failure to make the interest payment on or before September 14,
2002, the end of the 30 day grace period, will result in an event of default
under the indenture.

If an event of default under the indenture occurs because the Company fails
to make its required interest payment on or before September 14, 2002, the end
of the 30 day grace period, or upon any other events of default under the
indenture, the trustee could take the steps necessary to cause that debt to
become immediately due and payable, and individual bondholders may take actions
to collect their interest, which could lead to the commencement of a proceeding
under the federal bankruptcy code. Additionally, the failure to make the August
15, 2002 interest payment constitutes a default under the Foothill/Elliot Credit
Facility and will become an event of default under such facility at the end of
the grace period if such payment has not previously been made. Moreover, under
current circumstances other defaults have occurred or are expected to occur
under the Foothill/Elliott Credit Facility. Accordingly, the Company has
classified $18.0 million of otherwise long-term debt under the Foothill/Elliott
Credit Facility as current in the Company's financial statements for the quarter
ended June 30, 2002. Upon any events of default under the Foothill/Elliott
Credit Facility, Foothill may accelerate the maturity of amounts outstanding
under the Foothill/Elliott Credit Facility at any time. In addition, so long as
any defaults under the Foothill/Elliott Credit Facility (including not making
the interest payment on the 9 3/4% Senior Notes due 2008) is continuing,
Foothill is entitled to refuse to advance additional amounts to the Company
under the revolving facility. If Foothill were to accelerate amounts due under
the Foothill/Elliott Credit Facility or upon other events of default under the
indenture for the Company's 9 3/4% Senior Notes due 2008, including not making
the interest payment within the 30 day grace period, the trustee could take the
steps necessary to cause that debt to become immediately due and payable.
Accordingly, the Company has classified $43.5 million of otherwise long-term
debt related to the Senior Notes as current in the Company's financial
statements for the quarter ended June 30, 2002. If any of the Company's debt was
accelerated, it would be unlikely that the Company would be able to continue its
operations without seeking protection from its creditors under the federal
bankruptcy code.

The Company will need to attain profitable operating levels in order to
provide sufficient cash flow to service its debt, maintain its operations and
fund capital expenditures. While the Company was able to generate $0.7 million
of operating income in the six months ended June 30, 2002, the overcapacity in
the seismic service industry and the Company's increasing reliance on
international operations will require that the Company continue to closely
manage its available cash resources. Because of the high costs associated with
equipping and operating crews outside of North America and the time generally
required to process billings and receive payments, the Company expects to
require substantial cash flow to support its international projects.

The Company has approximately $145.2 million of debt and preferred stock
outstanding at June 30, 2002. Currently, the Company's highly leveraged capital
structure negatively impacts and will continue to negatively impact its
profitability and operating cash flow. If the Company is not able to
significantly improve its operations or obtain additional financing, either from
Elliott or other sources, a financial restructuring will be required to allow
the Company to be a viable entity on a long-term basis.

The Company has taken measures to reduce costs through consolidation of
certain locations, reducing the size of its United States operations due to
reduced demand levels, and reductions in overhead personnel. Should such
measures be unsuccessful, or should defaults on any of the Company's debt occur
and amounts be accelerated, there would be substantial doubt about the Company's
ability to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
those uncertainties.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND INDUSTRY CONDITIONS

The consolidated balance sheet of Grant Geophysical, Inc. and subsidiaries
(the "Company") as of June 30, 2002 and the related consolidated statements of
operations for the three and six months ended June 30, 2001 and 2002 and the
related statements of cash flows for the six months ended June 30, 2001 and 2002
are unaudited. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements of the Company contain all
adjustments (consisting only of normal, recurring adjustments) necessary to
present fairly the Company's financial position as of June 30, 2002, the results
of its operations for the three

7

and six months ended June 30, 2001 and 2002, and the results of its cash flows
for the six months ended June 30, 2001 and 2002, respectively. Results of
operations for the interim periods included herein are not necessarily
indicative of results of operations for the full year periods. The consolidated
financial statements should be read in conjunction with the audited financial
statements and footnotes for the year ended December 31, 2001, included in the
Company's Annual Report on Form 10-K, as filed with the Securities and Exchange
Commission (the "Commission").

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
the Company and all majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.

Multi-client Data Library

The costs incurred in acquiring and processing multi-client seismic data
owned by the Company are capitalized. During the twelve-month period beginning
at the completion of the acquisition and processing of each multi-client survey,
costs are amortized based on revenues from such survey as a percentage of total
estimated revenues to be realized from such survey. Thereafter, amortization of
remaining capitalized costs is provided at the greater of the percentage of
realized revenues to total estimated revenues or straight line over four years.
On March 23, 2001, the Company completed the sale of a substantial portion of
its multi-client data library, and ongoing rights thereto, in the southern
United States to a third party seismic data broker for $15,000,000 cash,
retaining all of its Canadian multi-client data library as well as several data
surveys in the southern United States. Amortization expense associated with the
Company's multi-client data library was $0.4 million and $49,000 for the three
months ended June 30, 2001 and 2002, respectively and $18.0 million and $93,000
for the six months ended June 30, 2001 and 2002 respectively. As of December 31,
2001 and June 30, 2002, accumulated amortization related to the Company's
multi-client data library was $29.0 million and $29.1 million, respectively. The
Company's remaining multi-client data library was $0.5 million at June 30, 2002.

On a quarterly basis, management estimates the residual value of each survey
and additional amortization is provided if the remaining revenues reasonably
expected to be obtained from any survey are less than the carrying value of such
survey or group of surveys.

Asset Impairment

In accordance with Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets",
long-lived assets and certain identifiable intangibles are written down to their
current fair value whenever events or changes in circumstances indicate that the
carrying amount of these assets are not recoverable. These events or changes in
circumstances may include but are not limited to a significant change to the
extent in which an asset is used, a significant decrease in the market value of
the asset, or a projection or forecast that demonstrated continuing losses
associated with an asset. If an impairment is determined, the asset is written
down to its current fair value and a loss is recognized.

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

The more significant areas requiring the use of management estimates relate
to expected future sales associated with the Company's multi-client data
library, estimated future cash flows related to long-lived assets and valuation
allowances for deferred tax assets. Actual results could differ materially from
these estimates making it reasonably possible that a change in these estimates
could occur in the near term.

Loss Per Common Share

In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share," basic loss per common share is computed based upon the
weighted average number of common shares outstanding during each period without
any dilutive effects considered. Diluted loss per common share reflects dilution
for all potentially dilutive securities, including warrants and convertible
securities. The loss is adjusted for cumulative preferred stock dividends in
calculating net loss applicable to the common stockholders.

8

The Company has not issued any common shares during 2002. Accordingly, the
weighted average number of common shares is the current number of shares
outstanding. Furthermore, options, warrants or securities are currently
anti-dilutive and have not been included in the weighted average for dilutive
shares outstanding.

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," that requires all business combinations
initiated after June 30, 2001 to be accounted for as purchases. The Company
adopted SFAS No. 141 as required on July 1, 2001. The adoption did not have a
material impact on the Company's financial position or results of operations.

In July 2001, the FASB also issued SFAS No. 142, "Goodwill and Other
Intangible Assets", requiring that all intangible assets without a contractual
life no longer be amortized but reviewed annually, or as warranted by triggering
events, for impairment in accordance with specific determination and measurement
provisions. The Company has adopted SFAS No. 142 when required to do so on
January 1, 2002; however, goodwill and intangible assets acquired subsequent to
June 30, 2001, were subject immediately to the provisions of this standard. Due
to impairments recorded in 2001, the Company has no remaining goodwill at June
30, 2002.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" was issued. SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed of" and Accounting Principles Board Opinion ("APB") No. 30,
"Reporting the Results of Operations - Reporting the Effects of the Disposal of
a Segment Business and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions." SFAS No. 144 establishes a single accounting model for assets
to be disposed of by sale whether previously held and used or newly acquired.
SFAS No. 144 retains the provisions of APB No. 30 for presentation of
discontinued operations in the income statement, but broadens the presentation
to include a component of an entity. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001, and the interim periods within. The Company
has adopted SFAS No. 144 on January 1, 2002 and does not believe that the
adoption of SFAS No. 144 will have a material impact on its financial position,
results of operations or cash flows.

In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS No. 4, 44
and 64, Amendment of SFAS Statement No. 13, and Technical Corrections." This
statement rescinds the following statement of SFAS 4, "Reporting Gains and
Losses from Extinguishment of Debt," and its amendment SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking Fund Requirements," as well as,
SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers". The statement
also amends SFAS No. 13, "Accounting for Leases", by eliminating an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002. Management does not
believe that this statement will have a material impact on its financial
position, results of operations or cash flows.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which nullifies Emerging Issues Task Force
("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred
in a Restructuring)." Under the terms of SFAS No. 146, the statement requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred rather than at the date an entity
commits to an exit plan. The effective date of the statement is for exit or
disposal activities initiated after December 31, 2002 with early application
encouraged. Management does not believe that this statement will have a material
impact on its financial position, results of operations or cash flows.

(3) PROPERTY, PLANT AND EQUIPMENT

Effective January 1, 2002, the Company extended the useful lives of certain
of its assets to properly match the depreciation expense with the future
revenues expected to be obtained from the assets. The assets are primarily
recording systems used to acquire seismic data in the Company's international
locations. The impact on depreciation resulting from the asset life extensions
was $380,000 and $160,000 for the six and three months ended June 30, 2002,
respectively.

(4) DEBT

On January 7, 2002, the agreement for purchase and assignment of foreign
accounts receivable with Elliott was modified to extend the term of the
agreement to September 30, 2002 and to increase the maximum amount allowable to
be purchased by Elliott from the Company to $5,250,000.

9

Furthermore, on February 5, 2002, March 5, 2002 and March 21, 2002,
additional modifications were made to the Elliott agreement to increase the
maximum amount allowable to be purchased by Elliott from the Company to
$7,500,000, $10,900,000 and $11,700,000, respectively. Additionally, the March
21, 2002 amendment expanded the scope of the agreement to include receivables
for all of the Company's South American locations.

On May 24, 2002, the Company completed further modifications to the
Foothill/Elliott Credit Facility whereby, among other things, the maximum amount
of the Foothill revolving facility was reduced from $10.0 million to $8.0
million (subject to additional borrowing base limitations) and Foothill agreed,
subject to conditions, to fund a $16.5 million supplemental term loan. The
revolving facility and supplemental term loan are in addition to the $7.5
million and $7.3 million ($7.8 million at June 30, 2002) in existing term loans
owing to Elliott and Foothill, respectively, under the Foothill/Elliott Credit
Facility. Advances under the supplemental term loan are conditioned, among other
things, on Elliott having elected, at its sole and absolute discretion, to
deposit cash collateral with Foothill in the amount of such advances to secure
Elliott's guarantee of the supplemental term loan. The supplemental term loan
will bear interest at the 90-day CD rate announced by Wells Fargo. The Foothill
supplemental term loan and all other obligations under the Foothill/Elliott
Credit Facility are secured by substantially all assets of the Company and its
subsidiaries, are guaranteed by Elliott and, except as to the existing Elliott
term loan, may be purchased from Foothill by Elliott at any time on 5 business
days' notice.

On May 24, 2002, the Company also completed further modifications to the
Elliott factoring agreement whereby the Company granted a lien to Elliott on
substantially all of the assets of the Company and its subsidiaries to secure
the Company's obligations to Elliott. As of August 12, 2002, $11.7 million was
outstanding under the factoring agreement all of which is due no later than
September 30, 2002. Elliott has indicated to the Company that it will not
provide any additional funding to the Company on this basis. The Company does
not expect to be able to retire these amounts from its operating cash flows. In
order to avoid a default under this agreement, either Elliott will, in its sole
and absolute discretion, elect to post $11.7 million in cash collateral to
permit an advance under the supplemental term loan of the Foothill/Elliott
Credit Facility in a like amount, the proceeds of which are used to repay the
Elliott factoring arrangement or the Company will need to otherwise reach an
accommodation with Elliott about the payment of these amounts or obtain
additional financing to refinance the amount payable to Elliott.

On July 8, 2002, the Company completed further modifications to the
Foothill/Elliott Credit Facility whereby, among other things, the maximum amount
of the Foothill supplemental term loan was increased from $16.5 million to $19.5
million. (see Note 9)

On July 8, 2002, the Company also completed further modifications to the
Elliott factoring agreement. (see Note 9)

Elliott has not committed to post any cash collateral in respect of the
supplemental term loan and may refuse to do so in its sole and absolute
discretion. The Company expects Elliott to review and consider Company requests
that Elliott post cash collateral based upon, among other things, the recent
performance of the Company at the time of each request. As of August 12, 2002,
Elliott has posted $6.8 million of cash collateral, and the Company has borrowed
a like amount under the supplemental term loan, $2.4 million in proceeds from
which have been used to repay overadvances under the Foothill revolving facility
in excess of the borrowing base. Of the $12.7 million remaining undrawn under
the supplemental term loan as of August 12, 2002, the Company expects Elliott to
post cash collateral for $11.7 million thereof in any event only to the extent
the Company's obligations to Elliott under the factoring arrangement will have
been reduced by a like amount at time of funding. Consequently, as of August 12,
2002, the Company expects the amended Foothill/Elliott Credit Facility will be
available to fund only $1.0 million of the Company's working capital needs and
only to the extent Elliott, at its sole and absolute discretion, posts
sufficient cash collateral. There are currently no additional committed sources
of financing available to the Company and no availability under existing
facilities. Even if the entire $19.5 million of the supplemental term loan is
made available to the Company and even if business conditions substantially
improve and cost control initiatives are successful during 2002, the Company
will require substantial cash flow to continue operations on a satisfactory
basis, fund capital expenditures and meet its principal and interest
requirements with respect to the 9 3/4% Senior Notes due 2008, the
Foothill/Elliott Credit Facility and other indebtedness and its obligations
under the Elliott factoring arrangement, as those amounts become due.

On August 15, 2002, the Company requested Elliott to post cash collateral
for $1.0 million to allow the Company to borrow a like amount under the
supplemental term loan of the Foothill/Elliott Credit Facility. The amount
outstanding under the supplemental term loan at that time was $6.8 million. This
request was not granted at that time, and as of August 19, 2002, the amount
outstanding under the supplemental term loan remains at $6.8 million. Elliott
has the right to review and consider Company requests that Elliott post cash
collateral to allow borrowings under the supplemental term loan of the
Foothill/Elliott Credit Facility based upon, among other things, the recent
performance of the Company at the time of each request.

10

On August 15, 2002, due to insufficient cash on hand, the Company was not
able to make the $2.1 million interest payment on the 9 3/4% Senior Notes due
2008 on that date as required by the indenture. The indenture provides a 30 day
grace period for the Company to make the payment before an event of default
occurs under the indenture. Elliott has not committed to post any additional
cash collateral in respect of the supplemental term loan and may refuse to do so
in its sole and absolute discretion. In addition, the Company does not expect to
be able to fulfill the interest payment obligation through its cash flow from
operations during this grace period. Therefore, unless Elliott, at its sole and
absolute discretion, posts cash collateral to allow the Company to borrow
additional amounts under the supplemental term loan or alternative financing is
obtained, such failure to make the interest payment on or before September 14,
2002, the end of the 30 day grace period, will result in an event of default
under the indenture.

If an event of default under the indenture occurs because the Company fails
to make its required interest payment on or before September 14, 2002, the end
of the 30 day grace period, or upon any other events of default under the
indenture, the trustee could take the steps necessary to cause that debt to
become immediately due and payable, and individual bondholders may take actions
to collect their interest, which could lead to the commencement of a proceeding
under the federal bankruptcy code. Additionally, the failure to make the August
15, 2002 interest payment constitutes a default under the Foothill/Elliot Credit
Facility and will become an event of default under such facility at the end of
the grace period if such payment has not previously been made. Moreover, under
current circumstances other defaults have occurred or are expected to occur
under the Foothill/Elliott Credit Facility. Accordingly, the Company has
classified $18.0 million of otherwise long-term debt under the Foothill/Elliott
Credit Facility as current in the Company's financial statements for the quarter
ended June 30, 2002. Upon any events of default under the Foothill/Elliott
Credit Facility, Foothill may accelerate the maturity of amounts outstanding
under the Foothill/Elliott Credit Facility at any time. In addition, so long as
any defaults under the Foothill/Elliott Credit Facility (including not making
the interest payment on the 9 3/4% Senior Notes due 2008) is continuing,
Foothill is entitled to refuse to advance additional amounts to the Company
under the revolving facility. If Foothill were to accelerate amounts due under
the Foothill/Elliott Credit Facility or upon other events of default under the
indenture for the Company's 9 3/4% Senior Notes due 2008, including not making
the interest payment within the 30 day grace period, the trustee could take the
steps necessary to cause that debt to become immediately due and payable.
Accordingly, the Company has classified $43.5 million of otherwise long-term
debt related to the Senior Notes as current in the Company's financial
statements for the quarter ended June 30, 2002. If any of the Company's debt was
accelerated, it would be unlikely that the Company would be able to continue its
operations without seeking protection from its creditors under the federal
bankruptcy code.

(5) MULTI-CLIENT DATA SALE

On March 23, 2001, the Company completed the sale of a substantial portion
of its multi-client data library, and ongoing rights thereto, in the southern
United States to a third party seismic data broker for $15,000,000 cash,
retaining all of its Canadian multi-client data library as well as several data
surveys in the southern United States. The sale proceeds of $15,000,000 were
recorded as revenues with a corresponding charge to amortization in the same
amount for the three months ended March 31, 2001. Revenues from aggregate sales
of multi-client data were $0.1 million and $0.2 million and amortization of
related costs were $49,000 and $44,000 for the three and six months ended June
30, 2002, respectively.

(6) SUPPLEMENTAL SCHEDULES TO CONSOLIDATED STATEMENTS OF CASH FLOWS

(7) SEGMENT INFORMATION

The Company has determined that its reportable segments are based on the
Company's method of internal reporting, which disaggregates its one
product/service line (geophysical services) further into four geographic
regions: the United States, Canada, Latin America and the Far East.

The Company evaluates the performance of its segments and allocates
resources to them, in part, based on operating income (loss). There are no
intersegment revenues.

11

The tables below present information about the Company's reported segments
for the periods indicated (dollars in thousands):

- ----------

(1) Includes $19,000 in revenues from multi-client data library sales and
$17,700 in associated amortization.

(8) COMMITMENTS AND CONTINGENCIES

The Company is a party to a lawsuit filed in August 2000, which alleges,
among other things, that the defendants wrongfully acquired geophysical data
from plaintiff's mineral estates after January 1, 1998. The Plaintiffs seek
unspecified damages and injunctive relief. As of June 30, 2002, procedural
hearings had been held on this matter and a class certification hearing on the
merits was set for November 2002. Subsequent to June 30, 2002, the Company filed
a motion for summary judgment and an amended motion for summary judgment which
was heard and taken under advisement by the Court. On August 23, 2002, the judge
ruled in favor of the Company and granted the amended motion for summary
judgment (see Note 9). Should the Plaintiffs choose to appeal, the Company
believes that the allegations of the Lawsuit are without merit and intends to
vigorously defend the Lawsuit. Management does not believe this lawsuit will
have a material adverse impact on the Company's financial position, results of
operations or cash flows.

(9) SUBSEQUENT EVENTS

On July 8, 2002, the Company completed further modifications to its
existing credit facility (the "Foothill/Elliott Credit Facility") with Foothill
Capital Corporation ("Foothill") and Elliott Associates, L.P. ("Elliott")
whereby, among other things, the maximum amount of the Foothill supplemental
term loan was increased from $16.5 million to $19.5 million. The supplemental
term loan is in addition to the Foothill revolving facility of $8.0 million
(subject to borrowing base limitations) and the $7.5 million and $7.3 million
($7.8 million at June 30, 2002) in existing term loans owing to Elliott and
Foothill, respectively, under the Foothill/Elliott Credit Facility. Advances
under the supplemental term loan are conditioned, among other things, on Elliott
having elected, at its sole and absolute discretion, to deposit cash collateral
with Foothill in the amount of such advances to secure Elliott's guarantee of
the supplemental term loan. The supplemental term loan will bear interest at the
90-day CD rate announced by Wells Fargo. The Foothill supplemental term loan and
all other obligations under the Foothill/Elliott Credit Facility are secured by
substantially all assets of the company and its subsidiaries, are guaranteed by
Elliott and, except as to the existing Elliott term loan, may be purchased from
Foothill by Elliott at any time on 5 business days' notice.

The modifications to the Foothill/Elliott Credit Facility also include a
new mandatory prepayment provision with respect to the $7.3 million Foothill
term loan ($7.8 million at June 30, 2002). In brief, the new provision generally
requires the Company, upon any net movement of equipment outside the United
States and Canada, to prepay the Foothill term loan so that the remaining
outstanding balance thereof is no greater than two-thirds of the appraised value
of the equipment remaining in the United States and Canada in which Foothill has
a perfected security interest.

On July 8, 2002, the Company also completed further modifications to the
Elliott factoring agreement. As amended, the factoring agreement provides, among
other things, for the sale to Elliott, subject to conditions, of all billed and
unbilled/work in progress non-U.S. dollar denominated foreign accounts
receivable, subject to the parties' agreement that the aggregate face amount of
accounts that Elliott will purchase thereunder at any time will not exceed $11.7
million divided by the factoring discount rate of 0.991667, or approximately
$11.8 million. Elliott is obligated to pay for purchased accounts at a
discounted rate of 0.991667 per dollar based on the invoice before value-added
tax. If any receivable is not collected within 30 days, the Company is obligated
to pay Elliott an additional discount at a monthly rate of 0.8333. Under the
factoring agreement, the Company is required, among other things, to remit

12

any payment received by the Company on any account purchased by Elliott on a
mutually agreed timetable but in any event no later than September 30, 2002. As
of August 12, 2002, $11.7 million was outstanding under the factoring agreement.
Elliott has indicated to the Company that it will not provide any additional
funding to the Company on this basis. The Company does not expect to be able to
retire these amounts from its operating cash flows. In order to avoid a default
under this agreement, either Elliott will, at its sole and absolute discretion,
elect to post $11.7 million in cash collateral to permit an advance under the
supplemental term loan of the Foothill/Elliott Credit Facility in a like amount,
the proceeds of which are used to repay the Elliott factoring arrangement or the
Company will need to otherwise reach an accommodation with Elliott about the
payment of these amounts or obtain additional financing to refinance the amount
payable to Elliott.

On August 15, 2002, the Company requested Elliott to post cash collateral
for $1.0 million to allow the Company to borrow a like amount under the
supplemental term loan of the Foothill/Elliott Credit Facility. The amount
outstanding under the supplemental term loan at that time was $6.8 million. This
request was not granted at that time, and as of August 19, 2002, the amount
outstanding under the supplemental term loan remains at $6.8 million. Elliott
has the right to review and consider Company requests that Elliott post cash
collateral to allow borrowings under the supplemental term loan of the
Foothill/Elliott Credit Facility based upon, among other things, the recent
performance of the Company at the time of each request.

On August 15, 2002, due to insufficient cash on hand, the Company was not
able to make the $2.1 million interest payment on the 9 3/4% Senior Notes due
2008 on that date as required by the indenture. The indenture provides a 30 day
grace period for the Company to make the payment before an event of default
occurs under the indenture. Elliott has not committed to post any additional
cash collateral in respect of the supplemental term loan and may refuse to do so
at its sole and absolute discretion. In addition, the Company does not expect to
be able to fulfill the interest payment obligation through its cash flow from
operations during this grace period. Therefore, unless Elliott, at its sole and
absolute discretion, posts cash collateral to allow the Company to borrow
additional amounts under the supplemental term loan or alternative financing is
obtained, such failure to make the interest payment on or before September 14,
2002, the end of the 30 day grace period, will result in an event of default
under the indenture.

If an event of default under the indenture occurs because the Company fails
to make its required interest payment on or before September 14, 2002, the end
of the 30 day grace period, or upon any other events of default under the
indenture, the trustee could take the steps necessary to cause that debt to
become immediately due and payable, and individual bondholders may take actions
to collect their interest, which could lead to the commencement of a proceeding
under the federal bankruptcy code. Additionally, the failure to make the August
15, 2002 interest payment constitutes a default under the Foothill/Elliot Credit
Facility and will become an event of default under such facility at the end of
the grace period if such payment has not previously been made. Moreover, under
current circumstances other defaults have occurred or are expected to occur
under the Foothill/Elliott Credit Facility. Accordingly, the Company has
classified $18.0 million of otherwise long-term debt under the Foothill/Elliott
Credit Facility as current in the Company's financial statements for the quarter
ended June 30, 2002. Upon any events of default under the Foothill/Elliott
Credit Facility, Foothill may accelerate the maturity of amounts outstanding
under the Foothill/Elliott Credit Facility at any time. In addition, so long as
any defaults under the Foothill/Elliott Credit Facility (including not making
the interest payment on the 9 3/4% Senior Notes due 2008) is continuing,
Foothill is entitled to refuse to advance additional amounts to the Company
under the revolving facility. If Foothill were to accelerate amounts due under
the Foothill/Elliott Credit Facility or upon other events of default under the
indenture for the Company's 9 3/4% Senior Notes due 2008, including not making
the interest payment within the 30 day grace period, the trustee could take the
steps necessary to cause that debt to become immediately due and payable.
Accordingly, the Company has classified $43.5 million of otherwise long-term
debt related to the Senior Notes as current in the Company's financial
statements for the quarter ended June 30, 2002. If any of the Company's debt was
accelerated, it would be unlikely that the Company would be able to continue its
operations without seeking protection from its creditors under the federal
bankruptcy code.

The Company is a party to a lawsuit filed in August 2000, which alleges,
among other things, that the defendants wrongfully acquired geophysical data
from plaintiff's mineral estates after January 1, 1998. The Plaintiffs seek
unspecified damages and injunctive relief. Subsequent to June 30, 2002 the
Company filed a motion for summary judgment and an amended motion for summary
judgment which was heard and taken under advisement by the Court. On August 23,
2002, under due consideration, the 229th Judicial District Court, Starr County,
Texas ruled in favor of Grant Geophysical, Inc. and Grant Geophysical,
Corporation's amended motion for summary judgment on this matter. The Court,
after considering the amended motion for summary judgment, the responses and the
argument of counsel ruled in favor of the Company. The Plaintiffs have the right
to appeal the judge's decision and should file the appropriate appellate
documents within 30 days of August 23, 2002 if they choose to do so. Failure to
file an appeal during this period will result in dismissal of this matter.
Should the Plaintiffs choose to appeal, the Company believes that the
allegations of the Lawsuit are without merit and intends to vigorously defend
the Lawsuit. Management does not believe this lawsuit will have a material
adverse impact on the Company's financial position, results of operations or
cash flows.

13

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

OVERVIEW

Grant is a provider of seismic data acquisition services in land and
transition zone environments in selected markets, including the United States,
Canada, Latin America and the Far East. The Company also markets seismic data
acquisition services in the Middle East and Africa. The Company's seismic data
acquisition services typically are provided on an exclusive contract basis to
domestic and international oil and gas exploration and production companies and
seismic data marketing companies. The Company also provides seismic data
processing services through its international support facilities.

The market for seismic land acquisition, both domestically and in Canada,
remained significantly depressed throughout the first six months of 2002.
Additionally, demand for land and transition zone seismic data acquisition
services are primarily determined by oil and gas industry capital expenditures,
budgets and spending patterns. These spending patterns are affected by
individual oil and gas company budgets as well as industry-wide conditions.
Overcapacity in the seismic service industry continues to suppress pricing and
activity levels and has materially adversely affected the Company's results of
operations. Management has implemented a business plan in 2002 with the specific
objectives of improving profitability and generating positive operating cash
flow through intensified sales and marketing, tighter cost controls and reduced
overhead expenses. Additionally, due to the competitive markets and decreased
demand in the United States and Canada, the Company has increased its reliance
on its international land and transition zone operations in areas where higher
demand levels exist.

As of August 12, 2002, the Company was operating or mobilizing 2 crews in
the United States, 4 crews in Latin America, 2 crews in Canada and 0 crews in
the Far East. For the three months ended June 30, 2002, the Company's total
revenues were $15.6 million, with approximately 4.7% from the United States,
91.5% from Latin America, 3.8% from Canada and 0.0% from the Far East. For the
six months ended June 30, 2002 the Company's total revenues were $44.9 million,
with approximately 4.0% from the United States, 78.4% from Latin America, 0.0%
from the Far East and 17.6% from Canada.

RESULTS OF OPERATIONS

FOR THE THREE-MONTH PERIOD ENDED JUNE 30, 2002 COMPARED WITH THE THREE-MONTH
PERIOD ENDED JUNE 30, 2001

Revenues. Revenues for the three months ended June 30, 2002 were $15.6
million, compared with $12.0 million for the three months ended June 30, 2001.
The net increase during the second quarter of 2002 of $3.6 million, or 30.0%,
was primarily the result of increased revenues from data acquisition operations
in Latin America partially offset by decreased revenues from data acquisition
operations in the United States, Canada and the Far East.

Revenues from United States data acquisition operations decreased $0.8
million, or 53.3%, from $1.5 million for the three months ended June 30, 2001 to
$0.7 million for the three months ended June 30, 2002. The decline in data
acquisition revenues is due to the Company reducing the size of its United
States operations as a result of reduced demand levels.

Revenues from seismic data processing operations were $0.1 million for both
the second quarter of 2002 and the second quarter of 2001.

Revenues from the Canadian data acquisition operations increased $0.1
million, or 25.0% from $0.4 million in the second quarter of 2001 to $0.5
million in the three months ended June 30, 2002. During the second quarter of
2001, a range of one to two land seismic crews were operating in Canada. During
the second quarter of 2002 one land seismic crew was operating in Canada but for
a longer duration than the 2001 quarter.

Revenues from sales of the data library for the three months ended June 30,
2002 were $0.1 million, compared to $1.3 million for the three months ended June
30, 2001. The decline is primarily due to the fact that the 2001 quarter
included the sale, with ongoing rights thereto, of one of the Company's
multi-client data surveys in the Southern U.S.

Revenues for data acquisition operations in Latin America increased $5.8
million, or 68.2%, from $8.5 million for the second quarter of 2001 to $14.3
million for the second quarter of 2002. This revenue increase is attributable to
significant increases in working crew levels in the area resulting from
increased customer exploration operations.

14

Revenues for data acquisition operations in the Far East decreased $0.2
million, or 100%, from $0.2 million for the three months ended June 30, 2001 to
$0.0 million for the three months ended June 30, 2002. During a portion of the
second quarter of 2001, the Company operated one crew in New Zealand. No crews
were operating in the Far East during the second quarter of 2002.

Expenses. Direct operating expenses for the three months ended June 30, 2002
increased $1.7 million, or 17.0%, to $11.7 million, compared to $10.0 million
for the three months ended June 30, 2001. This increase is primarily a result of
increased data acquisition activities in Latin America in the second quarter of
2002.

Selling, general and administrative expenses increased $0.2 million, or
10.0%, to $2.2 million for the three months ended June 30, 2002 from $2.0
million for the three months ended June 30, 2001. This increase is the result of
increased data acquisition activities in Latin America partially offset by the
Company's ongoing efforts to reduce support and overhead personnel in all of its
operating regions and at the corporate office level.

Depreciation and amortization decreased $2.5 million, or 50.0%, to $2.5
million in the three months ending June 30, 2002 from $5.0 million for the three
months ended June 30, 2001. This decrease in 2002 is due to reduced depreciation
resulting from the Company's impairment of certain fixed assets in the fourth
quarter of 2001 and asset life extensions in 2002 (see Note 3).

Other Income (Expenses). Interest expense, net, increased $0.3 million to
$1.9 million in the second quarter of 2002 from $1.6 million in the second
quarter of 2001. This increase is primarily due to additional debt outstanding
during the 2002 quarter. Included in the second quarter of 2002 are foreign
exchange gains of $0.3 million compared to $0.0 million in the 2001 quarter.

Tax Provision. The income tax provisions for the 2001 and 2002 quarters
consisted of foreign income taxes. No benefit for United States federal income
tax loss carry forwards was recorded in either period, given the uncertainty of
realization of such tax benefits.

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2002 COMPARED WITH THE SIX-MONTH PERIOD
ENDED JUNE 30, 2001

Revenues. Revenues for the six months ended June 30, 2002 were $44.9
million, compared with $48.0 million for the six months ended June 30, 2001. The
net decrease of $3.1 million, or 6.5%, was primarily due to the 2001 sale of a
substantial portion of its multi-client data library, partially offset by
increased Latin America data acquisition revenues.

Revenues from United States data acquisition operations decreased $2.9
million, or 64.4%, from $4.5 million for the six months ended June 30, 2001 to
$1.6 million for the six months ended June 30, 2002. This sharp decline in data
acquisition revenues is due to the Company reducing the size of its United
States operations due to reduced demand levels. During the first six months of
2001, the Company performed $1.2 million of data acquisition services for an
affiliated oil and gas exploration and production company.

Revenues from seismic data processing operations were $0.3 million and $0.2
million for the first half of 2001 and 2002 respectively. The decrease is
primarily due to the closing of the Company's Dallas processing center.

Revenues from the Canadian data acquisition operations were $7.8 million for
the first six months of 2001 and 2002.

Revenues from sales of the data library for the first six months of 2002
were $0.2 million, compared to $19.7 million for the first six months of 2001.
In March, 2001 the Company sold for $15.0 million cash a substantial portion of
its multi-client data library, and ongoing rights thereto, in the southern
United States to a third party seismic data broker, retaining all of its
Canadian multi-client data library as well as several data surveys in the
southern United States.

Revenues for data acquisition operations in Latin America increased $21.5
million, or 156.9%, from $13.7 million in the first six months of 2001 to $35.2
million in the first six months of 2002. The revenue increase is attributable to
increased working crew levels in the area resulting from increases in the
activity levels of customers' exploration operations.

Revenues for data acquisition operations in the Far East decreased $2.0
million, or 100.0%, from $2.0 million in the six months ended June 30, 2001 to
$0.0 million in the six months ended June 30, 2002. During the first six months
of 2001 the Company operated one crew in New Zealand although the crew was not
active for the entire period. The Company operated no crews in the Far East
during the six months ended June 30, 2002.

15

Expenses. Direct operating expenses for the six months ended June 30, 2002
increased $10.7 million, or 43.9%, to $35.1 million, compared to $24.4 million
for the six months ended June 30, 2001. This is primarily a result of increased
data acquisition activities in Latin America.

Selling, general and administrative expenses increased $0.2 million, or
4.8%, to $4.4 million for the six months ended June 30, 2002 from $4.2 million
for the six months ended June 30, 2001. This increase is the result of the
Company's increased activity levels in Latin America partially offset by the
Company's ongoing efforts to reduce support and overhead personnel in all of its
operating regions and at the corporate office level.

Depreciation and amortization decreased $22.4 million, or 82.4%, to $4.8
million in the first six months of 2002 from $27.2 million for the first six
months of 2001. This decrease reflects the impact of additional amortization as
a result of the sale of a substantial portion of its multi-client data library,
and ongoing rights thereto, in the first quarter of 2001 combined with reduced
depreciation resulting from the Company's life extensions in 2002 (see Note 3).

Other Income (Expenses). Interest expense, net, increased $0.3 million to
$3.6 million in the first six months of 2002 from $3.3 million in the first six
months of 2001 primarily due to increased outstanding debt. Included in the 2001
and 2002 amounts are foreign exchange gains (losses) of ($944,000) and $108,000,
respectively.

Tax Provision. The income tax provision consisted of foreign income taxes.
No benefit for United States federal income tax loss carry forwards was recorded
in either period, given the uncertainty of realization of such tax benefits.

LIQUIDITY AND CAPITAL RESOURCES

The liquidity of the Company should be considered in light of the cyclical
nature of demand for land and transition zone seismic services. These
fluctuations have rapidly impacted the Company's liquidity as supply and demand
factors directly affect pricing.

The Company's ability to meet its debt service and other obligations depends
on its future performance, which in turn is subject to general economic
conditions, activity levels in the oil and gas exploration sector, and other
factors beyond the Company's control. While management believes there has been a
recent improvement in market conditions for seismic services, especially in
Latin America, funds to finance operations are expected to remain limited
through 2002 and may not permit the Company to continue its operations in the
ordinary course. As previously discussed, the Company has in the past relied on
its majority stockholder, Elliott, to provide credit support and interim
funding. As of August 12, 2002, $11.7 million had been provided by Elliott to
the Company to provide working capital in the form of a factoring arrangement
for certain foreign receivables, which represents the maximum amount allowed
under the agreement and is due and payable no later than September 30, 2002 (see
Note 4). Elliott has indicated to the Company that it will not provide any
additional funding to the Company on this basis. The Company does not expect to
be able to retire these amounts from its operating cash flows. In order to avoid
a default under this agreement, either Elliott will, in its sole and absolute
discretion, elect to post $11.7 million in cash collateral to permit an advance
under the supplemental term loan (see Note 4) of the Foothill/Elliott Credit
Facility in a like amount, the proceeds of which are used to repay the Elliott
factoring arrangement or the Company will need to otherwise reach an
accommodation with Elliott about the payment of these amounts or obtain
additional financing to refinance the amount payable to Elliott.

Of the $12.7 million remaining undrawn under the supplemental term loan as
of August 12, 2002, the Company expects Elliott to post cash collateral for
$11.7 million thereof in any event only to the extent the Company's obligations
to Elliott under the factoring arrangement will have been reduced by a like
amount at the time of funding. Consequently, the Company expects the
Foothill/Elliott Credit Facility will be available to fund only $1.0 million of
the Company's working capital needs and only to the extent Elliott, at its sole
and absolute discretion, posts sufficient cash collateral. There are currently
no additional committed sources of financing available to the Company and no
availability under existing facilities. Even if business conditions
substantially improve and cost control initiatives are successful during 2002,
the Company will require substantial cash flow to continue operations on a
satisfactory basis, fund capital expenditures and meet its principal and
interest requirements with respect to the 9 3/4% Senior Notes, Foothill/Elliott
Credit Facility and other indebtedness, and its obligations under the Elliott
factoring arrangement, as those amounts become due.

On August 15, 2002, the Company requested Elliott to post cash collateral
for $1.0 million to allow the Company to borrow a like amount under the
supplemental term loan of the Foothill/Elliott Credit Facility. The amount
outstanding under the supplemental term loan at that time was $6.8 million. This
request was not granted at that time, and as of August 19, 2002, the amount
outstanding under the supplemental term loan remains at $6.8 million. Elliott
has the right to review and consider Company requests that Elliott post

16

cash collateral to allow borrowings under the supplemental term loan of the
Foothill/Elliott Credit Facility based upon, among other things, the recent
performance of the Company at the time of each request.

On August 15, 2002, due to insufficient cash on hand, the Company was not
able to make the $2.1 million interest payment on the 9 3/4% Senior Notes due
2008 on that date as required by the indenture. The indenture provides a 30 day
grace period for the Company to make the payment before an event of default
occurs under the indenture. Elliott has not committed to post any additional
cash collateral in respect of the supplemental term loan and may refuse to do so
in its sole and absolute discretion. In addition, the Company does not expect to
be able to fulfill the interest payment obligation through its cash flow from
operations during this grace period. Therefore, unless Elliott, at its sole and
absolute discretion, posts cash collateral to allow the Company to borrow
additional amounts under the supplemental term loan or alternative financing is
obtained, such failure to make the interest payment on or before September 14,
2002, the end of the 30 day grace period, will result in an event of default
under the indenture.

If an event of default under the indenture occurs because the Company fails
to make its required interest payment on or before September 14, 2002, the end
of the 30 day grace period, or upon any other events of default under the
indenture, the trustee could take the steps necessary to cause that debt to
become immediately due and payable, and individual bondholders may take actions
to collect their interest, which could lead to the commencement of a proceeding
under the federal bankruptcy code. Additionally, the failure to make the August
15, 2002 interest payment constitutes a default under the Foothill/Elliot Credit
Facility and will become an event of default under such facility at the end of
the grace period if such payment has not previously been made. Moreover, under
current circumstances other defaults have occurred or are expected to occur
under the Foothill/Elliott Credit Facility. Accordingly, the Company has
classified $18.0 million of otherwise long-term debt under the Foothill/Elliott
Credit Facility as current in the Company's financial statements for the quarter
ended June 30, 2002. Upon any events of default under the Foothill/Elliott
Credit Facility, Foothill may accelerate the maturity of amounts outstanding
under the Foothill/Elliott Credit Facility at any time. In addition, so long as
any defaults under the Foothill/Elliott Credit Facility (including not making
the interest payment on the 9 3/4% Senior Notes due 2008) is continuing,
Foothill is entitled to refuse to advance additional amounts to the Company
under the revolving facility. If Foothill were to accelerate amounts due under
the Foothill/Elliott Credit Facility or upon other events of default under the
indenture for the Company's 9 3/4% Senior Notes due 2008, including not making
the interest payment within the 30 day grace period, the trustee could take the
steps necessary to cause that debt to become immediately due and payable.
Accordingly, the Company has classified $43.5 million of otherwise long-term
debt related to the Senior Notes as current in the Company's financial
statements for the quarter ended June 30, 2002. If any of the Company's debt was
accelerated, it would be unlikely that the Company would be able to continue its
operations without seeking protection from its creditors under the federal
bankruptcy code.

The Company has taken measures to reduce costs through consolidation of
certain locations, resizing its United States operations to reduced current
demand levels, and reductions in overhead personnel. Should such measures be
unsuccessful or should additional defaults occur and any of the Company's debt
be accelerated, there would be substantial doubt about the Company's ability to
continue as a going concern. The accompanying financial statements do not
include any adjustments that might result from the outcome of those
uncertainties.

The Company's ongoing capital requirements arise primarily from its need to
service debt, fund its international projects and to acquire, maintain or
improve equipment. During the six months ended June 30, 2002, $4.2 million was
used in operating activities, a significant decrease from the same period last
year when the Company generated $2.9 million provided by operating activities.
This decrease in funds generated from operating activities was principally due
to decreases in the Company's accounts payable despite increased activity levels
and resulting accounts receivable combined with the fact that the 2001 quarter
included the $15.0 million data library sale mentioned below. During the six
months ended June 30, 2002, $6.4 million was provided by financing activities,
which was primarily due to additional funding provided under the Foothill
supplemental term loan and amounts advanced under the Elliott factoring
arrangement partially offset by payback on the Company's debt. This compares to
the same period in 2001 when $3.0 million was used in financing activities,
which was due to net reduction of debt. During the six months ended June 30,
2002, $1.7 million was used in investing activities, primarily due to $4.2
million of capital expenditures, $2.2 million of which is financed and will be
paid during the remainder of 2002 and beyond. This compares to $1.6 million used
in investing activities in the same period in 2001.

The Company will need to attain profitable operating levels in order to
provide sufficient cash flow to service its debt, maintain its operations and
fund capital expenditures. While the Company was able to generate operating
income in the six months ended June 30, 2002, the overcapacity in the seismic
service industry and the Company's increasing reliance on international
operations, will require that the Company continue to closely manage its
available cash resources. Because of the high costs associated with equipping
and operating crews outside of North America and the time generally required to
process billings and receive payments, the Company expects to require
significant amounts of liquidity to support its international projects.

17

In 2001, Elliott advanced approximately $4.9 million to the Company through
a depository agreement and a factoring arrangement, as discussed below, and as
of December 31, 2001, $4.0 million remained outstanding under the factoring
arrangement. Already in 2002, Elliott has advanced an additional $7.7 million to
the Company under the factoring arrangement representing the maximum advance
allowed under this arrangement. At August 12, 2002, the amount outstanding under
this arrangement was $11.7 million and all amounts are due and payable no later
than September 30, 2002. The Company does not expect to be able to retire these
amounts from its operating cash flows. In order to avoid a default under this
agreement, the Company will either need to reach an accommodation with Elliott
about the payment of these amounts or obtain additional financing to refinance
the amount payable to Elliott.

In March 2001, the Company sold a substantial portion of its multi-client
data library in the southern United States to a third party seismic data broker
for $15.0 million. The sales proceeds from the March 2001 sale were used to
retire $9.4 million cash advanced by Elliott in 2000 and 2001, including $1.9
million advanced under the depository agreement, plus accrued preferred return
thereon with the balance used to reduce outstanding borrowings under the Credit
Facility. Subsequent to the sale, the Company wrote down the remaining portion
of its multi-client data library to $0.6 million. As a result, the Company does
not expect that any additional potential sales of its multi-client data library
will result in significant amounts of proceeds that can fund operating
activities.

Capital expenditures for the six months ended June 30, 2002 were
approximately $4.2 million and were used primarily to upgrade and expand the
Company's seismic data acquisition and recording equipment. The Company's 2002
business plan contemplates up to $8.3 million of capital expenditures primarily
to upgrade and replace seismic data acquisition and recording equipment. Actual
capital expenditures will, however, be limited to an amount that can be funded
from available cash and any equipment financing provided by manufacturers.

As of June 30, 2002, the Company had approximately $80.6 million of
indebtedness consisting of $43.5 million principal amount of the Senior Notes,
$21.0 million outstanding borrowings under the Foothill/Elliott Credit Facility,
$11.7 million payable under the Elliott factoring arrangement and $4.4 million
of loans and capitalized leases primarily incurred to fund capital expenditures.
In addition to the Company's indebtedness, the Company has approximately $64.5
million of preferred stock outstanding at June 30, 2002. Currently, the
Company's highly leveraged capital structure negatively impacts and will
continue to negatively impact its profitability and operating cash flow. If the
Company is not able to significantly improve its operations or obtain additional
financing, either from Elliott or other sources, a financial restructuring will
be required to allow the Company to be a viable entity on a long-term basis.

FOREIGN CURRENCY RISK

The Company conducts a substantial portion of its business in currencies
other than the U.S. or Canadian dollars, particularly various Latin American
currencies, and its international operations are subject to fluctuations in
foreign currency exchange rates. Accordingly, the Company's international
contracts could be significantly affected by fluctuations in exchange rates.
International contracts requiring payment in currency other than U.S. or
Canadian dollar typically are indexed to inflationary tables and generally are
used for local expenses. With the exception of the Company's Canadian
subsidiary, the functional currency for each of the Company's subsidiaries or
branches is the U.S. dollar. The Company attempts to structure the majority of
its international contracts to be partially billed and paid in U.S. dollars.

The Company's operating results were impacted by foreign exchange gains
(losses) of approximately $108,000 and ($944,000) for the six months ended June
30, 2002 and 2001, respectively.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

From time to time, information provided by the Company, statements by its
employees or information included in written material, such as press releases
and filings (including this Form 10-Q Quarterly Report) with the Commission
(including portions of the "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and certain other sections
contained in such filings) may contain "forward-looking" statements within the
meaning of the Private Securities Litigation Reform Act of 1995.

Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable; it can give no assurance that such
expectations will prove to be correct. Such forward-looking statements are
subject to certain risks, uncertainties and assumptions. Should one or more of
these risks or uncertainties materialize, or should any of the underlying
assumptions prove incorrect, actual results of current and future operations may
vary materially from those anticipated, estimated or projected. Investors

18

are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of their dates.

Among the factors that will have a direct bearing on the Company's results
of operations and the oil and gas services industry in which it operates are the
effects of rapidly changing technology; the presence of competitors with greater
financial resources; operating risks inherent in the oil and gas services
industry; regulatory uncertainties; worldwide political stability and economic
conditions and other risks associated with international operations, including
foreign currency exchange risk; and the Company's successful execution of its
strategy and internal operating plans.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's debt consists of both fixed-interest and variable-interest
rate debt; consequently, the Company's results of operations and cash flows, as
well as the fair values of its fixed-rate debt instruments, are subject to
interest-rate risk. The Company has performed sensitivity analyses to assess the
impact of this risk based on a hypothetical ten-percent increase in market
interest rates. Market rate volatility is dependent on many factors that are
impossible to forecast, and actual interest rate increases could be more severe
than the hypothetical ten-percent increase. The Company estimates that if
prevailing market interest rates had been ten percent higher throughout the
first and second quarter of 2002 and all other factors affecting the Company's
debt remained the same, the Company's pretax loss would have been increased by
approximately $0.2 million and $0.4 million, respectively for the three and six
months ended June 30, 2002. With respect to the fair value of the Company's
fixed-interest rate debt, if prevailing market interest rates had been ten
percent higher during first six months of 2002, and all other factors affecting
the Company's debt remained the same, fair value of the Company's fixed-rate
debt, as determined on a present-value basis, would have been lower by
approximately $3.8 million at June 30, 2002. Given the composition of the
Company's debt structure, the Company does not hedge its interest rate risk.

19

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is a party to a lawsuit filed in August 2000, which alleges,
among other things, that the defendants wrongfully acquired geophysical data
from plaintiff's mineral estates after January 1, 1998. The Plaintiffs seek
unspecified damages and injunctive relief. Subsequent to June 30, 2002 the
Company filed a motion for summary judgment and an amended motion for summary
judgment which was heard and taken under advisement by the Court. On August 23,
2002, under due consideration, the 229th Judicial District Court, Starr County,
Texas ruled in favor of Grant Geophysical, Inc. and Grant Geophysical,
Corporation's amended motion for summary judgment on this matter. The Court,
after considering the amended motion for summary judgment, the responses and the
argument of counsel ruled in favor of the Company. The Plaintiffs have the right
to appeal the judge's decision and should file the appropriate appellate
documents within 30 days of August 23, 2002 if they choose to do so. Failure to
file an appeal during this period will result in dismissal of this matter.
Should the Plaintiffs choose to appeal, the Company believes that the
allegations of the Lawsuit are without merit and intends to vigorously defend
the Lawsuit. Management does not believe this lawsuit will have a material
adverse impact on the Company's financial position, results of operations or
cash flows.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

In April 2002, the Company issued 12,485 shares of its 8% convertible
preferred stock to satisfy payment in-kind dividend requirements on such stock
issue. The issuance of these securities were deemed to be exempt from
registration under the Securities Act of 1933, as amended, in reliance on
Section 4(2) of the Securities Act.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

On August 15, 2002, the Company requested Elliott to post cash collateral
for $1.0 million to allow the Company to borrow a like amount under the
supplemental term loan of the Foothill/Elliott Credit Facility. The amount
outstanding under the supplemental term loan at that time was $6.8 million. This
request was not granted at that time, and as of August 19, 2002, the amount
outstanding under the supplemental term loan remains at $6.8 million. Elliott
has the right to review and consider Company requests that Elliott post cash
collateral to allow borrowings under the supplemental term loan of the
Foothill/Elliott Credit Facility based upon, among other things, the recent
performance of the Company at the time of each request.

On August 15, 2002, due to insufficient cash on hand, the Company was not
able to make the $2.1 million interest payment on the 9 3/4% Senior Notes due
2008 on that date as required by the indenture. The indenture provides a 30 day
grace period for the Company to make the payment before an event of default
occurs under the indenture. Elliott has not committed to post any additional
cash collateral with respect to the supplemental term loan and may refuse to do
so at its sole and absolute discretion. In addition, the Company does not expect
to be able to fulfill the interest payment obligation through its cash flow from
operations during this grace period. Therefore, unless Elliott, at its sole and
absolute discretion, posts cash collateral to allow the Company to borrow
additional amounts under the supplemental term loan or alternative financing is
obtained, such failure to make the interest payment on or before September 14,
2002, the end of the 30 day grace period, will result in an event of default
under the indenture.

If an event of default under the indenture occurs because the Company fails
to make its required interest payment on or before September 14, 2002, the end
of the 30 day grace period, or upon any other events of default under the
indenture, the trustee could take the steps necessary to cause that debt to
become immediately due and payable, and individual bondholders may take actions
to collect their interest, which could lead to the commencement of a proceeding
under the federal bankruptcy code. Additionally, the failure to make the August
15, 2002 interest payment constitutes a default under the Foothill/Elliot Credit
Facility and will become an event of default under such facility at the end of
the grace period if such payment has not previously been made. Moreover, under
current circumstances other defaults have occurred or are expected to occur
under the Foothill/Elliott Credit Facility. Accordingly, the Company has
classified $18.0 million of otherwise long-term debt under the Foothill/Elliott
Credit Facility as current in the Company's financial statements for the quarter
ended June 30, 2002. Upon any events of default under the Foothill/Elliott
Credit Facility, Foothill may accelerate the maturity of amounts outstanding
under the Foothill/Elliott Credit Facility at any time. In addition, so long as
any defaults under the Foothill/Elliott Credit Facility (including not making
the interest payment on the 9 3/4% Senior Notes due 2008) is continuing,
Foothill is entitled to refuse to advance additional amounts to the Company
under the revolving facility. If Foothill were to accelerate amounts due under
the Foothill/Elliott Credit Facility or upon other events of default under the
indenture

20

for the Company's 9 3/4% Senior Notes due 2008, including not making the
interest payment within the 30 day grace period, the trustee could take the
steps necessary to cause that debt to become immediately due and payable.
Accordingly, the Company has classified $43.5 million of otherwise long-term
debt related to the Senior Notes as current in the Company's financial
statements for the quarter ended June 30, 2002. If any of the Company's debt was
accelerated, it would be unlikely that the Company would be able to continue its
operations without seeking protection from its creditors under the federal
bankruptcy code.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) List of Exhibits

EXHIBIT NO.

99.1* -- Certification of Chief Executive Officer

99.2* -- Certification of Chief Financial Officer

* Filed Herein

(b) Reports on Form 8-K

On June 13, 2002, the Company filed a current report on Form 8-K
related to the disclosure of Amendment Seven to the Foothill/Elliott credit
facility and Amendment Five the Elliott factoring arrangement.

On July 30, 2002, the Company filed a current report on Form 8-K
related to the disclosure of Amendment Eight to the Foothill/Elliott credit
facility and Amendment Six to the Elliott factoring arrangement.

On August 12, 2002, the Company filed a current report on Form 8-K
related to the dismissal of Arthur Andersen LLP as the Company's
independent auditors.

On August 21, 2002, the Company filed a current report on Form 8-K
related to the default in interest payment to holders of the 9 3/4% Senior
Notes due 2008 and the failure to timely file quarterly report on Form 10-Q
for the period ending June 30, 2002.

On August 26, 2002, the Company filed an amendment to its current
report on Form 8-K filed on August 12, 2002 to disclose the fact that the
Company has retained MANN FRANKFORT STEIN & LIPP CPAs, L.L.P. as the
Company's independent auditors.

21

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.

GRANT GEOPHYSICAL, INC.
Date: August 29, 2002

By: /s/ RICHARD F. MILES
--------------------------------------
Richard F. Miles
President, Chief Executive Officer and
Director
(Principal Executive Officer)

By: /s/ JAMES BLACK
-------------------------------------
James Black
Chief Financial Officer
(Principal Financial Officer)

By: /s/ SCOTT A. MCCURDY
-------------------------------------
Scott A. McCurdy
Controller
(Principal Accounting Officer)

22

EXHIBIT INDEX

Exhibit No. Description
-------------- --------------------------------------------

99.1* Certification of Chief Executive Officer

99.2* Certification of Chief Financial Officer

* Filed Herein