INPUT OUTPUT INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OR

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

COMMISSION FILE NUMBER 1-13402

INPUT/OUTPUT, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 22-2286646
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

12300 PARC CREST DR., 77477
STAFFORD, TEXAS (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(281) 933-3339

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE

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: [X] No: [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]

State the aggregate market value of the voting stock held by non-affiliates
of the registrant. Approximately $402.5 million as of June 28, 2002.

Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. Common stock, $1 par
value, 51,250,906 shares outstanding as of March 14, 2003.

Portions of the registrant's definitive proxy statement for its annual
meeting of stockholders scheduled to be held June 11, 2003 are incorporated by
reference into Part III hereof.
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PART I

PRELIMINARY NOTE: THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING
STATEMENTS AS DEFINED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
FORWARD-LOOKING STATEMENTS SHOULD BE READ IN CONJUNCTION WITH THE CAUTIONARY
STATEMENTS AND OTHER IMPORTANT FACTORS INCLUDED IN THIS FORM 10-K. SEE ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION -- CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS FOR
A DESCRIPTION OF IMPORTANT FACTORS WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS.

ITEM 1. BUSINESS

INPUT/OUTPUT, INC.

Input/Output, Inc. and its wholly owned subsidiaries (collectively referred
to as the "Company" or "I/O") is a leading provider of seismic acquisition
imaging technology for land, marine, transition zone exploration, production and
reservoir monitoring. Our data acquisition products are particularly well suited
for both traditional and passive three-dimensional ("3-D") and four dimensional
("4-D") data collection techniques, as well as the newer and more advanced
multi-component ("3C") data collection techniques. Our mission is to be the
recognized leader in delivering cost-effective imaging technology that improves
exploration and production economics for the energy industry.

We offer a full suite of related products and services for seismic data
acquisition, including products incorporating traditional analog technologies
and products incorporating our proprietary VectorSeis(R), True Digital(R)
technology. Our VectorSeis platform is based on a multi-component digital sensor
incorporating a unique micro-electromechanical systems (MEMS) based
accelerometer that we design and manufacture. As compared to traditional seismic
technologies, our VectorSeis platform offers improved seismic data quality and
operational efficiency with the potential to substantially improve finding and
development economics.

Our executive headquarters are located at 12300 Parc Crest Drive, Stafford,
Texas 77477. Our telephone number is (281) 933-3339. Our home page on the
Internet is www.i-o.com. We make our website content available for information
purposes only. It should not be relied upon for investment purposes, nor is it
incorporated by reference into this Form 10-K.

Throughout this Form 10-K, we incorporate by reference information from
parts of other documents filed with the Securities and Exchange Commission
("SEC"). The SEC allows us to disclose important information by referring to it
in this manner, and you should review this information. We make our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and proxy statement for our annual shareholders' meeting, as well as any
amendments to those reports, available free of charge through our website as
soon as reasonably practicable after we electronically file such material with,
or furnish it to, the SEC. You can learn more about us by reviewing our SEC
filings on our website. Our SEC reports can be accessed through the investor
relations page of our website, namely www.i-o.com/htmlweb/framesetinvest.htm.
The SEC also maintains a website at www.sec.gov that contains reports, proxy
statements and other information regarding SEC registrants, including
Input/Output, Inc.

RECENT DEVELOPMENTS

Net sales of our traditional analog products have been affected by the
lower level of worldwide oil and gas exploration activity and the diminished
profitability and cash flows of oil and gas companies and seismic contractors.
These factors are affected by expectations regarding the supply and demand for
oil and natural gas, energy prices, and finding and development costs. The use
of existing seismic data, principally library data, to generate prospects rather
than new exploration activity has significantly reduced demand for our analog
products. Demand for our VectorSeis product line is primarily related to the
acceptance of new technology by oil companies and seismic contractors. While we
are seeing great interest in products incorporating VectorSeis technology,
geophysical contractors and exploration and production companies in general are
still evaluating the technology. Other factors which may limit the demand for
our products may

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include, but are not limited to, those described in Item 7. Management's
Discussion and Analysis of Results of Operations and Financial
Condition -- Cautionary Statement for Purposes of Forward Looking Statements.

In response to the continued weak seismic market fundamentals, we have
taken decisive steps in 2002 to further reduce our overall cost structure to
enable us to operate profitably at lower levels of overall seismic activity.
First, we have taken steps to significantly reduce our corporate overhead burden
by reducing the number of personnel. Second, we closed our Austin, Texas
software development facility, combined our two Colorado-based operations into
one location, and are in the process of vacating our Alvin, Texas manufacturing
facility and our Norwich, U.K. based geophone stringing facility, eliminating
approximately 270,000 square feet of space. We are outsourcing the operations in
these facilities or relocating them to other existing Company facilities. In
late 2002, we finalized an agreement with Stewart & Stevenson to manufacture our
land energy sources. Also, we are in the process of relocating our cable
operations to a contract manufacturer in Mexico and our geophone stringing
operations to a Company-leased facility in the United Arab Emirates ("UAE").
Third, we have combined certain business units in order to improve efficiency
and further reduce our administrative costs. Finally, we are carefully
evaluating our portfolio of products to eliminate those products for which the
market outlook does not justify continuing investments.

We believe demand for seismic services and equipment will be weak in the
near term. Several of our largest customers have recently announced that they
will scale back their operations in 2003. Despite current conditions, we are
cautiously optimistic that planned increases in seismic expenditures by oil
companies, especially in international areas such as China and Russia, along
with growing acceptance of our VectorSeis platform products, will result in
higher sales in 2003. Based upon long-term forecasted increases in demand for
oil and gas, as well as statements from oil companies regarding lack of
sufficient prospects, we believe long-term fundamentals for the sector remain
strong. We further believe we should be well positioned to benefit from new
product introductions and anticipated strengthening demand.

On March 31, 2003, we announced that Robert P. Peebler has been appointed
the Company's President and Chief Executive Officer. Mr. Peebler is leaving his
positions as the President and Chief Executive Officer of Energy Virtual
Partners, Inc. ("EVP"), which he founded in April, 2001. Mr. Peebler will also
become chairman of EVP. Mr. Peebler has been a director of I/O since 1999.

In addition, we will invest $3.0 million in Series B Preferred securities
of EVP. After consummation of this investment, we will own approximately 22% of
the outstanding ownership interests of EVP and 11% of the outstanding voting
interests of EVP. The closing of the investment, which is subject to customary
closing conditions, is scheduled to occur in April 2003. EVP provides asset
management services to large oil and gas companies to enhance the value of their
oil and gas properties.

Mr. Peebler has had a 30-year career in the oil and gas industry. He began
as a field engineer and spent sixteen years with Schlumberger. While at
Schlumberger he held technical, marketing and management positions, including a
five-year period as Vice President of North America Wireline Operations, and two
years as Global Vice President of Strategic Marketing for Oil Field Services.
Mr. Peebler joined Landmark as Vice President of Marketing in 1989, and later
was appointed Chief Executive Officer in 1992. Mr. Peebler continued as Chief
Executive Officer for two years after Halliburton acquired Landmark in 1996, and
later became Halliburton's Vice President of e-Business and New Ventures. Mr.
Peebler left Halliburton to start EVP in the spring of 2001.

VECTORSEIS PRODUCTS

Our VectorSeis digital platforms offer high-resolution, cost-effective
compression-wave ("P-wave") data collection as well as shear wave
multi-component acquisition. Digital sensors, when compared with traditional
analog geophones, provide increased response linearity and bandwidth and
preserve a higher degree of vector fidelity. In addition, one digital sensor can
replace a string of six or more analog geophones providing geophysical
contractors with significant operating efficiencies. These advantages bring the
promise of improved location and characterization of reservoir structure and
fluids and more accurate identification of rock properties at reduced total
costs. We are utilizing VectorSeis for new seismic data acquisition systems for
(i) land surface applications, (ii) ocean-bottom applications, and (iii) in-well
applications.
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We began VectorSeis land acquisition field tests in 1999 and we have
acquired data throughout Canada, Mexico, the United States, France, Eastern
Europe and the Commonwealth of Independent States ("CIS"). In May 2002, we
commercialized our VectorSeis System Four(TM) radio-based land acquisition
system. Our initial land system incorporates our radio telemetry system, and we
anticipate commercializing a cable-based telemetry system in the first half of
2003. In addition, we have formed a marketing alliance with Veritas DGC that has
successfully collected VectorSeis data in North America during the past two
years. Initial reports by our customers indicate that crew productivity with
VectorSeis System Four has been better than anticipated in addition to providing
superior data quality.

Over the course of 2002, we increased our focus on reservoir applications
using VectorSeis. Our VectorSeis ocean-bottom product line addresses many of the
shortcomings of current multi-component ocean-bottom systems. VectorSeis modules
can operate at any angle which eliminates the need for gimbal receiver units
that distort data and add cost. In addition, our patented cable de-coupler
design further reduces data distortions and improves sea-bottom coupling. In
2002, we completed the first test of our VectorSeis ocean-bottom acquisition
system in the Ekofisk Field in the North Sea. This test was supported by
ConocoPhilips and delivered higher frequency and better vector fidelity than
previous OBC surveys. Based on this success, we are now negotiating with a
number of companies regarding the funding or purchase of both retrievable and
permanent VectorSeis ocean-bottom systems.

For in-well environments, we delivered our first mixed geophone and
VectorSeis systems last year for collecting passive, micro-seismic and 4D
reservoir data. These projects place VectorSeis sensors downhole to monitor
fluid fronts and other dynamic reservoir processes using natural formation noise
as an energy source. VectorSeis simplifies some of the complex data processing
procedures as VectorSeis sensors measure their vertical deployment angle
directly. Because VectorSeis sensors are smaller and provide much improved
vector fidelity compared to traditional analog sensors, VectorSeis sensors are
more suitable for permanently emplaced sensor arrays.

ANALOG LAND PRODUCTS

Data acquisition products for our Land Division include the following:

Data Acquisition Systems: Our Image(TM) land data acquisition system
consists of a central electronics unit and multiple remote ground equipment
modules, which are either connected by cable or utilize radio transmission and
retrievable data storage. The central electronics unit, which acts as the
control center of our data acquisition system, is typically mounted within a
vehicle or helicopter transportable enclosure. The central electronics unit
receives digitized data, stores the data on storage media for subsequent
processing and displays the data on optional monitoring devices. The central
electronics unit also provides calibration, status and test functionality. The
remote ground equipment of the I/O Image system consists of multiple remote
modules ("MRX(TM)") and line taps positioned over the survey area. Seismic
signals from geophones are collected by the MRX modules, which collect multiple
channels of analog seismic data. The MRX modules filter and digitize the data,
which is then transmitted by the MRX modules via cable to a line tap.
Alternatively, our radio telemetry system ("RSR(TM)") records data across a
variety of environments, including transition zones, swamps, mountain ranges,
jungles and other environments. RSRs are radio controlled and do not require
cables for data transmission since the information is stored at the unit source
and subsequently retrieved.

Geophones: Geophones are analog electro-mechanical seismic sensor devices
that measure acoustic energy reflected from rock layers in the earth's
subsurface. I/O markets a full suite of geophones and geophone test equipment
that operate in all environments including land, marine, ocean-bottom and
downhole. Our flagship geophone product, the SM-24, provides low distortion, and
wide bandwidth for greater realization of the potential of 24 bit seismic
recording systems.

Vibrators and Traditional Energy Sources: Vibrators are devices carried by
large vehicles and are used as energy sources for land seismic acquisition. We
market and sell the AHV-IV(TM), an articulated vibrator vehicle with simplified
hydraulics and superior maneuverability. In addition, we offer a low impact,
tracked

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vibrator, the X-Vib(TM) for use in environmentally sensitive areas like the
Arctic tundra and desert environments.

Our 2001 Pelton acquisition added energy source control and positioning
technology to the I/O suite of products. The Vib Pro(TM) control system provides
digital technology for VIBROSEIS(R) energy control, and integrates GPS
technology for navigation and positioning of vibrator vehicles. The Shot Pro(TM)
dynamite firing system is the equivalent technology for seismic operations using
dynamite energy sources. Integrated GPS technology and compatibility with the
Vib Pro control system streamline field operations and improve operational
efficiency.

Specialty Cables and Connectors: Cables and connectors are used in
conjunction with most seismic equipment. Our Tescorp(TM) cables not only offer a
replacement option to correct for ordinary wear, but also offer performance
improvement and specialization for new environments and applications.

MARINE PRODUCTS

Products for the Marine Division include the following:

Marine Positioning Systems: Our positioning systems include streamer cable
depth control devices (Model 5011 compassbird), compasses, acoustic positioning
systems (DigiRANGE(TM)), and other auxiliary sensors (velocimeters and speed
logs). Marine positioning equipment controls the depth of the streamer cables
and provides acoustic, compass and depth measurements so processors can tie
navigation and location data with geophysical data to determine the location of
potential hydrocarbon reserves for precise drilling operations.

Data Acquisition Systems: Our marine data acquisition system ("MSX(TM)")
consists primarily of towed marine streamers and shipboard electronics that
collect seismic data in marine environments below 30 meters. Marine streamers,
which contain hydrophones, electronic modules and cabling, may measure up to
12,000 meters in length and are towed behind a seismic acquisition vessel.
Seismic sensors installed in the cable (hydrophones) detect acoustical energy
transmitted through water from the earth's subsurface structure.

Airguns: Airguns are the primary seismic energy source used in marine
environments to initiate the acoustic energy transmitted through the earth's
subsurface. An airgun fires a high compression burst of air under water to
create an energy wave for seismic measurement. Additionally, we offer a digital
source control system, DigiSHOT(TM), which allows more precise and reliable
control and QC of airgun arrays.

INTERPRETATION-READY PROCESSING

In July 2002, we acquired AXIS Geophysics, Inc. ("AXIS"). AXIS is a seismic
data service company based in Denver, Colorado that provides specialized seismic
data processing and integration services to major and independent exploration
and production companies. The AXIS Interpretation-Ready Process(TM) ("IRP")
integrates seismic and subsurface geological data to provide customers more
accurate and higher quality data that can result in improved reservoir
characterizations. We combined AXIS with our geophysical software operations,
Green Mountain Geophysics ("GMG"). GMG offers a wide range of geophysical
software used in seismic survey planning and design. We are leveraging these
services to broaden and support our reservoir offerings.

APPLIED MEMS

Applied MEMS, Inc. holds our MEMS technology development and manufacturing
capabilities. In addition to producing the accelerometers for our VectorSeis
digital sensor, this business unit is also actively pursuing sales of
accelerometer products for non-seismic applications and foundry services for
third parties.

PRODUCT RESEARCH AND DEVELOPMENT

Our strategic focus for research and development is driven by our desire to
improve the quality of the subsurface image and the overall acquisition
economics of our customers. Our ability to compete effectively in

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the manufacture and sale of seismic instruments and data acquisition systems
depends upon continued technological innovation. Development cycles, from
initial conception through product introduction, may extend over several years.
Principally, research and development expenditures have related to the continued
enhancement and commercialization of our VectorSeis technology for (i) land
surface applications, (ii) ocean-bottom applications, and (iii) in-well
applications.

During 2002, our primary research and development efforts were focused on
field testing and commercialization of a land-based seismic data acquisition
recording system incorporating VectorSeis digital sensors for single and
multi-component recording. In 2003 our principal research and development goals
include the further migration of our VectorSeis platform into ocean-bottom
systems and in-well products.

We continue to develop a lightweight, cable-based land seismic system with
a view towards commercial introduction of this system during the first half of
2003 and are developing a next generation marine seismic data acquisition system
for commercial deployment in 2003. We have a number of other products under
development including reservoir monitoring applications for all acquisition
environments.

Because the new products are under development, their commercial
feasibility or degree of commercial acceptance, if any, is not yet known. No
assurance can be given concerning the successful development of any new products
or enhancements, the specific timing of their release or their level of
acceptance in the market place.

MARKETS AND CUSTOMERS

Our principal customers are seismic contractors that operate seismic data
acquisition systems and related equipment to collect data in accordance with
their customers' specifications or for their own seismic data libraries. In
addition, we market and sell products directly to oil and gas companies,
particularly for reservoir monitoring applications. During the year ended
December 31, 2002, two customers (Western-Geco and Laboratory of Regional Geo
Dynamics) each accounted for approximately 10% of consolidated net sales. In
recent years, our customers have been rapidly consolidating, shrinking the
demand for our products. The loss of any one of these customers could have a
material adverse effect on the results of operations and financial condition.
See Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Cautionary Statement for Purposes of Forward Looking
Statements -- Further consolidation among our significant customers could
materially and adversely affect us and Note 13 of Notes to Consolidated
Financial Statements.

A significant part of our marketing efforts are focused on areas outside
the United States. Contractors from China and the CIS are increasingly active
not only in their own countries, but also in other international areas. Foreign
sales are subject to special risks inherent in doing business outside of the
United States, including the risk of war, civil disturbances, exchange rate
fluctuations, embargo and governmental activities, as well as risks of
non-compliance with U.S. and foreign laws, including tariff regulations and
import/export restrictions. We sell products through a direct sales force
consisting of employees and through several international third-party sales
representatives responsible for key geographic areas. During the year ended
December 31, 2002, sales to destinations outside of North America accounted for
approximately 71% of net sales. Further, systems sold to domestic customers are
frequently deployed internationally and, from time to time, certain foreign
sales require export licenses. See Item 7. Management's Discussion and Analysis
of Results of Operations and Financial Condition -- Cautionary Statement for
Purposes of Forward Looking Statements -- We derive a substantial amount of our
revenues from foreign sales, which pose additional risks and Note 13 of Notes to
Consolidated Financial Statements.

Sales to customers are normally on standard net 30-day terms. We also
provide financing arrangements to customers through long-term notes receivable.
Notes receivable, which are generally collateralized by the products sold, bear
interest at contractual rates up to 13.5% per year and are due at various dates
through 2005. The weighted average interest rate at December 31, 2002 was 8.5%.
See Notes 1 and 10 of Notes to Consolidated Financial Statements.

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SUPPLIERS

As part of our strategic direction, we are increasing our use of contract
manufacturers as an alternative to our own manufactured products. We may
experience supply interruptions, cost escalations and competitive disadvantages
if we do not monitor these relationships properly. See Item 7. Management's
Discussion and Analysis of Results of Operations and Financial
Condition -- Cautionary Statement for Purposes of Forward Looking
Statements -- We have developed outsourcing arrangements for the manufacturing
of some of our products. If these third parties fail to deliver quality products
or components at reasonable prices on a timely basis, we may alienate some of
our customers, our revenues, profitability and cash flow may decline.

We and our contract manufacturers purchase a substantial portion of the
components used in our systems and products from third-party vendors. Certain
items, such as integrated circuits used in I/O systems are purchased from sole
source vendors. Although we and our contract manufacturers attempt to maintain
an adequate inventory of these single source items, the loss of ready access to
any of these items could temporarily disrupt our ability to manufacture and sell
certain products. Since our components are designed for use with these single
source items, replacing the single source items with functional equivalents
could require a redesign of our components and costly delays could result.

COMPETITION

The market for seismic data acquisition systems and seismic instrumentation
is highly competitive and is characterized by consolidation, as well as
continual and rapid changes in technology. Our principal competitor for land and
marine seismic equipment is Societe d'Etudes Recherches et Construction
Electroniques ("Sercel"), an affiliate of Compagnie General de Geophysique.
Unlike I/O, Sercel possesses an advantage of selling to an affiliated seismic
contractor. In addition, I/O competes with other companies on a product-by-
product basis.

INTELLECTUAL PROPERTY

We rely on a combination of trade secrets, patents, copyrights and
technical measures to protect our proprietary hardware and software
technologies. Although patents are considered important to our operations, no
one patent is considered essential to our success. Copyright and trade secret
protection may be unavailable in certain foreign countries in which we sell
products. In addition, we seek to protect trade secrets through confidentiality
agreements with employees and agents and through ownership of a number of
trademarks.

REGULATORY MATTERS

Our export activities are subject to extensive and evolving trade
regulations. Certain countries in which products may be utilized are subject to
trade restrictions, embargoes and sanctions imposed by the U.S. government.
These restrictions and sanctions, generally speaking, limit us from
participating in certain business activities in those countries.

Our operations are subject to numerous local, state and federal laws and
regulations in the United States and in foreign jurisdictions concerning the
containment and disposal of hazardous materials. We do not currently foresee the
need for significant expenditures to ensure continued compliance with current
environmental protection laws. Regulations in this area are subject to change,
and there can be no assurance that future laws or regulations will not have a
material adverse effect on us. Our customer's operations are also significantly
impacted by laws and regulations concerning the protection of the environment
and endangered species. For instance, many of our marine contractors have been
affected by new regulations protecting marine mammals in the Gulf of Mexico. To
the extent that our customer's operations are disrupted by future laws and
regulations, our business and results of operations may be materially and
adversely affected.

EMPLOYEES

At December 31, 2002, we had 598 full-time employees worldwide, 434 of whom
were employed in the United States. Also, at December 31, 2002, we had 106
temporary employees. Our temporary employee base

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fluctuates based upon our level of manufacturing activity, as a majority of
these positions are manufacturing related. U.S. employees are not subject to any
collective bargaining agreements and we have never experienced a work stoppage.

ITEM 2. PROPERTIES

Primary manufacturing facilities at March 1, 2003 are as follows:

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* Leased

** Owned

*** Owned and in the process of vacating.

**** Leased and in the process of vacating.

In addition we lease facilities in Denver, Colorado, Norwich, England and
Beijing, China to support our processing operations and our global sales force.
Our executive headquarters (utilizing approximately 25,000 square feet) are
located at 12300 Parc Crest Drive, Stafford, Texas. The machinery, equipment,
buildings and other facilities leased are considered by management to be
sufficiently maintained and adequate for current operations.

ITEM 3. LEGAL PROCEEDINGS

In the ordinary course of business, we have been named in various lawsuits
or threatened actions. While the final resolution of these matters may have an
impact on our consolidated financial results for a particular reporting period,
we believe that the ultimate resolution of these matters will not have a
material adverse impact on our financial position, results of operations or
liquidity.

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

Not applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

GENERAL

Our common stock trades on the New York Stock Exchange ("NYSE") under the
symbol "IO." The following table sets forth the high and low sales prices of the
common stock for the periods indicated, as reported on the NYSE composite tape.

We have not historically paid, and do not intend to pay in the foreseeable
future, cash dividends on our common stock. We presently intend to retain cash
from operations for use in our business, with any future decision to pay cash
dividends on our common stock dependent upon our growth, profitability,
financial condition and other factors our Board of Directors consider relevant.
The $31.0 million unsecured promissory note issued in August 2002, in connection
with the repurchase of preferred stock, restricts cash dividends in excess of
$5.0 million per year while the note is outstanding. See Notes 8 and 11 of Notes
to Consolidated Financial Statements.

On December 31, 2002, there were 282 stockholders of record of common stock
outstanding.

In October 2001 our Board of Directors authorized the repurchase of up to
1,000,000 shares of our common stock in the open market and privately negotiated
transactions at such prices and at such times as management deems appropriate.
Under this repurchase program the Company has repurchased 40,000 shares of
common stock for a total purchase price of $0.2 million at an average price of
$3.97 per share for the year ended December 31, 2002 and 461,900 shares of our
common stock for a total purchase price of $3.6 million at an average price of
$7.78 per share for the year ended December 31, 2001.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data set forth below with respect to
our consolidated statements of operations for the years ended December 31, 2002
and 2001, the seven months ended December 31, 2000 and the three fiscal years
ended May 31, 2000, 1999 and 1998, and with respect to our consolidated balance
sheets at December 31, 2002, 2001, and 2000 and May 31, 2000, 1999 and 1998 have
been derived from our audited consolidated financial statements. Our results of
operations and financial condition have been affected by acquisitions of
businesses and significant charges during certain periods presented, which may
affect the comparability of the financial information. For a discussion of
significant charges, please see Note 18 of Notes to Consolidated Financial
Statements. This information should be read in conjunction with Item 7.
Management's Discussion and Analysis of Results of Operations and Financial
Condition and the consolidated financial statements and the notes thereto
included elsewhere in this Form 10-K.

Results for each of the years ended December 31, 2002 and 2001, the seven
months ended December 31, 2000 and the year ended May 31, 2000 include specific
charges (if applicable) as discussed in Note 18 of Notes to Consolidated
Financial Statements. For the year ended May 31, 1999, charges of $77.0 million
were included in cost of sales relating to inventory write-downs of $57.0
million and warranty reserves and other product related contingencies of $20.0
million. In addition, charges of $1.1 million primarily related to prototype
development costs were included in research and development, along with charges
of $46.4 million included in general and administrative expenses related to
accounts and notes receivable allowances of $39.9 million, the early termination
of a facility lease and other restructuring costs of $2.6 million and employee
severances and other expense totaling $3.9 million. Charges of $14.5 million
were included in impairment of long-lived assets for the year ended May 31,
1999.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION

In our traditional analog business, we are committed to reducing both the
unit cost of our products and our fixed cost structure. These reductions, if
achieved, will make our products more competitive and reduce our annual
breakeven revenue level. By the end of 2003, we intend to substantially
transform our business by outsourcing most of our non-core manufacturing
processes and otherwise relocating our operations to lower cost venues. At the
same time, as we continue to transform our traditional analog business, we
intend to grow our business by aggressively marketing our VectorSeis technology
in our traditional exploration markets and also in production-related markets
where we have not historically generated significant revenue.
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RECENT EVENTS AND SIGNIFICANT 2002 CHARGES

During 2002, we recorded significant charges in connection with our
restructuring program. The related reserves reflect many estimates, including
those pertaining to severance costs of $3.5 million, facility related charges,
primarily future, non-cancelable, lease obligations of $1.3 million, and
inventory revaluation charges of $4.3 million. In addition, during 2002, we
recorded charges of $15.1 million relating to the impairment of goodwill and
$6.9 million for the impairment of long-lived assets. We will continually
reassess the requirements necessary to complete our restructuring plan, which
may result in additional charges recorded in future periods. However, we
currently do not anticipate any significant future charges or adjustments to our
restructuring accruals. See Notes 1, 3, 4, 5, 9 and 18 of Notes to Consolidated
Financial Statements for further discussion of these charges.

We recorded a net charge of $60.0 million to income tax expense to
establish an additional valuation allowance for our net deferred tax assets. We
will continue to reserve all of our net deferred tax assets until we have
sufficient evidence to warrant reversal. See Note 14 of Notes to Consolidated
Financial Statements.

FISCAL YEAR CHANGE

In September 2000, our Board of Directors approved changing our fiscal
year-end to December 31 of each year. The consolidated statements of operations,
stockholders' equity and comprehensive loss and cash flows for the period from
June 1, 2000 to December 31, 2000 represent a transition period of seven months.
The following is a comparative summary of the operating results for the years
ended December 31, 2002, 2001 and 2000 and the seven month periods ended
December 31, 2000 and 1999 (in thousands, except per share amounts).

11

COMPARABILITY OF PERIODS

Results of operations and financial condition have been affected by
acquisitions of businesses and pre-tax charges during certain periods discussed
which may affect the comparability of the financial information. See Notes 12
and 18 of Notes to Consolidated Financial Statements. Additionally, during 2000
we changed our year end from May 31 to December 31. As a result, we have
presented our historical results on an unaudited basis for the twelve months
ended December 31, 2000 for comparative purposes within Management's Discussion
and Analysis of Results of Operations and Financial Condition.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

Net Sales: Net sales of $118.6 million for the year ended December 31,
2002 decreased $93.5 million, or 44%, compared to the prior year. Our Land
Division's net sales decreased $97.1 million, or 60%, to $65.2 million,
primarily as a result of declining industry conditions and a loss of market
share to our principal competitor. Our Marine Division's net sales increased
$3.6 million or 7%, to $53.4 million, compared to the prior year, primarily due
to an increase in demand from Russian contractors.

Cost of Sales: Cost of sales of $99.6 million for the year ended December
31, 2002 decreased $38.8 million, or 28%, compared to the prior year. The
decrease results from a decrease in revenues, partially offset by lower gross
profit on those revenues and severance for work force reductions totaling $1.9
million. Cost of sales was negatively affected by $4.3 million of inventory
related charges. Cost of sales of our Land Division was $65.8 million and cost
of sales of our Marine Division was $33.8 million.

Gross Profit and Gross Profit Percentage: Gross profit of $19.0 million
for the year ended December 31, 2002 decreased $54.7 million, or 74%, compared
to the prior year. Gross profit percentage for the year ended December 31, 2002
was 16% compared to 35% in the prior year. The decline in gross profit
percentage is primarily due to under-absorbed manufacturing overhead, inventory
revaluations of $4.3 million, and to a lesser degree, severance for work force
reductions totaling $1.9 million. Excluding inventory revaluations and severance
expense, our gross profit percentage for the year ended December 31, 2002 was
21%.

Research and Development: Research and development expense of $28.8
million for the year ended December 31, 2002 decreased $0.7 million, or 2%,
compared to the prior year. Research and development expense remained at high
levels as we completed the final stages of VectorSeis commercialization and
continue to develop a solid marine streamer, a lightweight ground electronics
system and an ocean bottom system that exploits our VectorSeis technology. Also,
research and development expenses included significant charges of $2.1 million
for severance expenses of $0.8 million and charges related to the closure of our
Austin, Texas software development facility of $1.3 million. After completion of
our lightweight, cable-based VectorSeis ground system, we expect a significant
reduction in our research and development expense.

Marketing and Sales: Marketing and sales expense of $11.2 million for the
year ended December 31, 2002 decreased $0.4 million, or 4%, compared to the
prior year. The decrease is primarily related to lower payroll costs and
commissions on sales, partially offset by severance for work force reductions of
$0.3 million.

General and Administrative: General and administrative expense of $19.2
million for the year ended December 31, 2002 decreased $0.5 million, or 3%,
compared to the prior year. The decrease in general and administrative expense
is primarily due to decreases in payroll, profit-based bonuses and facility
related costs, partially offset by an increase in bad debt expense (net of
recoveries) of $0.5 million and severance for workforce reductions of $0.5
million.

Amortization of Intangibles and Goodwill: Amortization of intangibles of
$1.4 million for the year ended December 31, 2002 decreased $3.5 million, or
72%, compared to the prior year. The decrease in amortization of intangibles and
goodwill relates to the implementation of Statement of Financial Accounting
Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets" in the current
year, which, among other things, eliminates the amortization of goodwill.
Goodwill amortization for 2001 was $3.9 million.

12

Impairment of Long-Lived Assets: Impairment of long-lived assets of $6.9
million for the year ended December 31, 2002 primarily relates to the impairment
of our Alvin, Texas manufacturing facility, the impairment of the leasehold
improvements of our Norwich, U.K. geophone stringing facility and certain
related manufacturing equipment of both facilities. The impairments were
triggered by the announced closures of facilities. There was no corresponding
charge during the year ended December 31, 2001. See Note 4 of Notes to
Consolidated Financial Statements.

Goodwill Impairment: Goodwill impairment of $15.1 million for the year
ended December 31, 2002 relates to the impairment of goodwill of our analog land
products reporting unit. There was no corresponding charge during the year ended
December 31, 2001. See Note 5 of Notes to Consolidated Financial Statements.

Net Interest and Other Income: Total net interest and other income of $1.6
million for the year ended December 31, 2002 decreased $6.2 million compared to
the prior year. The decrease is primarily due to falling interest rates on cash
balances, as well as increased interest expense on new debt, compared to the
prior year.

Fair Value Adjustment of Warrant Obligation: The fair value adjustment of
the warrant obligation totaling $3.3 million is due to a change in the fair
value between August 6, 2002 (the issuance date) and December 31, 2002 of the
common stock warrants, as further discussed below in "Repurchase of Series B and
Series C Preferred Stock" and Note 11 of Notes to Consolidated Financial
Statements.

Income Tax Expense: Income tax expense of $57.9 million for the year ended
December 31, 2002 increased $54.8 million compared to the year ended December
31, 2001 due to a charge of $60.0 million in 2002 to establish an additional
valuation allowance for our net deferred tax assets. Although management's plans
include generating sufficient taxable income in future years to fully utilize
our net operating losses, such expectation is subject to a significant amount of
risk and uncertainty. In accordance with SFAS No. 109 "Accounting for Income
Taxes," we established an additional valuation allowance for our net deferred
tax assets based on our cumulative operating results in the most recent
three-year period. Our results in this period were heavily affected not only by
industry conditions, but also by deliberate and planned business restructuring
activities in response to the prolonged downturn in the seismic equipment
market, as well as heavy expenditures on research and development of our
VectorSeis technology. Nevertheless, recent losses represented sufficient
negative evidence to establish an additional valuation allowance. We have
continued to reserve all of our net deferred tax assets and will continue until
we have sufficient evidence to warrant reversal. This valuation allowance does
not affect our ability to reduce future tax expense through utilization of net
operating losses.

Preferred Stock Dividends: Preferred stock dividends for the years ended
December 31, 2002 and 2001 are related to previously outstanding Series B and
Series C Preferred Stock (the "Preferred Stock"). We recognized the dividends as
a charge to retained earnings at a stated rate of 8% per year, compounded
quarterly (of which 7% was accounted for as a non-cash event recorded to
additional paid-in capital so as to reflect potential dilution upon preferred
stock conversion and 1% was paid as a quarterly cash dividend). The preferred
stock dividend charge for the year ended December 31, 2002 was $0.9 million,
compared to $5.6 million for the year ended December 31, 2001. As discussed
below in "Repurchase of Series B and Series C Preferred Stock" and Note 11 of
Notes to Consolidated Financial Statements, we repurchased the Preferred Stock
on August 6, 2002. The decrease in preferred dividends is due to a preferred
stock dividend credit of approximately $2.5 million, which represents the
difference in the fair value of the consideration granted to the holders of the
Preferred Stock and our carrying value of the Preferred Stock at the time of the
repurchase and less than a full year of dividends in 2002.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
(UNAUDITED)

Net Sales: Net sales of $212.1 million for the year ended December 31,
2001 increased $74.7 million, or 54%, compared to the prior year. The increase
was primarily due to increased demand for products produced by our Land
Division. Our Land Division's net sales increased $70.5 million, or 77%, to
$162.3 million, primarily as a result of improved industry conditions and the
introduction of new products. Our Marine Division's net sales increased $4.2
million or 9%, to $49.8 million, compared to the prior year. Marine sales
remained lackluster primarily due to over capacity in the sector and an
abundance of marine library data.
13

Cost of Sales: Cost of sales of $138.4 million for the year ended December
31, 2001 increased $19.2 million, or 16%, compared to the prior year. Cost of
sales of our Land Division was $109.1 million and cost of sales of our Marine
Division was $29.3 million. Results for the year ended December 31, 2000
included $10.6 million, net, in pre-tax charges for inventory write-downs
partially offset by favorable legal settlements.

Gross Profit and Gross Profit Percentage: Gross profit of $73.6 million
for the year ended December 31, 2001 increased $55.5 million, or 305%, compared
to the prior year. Results for the year ended December 31, 2000 included $10.6
million, net, in pre-tax charges for inventory write-downs partially offset by
favorable legal settlements. Gross profit percentage for the year ended December
31, 2001 was 35% compared to 13% in the prior year (21% excluding pre-tax
charges). A return to a more normal pricing regime, success in reducing costs,
improved absorption of fixed and semi-fixed overhead, as well as the continued
elimination from the sales mix of products that had been highly discounted
during prior periods of weaker demand contributed to the higher 2001 gross
profit percentage.

Research and Development: Research and development expense of $29.4
million for the year ended December 31, 2001 increased $1.4 million, or 5%,
compared to the prior year. Research and development expense remained relatively
constant due to ongoing VectorSeis development efforts.

Marketing and Sales: Marketing and sales expense of $11.7 million for the
year ended December 31, 2001 increased $2.9 million, or 33%, compared to the
prior year. Compensation expense to our in-house sales force increased because
of the higher net sales and gross profit percentage compared to the prior year.
Marketing and sales expense as a percentage of revenues remained relatively
constant in both years.

General and Administrative: General and administrative expense of $19.7
million for the year ended December 31, 2001 increased $2.1 million, or 12%,
compared to the prior year. The increase in general and administrative expense
was primarily attributable to increased compensation expense, reflecting
profit-based bonuses in 2001, and the inclusion of Pelton in the year ended
December 31, 2001 results.

Amortization of Intangibles and Goodwill: Amortization of intangibles of
$4.9 million for the year ended December 31, 2001 decreased $1.2 million, or
20%, compared to the prior year. The decrease was due to the impairment of
goodwill during the year ended December 31, 2000, for which there was no
amortization expense recorded in the current year.

Goodwill Impairment: The decrease in goodwill impairment is due to the
impairment of goodwill of $31.6 million in the year ended December 31, 2000, for
which there was no corresponding charge during the year ended December 31, 2001.

Net Interest and Other Income: Total net interest and other income of $4.6
million for the year ended December 31, 2001 decreased $2.7 million, or 37%,
compared to the prior year, primarily due to fluctuations in exchange rates and
falling interest rates.

Income Tax Expense: Income tax expense of $3.1 million for the year ended
December 31, 2001 decreased $2.2 million from the prior year. Income tax expense
decreased from the prior period despite higher earnings before income taxes
because: (i) we returned to profitability and were recording an income tax
provision that reflected a year-end effective tax rate of 38% before resolution
of certain tax issues, (ii) during the prior period we were profitable in
certain foreign tax jurisdictions but recognized no offsetting benefit from
domestic net operating losses, and (iii) we resolved certain tax issues in 2001
and received a $1.6 million cash benefit.

Preferred Stock Dividends: Preferred stock dividends for the year ended
December 31, 2001 and 2000 were related to outstanding Preferred Stock. We
recognized the dividends as a charge to retained earnings at a stated rate of 8%
per year, compounded quarterly (of which 7% is accounted for as a non-cash event
recorded to additional paid-in capital so as to reflect potential dilution upon
preferred stock conversion and 1% was paid as a quarterly cash dividend.) As
discussed below in "Repurchase of Series B and Series C Preferred Stock" and
Note 11 of Notes to Consolidated Financial Statements, we repurchased the
preferred stock on August 6, 2002. The preferred stock dividend charge for the
year ended December 31, 2001 was $5.6 million, compared to $5.0 million for the
prior year.

14

LIQUIDITY AND CAPITAL RESOURCES

We have typically financed operations from internally generated cash and
funds from equity financings. Cash and cash equivalents were $77.1 million at
December 31, 2002, a decrease of $24.5 million, or 24%, compared to December 31,
2001. The decrease is primarily due to the repurchase of preferred stock and
cash used in investing activities, partially offset by a decrease in working
capital. Net cash provided by operating activities was $14.3 million for the
year ended December 31, 2002, compared to $17.5 million for the year ended
December 31, 2001. This decrease in cash flow from operations is generally a
result of lower operating levels in 2002 with smaller gross margins, as
discussed in Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Results of Operations.

Net cash flow used in investing activities was $10.9 million for the year
ended December 31, 2002, a decrease of $3.9 million compared to the year ended
December 31, 2001. The principal investing activities were $8.2 million relating
to capital expenditure projects and $2.7 million, net of cash acquired, relating
to the acquisition of AXIS and S/N Technologies ("S/N"). Included in capital
expenditures is $2.9 million of rental equipment, which has been leased to two
marine customers. Planned capital expenditures for 2003 are approximately $7.6
million.

Cash flow used in financing activities was $31.3 million for the year ended
December 31, 2002, a decrease of $38.9 million compared to the year ended
December 31, 2001. The principal use of cash was $30.0 million relating to the
repurchase of preferred stock and $2.6 million on the repayment of long-term
debt, partially offset by proceeds of $0.8 million from the issuance of common
stock under our Employee Stock Purchase Plan and $1.0 million from the exercise
of stock options.

We believe the combination of existing working capital of $114.9 million as
of December 31, 2002, including current cash on hand of $77.1 million at
year-end, will be adequate to meet anticipated capital and liquidity
requirements for the foreseeable future even if the prolonged downturn in the
seismic equipment market continues. The most significant use of cash over the
next two-year period will be the requirement to repay the $31.0 million
unsecured promissory note due in May 2004. Based on our current cash levels and
estimated uses of cash over this period, we believe we will be able to
sufficiently fund our planned operations. However, there can be no assurance
that our sources of cash will be able to support our capital requirements in the
long-term, and we may be required to issue additional debt or equity securities
in the future to meet our capital requirements. There can be no assurance we
would be able to issue additional equity or debt securities in the future on
terms that are acceptable to us or at all.

FUTURE CONTRACTUAL OBLIGATIONS

The following table sets forth estimates of future payments for 2003
through 2008 and thereafter of our consolidated contractual obligations as of
December 31, 2002 (in thousands):

The debt and lease obligations at December 31, 2002 consist of a $31.0
million unsecured promissory note issued in connection with the repurchase of
Preferred Stock during 2002, along with $2.7 million in additional unsecured
promissory notes related to acquisitions made during 2002 and 2001. The
remaining amount of the obligation (approximately $19.9 million) relates to
lease arrangements primarily involving the Company's use of certain land and
buildings. Under this lease arrangement, the Company has not met the tangible
net worth test for the third and fourth quarters of 2002. If the Company fails
to meet the requirements

15

of this test for any four consecutive quarters during the first five years of
the lease, the Company is required to provide a letter of credit in the amount
of $1.5 million. For further discussion of Long-Term Debt and Lease Obligations,
see Note 8 of Notes to Consolidated Financial Statements.

The operating lease commitments at December 31, 2002 relate to the
Company's lease of certain equipment, offices, and warehouse space under
non-cancelable operating leases. For further discussion of operating leases, see
Note 15 of Notes to Consolidated Financial Statements.

The liability for product warranties at December 31, 2002 relates to the
estimated future expenditures associated with the Company's guarantee that all
manufactured equipment is free from defects in workmanship, materials, and
parts. For further discussion of product warranty, see Note 7 of Notes to
Consolidated Financial Statements.

The warrant obligation at December 31, 2002 represents the fair value of
warrants which were issued by the Company in connection with the August 2002
repurchase of Preferred Stock. If the Company is acquired in a business
combination pursuant to which the stockholders receive less than 60% of the
aggregate consideration in the form of publicly traded common equity, then the
holder of the warrants has the option to require the Company to acquire the
warrants at their fair value as determined by the Black-Scholes valuation model
as further refined by the terms of the warrant agreement. Because the Company
may be required to repurchase the warrants in these limited circumstances, the
warrants are classified as a current liability on our balance sheet and we
record any change in value as a credit or charge to the consolidated statement
of operations. For further discussion of the warrant obligation, see Note 11 of
Notes to Consolidated Financial Statements.

As part of the acquisition of AXIS, the Company could be required to pay
additional consideration to the former shareholders of AXIS at an amount equal
to 33.33% of AXIS' EBITDA (as adjusted by the terms of the Earn-out Agreement),
for the years ended December 31, 2003, 2004, and 2005, exceeding a minimum
threshold of $1.0 million.. Also, as part of the S/N acquisition, the Company
could be required to pay additional consideration up to a maximum of $5.0
million if certain revenue and sales thresholds are met.

Under many of our outsourcing arrangements, our manufacturing partners
first utilize our on-hand inventory, then directly purchase inventory at
agreed-upon levels to meet our forecasted demand. If demand proves to be less
than we originally forecasted, our manufacturing partners have the right to
require us to purchase any excess or obsolete inventory that our partners
purchased on our behalf. Should we be required to purchase inventory pursuant to
these provisions, we may be required to expend large sums of cash for inventory
that we may never utilize. Such purchases could materially and adversely effect
our financial position and our results of operations. As our outsourcing
activity increases the risk will increase that we might be required to purchase
excess or obsolete inventory. Historically, we have not been required to
purchase any excess or obsolete inventory under our outsourcing arrangements.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations". This Statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The provisions of this Statement are effective for fiscal years beginning
after June 15, 2002. Due to the nature of our business, this Statement is not
expected to have a significant impact on our reported results of operations and
financial condition.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Correction." SFAS No. 145 allows classification of gains and losses from the
extinguishment of debt as extraordinary items in the income statement only if
they are deemed to be unusual and infrequent. In addition, SFAS No. 145 also
requires that capital leases that are modified so that the resulting lease
agreement is classified as an operating lease be accounted for as a sale-
leaseback transaction. SFAS No. 145 is effective for fiscal years beginning
after May 15, 2002. We do not

16

expect the provisions of this Statement to have a significant impact on our
reported results of operations and financial condition.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and 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)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF Issue No.
94-3, a liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. The provisions of this Statement are effective for
exit or disposal activities that are initiated after December 31, 2002. We have
continued to follow EITF No. 94-3 for our exit and disposal activities, which
were initiated prior to December 31, 2002.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- and amendment of FASB No. 123."
This Statement amends SFAS No. 123, "Accounting for Stock-Based Compensation,"
to provide alternative methods of transition for a voluntary change in fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require more prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The provisions of this
Statement are effective for fiscal years ending after December 15, 2002. We have
elected to continue to follow the intrinsic value method of accounting
prescribed by Accounting Principal Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees." See Critical Accounting Policies and Estimates and
Note 1 of Notes to Consolidated Financial Statements for the proforma results if
we had adopted SFAS No. 123.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others: an Interpretation of FASB Statements No.
5, 67, and 107 and Rescission of FASB Interpretation No. 34." Interpretation No.
45 clarifies the requirements of FASB Statement No. 5, "Accounting for
Contingencies," relating to the guarantor's accounting for, and disclosure of,
the issuance of certain types of guarantees. The initial recognition and
measurement provisions of this Interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The disclosure
provisions of the Interpretation are effective for financial statements ending
after December 15, 2002. We have adopted the provisions related to the
disclosure requirements of this Interpretation effective for the year ended
December 31, 2002. We do not expect the provisions of this Interpretation to
have a significant impact on our reported results of operations and financial
condition.

REPURCHASE OF SERIES B AND SERIES C PREFERRED STOCK

On August 6, 2002, we repurchased all of the 40,000 outstanding shares of
our Series B Convertible Preferred Stock and all of the 15,000 outstanding
shares of our Series C Convertible Preferred Stock from SCF-IV, LP ("SCF"), a
Houston-based private equity fund specializing in oil service investments. In
exchange for the Preferred Stock, we paid SCF $30.0 million in cash at closing,
issued SCF a $31.0 million unsecured promissory note due May 7, 2004 and granted
SCF warrants to purchase 2,673,517 shares of our common stock at $8.00 per share
through August 5, 2005. The Note bears interest at 8% per annum until May 7,
2003, at which time the interest rate will increase to 13%. We record interest
on this note at an effective rate of approximately 11% per year. Should we
redeem the note early, any excess interest accrued would be recorded as an
adjustment of interest expense during the period the note is redeemed.
Immediately preceding the closing of this transaction, David C. Baldwin, the
elected representative of the holder of the Preferred Stock, resigned from our
Board of Directors.

We issued the Preferred Stock in 1999, at a purchase price of $1,000 per
share (the "Stated Value"), for an aggregate of $55.0 million. Since that time,
the Preferred Stock has earned an 8% dividend, of which we paid 1% quarterly in
cash and we accrued the balance to increase the Adjusted Stated Value ($1,000
per share

17

Stated Value plus accrued and unpaid dividends) of the Preferred Stock. The
Adjusted Stated Value of the Preferred Stock as of August 6, 2002, was $68.8
million.

The Preferred Stock became convertible at the option of SCF on May 7, 2002.
Under its terms, the number of shares into which the Preferred Stock would have
been convertible is the greater of (i) Stated Value divided by approximately
$8.14 per share or (ii) Adjusted Stated Value divided by the average market
price of our common stock during the ten-day trading period immediately prior to
conversion. We had the right, without the holder's consent, to redeem for cash
up to one-half of any Preferred Stock tendered for conversion based on the
Adjusted Stated Value of such Preferred Stock on the conversion date. If SCF had
converted all of the Preferred Stock on August 6, 2002, and we had declined to
exercise our redemption rights, SCF would have received approximately 9.2
million shares of our common stock, representing 15.3% of the total outstanding
common stock of the Company after giving effect to the conversion.

Under the terms of a registration rights agreement, SCF has the right to
demand that we file a registration statement for the resale of the shares of
Common Stock SCF acquires upon exercise of the warrants. Sales or the
availability for sale of a substantial number of our shares of Common Stock in
the public market could adversely affect the market price for our Common Stock.
If we are acquired in a business combination pursuant to which our stockholders
receive less than 60% of the aggregate consideration in the form of publicly
traded common equity, then the holder of the warrants has the option to require
the Company to acquire the warrants at their fair value as determined by the
Black-Scholes valuation model as further refined by the terms of the warrant
agreement. Because we may be required to repurchase the warrants in these
limited circumstances, we classify the warrants as a current liability on our
consolidated balance sheet. Every quarter the warrants are revalued and any
change in value is recorded as a credit or charge to our consolidated statement
of operations.

CREDIT RISK

A continuation of weak demand for the services of certain of our customers
will further strain their revenues and cash resources, thereby resulting in
lower sales levels and a higher likelihood of defaults in the timely payment of
their obligations under credit sales arrangements. Increased levels of payment
defaults with respect to our credit sales arrangements could have a material
adverse effect on our results of operations.

Our principal customers are seismic contractors, which operate seismic data
acquisition systems and related equipment to collect data in accordance with
their customers' specifications or for their own seismic data libraries. In
addition, we market and sell products to oil and gas companies. During the year
ended December 31, 2002, two customers (Western-Geco and Laboratory of Regional
Geo Dynamics) each accounted for approximately 10% of consolidated net sales.
The loss of either of these customers could have a material adverse effect on
our results of operations and financial condition. In recent years, our
customers have been rapidly consolidating, shrinking the demand for our
products. See Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Cautionary Statement for Purposes of Forward Looking
Statements -- Further consolidation among our significant customers could
materially and adversely affect us and Note 13 of Notes to Consolidated
Financial Statements.

During the year ended December 31, 2002, we recognized $21.2 million of
sales to customers in Russia and other former Soviet Union countries, $7.2
million of sales to customers in Latin American countries and $15.7 million of
sales to customers in Asia. The majority of our foreign sales are denominated in
U.S. dollars. In recent years, Russia and certain Latin American countries have
experienced economic problems and uncertainties as well as devaluations of their
currencies. To the extent that economic conditions negatively affect our future
sales to customers in those regions or the collectibility of our existing
receivables, our future results of operations, liquidity and financial condition
may be adversely affected.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of consolidated financial statements in conformity with
generally accepted accounting principles in the United States of America
requires management to make choices between acceptable methods of accounting and
to use judgment in making estimates and assumptions that affect the reported
18

amounts of assets and liabilities, disclosure of contingent assets and
liabilities and the reported amounts of revenue and expenses. The following
accounting policies are based on, among other things, judgments and assumptions
made by management that include inherent risk and uncertainties. Management's
estimates are based on the relevant information available at the end of each
period.

- Our revenue is primarily derived from the sale of data acquisition
systems and related equipment. We typically recognize revenue when we
ship products and risk of ownership has passed to the customer. We
warrant that all manufactured equipment will be free from defects in
workmanship, material and parts. Warranty periods typically range from 90
days to three years from the date of original purchase, depending on the
product. We record an accrual for product warranty and other
contingencies when estimated future expenditures associated with such
contingencies become probable, and the amounts can be reasonably
estimated. However, new information may become available, or
circumstances (such as applicable laws and regulations) may change,
thereby resulting in an increase or decrease in the amount required to be
accrued for such matters (and therefore a decrease or increase in
reported net income in the period of such change).

- We periodically evaluate the net realizable value of long-lived assets,
including property, plant and equipment, relying on a number of factors
including operating results, business plans, economic projections and
anticipated future cash flows. We recognize impairment in the carrying
value of an asset whenever we estimate that anticipated future cash flows
(undiscounted) from an asset are less than its carrying value. We
recognize the difference between the carrying value of the asset and its
fair value as the amount of the impairment. Since we must exercise
judgment in determining the fair value of long-lived assets, the carrying
value of our long-lived assets may be overstated or understated.

In 2002, we announced plans to close our Alvin, Texas and Norwich, U.K.
manufacturing facilities and combined our two Colorado-based operations
into one location. Applicable accounting rules required us to perform an
impairment analysis as a result of the announced closures. As a result,
we recorded an impairment charge of $6.9 million in 2002. We primarily
relied upon quoted market prices for the facilities and forecasted
negative cash flows during the interim period prior to their closure to
determine the amount of the impairment.

- On January 1, 2002, we adopted SFAS No. 142 "Goodwill and Other
Intangible Assets." Since adoption of SFAS No. 142 we no longer amortize
goodwill, but instead test for impairment at least annually and as
triggering events occur. In making this assessment we rely on a number of
factors including operating results, business plans, economic
projections, anticipated future cash flows and market place data. There
are inherent uncertainties related to these factors and our judgment in
applying them to the analysis of goodwill impairment. Since our judgment
is involved in performing goodwill valuation analyses, the carrying value
of our goodwill may be overstated or understated.

In the third quarter of 2002, we recorded an impairment charge of $15.1
million, which related to all the goodwill of our land analog reporting
unit, a reporting unit within our Land division. The continuing weakness
in the traditional analog land seismic markets and the precarious
financial condition of many of the seismic contractors, coupled with an
anticipated decrease in demand for analog products due to the success of
our new VectorSeis digital sensor technology, precipitated the need for
this interim impairment. We determined the fair value of the reporting
units using a discounted future returns valuation method.

- When we consider an account or note is impaired, we measure the amount of
the impairment based on the present value of expected future cash flows
or the fair value of collateral. We include impairment losses
(recoveries) in our allowance for doubtful accounts and for loan loss
through an increase (decrease) in bad debt expense. Notes receivable are
generally collateralized by the products sold, bear interest at
contractual rates up to 13.5% per year and are due at various dates
through 2005. The weighted average interest rate at December 31, 2002 for
our notes receivable was 8.5%. We first apply cash receipts on impaired
notes to reduce the principal amount of such notes until the principal
has been recovered and then we recognize additional cash receipts as
interest income thereafter.

19

- We provide reserves for estimated obsolescence or excess inventory equal
to the difference between cost of inventory and estimated market value
based upon assumptions about future demand for our products and market
conditions. In 2002 and 2001, we recorded inventory obsolescence charges
of approximately $4.3 million and $3.6 million, respectively, which
primarily related to the discontinuance of certain analog land seismic
and marine positioning products, and to a lesser extent, inventory
determined to be in excess of our near-term requirements.

- In 2002, we established an additional valuation allowance to reserve all
of our net deferred tax assets. Although our plans include generating
sufficient taxable income in future years to fully utilize our net
operating losses, such expectation is subject to significant amount of
risk and uncertainty. In accordance with SFAS No. 109 we established an
additional valuation allowance for our net deferred tax assets based on
our cumulative operating results in the most recent three-year period.
Our results in this period were heavily affected not only by industry
conditions, but also by deliberate and planned business restructuring
activities in response to the prolonged downturn in the seismic equipment
market, as well as heavy expenditures on research and development of our
VectorSeis technology. Nevertheless, recent losses represented sufficient
negative evidence to establish an additional valuation allowance. We will
continue to reserve all of our net deferred tax assets until we have
sufficient evidence to warrant reversal. This valuation allowance in no
way affects our ability to reduce future tax expense through utilization
of net operating losses.

- The Company has elected to continue to follow the intrinsic value method
of accounting for equity-based compensation as prescribed by APB Opinion
No. 25. If the Company had adopted SFAS No. 123, net earnings (loss),
basic earnings (loss) per share and diluted earnings (loss) per share for
the periods presented would have been reduced (increased) as follows (in
thousands, except per share amounts):

We believe that all of the estimates used to prepare our financial
statements were reasonable at the time we made them, but circumstances may
change requiring us to revise our estimates in ways that could be materially
adverse.

RELATED PARTIES

In connection with the acquisition of DigiCourse, Inc. in November 1998, we
entered into a service agreement under which a predecessor to Laitram, L.L.C.
("Laitram") agreed to provide accounting, software, manufacturing and
maintenance services. The service agreement expired September 30, 2001 and
Laitram now charges us on an invoice basis for facility rental and maintenance
as well as manufacturing services. Our chairman of the board is the chairman and
a principal stockholder of Laitram. For the year ended December 31, 2002, we
paid Laitram a total of $1.9 million, which consisted of $1.2 million for
manufacturing services, $0.6 million for rent and other facility related
services and $0.1 million for other services. Manufacturing services consisted
primarily of machining of parts for our marine positioning systems. For the year
ended December 31, 2001, seven months ended December 31, 2000 and year ended May
31, 2000, we paid Laitram an aggregate $1.4 million, $0.8 million and $1.5
million, respectively. In the opinion of management, the terms of such services
are fair and reasonable, and as favorable to I/O as those which could have been
obtained from unrelated third parties at the time of their performance.

20

In 2000, a former director and former officer assisted in the collection
efforts of certain accounts and notes receivable. In return, we paid him a
commission on actual amounts collected. Commissions earned amounted to $0.1
million and $0.5 million, for the seven months ended December 31, 2000 and year
ended May 31, 2000, respectively.

We have guaranteed $0.2 million of bank indebtedness for one officer
related to the open market purchases of our common stock. The share purchases
were made in conjunction with shares issued in May 2000 under the Input/Output,
Inc. 2000 Restricted Stock Plan. The outstanding loan balance at December 31,
2002 was $0.2 million. Our guarantee expired in March 2003.

CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS

We have made statements in this report which constitute forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934. Examples of forward-looking statements in this report include statements
regarding:

- our expected revenues, operating profit and net income for 2003 or the
three months ended March 31, 2003;

- our plans for facility closures and other future business
reorganizations;

- charges we expect to take for future reorganization activities;

- savings we expect to achieve from our restructuring activities;

- future demand for seismic equipment and services;

- future commodity prices;

- future economic conditions;

- anticipated timing of commercialization and capabilities of products
under development;

- our expectations regarding future mix of business and future asset
recoveries;

- our expectations regarding realization of deferred tax assets;

- our beliefs regarding accounting estimates we make;

- the result of pending or threatened disputes and other contingencies; and

- our future levels of capital expenditures.

You can identify these forward-looking statements by forward-looking words
such as "believe," "may," "could," "will," "estimate," "continue," "anticipate,"
"intend," "seek," "plan," "expect," "should," "would" and similar expressions.
These forward-looking statements reflect our best judgment about future events
and trends based on the information currently available to us. Our results of
operations can be affected by inaccurate assumptions we make or by risks and
uncertainties known or unknown to us. Therefore, we cannot guarantee the
accuracy of the forward-looking statements. Actual events and results of
operations may vary materially from our current expectations. While we cannot
identify all of the factors that may cause actual events to vary from our
expectations, we believe the following factors should be considered carefully:

Recent announcements by geophysical contractors indicate that demand for
our products will continue to be weak in the near term. Western-Geco, our
largest customer, recently announced that it was ceasing land seismic operations
in Canada and the Continental United States. Veritas DGC, another large
customer, recently announced that it was reducing its capital expenditures by
more than $30 million in its current fiscal year. These and other announcements
by geophysical contractors indicate that demand for our products will continue
to be weak in the near term which will have a material adverse effect on our
results of operations and financial condition.

We may not gain rapid market acceptance for VectorSeis products, which
could materially and adversely affect our results of operations and financial
condition. We have spent considerable time and capital
21

developing our VectorSeis products line. Because our VectorSeis products rely on
a new digital sensor, our ability to sell our VectorSeis products will depend on
acceptance of digital sensor by geophysical contractors and exploration and
production companies. If our customers do not believe that our digital seismic
sensors deliver higher quality data with greater operational efficiency, our
results of operations and financial condition will be adversely affected.

In addition, products as complex as those we offer sometimes contain
undetected errors or bugs when first introduced that, despite our rigorous
testing program, are not discovered until the product is purchased and used by a
customer. If our customers deploy our new products and they do not work
correctly, our relationship with our customers may be materially and adversely
affected. We cannot assure you that errors will not be found in future releases
of our products, or that these errors will not impair the market acceptance of
our products. If our customers do not accept our new products as rapidly as we
anticipate, our business and results of operations may be materially and
adversely affected.

Our business reorganization and facilities closure plans may not yield the
benefits we expect and could even harm our financial condition, reputation and
prospects. We intend to significantly reduce our corporate and operational
headcount, close certain manufacturing facilities and combine certain of our
business units. These activities may not yield the benefits we expect, and may
raise product costs, delay product production, result in or exacerbate labor
disruptions and labor-related legal actions against us, and create
inefficiencies in our business.

Our strategic direction and restructuring program also may give rise to
unforeseen costs, which could wholly or partially offset any expense reductions
or other financial benefits we attain as a result of the changes to our
business. In addition, if the markets for our products do not improve, we will
take additional restructuring actions to address these market conditions. Any
such additional actions could result in additional restructuring charges.

We have developed outsourcing arrangements for the manufacturing of some of
our products. If these third parties fail to deliver quality products or
components at reasonable prices on a timely basis, we may alienate some of our
customers, our revenues, profitability and cash flow may decline. As part of
our strategic direction, we are increasing our use of contract manufacturers as
an alternative to our own manufacture of products. If, in implementing this
initiative, we are unable to identify contract manufacturers willing to contract
with us on competitive terms and to devote adequate resources to fulfill their
obligations to us or if we do not properly manage these relationships, our
existing customer relationships may suffer. In addition, by undertaking these
activities, we run the risk that the reputations and competitiveness of our
products and services may deteriorate as a result of the reduction of our
control over quality and delivery schedules. We also may experience supply
interruptions, cost escalations and competitive disadvantages if our contract
manufacturers fail to develop, implement, or maintain manufacturing methods
appropriate for our products and customers.

If any of these risks are realized, our revenues, profitability and cash
flow may decline. In addition, as we come to rely more heavily on contract
manufacturers, we may have fewer personnel resources with expertise to manage
problems that may arise from these third-party arrangements.

Our outsourcing relationships may require us to purchase inventory when
demand for products produced by third-party manufacturers is low. Under many of
our outsourcing arrangements, our manufacturing partners purchase agreed upon
inventory levels to meet our forecasted demand. If demand proves to be less than
we originally forecasted, our manufacturing partners have the right to require
us to purchase any excess or obsolete inventory. Should we be required to
purchase inventory pursuant to these provisions, we may be required to expend
large sums of cash for inventory that we may never utilize. Such purchases could
materially and adversely effect our financial position and our results of
operations.

Recent resignations by our executives may require a change in strategy
which may materially and adversely affect our business and results of
operations. Since the beginning of this year, our former Chief Executive
Officer and our Vice President-Marketing & Sales have resigned and our Chief
Operating Officer has announced his intention to resign shortly after the
appointment of a new Chief Executive Officer. We

22

recently hired a new Chief Executive Officer and may recruit other senior
managers. It will take some time for our new Chief Executive Officer to learn
about our various businesses and to develop strong working relationships with
our operating managers. To the extent we decide to change our strategy as a
result of these hires or to the extent such hires are delayed, our business and
results of operations may be materially and adversely affected, particularly in
the near-term.

Oil and gas companies and geophysical contractors will reduce demand for
our products if there is further reduction in the level of exploration
expenditures. Demand for our products is particularly sensitive to the level of
exploration spending by oil and gas companies and geophysical contractors.
Exploration expenditures have tended in the past to follow trends in the price
of oil and gas, which have fluctuated widely in recent years in response to
relatively minor changes in supply and demand for oil and gas, market
uncertainty and a variety of other factors beyond our control. Any prolonged
reduction in oil and gas prices will depress the level of exploration activity
and correspondingly depress demand for our products. A prolonged downturn in
market demand for our products will have a material adverse effect on our
results of operations and financial condition.

We derive a substantial amount of our revenues from foreign sales, which
pose additional risks. Sales to customers outside of the United States and
Canada accounted for approximately 71% of our consolidated net sales for the
year ended December 31, 2002. As Western contractors have announced plans to
curtail operations, we believe that export sales will grow as a percentage of
our revenue. United States export restrictions affect the types and
specifications of products we can export. Additionally, to complete certain
sales, United States laws may require us to obtain export licenses and there can
be no assurance that we will not experience difficulty in obtaining such
licenses. Operations and sales in countries other than the United States are
subject to various risks peculiar to each country. With respect to any
particular country, these risks may include:

- expropriation and nationalization;

- political and economic instability;

- armed conflict and civil disturbance;

- currency fluctuations, devaluations and conversion restrictions;

- confiscatory taxation or other adverse tax policies;

- governmental activities that limit or disrupt markets, restrict payments
or the movement of funds; and

- governmental activities that may result in the deprivation of contractual
rights.

The majority of our foreign sales are denominated in United States dollars.
An increase in the value of the dollar relative to other currencies will make
our products more expensive, and therefore less competitive, in foreign markets.

In addition, we are subject to taxation in many jurisdictions and the final
determination of our tax liabilities involves the interpretation of the statutes
and requirements of taxing authorities worldwide. Our tax returns are subject to
routine examination by taxing authorities, and these examinations may result in
assessments of additional taxes, penalties and/or interest.

The on-going conflict with Iraq could materially and adversely affect
future sales of our geophone strings. We have relocated some of our geophone
stringing operations to a Company-leased facility in the UAE. The on-going war
with Iraq has resulted in the Company placing restrictions on travel to and from
the UAE. The war has raised the likelihood that we may need to curtail
operations at the UAE facility, causing us to experience significant costs
associated with temporarily relocating the manufacturing of geophone strings. If
we are unable to quickly relocate our UAE operations, we may be unable to
fulfill current orders or accept future orders and our results of operations and
financial condition will be materially and adversely affected.

The rapid pace of technological change in the seismic industry requires us
to make substantial research and development expenditures and could make our
products obsolete. The markets for our products are

23

characterized by rapidly changing technology and frequent product introductions.
We must invest substantial capital to maintain our leading edge in technology
with no assurance that we will receive an adequate rate of return on such
investments. If we are unable to develop and produce successfully and timely new
and enhanced products, we will be unable to compete in the future and our
business and results of operations will be materially and adversely affected.

Competition from sellers of seismic data acquisition systems and equipment
is intensifying and could adversely affect our results of operations. Our
industry is highly competitive. Our competitors have been consolidating into
better-financed companies with broader product lines. Several of our competitors
are affiliated with seismic contractors, which forecloses a portion of the
market to us. Some of our competitors have greater name recognition, more
extensive engineering, manufacturing and marketing capabilities, and greater
financial, technical and personnel resources than those available to us.

Our competitors have expanded or improved their product lines, which has
adversely affected our results of operations. For instance, one competitor
introduced a lightweight land seismic system that we believe has made our
current land system more difficult to sell at acceptable margins. In addition,
one of our competitors introduced a marine solid streamer product that competes
with our oil-filled product. Our net sales of marine streamers have been, and
will continue to be, adversely affected by customer preferences for solid
products. We cannot assure you that we will find a cost-effective way to market
a solid streamer product or that we will be able to compete effectively in the
future for sales of marine streamers.

Further consolidation among our significant customers could materially and
adversely affect us. Historically, a relatively small number of customers have
accounted for the majority of our net sales in any period. In recent years, our
customers have been rapidly consolidating, shrinking the demand for our
products. The loss of any of our significant customers to further consolidation
or otherwise could materially and adversely affect our results of operations and
financial condition.

Large fluctuations in our sales and gross margin can result in operating
losses. Because our products have a high sales price and are technologically
complex, we experience a very long sales cycle. In addition, the revenues from
any particular sale can vary greatly from our expectations due to changes in
customer requirements. These factors create substantial fluctuations in our net
sales from period to period. Variability in our gross margins compound the
uncertainty associated with our sales cycle. Our gross margins are affected by
the following factors:

- pricing pressures from our customers and competitors;

- product mix sold in a period;

- inventory obsolescence;

- unpredictability of warranty costs;

- changes in sales and distribution channels;

- availability and pricing of raw materials and purchased components; and

- absorption of manufacturing costs through volume production.

We must establish our expenditure levels for product development, sales and
marketing and other operating expenses based, in large part, on our forecasted
net sales and gross margin. As a result, if net sales or gross margins fall
below our forecasted expectations, our operating results and financial condition
are likely to be adversely affected because not all of our expenses vary with
our revenues.

We may be unable to obtain broad intellectual property protection for our
current and future products, which may significantly erode our competitive
advantages. We rely on a combination of patent, copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to protect
our proprietary technologies. We believe that the technological and creative
skill of our employees, new product developments, frequent product enhancements,
name recognition and reliable product maintenance are the foundations of our
competitive advantage. Although we have a considerable portfolio of patents,
copyrights

24

and trademarks, these property rights offer us only limited protection. Our
competitors may attempt to copy aspects of our products despite our efforts to
protect our proprietary rights, or may design around the proprietary features of
our products. Policing unauthorized use of our proprietary rights is difficult
and we are unable to determine the extent to which such use occurs. Our
difficulties are compounded in certain foreign countries where the laws do not
offer as much protection for proprietary rights as the laws of the United
States.

We are not aware that our products infringe upon the proprietary rights of
others. However, third parties may claim that we have infringed upon their
intellectual property rights. Any such claims, with or without merit, could be
time consuming, result in costly litigation, cause product shipment delays or
require us to enter into royalty or licensing arrangements. Such claims could
have a material adverse affect on our results of operations and financial
condition.

Significant payment defaults under extended financing arrangements could
adversely affect us. We often sell to customers on extended-term arrangements.
Significant payment defaults by customers could have a material adverse effect
on our financial position and results of operations.

Our operations are subject to numerous government regulations, which could
adversely limit our operating flexibility. Our operations are subject to laws,
regulations, government policies and product certification requirements
worldwide. Changes in such laws, regulations, policies or requirements could
affect the demand for our products or result in the need to modify products,
which may involve substantial costs or delays in sales and could have an adverse
effect on our future operating results. Certain countries are subject to
restrictions, sanctions and embargoes imposed by the United States government.
These restrictions, sanctions and embargoes prohibit or limit us from
participating in certain business activities in those countries. In addition,
changes in governmental regulations applicable to our customers may reduce
demand for our products. For instance, recent regulations regarding the
protection of marine mammals in the Gulf of Mexico may reduce demand for our
airguns and other marine products.

Disruption in vendor supplies will adversely affect our results of
operations. Our manufacturing processes require a high volume of quality
components. Certain components used by us are currently provided by only one
supplier. We may, from time to time, experience supply or quality control
problems with suppliers, and these problems could significantly affect our
ability to meet production and sales commitments. Reliance on certain suppliers,
as well as industry supply conditions generally involve several risks, including
the possibility of a shortage or a lack of availability of key components and
increases in component costs and reduced control over delivery schedules; any of
these could adversely affect our future results of operations.

NOTE: THE FOREGOING REVIEW OF FACTORS PURSUANT TO THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 SHOULD NOT BE CONSTRUED AS EXHAUSTIVE. IN ADDITION
TO THE FOREGOING, WE WISH TO REFER READERS TO OTHER FACTORS DISCUSSED ELSEWHERE
IN THIS REPORT AS WELL AS OTHER FILINGS AND REPORTS WITH THE SEC FOR A FURTHER
DISCUSSION OF RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE CONTAINED IN FORWARD-LOOKING STATEMENTS. WE UNDERTAKE NO
OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS TO ANY SUCH
FORWARD-LOOKING STATEMENTS, WHICH MAY BE MADE TO REFLECT THE EVENTS OR
CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We may, from time to time, be exposed to market risk, which is the
potential loss arising from adverse changes in market prices and rates. The
Company traditionally has not entered into significant derivative or other
financial instruments other than as described below. The Company is not
currently a borrower under any material credit arrangements, which feature
fluctuating interest rates. The Company is subject to exposure from fluctuations
in foreign currencies.

As discussed in "Item 7 -- Managements Discussion and Analysis of Results
of Operations -- Repurchase of Series B and Series C Preferred Stock" and Note
11 of Notes to Consolidated Financial Statements, we repurchased all outstanding
shares of our Preferred Stock. As part of the repurchase we granted warrants to
purchase 2,673,517 shares of the Company's common stock at $8.00 per share
through August 5, 2005.

25

Because in certain circumstances upon a change in control we may be required to
redeem the warrants for cash, we record changes in the fair value of the
warrants as a credit to income or as an expense. A $1 increase in our common
stock price at December 31, 2002, would have increased the fair value of
warrants resulting in an increase to our net loss of approximately $1.3 million
or $(.02) per common share. A $1 decrease in our common stock price at December
31, 2002, would have decreased the fair value of warrants resulting in a
decrease to our net loss of approximately $1.0 million or $.02 per common share.
The fair value of the warrants was $2.2 million at December 31, 2002. We
determined fair value using the Black-Scholes valuation model as further refined
by the terms of the warrant agreement. The key variables we used in valuing the
warrants were contractually specified and were as follows: risk-free rate of
return of Treasury notes having an approximate duration of the remaining term of
the warrants and expected stock price volatility of 60%.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements required by this item begin at page F-1 hereof.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 10 is included in our definitive proxy
statement for our 2003 Annual Meeting of Stockholders under the headings
"Election of Directors" and "Executive Officers."

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 is included in our definitive proxy
statement for our 2003 Annual Meeting of Stockholders under the heading
"Executive Compensation."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The information required by Item 12 is included in our definitive proxy
statement for our 2003 Annual Meeting of Stockholders under the heading
"Ownership of Equity Securities in I/O.".

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 is included in our definitive proxy
statement for our 2003 Annual Meeting of Stockholders under the heading "Certain
Transactions and Relationships."

ITEM 14. CONTROLS AND PROCEDURES

Our President and Chief Operating Officer and our Chief Administrative
Officer (the "Certifying Officers") have evaluated the Company's disclosure
controls and procedures (as defined in Rule 13a-14(c) and Rule 15d-14(c) under
the Exchange Act) as of March 24, 2003 and concluded that those disclosure
controls and procedures are effective.

The Certifying Officers have indicated that there have been no significant
changes in our internal controls or in other factors known to us that could
significantly affect these controls subsequent to their evaluation, nor any
corrective actions with regard to significant deficiencies and material
weaknesses.

While we believe that our existing disclosure controls and procedures have
been effective to accomplish these objectives, we intend to continue to examine,
refine and formalize our disclosure controls and procedures and to monitor
ongoing developments in this area.

26

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) List of Documents Filed.

(1) Financial Statements

The financial statements filed as part of this report are listed in
the "Index to Consolidated Financial Statements" on page F-1 hereof.

(2) Financial Statement Schedules

The following financial statement schedule is included as part of this
Annual Report on Form 10-K:

Schedule II -- Valuation and Qualifying Accounts

All other schedules are omitted because they are inapplicable or the
requested information is shown in the financial statements or noted
therein.

(3) Exhibits

3.1 -- Amended and Restated Certificate of Incorporation filed as
Exhibit 3.1 to the Company's Transition Report on Form 10-K
for the seven months ended December 31, 2000, and
incorporated herein by reference.
3.2 -- Certificate of Amendment to the Amended and Restated
Certificate of Incorporation, dated October 11, 1996, filed
as Exhibit 3.2 to the Company's Annual Report on Form 10-K
for the fiscal year ended May 31, 1997, and incorporated
herein by reference.
3.3 -- Amended and Restated Bylaws filed as Exhibit 4.3 to the
Company's Current Report or Form 8-K filed with the
Securities and Exchange Commission on March 8, 2002, and
incorporated herein by reference.
4.1 -- Form of Certificate of Designation, Preferences and Rights
of Series A Preferred Stock of Input/ Output, Inc., filed as
Exhibit 2 to the Company's Registration Statement on Form
8-A dated January 27, 1997, (attached as Exhibit 1 to the
Rights Agreement referenced in Exhibit 10.6) and
incorporated herein by reference.
**10.1 -- Amended and Restated 1990 Stock Option Plan, filed as
Exhibit 4.2 to the Company's Registration Statement on Form
S-8 (Registration No. 333-80299), filed with the Securities
and Exchange Commission on June 9, 1999, and incorporated
herein by reference.
10.2 -- Lease Agreement dated as of August 20, 2001, between NL
Ventures III Stafford L.P. and Input/ Output, Inc. filed as
Exhibit 10.28 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001, and incorporated
herein by reference.
**10.3 -- Amended Directors Retirement Plan, filed as Exhibit 10.7 to
the Company's Annual Report on form 10-K for the fiscal year
ended May 31, 1997, and incorporated herein by reference.
**10.4 -- Input/Output, Inc. Amended and Restated 1996 Non-Employee
Director Stock Option Plan, filed as Exhibit 4.3 to the
Company's Registration Statement on Form S-8 (Registration
No. 333-80299), filed with the Securities and Exchange
Commission on June 9, 1999, and incorporated herein by
reference.
10.5 -- Rights Agreement, dated as of January 17, 1997, by and
between Input/Output, Inc. and Harris Trust and Savings
Bank, as Rights Agent, including exhibits thereto, filed as
Exhibit 4 to the Company's Form 8-A dated January 27, 1997,
and incorporated herein by reference.
**10.6 -- Input/Output, Inc. Employee Stock Purchase Plan, filed as
Exhibit 4.4 to the Company's Registration Statement on Form
S-8 (Registration No. 333-24125) filed with the Securities
and Exchange Commission on March 18, 1997, and incorporated
herein by reference.
10.7 -- First Amendment to Rights Agreement by and between the
Company and Harris Trust and Savings Bank as Rights Agent,
dated April 21, 1999, filed as Exhibit 10.3 to the Company's
Form 8-K dated April 21, 1999, and incorporated herein by
reference.

27

10.8 -- Registration Rights Agreement by and among the Company and
The Laitram Corporation, dated November 16, 1998, filed as
Exhibit 99.2 to the Company's Form 8-K dated November 16,
1998, and incorporated herein by reference.
**10.9 -- Input/Output, Inc. 1998 Restricted Stock Plan, filed as
Exhibit 4.7 to the Company's Registration Statement on Form
S-8 (Registration No. 333-80297), filed with the Securities
and Exchange Commission on June 9, 1999, and incorporated
herein by reference.
**10.10 -- Input/Output, Inc. Non-qualified Deferred Compensation Plan,
filed as Exhibit 10.14 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2001, and
incorporated herein by reference.
**10.11 -- Amendment No. 1 to the Input/Output, Inc. Amended and
Restated 1996 Non-Employee Director Stock Option Plan, dated
September 13, 1999, filed as Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
August 31, 1999, and incorporated herein by reference.
* **10.12 -- Employment Agreement by and between the Company and C.
Robert Bunch dated effective as of February 4, 2003.
* **10.13 -- Employment Agreement by and between the Company and Larry E.
Denver dated effective as of February 4, 2003.
* **10.14 -- Employment Agreement by and between the Company and Bjarte
Fageraas dated effective as of February 4, 2003.
* **10.15 -- Employment Agreement by and between the Company and Brad
Eastman dated effective as of February 4, 2003
* **10.16 -- Employment Agreement by and between the Company and Laura
Guthrie dated effective as of February 4, 2003
**10.17 -- Input/Output, Inc. 2000 Restricted Stock Plan, effective as
of March 13, 2000 filed as Exhibit 10.27 to the Company's
Annual Report on Form 10-K for the fiscal year ended May 31,
2000, and incorporated herein by reference.
**10.18 -- Input/Output, Inc. 2000 Long-Term Stock Plan, filed as
Exhibit 4.7 to the Company's Registration Statement on Form
S-8 (No. 333-49382) dated November 6, 2000 and incorporated
by reference herein.
10.19 -- Exchange Agreement dated August 6, 2002 by and between The
Company and SCF-IV, L.P., filed as Exhibit 10.21 to the
Company's Form 8-K dated August 6, 2002, and incorporated
herein by reference.
10.20 -- Promissory Note dated August 6, 2002 payable by the Company
to SCF-IV, L.P., filed as Exhibit 10.22 to the Company's
Form 8-K dated August 6, 2002, and incorporated herein by
reference.
10.21 -- Warrant dated August 6, 2002 payable to the Company to
SCF-IV, L.P., filed as Exhibit 10.23 to the Company's Form
8-K dated August 6, 2002, and incorporated herein by
reference.
10.22 -- Registration Rights Agreement dated August 6, 2002 by and
between The Company and SCF-IV, L.P., filed as Exhibit 10.24
to the Company's Form 8-K dated August 6, 2002, and
incorporated herein by reference.
**10.23 -- Amended and Restated 1991 Directors Stock Option Plan, filed
as Exhibit 4.3 o the Company's Registration Statement on
Form S-8 Filed with the Securities and Exchange Commission
on October 19, 1994, and incorporated herein by reference
**10.24 -- Amendment to the Amended and Restated 1991 Directors Stock
Option Plan, filed as Exhibit 10.9 to the Company's Annual
Report On Form 10-K for the fiscal year ended May 31, 1997
and incorporated herein by reference.
**10.25 -- Amendment No, 2 to the Input/Output, Inc. Amended and
Restated 1991 Director Stock Option Plan, dated September
13, 1999, filed as Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended August 31,
1999, and incorporated herein by reference
*10.26 -- Separation Agreement and General Release between
Input/Output, Inc. and Kenneth W. Pope dated January 24,
2003.

28

*10.27 -- Consulting Agreement between Input/Output, Inc. and Kenneth
W. Pope dated January 31, 2003.
*21.1 -- Subsidiaries of the Company.
*23.1 -- Consent of PricewaterhouseCoopers LLP.
*23.2 -- Consent of KPMG LLP.
*24.1 -- The Power of Attorney is set forth on the signature page
hereof.
*99.1 -- Certification of C. Robert Bunch, President and Chief
Operating Officer, Pursuant to 18 U.S.C sec. 1350.
*99.2 -- Certification of Brad Eastman, Chief Administrative Officer
Pursuant to 18 U.S.C sec. 1350.

- ---------------

* Filed herewith.

** Management contract or compensatory plan or arrangement.

(b) Reports on Form 8-K

On March 8, 2002, we filed a Current Report on Form 8-K reporting
under Item 5. Other Events certain amendments to our Bylaws.

On April 1, 2002 we filed a Current Report on Form 8-K reporting under
Item 5 Other Events the change in accounting for our sales/leaseback
transaction.

On August, 13 2002, we filed a Current Report on Form 8-K reporting
under Item 5. Other Events the repurchase of our Series B and Series C
Preferred Stock.

(c) Exhibits required by Item 601 of Regulation S-K.

Reference is made to subparagraph (a) (3) of this Item 14, which is
incorporated herein by reference.

(d) Not applicable.

29

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 in the City of
Stafford, State of Texas, on March 31, 2003.

INPUT/OUTPUT, INC.

By /s/ C. ROBERT BUNCH
------------------------------------
President and Chief Operating
Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints C. Robert Bunch and Brad Eastman and each of
them, as his or her true and lawful attorneys-in-fact and agents with full power
of substitution and re-substitution for him or her and in his or her name, place
and stead, in any and all capacities, to sign any and all documents relating to
the Annual Report on Form 10-K, for the year ended December 31, 2002, including
any and all amendments and supplements thereto, and to file the same with all
exhibits thereto and other documents in connection therewith with the Securities
and Exchange Commission granting unto said attorneys-in-fact and agents full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully as to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or their or his substitute
or substitutes may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.

31

CERTIFICATIONS

I, C. Robert Bunch, certify that:

1. I have reviewed this annual report on Form 10-K of Input/Output, Inc.

2. Based on my knowledge, this annual report does not contain any untrue
statement of material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons fulfilling the
equivalent functions):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

/s/ C. ROBERT BUNCH
--------------------------------------
C. Robert Bunch
President and Chief Operating Officer

Date: March 31, 2003

32

CERTIFICATIONS

I, Brad Eastman, certify that:

1. I have reviewed this annual report on Form 10-K of Input/Output, Inc.

2. Based on my knowledge, this annual report does not contain any untrue
statement of material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons fulfilling the
equivalent functions):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

/s/ BRAD EASTMAN
--------------------------------------
Brad Eastman
Vice President, Chief Administrative
Officer
and Secretary

Date: March 31, 2003

33

INPUT/OUTPUT, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Stockholders of Input/Output, Inc.:

In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Input/Output, Inc. and its subsidiaries (the "Company") at December
31, 2002 and 2001, and the results of their operations and their cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audit. We conducted our
audit of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion. The
financial statements and financial statement schedule of the Company for the
seven months ended December 31, 2000 and for the year ended May 31, 2000 were
audited by other independent accountants whose report dated February 1, 2001
expressed an unqualified opinion on those statements.

As discussed in Note 1 to the consolidated financial statements, in 2002,
the Company changed its method of accounting for goodwill as a result of
adopting the provisions of Statement of Financial Accounting Standards No. 142
"Goodwill and Other Intangible Assets."

PRICEWATERHOUSECOOPERS LLP

Houston, Texas
March 26, 2003

F-2

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and
Stockholders of Input/Output, Inc.:

We have audited the consolidated statements of operations, stockholders'
equity and comprehensive earnings (loss) and cash flows of Input/Output, Inc.
and subsidiaries for the seven-month period ended December 31, 2000, and the
year ended May 31, 2000. We have also audited the financial statement schedule
for the seven-month period ended December 31, 2000, and the year ended May 31,
2000 as listed in the accompanying index. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Input/Output, Inc. for the seven-month period ended December 31, 2000
and the year ended May 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

KPMG LLP

Houston, Texas
February 1, 2001

F-3

INPUT/OUTPUT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See accompanying Notes to Consolidated Financial Statements.
F-4

INPUT/OUTPUT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying Notes to Consolidated Financial Statements.
F-5

INPUT/OUTPUT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE EARNINGS (LOSS)
YEARS ENDED DECEMBER 31, 2002 AND 2001, SEVEN MONTHS ENDED DECEMBER 31, 2000
AND YEAR ENDED MAY 31, 2000

See accompanying Notes to Consolidated Financial Statements.

F-6

INPUT/OUTPUT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying Notes to Consolidated Financial Statements.
F-7

INPUT/OUTPUT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General Description and Principles of Consolidation. Input/Output, Inc.
and its wholly owned subsidiaries design, manufacture and market seismic data
acquisition products for the oil and gas exploration and production industry
worldwide. The consolidated financial statements include the accounts of
Input/Output, Inc. and its wholly owned subsidiaries (collectively referred to
as the "Company" or "I/O"). Inter-company balances and transactions have been
eliminated.

Fiscal Year Change. In September 2000, the Company's Board of Directors
approved the Company's changing of its fiscal year-end to December 31 of each
year. The consolidated statements of operations, stockholders' equity and
comprehensive earnings (loss) and cash flows for the period from June 1, 2000 to
December 31, 2000 represent a transition period of seven months. The Company
filed a Transition Report on Form 10-K for the transition period ended December
31, 2000 and commenced reporting on a calendar year basis with the filing of the
Form 10-Q for the quarter ended March 31, 2001. The following is a comparative
summary of the condensed and consolidated operating results for the years ended
December 31, 2002, 2001 and 2000 and the seven month periods ended December 31,
2000 and December 31, 1999 (in thousands, except per share amounts).

Use of Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Significant estimates are made at discrete

F-8

INPUT/OUTPUT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

points in time based on relevant market information. These estimates may be
subjective in nature and involve uncertainties and matters of judgment and
therefore cannot be determined with exact precision. Areas involving significant
estimates include, but are not limited to, accounts and notes receivable,
inventory valuation, deferred taxes, and accrued warranty costs. Actual results
could differ from those estimates.

Cash and Cash Equivalents. The Company considers all highly liquid debt
instruments with an original maturity of three months or less to be cash
equivalents. At December 31, 2002, there was approximately $0.2 million of
restricted cash used to secure standby and commercial letters of credit.

Accounts and Notes Receivable. Accounts and notes receivable are recorded
at cost, less the related allowance for doubtful accounts and loan loss. The
Company considers current information and events regarding the customers'
ability to repay obligations, and considers an account or note to be impaired
when it is probable that the Company will be unable to collect all amounts due
according to the contractual terms. When an account or note is considered
impaired, the amount of the impairment is measured based on the present value of
expected future cash flows or the fair value of collateral. Impairment losses
(recoveries) are included in the allowance for doubtful accounts and for loan
loss through an increase (decrease) in bad debt expense. Notes receivable are
generally collateralized by the products sold and bear interest at contractual
rates up to 13.5% per year. Cash receipts on impaired notes are applied to
reduce the principal amount of such notes until the principal has been recovered
and are recognized as interest income thereafter.

Inventories. Inventories are stated at the lower of cost (primarily
first-in, first-out) or market. The Company provides reserves for estimated
obsolescence or excess inventory equal to the difference between cost of
inventory and estimated market value based upon assumptions about future demand
for our products and market conditions.

Property, Plant and Equipment. Property, plant and equipment are stated at
cost. Depreciation expense is provided straight-line over the following
estimated useful lives:

Expenditures for renewals and betterments are capitalized; repairs and
maintenance are charged to expense as incurred. The cost and accumulated
depreciation of assets sold or otherwise disposed of are removed from the
accounts and any gain or loss is reflected in operations.

The Company periodically evaluates the net realizable value of long-lived
assets, including property, plant and equipment, relying on a number of factors
including operating results, business plans, economic projections and
anticipated future cash flows. Impairment in the carrying value of an asset is
recognized whenever anticipated future cash flows (undiscounted) from an asset
are estimated to be less than its carrying value. The amount of the impairment
recognized is the difference between the carrying value of the asset and its
fair value.

Financial Instruments. Fair value estimates are made at discrete times
based on relevant market information. These estimates may be subjective in
nature and involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. The Company believes that the
carrying amount of its cash and cash equivalents, accounts and notes receivable,
accounts payable and long-term debt approximate the fair values at those dates.
See Note 11 of Notes to Consolidated Financial Statements for discussion on the
fair value of warrants issued in connection with the repurchase of Preferred
Stock.

Derivatives. Effective January 1, 2001, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended,

F-9

INPUT/OUTPUT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

which establishes accounting and reporting standards for derivative instruments
and hedging activities. SFAS No. 133 requires that the Company recognize all
derivatives as either assets or liabilities in the Consolidated Balance Sheet
and measure those instruments at fair value. The adoption of SFAS No. 133 did
not have a material impact on our reported results of operations and financial
position.

Goodwill and Other Intangible Assets. Goodwill results from business
acquisitions and represents the excess of acquisition costs over the fair value
of the net assets of businesses acquired. On January 1, 2002, the Company
adopted SFAS No. 142 "Goodwill and Other Intangible Assets." Under SFAS No. 142,
existing goodwill will no longer be amortized, but instead is assessed for
impairment at least annually. Under the transition provisions of SFAS No. 142,
there was no impairment at January 1, 2002. Additionally, the Company has
elected to make December 31 the annual impairment assessment date for all
reporting units, and will perform additional impairment tests when triggering
events occur. SFAS No. 142 defines a reporting unit as an operating segment or
one level below an operating segment. Our reporting units as of December 31,
2002 were as follows: Analog Land Products, Digital Land Products, Marine
Products and Reservoir. During the third quarter of 2002, the Company performed
an interim impairment test on the analog land products reporting unit and
recorded an impairment charge of $15.1 million. See further discussion at Note 5
of Notes to Consolidated Financial Statements.

Intangible assets other than goodwill relate to proprietary technology,
patents, customer lists, and non-compete agreements that are amortized over the
estimated periods of benefit (ranging from 2 to 18 years) and are presented in
the Consolidated Balance Sheets net of accumulated amortization. The Company
reviews the carrying values of these intangible assets for impairment if events
or changes in the facts and circumstances indicate that their carrying value may
not be recoverable. Any impairment determined is recorded in the current period
and is measured by comparing the fair value of the related asset to its carrying
value.

Research and Development. Research and development costs primarily relate
to activities that are designed to improve the quality of the subsurface image
and overall acquisition economics of our customers. The costs associated with
these activities are expensed as incurred. These costs include prototype
material and field testing expenses, along with the related salaries, allocated
corporate costs, consulting fees, tools and equipment usage, and other
miscellaneous expenses associated with these activities. Research and
development expenses were $28.8 million, $29.4 million, $16.1 million, and $28.6
million for the years ended December 31, 2002 and 2001, the seven months ended
December 31, 2000, and for the year ended May 31, 2000, respectively.

Revenue Recognition and Product Warranty. Revenue is primarily derived
from the sale of data acquisition systems and related equipment. Revenue is
typically recognized when products are shipped and risk of ownership has passed
to the customer. The Company warrants that all manufactured equipment will be
free from defects in workmanship, material and parts. Warranty periods typically
range from 90 days to three years from the date of original purchase, depending
on the product. The Company provides for estimated warranty as a charge to cost
of sales at time of sale.

Income Taxes. Income taxes are accounted for under the liability method.
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred income tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The Company reserves all net deferred tax assets and
will continue to reserve all net deferred tax assets until there is sufficient
evidence to warrant reversal (see Note 14 of Notes to Consolidated Financial
Statements). The effect on deferred income tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

F-10

INPUT/OUTPUT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Comprehensive Earnings (Loss). Comprehensive earnings (loss), consisting
of net earnings (loss) and foreign currency translation adjustments, is
presented in the consolidated statements of stockholders' equity and
comprehensive earnings (loss). The balance in accumulated other comprehensive
loss consists primarily of foreign currency translation adjustments.

Earnings (Loss) per Common Share. Basic earnings (loss) per common share
is computed by dividing net earnings (loss) applicable to common shares by the
weighted average number of common shares outstanding during the period. Diluted
earnings (loss) per common share is determined on the assumption that
outstanding dilutive stock options have been exercised and the aggregate
proceeds were used to reacquire common stock using the average price of such
common stock for the period. The following table summarizes the calculation of
weighted average number of common shares and weighted average number of diluted
common shares outstanding for purposes of the computation of basic earnings
(loss) per common share and diluted earnings (loss) per common share (in
thousands, except share and per share amounts):

At December 31, 2002, 2001 and 2000, and May 31, 2000; 4,998,043;
3,718,248; 4,778,478; and 5,238,352 respectively, of common shares subject to
stock options were considered anti-dilutive and not included in the calculation
of diluted earnings (loss) per common share. In August 2002, the Company
repurchased all outstanding shares of its Series B and Series C Convertible
Preferred Stock (the "Preferred Stock"). As part of the repurchase, the Company
granted warrants to purchase 2,673,517 shares of the Company's common stock at
$8.00 per share through August 5, 2005. The Preferred Stock and warrants are
considered anti-dilutive for all periods outstanding and are not included in the
calculation of diluted earnings (loss) per common share.

Foreign Currency Gains and Losses. Assets and liabilities of the Company's
subsidiaries operating outside the United States which account in a functional
currency other than U.S. dollars have been translated to U.S. dollars using the
exchange rate in effect at the balance sheet date. Results of foreign operations
have been translated using the average exchange rate during the periods of
operation. Resulting translation adjustments have been recorded as a component
of "Accumulated Other Comprehensive Loss" in the Consolidated Statements of
Stockholders' Equity and Comprehensive Earnings (Loss). Foreign currency
transaction gains and losses are included in the Consolidated Statements of
Operations as they occur.

Foreign Sales Risk. Sales outside the United States have historically
accounted for a significant part of the Company's net sales. Foreign sales are
subject to special risks inherent in doing business outside of the United
States, including the risk of war, civil disturbances, embargo and government
activities, which may disrupt markets and affect operating results.
F-11

INPUT/OUTPUT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Demand for products from customers in developing countries is difficult to
predict and can fluctuate significantly from year to year. These changes in
demand result primarily from the instability of economies and governments in
certain developing countries, changes in internal laws and policies affecting
trade and investment, and because those markets are only beginning to adopt new
technologies and establish purchasing practices. These risks may adversely
affect future operating results and financial position. In addition, sales to
customers in developing countries on extended terms can present heightened
credit risks.

Stock-Based Compensation. SFAS No. 123, "Accounting for Stock-Based
Compensation" allows a company to adopt a fair value based method of accounting
for its stock-based compensation plans, or to continue to follow the intrinsic
value method of accounting prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees". The Company has
elected to continue to follow APB Opinion No. 25. If the Company had adopted
SFAS No. 123, net earnings (loss), basic earnings (loss) per share and diluted
earnings (loss) per share for the periods presented would have been reduced
(increased) as follows (in thousands, except per share amounts):

The weighted average fair value of options granted during the years ended
December 31, 2002 and 2001, the seven months ended December 31, 2000 and for the
year ended May 31, 2000 was $4.90, $4.38, $4.02, and $3.06, respectively. The
fair value of each option was determined using the Black-Scholes option
valuation model. The key variables used in valuing the options were as follows:
average risk-free interest rate based on 5-year Treasury bonds, an estimated
option term of five years, $0 dividends and expected stock price volatility of
60% during the year ended December 31, 2002, 41% during the year ended December
31, 2001 and 49% during the seven months ended December 31, 2000 and the year
ended May 31, 2000.

In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation: an Interpretation of APB Opinion No. 25". Among other issues,
Interpretation No. 44 clarifies the application of APB No. 25 regarding (a) the
definition of employee for purposes of applying APB No. 25, (b) the criteria for
determining whether a plan qualifies as a non-compensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
options in a business combination. The provisions of Interpretation No. 44 were
applied on a prospective basis effective July 1, 2000, and did not have a
material impact on our reported results of operations and financial position.

Recent Accounting Pronouncements. In June 2001, the FASB issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The provisions of SFAS No. 143 are effective for fiscal years beginning
after June 30, 2002. Due to the nature of the Company's business, this Statement
is not expected to have a significant impact on the Company's reported results
of operations and financial condition.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Correction." SFAS No. 145 allows classification of gains and losses from the
extinguishment of debt as extraordinary items in the income statement only if
they

F-12

INPUT/OUTPUT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

are deemed to be unusual and infrequent. In addition, SFAS No. 145 also requires
that capital leases that are modified so that the resulting lease agreement is
classified as an operating lease be accounted for as a sale-leaseback
transaction. SFAS No. 145 is effective for fiscal years beginning after May 15,
2002. The provisions of this Statement are not expected to have a significant
impact on the Company's reported results of operations and financial condition.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and 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)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity is recognized when the liability is incurred. Under EITF Issue 94-3, a
liability for an exit cost was recognized at the date of an entity's commitment
to an exit plan. The provisions of SFAS No. 146 are effective for exit or
disposal activities that are initiated after December 31, 2002. The Company
continued to follow EITF No. 94-3 for its exit and disposal activities, which
were initiated prior to December 31, 2002 (See Note 3.)

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- and Amendment of FASB No. 123."
SFAS No. 148 amends FASB No. 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition for a voluntary change in fair value
based method of accounting for stock-based employee compensation. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company has elected to continue to follow
the intrinsic value method of accounting prescribed by APB Opinion No. 25.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others: an Interpretation of FASB Statements No.
5, 67, and 107 and Rescission of FASB Interpretation No. 34". Interpretation No.
45 clarifies the requirements of FASB Statement No. 5, "Accounting for
Contingencies", relating to the guarantor's accounting for, and disclosure of,
the issuance of certain types of guarantees. The initial recognition and
measurement provisions of this Interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The disclosure
provisions of the Interpretation are effective for financial statements ending
after December 15, 2002. The Company has adopted the provisions related to the
disclosure requirements of this Interpretation effective for the year ended
December 31, 2002. The provisions of this Interpretation are not expected to
have a significant impact on the Company's reported results of operations and
financial condition.

Reclassification. Certain amounts previously reported in the consolidated
financial statements have been reclassified to conform to the current year
presentation.

F-13

INPUT/OUTPUT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(2) SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental disclosure of cash flow information is as follows (in
thousands):

(3) RESTRUCTURING ACTIVITIES

In response to the continued weak seismic market fundamentals, the Company
has taken steps in 2002 to further reduce its overall cost structure to enable
it to operate profitably at lower levels of overall seismic activity. First, the
Company has taken steps to reduce its corporate overhead burden by reducing the
number of personnel. Second, the Company closed their Austin, Texas software
development facility, combined its two Colorado-based operations into one
location, and is in the process of vacating their Alvin, Texas manufacturing
facility and Norwich, U.K. based geophone stringing facility, eliminating
approximately 270,000 square feet of space. The Company is outsourcing the
operations in these facilities or relocating them to other existing Company
facilities. Third, the Company has combined certain business units in order to
improve efficiency and further reduce administrative costs. Finally, the Company
is carefully evaluating its portfolio of products to eliminate those products
for which the market outlook does not justify continuing investments.

Under the planned reduction in workforce, the Company has or will eliminate
approximately 300 full-time positions. Total severance expense incurred during
the year ended December 31, 2002 was approximately $3.5 million, of which $2.5
million was paid during the year ended December 31, 2002. This reduction in
workforce relates to the elimination of approximately 190 manufacturing
personnel and 20 customer service personnel ($1.9 million of severance expense
included in cost of sales), 45 research and development personnel ($0.8 million
of severance expense included in research and development expenses), 15 sales
and marketing personnel ($0.3 million of severance expense included in sales and
marketing expenses) and 30 general and administrative personnel ($0.5 million of
severance expense included in general and administrative expenses). Included
within the approximate 300 full-time positions are approximately 80 full-time
positions which will be eliminated in 2003 and were included in the $1.2 million
severance accrual at December 31, 2002. The severance accrual at December 31,
2001 was $0.2 million.

The announced closures of the Alvin, Texas and Norwich, U.K. manufacturing
facilities were triggering events which required the Company to perform an
impairment analysis of related fixed assets. See Note 4 of Notes to Consolidated
Financial Statements. In addition, the Company recorded a charge of $1.3 million
(included in research and development expenses) for the closure of its Austin,
Texas software development

F-14

INPUT/OUTPUT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

facility and $0.6 million for the closure of its Louisville, Colorado facility,
both of which primarily relate to the future, non-cancelable, lease obligations.
In 2002, the Company paid $0.9 million, net of sublease income, related to all
abandoned non-cancelable lease obligations. The accrual for these obligations
was $1.5 million at December 31, 2002 and $0.5 million at December 31, 2001.

(4) PROPERTY, PLANT AND EQUIPMENT

A summary of property, plant and equipment is as follows (in thousands):

Total depreciation expense for the years ended December 31, 2002 and 2001,
the seven months ended December 31, 2000 and for the year ended May 31, 2000 was
$11.8 million, $12.5 million, $8.7 million and $14.9 million, respectively. At
December 31, 2002, there is $13.9 million of land and buildings, net, which are
recorded pursuant to a twelve-year non-cancelable lease agreement as described
in Note 8 and are being depreciated over the twelve-year lease term.

In 2002, the Company took steps to reduce its overall cost structure. As
part of these steps the Company combined its two Colorado-based operations into
one location and is in the process of vacating its Alvin, Texas manufacturing
facility and Norwich, U.K. based geophone-stringing facility. Due to the planned
closure of the Alvin, Texas and Norwich, U.K. manufacturing facilities, the
Company performed impairment tests in accordance with SFAS No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets". As a result of the
impairment tests, the Alvin facility, the leasehold improvements of the Norwich
facility and certain related manufacturing equipment was considered impaired and
the Company recorded an impairment charge of approximately $6.3 million in 2002.
The method of determining fair value was primarily based upon quoted market
prices for the facility and forecasted negative cash flows during the interim
period prior to their closure. In addition, the Company recorded a charge of
$0.6 million for the closure of the Louisville, Colorado facility, which
primarily relates to the future, non-cancelable, lease obligation.

(5) GOODWILL

During the third quarter of 2002, the Company performed an interim
impairment test on the Company's analog land seismic reporting unit. This
reporting unit represents the Company's traditional analog geophones, vehicles
and vibrators, cables and connectors. The need for an interim impairment test
was predicated upon the continuing weakness in the traditional analog land
seismic markets and the precarious financial condition of many of the seismic
contractors, coupled with an anticipated decrease in demand for analog products
due to the success of the Company's new VectorSeis digital sensor technology.
The results of the impairment test indicated that all of the goodwill associated
with the Company's analog land seismic reporting unit was impaired. Therefore an
impairment charge of $15.1 million was recorded in the third quarter of 2002.
The Company completed its annual test for impairment in the fourth quarter,
which did not indicate any additional

F-15

INPUT/OUTPUT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

impairment of its goodwill. The Company determined the fair value of the
reporting units using a discounted future returns valuation method.

The following is a summary of the changes in the carrying amount of
goodwill for the year ended December 31, 2002:

The following is a reconciliation of reported net income to adjusted net
income subsequent to the adoption of SFAS No. 142 (in thousands):

(6) INTANGIBLE ASSETS

A summary of intangible assets, included in other assets, net, is as
follows (in thousands):

Total amortization expense, excluding amortization of goodwill, for the
years ended December 31, 2002 and 2001, the seven months ended December 31, 2000
and for the year ended May 31, 2000 was $1.4 million, $1.1 million, $0.6 million
and $1.2 million, respectively. A summary of the estimated amortization expense
for the next five years is as follows (in thousands):

F-16

INPUT/OUTPUT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(7) ACCRUED EXPENSES

A summary of accrued expenses is as follows (in thousands):

The Company warrants that all manufactured equipment will be free from
defects in workmanship, materials and parts. Warranty periods typically range
from 90 days to three years from the date of original purchase, depending on the
product. The Company provides for estimated warranty as a charge to cost of
sales at time of sale, which is when estimated future expenditures associated
with such contingency becomes probable and reasonably estimated. However, new
information may become available, or circumstances (such as applicable laws and
regulations) may change, thereby resulting in an increase or decrease in the
amount required to be accrued for such matters (and therefore a decrease or
increase in reported net income in the period of such change). A summary of
warranty activity is as follows (in thousands):

(8) LONG-TERM DEBT AND LEASE OBLIGATIONS

In August 2002, in connection with the repurchase of Preferred Stock, the
Company issued a $31.0 million unsecured promissory note due May 7, 2004,
bearing interest at 8% per year until May 7, 2003, at which time the interest
rate will increase to 13%. Interest is payable in quarterly payments, with all
principal and unpaid interest due on May 7, 2004. The Company records interest
on this note at an effective rate of approximately 11% per year over the life of
the note. Should the Company redeem the note early, any excess accrued interest
would be recorded as an adjustment of interest expense during the period the
note is redeemed. The note restricts cash dividends in excess of $5.0 million
per year while the note is outstanding.

In July 2002, in connection with the acquisition of AXIS Geophysics, Inc.
("AXIS"), the Company entered into a $2.5 million three year unsecured
promissory note payable to the former shareholders of AXIS, bearing interest at
4.34% per year. Principal is payable in quarterly payments of $0.2 million plus
interest, with final payment due in July 2005. The unpaid balance at December
31, 2002 was $2.3 million.

F-17

INPUT/OUTPUT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In January 2001, in connection with the acquisition of Pelton Company, Inc.
("Pelton"), the Company entered into a $3.0 million two-year unsecured
promissory note payable to the former shareholder of Pelton, bearing interest at
8.5% per year. The unpaid balance at December 31, 2002 was $0.4 million, which
was paid in full in February 2003.

In 1996, the Company obtained a $12.5 million, ten-year term loan
collateralized by certain land and buildings. The term loan bore interest at a
fixed rate of 7.875% per year and was repayable in equal monthly installments of
principal and interest of $151,439. In August 2001, the Company sold the same
land and buildings for $21.0 million. As part of the transaction, the Company
repaid the ten-year term loan. Simultaneous to the sale and loan repayment, the
Company entered into a non-cancelable lease with the purchaser of the property.
The lease has a twelve-year term with three consecutive options to extend the
lease for five years each. The Company has no purchase option pursuant to the
lease. As a result of the lease terms, the commitment was recorded as a
twelve-year $21.0 million lease obligation with an implicit interest rate of
9.1%. The unpaid balance at December 31, 2002 was $19.9 million. The Company
paid $1.7 million in commissions and professional fees, which have been recorded
as deferred financing costs and are being amortized over the twelve-year term of
the obligation. The Company did not meet the tangible net worth test of this
lease for either the third or fourth quarter of 2002. If the Company fails to
meet the requirements of this test for any four consecutive quarters during the
first five years of the lease, the Company is required to provide a letter of
credit to the purchaser of the property in the amount of $1.5 million.

A summary of future principal obligations under the note payable and lease
obligation is as follows (in thousands):

(9) INVENTORIES

A summary of inventories, net of reserves, is as follows (in thousands):

In 2002, the Company recorded an inventory obsolescence charge of
approximately $4.3 million (included in cost of sales). This charge was
primarily related to the discontinuance of certain analog land seismic and
marine positioning products, and to a lesser extent, inventory determined to be
in excess of the Company's near-term requirements. For the year ended December
31, 2001, the Company recorded total inventory obsolescence charges of
approximately $3.6 million (included in cost of sales).

F-18

INPUT/OUTPUT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(10) ACCOUNTS AND NOTES RECEIVABLE

A summary of accounts receivable is as follows (in thousands):

The recorded investment in notes receivable, excluding accrued interest,
was $28.3 million at December 31, 2002. Notes receivable are generally
collateralized by the products sold, bear interest at contractual rates up to
13.5% per year and are due at various dates through 2005. The weighted average
interest rate at December 31, 2002 was 8.5%. A summary of notes receivable,
accrued interest and allowance for loan-loss is as follows (in thousands):

The activity in the allowance for note receivable loan loss is as follows
(in thousands):

Recoveries for the years ended December 31, 2002 and 2001 and for the seven
months ended December 31, 2000 includes $0.7 million, $1.6 million and $2.8
million, respectively, of various recoveries of previously non-performing notes
receivable. Recoveries for the year ended May 31, 2000 include $10.2 million
attributable to a more favorable than anticipated resolution of a customer's
bankruptcy settlement, $8.5 million of recoveries in the form of repossessed
equipment and inventories and $4.9 million of various recoveries of previously
non-performing notes receivable.

(11) STOCKHOLDERS' EQUITY

Series B and Series C Preferred Stock. In 1999, SCF-IV L.P., ("SCF"), a
Houston-based private equity fund specializing in oil service investments,
purchased, in a privately negotiated transaction, 40,000 shares of Series B
Cumulative Preferred stock and 15,000 shares of Series C Convertible Preferred
Stock (the "Preferred Stock") at a purchase price of $1,000 per share (the
"Stated Value"), for an aggregate

F-19

INPUT/OUTPUT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of $55.0 million. Since that time, the Preferred Stock earned an 8% dividend, of
which the Company paid 1% quarterly in cash and accrued the balance to increase
the Adjusted Stated Value ($1,000 per share Stated Value plus accrued and unpaid
dividends) of the Preferred Stock.

The Preferred Stock became convertible at the option of SCF on May 7, 2002.
Under its terms, the number of shares into which the Preferred Stock would have
been convertible was the greater of (i) Stated Value divided by approximately
$8.14 per share or (ii) Adjusted Stated Value divided by the average market
price of common stock during the ten-day trading period immediately prior to
conversion. The Company had the right, without the holder's consent, to redeem
for cash up to one-half of any Preferred Stock tendered for conversion based on
the Adjusted Stated Value of such Preferred Stock on the conversion date.

On August 6, 2002, the Company repurchased all Preferred Stock from SCF. If
SCF had converted all of the Preferred Stock on August 6, 2002, and the Company
had declined to exercise their redemption rights, SCF would have received about
9.2 million shares of common stock, representing 15.3% of the total outstanding
common stock of the Company after giving effect to the conversion. In exchange
for the Preferred Stock, the Company paid SCF $30.0 million in cash at closing,
issued SCF a $31.0 million unsecured promissory note due May 7, 2004 and granted
SCF warrants to purchase 2,673,517 shares of common stock at $8.00 per share
through August 5, 2005. The Note bears interest at 8% per annum until May 7,
2003, at which time the interest rate will increase to 13%. The Company records
interest on this note at an effective rate of approximately 11% per year. The
difference in the fair value of the consideration granted to SCF and the
carrying value of the Preferred Stock on the Company's balance sheet ($68.8
million) was added to net earnings available to common shareholders in the
calculation of earnings per share. The difference represents the forgone return
to the preferred shareholder and is treated similar to a dividend; accordingly,
a negative dividend of $2.5 million was recognized upon the repurchase.
Immediately preceding the closing of this transaction, David C. Baldwin, the
elected representative of the holder of the Preferred Stock, resigned from the
board of directors.

Under the terms of a registration rights agreement, SCF has the right to
demand that the Company file a registration statement for the resale of the
shares of Common Stock SCF acquires upon exercise of the warrants. Sales or the
availability for sale of a substantial number of shares of Common Stock in the
public market could adversely affect the market price for Common Stock. If the
Company is acquired in a business combination pursuant to which the stockholders
receive less than 60% of the aggregate consideration in the form of publicly
traded common equity, then the holder of the warrants has the option to require
the Company to acquire the warrants at their fair value as determined by the
Black-Scholes valuation model as further refined by the terms of the warrant
agreement. Because the Company may be required to repurchase the warrants in
these limited circumstances, the warrants are classified as a current liability
on the balance sheet and the Company records any change in value as a credit or
charge to the consolidated statement of operations. The change in the fair value
of the warrants between August 6, 2002 and December 31, 2002 resulted in other
income of approximately $3.3 million. The fair value of the warrants was $2.2
million at December 31, 2002. Fair value was determined using the Black-Scholes
valuation model. The key variables used in valuing the warrants were
contractually specified and were as follows: risk-free rate of return of
Treasury notes having an approximate duration of the remaining term of the
warrants and expected stock price volatility of 60%.

Treasury Stock. During the year ended May 31, 2000, the Company purchased
100,000 shares of common stock from a former officer for $0.8 million, purchased
in open market transactions 150,000 shares of common stock for an aggregate
purchase price of $1.0 million and reissued 17,500 shares to the interim Chief
Executive Officer of the Company for services provided. The Company in open
market transactions during the seven months ended December 31, 2000 repurchased
11,000 shares of common stock. In October 2001, the Company's Board of Directors
authorized the repurchase of up to 1,000,000 shares of common stock in the open
market and privately negotiated transactions at such prices and at such times as
management deems

F-20

INPUT/OUTPUT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

appropriate. Under this repurchase program the Company had repurchased 40,000
shares of common stock for a total purchase price of $0.2 million at an average
price of $3.97 per share for the year ended December 31, 2002 and 461,900 shares
of common for a total purchase price of $3.6 million at an average price of
$7.78 per share for the year ended December 31, 2001. Under a prior repurchase
program, the Company had repurchased 37,898 shares of common stock during 2001,
for a purchase price of $0.4 million. At December 31, 2002, the Company owned
783,298 shares of treasury stock.

Stock Option Plans. The Company has adopted an employee stock option plan
for eligible employees, which, together with a previous plan, provides for the
granting of options to purchase a maximum of 9,700,000 shares of common stock.
The Company has also adopted a director's stock option plan, which provides for
the granting of options to purchase a maximum of 700,000 shares of common stock
by non-employee directors. At December 31, 2002, 810,108 shares remained
available for issuance pursuant to these plans.

Transactions under the stock option plans are summarized as follows:

F-21

INPUT/OUTPUT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Stock options outstanding at December 31, 2002 are summarized as follows:

The Company has elected to continue to follow the intrinsic value method of
accounting as prescribed by APB Opinion No. 25. See Note 1 of Notes to
Consolidated Financial Statement for a summary of the net earnings (loss) impact
if the Company had adopted the fair value method of accounting for stock-based
compensation of SFAS No. 123.

Restricted Stock Plans. In January 1998, the Company adopted the
Input/Output, Inc. 1998 Restricted Stock Plan which provides for the award of up
to 100,000 shares of common stock to key officers and employees. Ownership of
the common stock will vest over a period as determined by the Company in its
sole discretion. Shares awarded may not be sold, assigned, transferred, pledged
or otherwise encumbered by the grantee during the vesting period. Except for
these restrictions, the grantee of an award of shares has all the rights of a
common stockholder, including the right to receive dividends and the right to
vote such shares. At December 31, 2002, there were 28,600 shares outstanding,
which are scheduled to vest over a period through March 1, 2005. At December 31,
2002 there are 71,400 shares available for grant under this plan.

In March 2000 the Company adopted the Input/Output, Inc. 2000 Restricted
Stock Plan which provides for the award of up to 200,000 shares of common stock
to key employees. Ownership of the common stock will vest over a period as
determined by the Company in its sole discretion. Shares awarded may not be
sold, assigned, transferred, pledged or otherwise encumbered by the grantee
during the vesting period. Except for these restrictions, the grantee of an
award of shares has all the rights of a common stockholder, including the right
to receive dividends and the right to vote such shares. At December 31, 2002,
the Company had 112,850 unvested shares outstanding, which are scheduled to vest
over a period through June 7, 2006. At December 31, 2002 there are 87,150 shares
available for grant under this plan.

The market value of shares of common stock granted under the restricted
stock plans were recorded as unamortized restricted stock compensation and
reported as a separate component of stockholders' equity. The restricted stock
compensation is amortized over the vesting period.

Employee Stock Purchase Plan. In April 1997 the Company adopted the
Employee Stock Purchase Plan which allows all eligible employees to authorize
payroll deductions at a rate of 1% to 15% of base compensation for the purchase
of our common stock. The purchase price of the common stock will be the lesser
of 85% of the closing price on the first day of the applicable offering period
(or most recently preceding trading day) or 85% of the closing price on the last
day of the offering period (or most recently preceding trading day). Each
offering period is six months and commences on January 1 and July 1 of each
year. There were 117,876; 102,186; 105,740 and 196,849 shares purchased by
employees during the years ended

F-22

INPUT/OUTPUT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

December 31, 2002 and 2001, the seven months ended December 31, 2000 and for the
year ended May 31, 2000, respectively.

(12) ACQUISITIONS

In July 2002, the Company acquired all of the outstanding capital stock of
AXIS for $2.5 million of cash and issued a $2.5 million three-year unsecured
promissory note. The Company will pay additional consideration to the former
shareholders of AXIS at an amount equal to 33.33% of AXIS' EBITDA (as adjusted
by the terms of the Earn-Out Agreement), for the years ended December 31, 2003,
2004 and 2005, exceeding a minimum threshold of $1.0 million. AXIS is a seismic
data service company based in Denver, Colorado, which provides specialized
seismic data processing and integration services to major and independent
exploration and production companies. The AXIS Interpretation-Ready Process
("IRP") integrates seismic and subsurface geological data to provide customers
more accurate and higher quality data that can result in improved reservoir
characterizations.

In May 2002, the Company acquired certain of the assets of S/N Technologies
("S/N") for $0.7 million of cash. In addition, the Company will pay
consideration up to a maximum of $5.0 million if certain revenue and sales
thresholds are met. The assets acquired from S/N include proprietary technology
applicable to solid streamer products used to acquire 2D, 3D and high-resolution
marine seismic data.

In January 2001, the Company acquired all of the outstanding capital stock
of Pelton for approximately $6.0 million in cash and a $3.0 million two-year
unsecured promissory note. Pelton is based in Ponca City, Oklahoma and designs,
manufactures and sells seismic vibrator control systems, vibrator positioning
systems and explosive energy control systems.

The acquisitions were accounted for by the purchase method, with the
purchase price allocated to the fair value of assets purchased and liabilities
assumed. The allocation of the purchase price, including related direct costs,
for the acquisition of AXIS, S/N and Pelton are as follows (in thousands):

The consolidated results of operations of the Company include the results
of AXIS, S/N and Pelton from the date of acquisition. Pro-forma results prior to
the acquisition date were not material to the Company's consolidated results of
operations.

The intangible asset of AXIS relates to proprietary technology, which is
being amortized over a 4-year period. The intangible assets of S/N relate to
acquired patents and are being amortized over a 10-year period. The intangible
assets of Pelton primarily relate to acquired patents and are being amortized
over a weighted-

F-23

INPUT/OUTPUT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

average useful life of 11 years. The goodwill of AXIS was assigned to the
digital land products reporting unit and Pelton to the analog land products
reporting unit, both reporting units within the Company's Land division.

(13) SEGMENT AND GEOGRAPHIC INFORMATION

The Company evaluates and reviews results based on two segments, Land and
Marine, to allow for increased visibility and accountability of costs and more
focused customer service and product development. The Company measures segment
operating results based on earnings (loss) from operations. A summary of segment
information is as follows (in thousands):

F-24

INPUT/OUTPUT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Intersegment sales are insignificant for all periods presented. Corporate
assets include all assets specifically related to corporate personnel and
operations, substantially all cash and cash equivalents, all facilities and
manufacturing machinery and equipment that are jointly utilized by segments and
all income taxes receivable and deferred income tax assets. Depreciation and
amortization expense is allocated to segments based upon use of the underlying
assets.

A summary of net sales by geographic area follows (in thousands):

Net sales are attributed to individual countries on the basis of the
ultimate destination of the equipment, if known; if the ultimate destination is
not known, it is based on the geographical location of initial shipment.

Net sales to individual customers representing 10% or more of net sales
were as follows:

(14) INCOME TAXES

A reconciliation of the expected income tax expense (benefit) on earnings
(loss) before income taxes using the statutory Federal income tax rate of 35%
for the years ended December 31, 2002 and 2001, the seven

F-25

INPUT/OUTPUT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

months ended December 31, 2000 and the year ended May 31, 2000, to the income
taxes reported herein is as follows (in thousands):

The tax effects of the cumulative temporary differences resulting in the
net deferred income tax asset (liability) are as follows (in thousands):

F-26

INPUT/OUTPUT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In 2002, the Company recorded an additional valuation allowance of $85.9
million, resulting in a net charge to income tax expense of $60.0 million for
its net deferred tax assets, which are primarily net operating loss
carryforwards. The Company currently does not recognize a benefit from net
operating losses. The establishment of this valuation allowance does not affect
the Company's ability to reduce future tax expense through utilization of prior
years net operating losses.

The valuation allowance was calculated in accordance with the provisions of
SFAS No. 109, "Accounting for Income Taxes," which places primary importance on
the Company's cumulative operating results in the most recent three-year period
when assessing the need for a valuation allowance. Although management believes
the Company's results for those periods were heavily affected not only by
industry conditions, but also by deliberate and planned business restructuring
activities in response to the prolonged downturn in the seismic equipment
market, as well as heavy expenditures on research and development technology,
the Company's cumulative loss in the most recent three-year period, including
the net loss reported in 2002, represented sufficient negative evidence to
establish an additional valuation allowance under the provisions of SFAS No.
109. The Company intends to maintain a full valuation allowance for its net
deferred tax assets and net operating loss carryforwards until sufficient
positive evidence exists to support reversal of the allowance. At December 31,
2002, the Company has net operating loss carry-forwards of $145 million, which
expire over the next 16 to 20 years.

Included within Other Long-Term Liabilities on the Consolidated Balance
Sheets at December 31, 2002 and 2001, is $4.2 million which primarily consists
of reserves for various foreign and state tax matters.

(15) OPERATING LEASES

Leasee. The Company leases certain equipment, offices and warehouse space
under non-cancelable operating leases. Rental expense was $2.1 million, $1.8
million, $1.1 million, and $2.2 million for the years ended December 31, 2002
and 2001, the seven months ended December 31, 2000 and for the year ended May
31, 2000, respectively.

A summary of future rental commitments under non-cancelable operating
leases is as follows (in thousands):

F-27

INPUT/OUTPUT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Lessor. The Company leases seismic equipment to customers under operating
leases of two years or less. At December 31, 2002, the total cost of equipment
leased or held for lease was $4.0 million, less accumulated amortization of $1.9
million. The Company also leases under-utilized facilities under various lease
and sub-lease agreements. A summary of lease revenues is as follows (in
thousands):

A summary of future minimum non-cancelable lease and sublease income is as
follows (in thousands):

(16) BENEFIT PLANS

401(k). The Company has a 401(k) retirement savings plan which covers
substantially all employees. Employees may voluntarily contribute up to 15% of
their compensation, as defined, to the plan. The Company, effective June 1,
2000, adopted a company matching contribution to the 401(k) plan. The Company
matches the employee contribution at a rate of 50% of the first 6% of
compensation contributed to the plan. Company contributions to the plan were
$0.8 million, $0.9 million, $0.6 million, and $0 during the years ended December
31, 2002 and 2001, the seven months ended December 31, 2000 and for the year
ended May 31, 2000, respectively.

Supplemental executive retirement plan. The Company has a non-qualified,
supplemental executive retirement ("SERP") plan. The SERP Plan provides for
certain compensation to become payable on the participants' death, retirement or
total disability as set forth in the plan. Assets of this plan consist of the
cash surrender value of life insurance policies. The consolidated financial
statements include pension expense (benefit) of $0, $0.1 million, $0, and $(0.5)
million for the years ended December 31, 2002 and 2001, the seven months ended
December 31, 2000 and for the year ended May 31, 2000, respectively. All
benefits under this plan have previously been frozen.

Directors Plan. The Company has also adopted a non-qualified, unfunded
outside directors retirement plan. The plan provides for certain compensation to
become payable on the participants' death, retirement or total disability as set
forth in the plan. The consolidated financial statements include pension expense
of $0.2 million, $0, $0.1 million, and $0.1 million for the years ended December
31, 2002 and 2001, the seven months ended December 31, 2000 and for the year
ended May 31, 2000, respectively. All benefits under this plan have previously
been frozen.

F-28

INPUT/OUTPUT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(17) SELECTED QUARTERLY INFORMATION -- (UNAUDITED)

A summary of selected quarterly information is as follows (in thousands,
except per share amounts):

F-29

INPUT/OUTPUT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

- ---------------

* See Note 18 for the summary charges occurring during the years ended December
31, 2002 and 2001, and for the year ended May 31, 2000.

(18) SUMMARY OF SIGNIFICANT CHARGES AND RECOVERIES

The table below summarizes the significant charges during the periods
presented (in thousands):

F-30

INPUT/OUTPUT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Pre-tax charges of $4.7 million were recorded in the first quarter of the
year ended May 31, 2000 and included $3.3 million related to employee severance
arrangements and the closing of a facility (included in general and
administrative expenses) and charges of $1.4 million for product-related
warranties (included in cost of sales). These charges resulted from continued
weak customer demand for seismic equipment.

Pre-tax charges and recoveries of $0.3 million, net, were recorded in the
third quarter of the year ended May 31, 2000 and included $8.7 million of
inventory charges (included in cost of sales) related to a decision to
commercialize VectorSeis digital sensor products having higher technical
standards than the products previously produced. The Company had previously
determined to commercialize these earlier VectorSeis products which subsequently
were proven not to be commercially feasible based on data gathered from trial
surveys, the anticipated longer-term market recovery for new seismic
instrumentation and given current and expected market conditions. Other charges
were $2.4 million of bad debt expense (included in general and administrative
expense); $1.3 million of charges related to the reduction in workforce
worldwide (included in general and administrative expense); and $0.7 million of
charges related to legal settlements (included in cost of sales -- $0.3 million,
and in general and administrative expense -- $0.4 million). These charges were
offset in part by $12.8 million of recoveries attributable to a more favorable
than anticipated resolution of a customer's bankruptcy settlement, consisting of
a $10.2 million reduction in allowance for loan loss (recorded as a reduction to
general and administrative expense) and a $2.6 million reversal of warranty
reserves based on the bankruptcy settlement (recorded as a reduction to cost of
sales).

Pre-tax charges of $45.8 million were recorded in the fourth quarter of the
year ended May 31, 2000 and included $4.2 million of inventory and warranty
charges (included in cost of sales) primarily related to write-down of certain
marine streamer and related products, reflecting the deterioration of the marine
towed array seismic sector. Additionally, $10.0 million was charged to general
and administrative expenses consisting of a $5.0 million charge for settlement
of litigation, a $3.6 million loan loss expense, $0.7 million related to the
sale of certain idle manufacturing capacity in Europe, and $0.7 million of
charges related to employee severance and continued cost reduction efforts
worldwide. Finally, $31.6 million was charged to goodwill impairment, reflecting
the impairment of certain goodwill recorded in conjunction with the acquisition
of manufacturing

F-31

INPUT/OUTPUT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

assets of Western Geophysical in 1995 and the acquisition of CompuSeis, Inc. in
1998. The impairment of the Western Geophysical goodwill principally reflected
the diminished outlook for the marine towed array seismic sector in general,
evidenced by customers' decisions to reduce the size of their marine fleets, and
changes in customers' preferences and technology for certain products within
that sector. The impairment of the CompuSeis goodwill reflected the result of
certain technological changes relating to land seismic systems.

Pre-tax charges of $0.5 million were recorded in the first quarter of 2002
related to employee severance arrangements ($0.4 million included in cost of
sales and $0.1 million included in research and development expenses).

Pre-tax charges of $2.4 million were recorded in the second quarter of 2002
and included $1.3 million related to the closure of the Austin, Texas, software
development facility (included in research and development expenses) and charges
of $1.1 million related to employee severance arrangements ($0.5 million
included in cost of sales, $0.4 million included in research and development
expenses and $0.2 million in general and administrative expenses).

Pre-tax charges of $24.8 million were recorded in the third quarter of 2002
and included $3.8 million of inventory obsolescence charges (included in cost of
sales); $15.1 million of goodwill impairment charges related to our analog land
seismic reporting unit (included in goodwill impairment); and $5.9 million of
facility and equipment impairment charges related to the closure of the Alvin,
Texas, and Louisville, Colorado facilities (included in charges for the
impairment of long-lived assets).

Pre-tax charges of $3.4 million were recorded in the fourth quarter of 2002
and included $1.0 million of additional impairment charges related to the
Company's Alvin, Texas facility and closure of the Company's Norwich, U.K.
manufacturing facility (included in impairment of long-lived assets); charges of
$1.9 million related to employee severance arrangements ($1.0 million included
in cost of sales, $0.3 million included in research and development expenses,
$0.3 million in marketing and sales expenses and $0.3 million in general and
administrative expenses); and additional inventory obsolescence charges of $.5
million (included in cost of sales).

In 2002, the Company recorded net charges of $60.0 million to establish an
additional valuation allowance for its net deferred tax assets. The Company will
continue to reserve all of its net deferred tax assets until it has sufficient
evidence to warrant reversal.

(19) LEGAL MATTERS

In the ordinary course of business, the Company has been named in various
lawsuits. While the final resolution of these matters could have an impact on
the consolidated financial results for a particular reporting period, the
Company believes that the ultimate resolution of these matters will not have a
material adverse impact on the financial position, results of operations or
liquidity of the Company.

(20) RELATED PARTIES

In connection with the acquisition of DigiCourse in November 1998, the
Company entered into a service agreement under which a predecessor to Laitram,
L.L.C. ("Laitram") agreed to provide accounting, software, manufacturing and
maintenance services. The service agreement expired September 30, 2001 and
Laitram now charges the Company on an invoice basis for facility rental and
maintenance as well as manufacturing services. The Company's chairman of the
board is the chairman and a principal stockholder of Laitram. For the year ended
December 31, 2002, the Company paid Laitram a total of $1.9 million, which
consisted of $1.2 million for manufacturing services, $0.6 million for rent and
other facility related services and $0.1 million for other services.
Manufacturing services consisted primarily of machining of parts for the
Company's marine positioning systems. For the year ended December 31, 2001, the
seven months ended December 31, 2000 and the year ended May 31, 2000, the
Company paid Laitram an aggregate $1.4 million,
F-32

INPUT/OUTPUT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$0.8 million and $1.5 million, respectively. In the opinion of management, the
terms of such services are fair and reasonable, and as favorable to I/O as those
which could have been obtained from unrelated third parties at the time of their
performance.

In 2000, a former director and former company officer assisted in the
collection efforts of certain accounts and notes receivable. In return, he was
paid a commission on actual amounts collected. Commissions earned amounted to
$0.1 million and $0.5 million for the seven months ended December 31, 2000 and
for the year ended May 31, 2000, respectively.

The Company has guaranteed $0.2 million of bank indebtedness for one
officer related to the open market purchases of the Company's common stock. The
share purchases were made in conjunction with shares issued in May 2000 under
the Input/Output, Inc. 2000 Restricted Stock Plan. The outstanding loan balance
at December 31, 2002 was $0.2 million. The Company's guarantee expired in March
2003.

(21) SUBSEQUENT EVENTS

On March 31, 2003, the Company announced that Robert P. Peebler had been
appointed the Company's President and Chief Executive Officer. Mr. Peebler
formerly was the President and Chief Executive Officer of Energy Virtual
Partners ("EVP"), which he founded in April, 2001. Mr. Peebler will also become
Chairman of EVP. Mr. Peebler has been a director of I/O since 1999.

In addition, the Company will invest $3.0 million in Series B Preferred
securities of EVP. After consummation of this investment, the Company will own
approximately 22% of the outstanding ownership interests of EVP and 11% of the
outstanding voting interests of EVP. EVP provides asset management services to
large oil and gas companies to enhance the value of their oil and gas
properties.

F-33

SCHEDULE II

INPUT/OUTPUT, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

- ---------------

(1) Includes recoveries of $2.1 million.

(2) Includes reversal of $2.6 million based on bankruptcy settlement of a
customer.

(3) Represents transfer to loan loss allowance as a result of conversion of
trade receivable to a note receivable.

S-1

INDEX TO EXHIBITS

3.1 -- Amended and Restated Certificate of Incorporation filed as
Exhibit 3.1 to the Company's Transition Report on Form 10-K
for the seven months ended December 31, 2000, and
incorporated herein by reference.
3.2 -- Certificate of Amendment to the Amended and Restated
Certificate of Incorporation, dated October 11, 1996, filed
as Exhibit 3.2 to the Company's Annual Report on Form 10-K
for the fiscal year ended May 31, 1997, and incorporated
herein by reference.
3.3 -- Amended and Restated Bylaws filed as Exhibit 4.3 to the
Company's Current Report or Form 8-K filed with the
Securities and Exchange Commission on March 8, 2002, and
incorporated herein by reference.
4.1 -- Form of Certificate of Designation, Preferences and Rights
of Series A Preferred Stock of Input/ Output, Inc., filed as
Exhibit 2 to the Company's Registration Statement on Form
8-A dated January 27, 1997, (attached as Exhibit 1 to the
Rights Agreement referenced in Exhibit 10.6) and
incorporated herein by reference.
**10.1 -- Amended and Restated 1990 Stock Option Plan, filed as
Exhibit 4.2 to the Company's Registration Statement on Form
S-8 (Registration No. 333-80299), filed with the Securities
and Exchange Commission on June 9, 1999, and incorporated
herein by reference.
10.2 -- Lease Agreement dated as of August 20, 2001, between NL
Ventures III Stafford L.P. and Input/ Output, Inc. filed as
Exhibit 10.28 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001, and incorporated
herein by reference.
**10.3 -- Amended Directors Retirement Plan, filed as Exhibit 10.7 to
the Company's Annual Report on form 10-K for the fiscal year
ended May 31, 1997, and incorporated herein by reference.
**10.4 -- Input/Output, Inc. Amended and Restated 1996 Non-Employee
Director Stock Option Plan, filed as Exhibit 4.3 to the
Company's Registration Statement on Form S-8 (Registration
No. 333-80299), filed with the Securities and Exchange
Commission on June 9, 1999, and incorporated herein by
reference.
10.5 -- Rights Agreement, dated as of January 17, 1997, by and
between Input/Output, Inc. and Harris Trust and Savings
Bank, as Rights Agent, including exhibits thereto, filed as
Exhibit 4 to the Company's Form 8-A dated January 27, 1997,
and incorporated herein by reference.
**10.6 -- Input/Output, Inc. Employee Stock Purchase Plan, filed as
Exhibit 4.4 to the Company's Registration Statement on Form
S-8 (Registration No. 333-24125) filed with the Securities
and Exchange Commission on March 18, 1997, and incorporated
herein by reference.
10.7 -- First Amendment to Rights Agreement by and between the
Company and Harris Trust and Savings Bank as Rights Agent,
dated April 21, 1999, filed as Exhibit 10.3 to the Company's
Form 8-K dated April 21, 1999, and incorporated herein by
reference.
10.8 -- Registration Rights Agreement by and among the Company and
The Laitram Corporation, dated November 16, 1998, filed as
Exhibit 99.2 to the Company's Form 8-K dated November 16,
1998, and incorporated herein by reference.
**10.9 -- Input/Output, Inc. 1998 Restricted Stock Plan, filed as
Exhibit 4.7 to the Company's Registration Statement on Form
S-8 (Registration No. 333-80297), filed with the Securities
and Exchange Commission on June 9, 1999, and incorporated
herein by reference.
**10.10 -- Input/Output, Inc. Non-qualified Deferred Compensation Plan,
filed as Exhibit 10.14 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2001, and
incorporated herein by reference.
**10.11 -- Amendment No. 1 to the Input/Output, Inc. Amended and
Restated 1996 Non-Employee Director Stock Option Plan, dated
September 13, 1999, filed as Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
August 31, 1999, and incorporated herein by reference.
* **10.12 -- Employment Agreement by and between the Company and C.
Robert Bunch dated effective as of February 4, 2003.
* **10.13 -- Employment Agreement by and between the Company and Larry E.
Denver dated effective as of February 4, 2003.

* **10.14 -- Employment Agreement by and between the Company and Bjarte Fageraas dated effective as of February
4, 2003.
* **10.15 -- Employment Agreement by and between the Company and Brad Eastman dated effective as of February 4,
2003
* **10.16 -- Employment Agreement by and between the Company and Laura Guthrie dated effective as of February 4,
2003
**10.17 -- Input/Output, Inc. 2000 Restricted Stock Plan, effective as of March 13, 2000 filed as Exhibit 10.27
to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2000, and incorporated
herein by reference.
**10.18 -- Input/Output, Inc. 2000 Long-Term Stock Plan, filed as Exhibit 4.7 to the Company's Registration
Statement on Form S-8 (No. 333-49382) dated November 6, 2000 and incorporated by reference herein.
10.19 -- Exchange Agreement dated August 6, 2002 by and between The Company and SCF-IV, L.P., filed as
Exhibit 10.21 to the Company's Form 8-K dated August 6, 2002, and incorporated herein by reference.
10.20 -- Promissory Note dated August 6, 2002 payable by the Company to SCF-IV, L.P., filed as Exhibit 10.22
to the Company's Form 8-K dated August 6, 2002, and incorporated herein by reference.
10.21 -- Warrant dated August 6, 2002 payable to the Company to SCF-IV, L.P., filed as Exhibit 10.23 to the
Company's Form 8-K dated August 6, 2002, and incorporated herein by reference.
10.22 -- Registration Rights Agreement dated August 6, 2002 by and between The Company and SCF-IV, L.P.,
filed as Exhibit 10.24 to the Company's Form 8-K dated August 6, 2002, and incorporated herein by
reference.
**10.23 -- Amended and Restated 1991 Directors Stock Option Plan, filed as Exhibit 4.3 o the Company's
Registration Statement on Form S-8 Filed with the Securities and Exchange Commission on October 19,
1994, and incorporated herein by reference
**10.24 -- Amendment to the Amended and Restated 1991 Directors Stock Option Plan, filed as Exhibit 10.9 to the
Company's Annual Report On Form 10-K for the fiscal year ended May 31, 1997 and incorporated herein
by reference.
**10.25 -- Amendment No, 2 to the Input/Output, Inc. Amended and Restated 1991 Director Stock Option Plan,
dated September 13, 1999, filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended August 31, 1999, and incorporated herein by reference
*10.26 -- Separation Agreement and General Release between Input/Output, Inc. and Kenneth W. Pope dated
January 24, 2003.
*10.27 -- Consulting Agreement between Input/Output, Inc. and Kenneth W. Pope dated January 31, 2003.
*21.1 -- Subsidiaries of the Company.
*23.1 -- Consent of PricewaterhouseCoopers LLP.
*23.2 -- Consent of KPMG LLP.
*24.1 -- The Power of Attorney is set forth on the signature page hereof.
*99.1 -- Certification of C. Robert Bunch, President and Chief Operating Officer, Pursuant to 18 U.S.C
sec. 1350.
*99.2 -- Certification of Brad Eastman, Chief Administrative Officer Pursuant to 18 U.S.C sec. 1350.

- ---------------

* Filed herewith.

** Management contract or compensatory plan or arrangement.