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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2004

or

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

Commission File Number 0-13111

ANALYTICAL SURVEYS, INC.

(Exact name of registrant as specified in its charter)

11900 Crownpoint Drive, San Antonio, Texas 78233

(Address of principal executive offices)

(210) 657-1500

(Registrant’s telephone number, including area code)

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 past twelve (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 ninety (90) days. Yes x No¨

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

The number of shares of common stock outstanding as of May 11, 2004, was 1,089,173.

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Part I

Financial Information

Item 1. Financial Statements

ANALYTICAL SURVEYS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

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ANALYTICAL SURVEYS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

See accompanying notes to consolidated financial statements

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ANALYTICAL SURVEYS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

See accompanying notes to consolidated financial statements

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ANALYTICAL SURVEYS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Six Months Ended March 31, 2004

(In thousands)

(Unaudited)

See accompanying notes to consolidated financial statements.

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ANALYTICAL SURVEYS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See accompanying notes to consolidated financial statements.

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Notes to Consolidated Financial Statements

(Unaudited)

1. Summary of Significant Accounting Policies

The accompanying unaudited interim consolidated financial statements have been prepared by management in accordance with the accounting policies described in our annual report for the year ended September 30, 2003. The consolidated financial statements include the accounts of Analytical Surveys, Inc. (“ASI”, “we”, “our” or the “Company”) and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain information and note disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been omitted. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K/A for the year ended September 30, 2003.

The consolidated balance sheet as of September 30, 2003 and the consolidated statements of operations for the three months and six months ended March 31, 2004 and the statements of stockholders’ equity and cash flows for the six months ended March 31, 2003 have been restated to properly account for a conversion feature of our convertible senior secured note and related warrants that were issued on April 2, 2002.

The consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary to present fairly the financial position of ASI, and its subsidiaries at March 31, 2004, the results of their operations for the three and six months ended March 31, 2004 and 2003 and cash flows for the six months ended March 31, 2004 and 2003.

All shares and per share amounts have been adjusted to reflect the Company’s one-for-ten reverse stock split effected in October 2002.

Stock Based Compensation. As permitted by Statement on Financial Standards (“SFAS”) No. 123, we account for our stock-based compensation utilizing the intrinsic-value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. No stock-based employee compensation expense related to our stock option plans is reflected in net loss, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Pro forma information regarding net loss and loss per share is required by SFAS No. 148. This information has been estimated at the date of grant using the fair value method.

During the quarter ended March 31, 2004, we recognized approximately $2,400 in compensation expense related to inducement stock options that we granted to our new Chief Executive Officer on March 22, 2004. The inducement options were not issued pursuant to our stock option plans. The options, which vest over a twelve-month period, provide for the purchase of 75,000 shares of common stock at an exercise price equal to $1.50 per share, which was below the market value of $2.82 on the date of issuance.

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2. Earnings Per Share

Basic earnings per share is computed by dividing earnings available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share include the effects of the potential dilution of outstanding options, warrants, and convertible debt on our common stock, determined using the treasury stock method.

All dilutive common stock equivalents are reflected in our earnings per share calculation; the conversion of 786,607 shares under the convertible debt agreement is antidilutive for the three-month period ended March 31, 2004. Additionally, for the three-month periods ended March 31, 2004 and 2003, potential dilutive common shares under the warrant agreement, an inducement option, and stock option plans were not included in the calculation of diluted earnings per share as these shares were antidilutive.

3. Impact of Recently Issued Accounting Pronouncements

In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure – an Amendment of SFAS 123”. SFAS No. 148 provides additional transition guidance for those entities that elect to voluntarily adopt the provisions of SFAS No. 123, “Accounting for Stock Based Compensation”. Furthermore, SFAS No. 148 mandates new disclosures in both interim and year-end financial statements of the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective

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for fiscal years beginning after December 15, 2002. We adopted SFAS No. 148 on April 1, 2003. We do not expect to change to using the fair value based method of accounting for stock-based employee compensation; and therefore, adoption of SFAS No. 148 is expected to impact only our disclosures and not our financial results. See Note 1.

In May 2003, the FASB issued SFAS No. 150, “Accounting For Certain Financial Instruments with Characteristics of Both Liabilities and Equity” which establishes standards for how an issuer of financial instruments classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) if, at inception, the monetary value of the obligation is based solely or predominantly on a fixed monetary amount known at inception, variations in something other than the fair value of the issuer’s equity shares or variations inversely related to changes in the fair value of the issuer’s equity shares. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 required the reclassification of the redeemable preferred stock as debt and future preferred stock dividends to be classified as interest expense. Effective July 1, 2003, we reclassified mandatorily redeemable shares that were issued prior to May 31, 2003 as liabilities. The total amount of the reclassification was $1.3 million.

4. Accrued Payroll and Related Benefits

Our accrued payroll and related benefits are summarized as follows (in thousands).

5. Debt

Our debt is summarized as follows (in thousands).

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On April 2, 2002, we completed the sale of a $2.0 million senior secured convertible note (“Note”) and warrants to purchase our common stock to Tonga Partners, L.P. (“Tonga”). The Note, which carries a face value of $2 million, matures on April 2, 2005, and accrues interest on its face value at an annual rate of 5.00%. Accrued interest is not payable in cash but is to be converted into common stock upon a voluntary conversion date or maturity of the Note as described below. We recorded the Note at $1.664 million reflecting a discount after giving effect to the $200,000 and $136,000 estimated fair value of the warrants and conversion feature, respectively (“derivative features”) which were recorded as current liabilities.

The provisions of the Note and the warrants allow for net cash settlement by the holder of the Note’s conversion feature and warrants if a registration statement registering the shares issuable upon conversion of the Note is not declared effective within 150 days after filing such registration statement with the SEC, which filing must occur on or before December 31, 2003. As a result, both the warrants and the Note’s conversion feature (“derivative features”) are classified as current liabilities.

The original carrying value of the Note is being accreted to its face value as we record interest expense over its three-year term at a rate of $28,000 per fiscal quarter. The rate of interest on the Note is 12.5%. The $336,000 current liability will be adjusted during the Note’s three-year term and will be increased or decreased to reflect the fair value of the derivatives at the end of each fiscal quarter. The liability will be reduced to $0 upon maturity or other disposition of the Note, and we will recognize net other income totaling $336,000 during the term of the Note, but not in accordance with the rate at which we record interest expense. The adjustments will result in other income or expense and will fluctuate in accordance with the changes in the fair value of our common stock. Accordingly, our quarterly results will vary in accordance with these fluctuations as we record non-cash expense or gains as a result of the increase or decrease in the fair value of the derivative features.

The carrying value of the Note at March 31, 2004, is $1.588 million and represents the $1.7 million outstanding principal less the unearned discount. The unearned discount represents the estimated fair value of the derivative features of $336,000 less accretion totaling $224,000 as of March 31, 2004.

The fair value of the derivative features totaled $204,000, $260,000 and $207,000 on March 31, 2004, December 31, 2003, and September 30, 2003, respectively. Accordingly, we recorded other income totaling $56,000 and $3,000 for the three- and six-month periods ended March 31, 2004. The fair value of the derivative features decreased from $246,000 on September 30, 2002 to $182,000 on December 31, 2002, and increased to $584,000 on March 31, 2003. Accordingly, we recorded other income totaling $64,000 for the three-month period and other expense totaling $402,000 for the six-month period ended March 31, 2003.

The Note is convertible at any time into our common stock (“Common Stock”) at a price (“Conversion Price”) equal to the least of (i) $4.00, (ii) 90% of the average closing bid prices of the Common Stock for the 90 trading days ending the trading date immediately preceding the

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closing date, and (iii) 90% of the average closing bid prices for the three trading days having the lowest closing bid price during the 20 trading days immediately prior to the conversion date. Accordingly, the Conversion Price and number of shares issuable upon conversion of the note will vary in accordance with the changes in the closing bid price of our Common Stock. In any event, the number of shares issuable upon full conversion of the Note must constitute at least 38% of the issued and outstanding shares, on a fully diluted basis, as of the date of full conversion. Additionally, the number of shares issuable upon conversion of the Note and exercise of warrants are to be no less than 55% of the outstanding Common Stock (unless Tonga exercises the warrants in a cashless exercise where Tonga uses the value of some of the warrants to pay the exercise price for other warrants).

Tonga also received warrants to purchase an additional 500,000 shares of Common Stock (subject to adjustment). One whole warrant entitles Tonga to acquire shares of Common Stock at an exercise price equal to 115% of the Conversion Price in effect on the date of the exercise the warrants. Prior to the effectiveness of a registration statement registering the underlying common stock issuable upon exercise of the warrants, Tonga has the right to exercise the warrants through a cashless exercise mechanism.

On October 29, 2003, we received from Tonga a notice of conversion of $300,000 in principal amount of the Note. On November 6, 2003, we issued 241,936 shares at a Conversion Price equal to $1.24, which represented 90% of the average closing bid prices for the three trading days having the lowest closing bid price during the 20 trading days immediately prior to October 29, 2003. We also issued 19,522 shares at the same Conversion Price for $24,208 accrued interest on the converted principal. The Note was exchanged for the shares and a $1.7 million debenture bearing the same terms. The newly issued shares increased our total common shares outstanding from 823,965 to 1,085,423. Tonga owned 24% of our outstanding shares immediately after the partial conversion.

For illustration purposes, if the $1,700,000 debenture had been converted in full on April 1, 2004, the Conversion Price would have been $2.38, and we would have issued 786,607 shares to redeem the principal and accrued interest. The Conversion Price would have been equal to 90% of the average closing bid prices of the Common Stock for the three trading days having the lowest closing bid price during the 20 trading days preceding April 1. If the warrants had been exercised on April 1, 2004, the exercise price would have been $2.74 (115% of $2.38), and the aggregate exercise price for the warrants would have been $1,370,000 for the issuance of 500,000 shares of Common Stock. Tonga would have owned 65% of our outstanding shares immediately after such full conversion and warrant exercise.

On December 30, 2003, we filed a Registration Statement Form S-3 to register the shares issued in November 2003, as well as shares issuable pursuant to the conversion of the Note and exercise of the warrant. Tonga may accelerate the Note if the Registration Statement is not declared effective by the Securities and Exchange Commission (“SEC”) on or before May 28, 2004, which is 150 days after the filing date.

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We are generally restricted from issuing additional equity securities without Tonga’s consent, and Tonga has a right of first refusal as to certain subsequent financings. The note is subject to mandatory conversion in three years and is secured by all of our assets. As part of the transaction, for a period of three years from the date of the Note, Tonga has the right to appoint a majority of our board of directors. Tonga has appointed three members to the Board and as a result, controls ASI. In addition, upon exercise of the warrants and conversion of the Note, Tonga will own a majority of the Common Stock, thereby giving Tonga additional control over ASI.

6. Redeemable Preferred Stock

On December 28, 2001, we issued 1.6 million shares of no par value Series A Preferred Stock with a face value of $3.2 million, pursuant to the extinguishment of a bank credit agreement (“Agreement”). We recorded this preferred stock at a fair market value of $300,000 as described below. The shares are redeemable on or before December 28, 2006. Until December 27, 2004, we are entitled to redeem the shares at $1.40 per share ($2.24 million). The redemption price increases $0.20 per year to $1.60 on December 28, 2004, $1.80 on December 28, 2005 and $2.00 on December 28, 2006.

The Agreement calls for a mandatory redemption payment of $800,000 on or before December 28, 2004, plus any accrued dividends on such shares. Since its issuance, we have accrued but not declared or paid dividends on the preferred stock. If we pay the $800,000 mandatory redemption payment on or before December 27, 2004, the redemption price will be $1.40, and we will redeem 571,428 shares of the preferred stock. We must also pay accrued dividends totaling $96,000 on the mandatory redemption date. Further, if we redeem the remaining outstanding shares on December 27, 2006, we will redeem 1,028,572 at $1.80 per share, totaling $1,851,429, plus accrued dividends totaling approximately $367,000. The preferred stock earns a dividend at the annual rate of 5.00% of the then applicable redemption price on a cumulative, non-participating basis and has a liquidation preference equal to the then applicable redemption value of shares outstanding at the time of liquidation.

The carrying value for the preferred stock is $1.725 million at March 31, 2004. The carrying value represents the estimated fair market value of the stock on the date of issuance plus issuance costs, adjusted for accretion of the difference between fair market value at the date of issuance and the redemption value at the mandatory redemption dates. The fair market value was based on the present value of required cash flows using a discount rate of 80%. We selected the discount rate based on discussions with third parties that took into account market conditions for similar securities, the current economic climate and our financial condition and performance as major factors.

Until June 30, 2003, accretion was affected by a charge to retained earnings, and the rate of accretion approximates the interest method. We adopted SFAS No. 150 on July 1, 2003, which required the reclassification of the redeemable preferred stock as debt and future preferred stock dividends as interest expense. Effective July 1, 2003, we reclassified mandatorily redeemable

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shares that were issued prior to May 31, 2003 as liabilities. The total amount of the reclassification was $1.3 million. Additionally, effective July 1, 2003, the accretion of the preferred stock is classified as interest expense.

7. Segment Information

We evaluate operations and make key strategic and resource decisions based on the operating results of our individual production centers. Segment data includes revenue, operating income, including allocated costs charged to each of the operating segments, equipment investment and project investment, which includes net accounts receivables and revenue earned in excess of billings. We have presented segment data for the three and six months ended March 31, 2003, for comparative purposes.

We have not allocated interest expense and other non-segment specific expenses to individual segments to determine our performance measure. Non-segment assets to reconcile to total assets consist of corporate assets including cash and prepaid expenses (in thousands).

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8. Litigation and Other Contingencies

On June 26, 2002, two of our shareholders, the Epner Family Limited Partnership and the Braverman Family Limited Partnership, (“Claimants”), initiated arbitration proceedings against us. They alleged that certain representations and warranties which we made in connection with our acquisition of Cartotech in June 1998 were false because our financial condition allegedly was worse than depicted in our financial statements for 1997 and the unaudited reports for the first two quarters of fiscal 1998. In December 2003, an American Arbitration Association panel ruled in our favor, awarding zero damages to the Claimants and ordering each side to bear its own attorneys’ fees. The Claimants also filed suit against four of our former officers for alleged violation of Texas and Indiana securities laws in connection with our acquisition of Cartotech, Inc. The case was dismissed on January 30, 2004.

We submitted to our insurance carrier legal bills for the defense of the proceedings initiated by the Claimants. Defense costs totaled approximately $2,100,000. As of March 31, 2004, we had been reimbursed $1,600,000 from our insurance carrier as reimbursement of these defense costs.

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We have included approximately $450,000 of the defense costs in accounts payable as of March 31, 2004. We have also recorded a receivable representing an additional amount that we expect to receive as reimbursement of defense costs from our insurer.

Robert Montgomery, one of our former officers, filed suit in Hamilton County Superior Court, State of Indiana, on July 19, 2002, seeking recovery of unpaid commissions pursuant to the Indiana Wage Payment statute. Mr. Montgomery seeks recovery of $67,611 in unpaid commissions, treble damages, costs interest and attorney’s fees. We are vigorously defending this lawsuit.

We are also subject to various other routine litigation incidental to our business. Management does not believe that any of these routine legal proceedings would have a material adverse effect on our financial condition or results of operations.

9. Concentration of Credit Risk

At March 31, 2004, we had multiple contracts with four customers that represented 86% (46%, 18%, 12% and 10%, respectively) of the total balance of net accounts receivable and revenue in excess of billings. Revenues from these customers for the three-month period ended March 31, 2004 were 72% (15%, 37%, 11% and 9%, respectively) of total revenue. Revenues from these customers for the six-month period ended March 31, 2004 were 73% (17%, 34%, 9% and 12%, respectively) of total revenue. At September 30, 2003, three of those customers represented 73% (58%, 7% and 8%, respectively) of the total balance of net accounts receivable and revenue in excess of billings. Billing terms are negotiated in a competitive environment and are based on reaching project milestones. We anticipate that sufficient billing milestones or contract completion will be achieved during fiscal 2004 and the first quarter of fiscal 2005 such that the majority of revenue in excess of billings for these customer contracts will be collected.

10. Liquidity

The accompanying financial statements have been prepared on a going concern basis that contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. During the fiscal years of 2000 through 2004, we experienced significant operating losses with corresponding reductions in working capital and net worth, excluding the impact of debt forgiveness, and we do not currently have a line of credit in place to support operating cash flow requirements. Our revenues and backlog have also decreased substantially during the same period. The Note also has certain immediate call provisions that are outside of our control, and if triggered and exercised, would make it difficult for us to meet accelerated debt payments. These factors, among others, raise substantial doubt about our ability to continue as a going concern.

To address the going concern issue, we have implemented financial and operational restructuring plans designed to improve operating efficiencies, reduce and eliminate cash losses and position ASI for profitable operations. The consolidation of our production operations to two solution centers has resulted in lower general and administrative costs and improved operating

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efficiencies. Additionally, the relocation of our corporate headquarters has resulted in additional savings realized with a smaller corporate staff and efficiencies in occupancy and travel related expenses. Our sales and marketing team is pursuing market opportunities in both our traditional digital mapping and newly launched data management initiatives. We continue to focus on cost control as we develop the data management initiative. We have made several changes to our management team and strengthened our focus on operations and future strategies.

The financial statements do not include any adjustments relating to the recoverability of assets and the classifications of liabilities that might be necessary should we be unable to continue as a going concern. However, management believes that our continued turnaround efforts, if successful, will improve operations and generate sufficient cash to meet our obligations in a timely manner.

Item 2. Management’s Discussion and Analysis and Results of Operations.

THE DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY SET FORTH BELOW SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS FORM 10-Q. THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS FORM 10-Q THAT ARE NOT PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. WHEN USED IN THIS FORM 10-Q, OR IN THE DOCUMENTS INCORPORATED BY REFERENCE INTO THIS FORM 10-Q, THE WORDS “ANTICIPATE,” “BELIEVE,” “ESTIMATE,” “INTEND” AND “EXPECT” AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, THE STATEMENTS REGARDING THE COMPANY’S STRATEGY, FUTURE SALES, FUTURE EXPENSES, FUTURE LIQUIDITY AND CAPITAL RESOURCES. ALL FORWARD-LOOKING STATEMENTS IN THIS FORM 10-Q ARE BASED UPON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE OF THIS FORM 10-Q, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY’S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS FORM 10-Q. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES (“CAUTIONARY STATEMENTS”) INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN ITEM 1. BUSINESS—”RISK FACTORS” AND ELSEWHERE IN THE COMPANY’S ANNUAL REPORT ON FORM 10-K, WHICH ARE INCORPORATED BY REFERENCE HEREIN AND IN THIS REPORT. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY, OR PERSONS ACTING ON THE COMPANY’S BEHALF, ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.

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Overview

Founded in 1981, we are a provider of data conversion and digital mapping services to users of customized geographic information systems. Since fiscal 2000, our operating results have been affected by a downturn in macroeconomic and industry market conditions and increased competition primarily from offshore competitors. These factors have resulted in a reduction of timely order flow and a corresponding reduction in revenue generated and continued operating losses. In response to reduced demand, we have reduced the size of our operations as well as our general and administrative functions. We added $1.2 million in new contracts during the quarter ended March 31, 2004. We must continue to enter into new contracts in order to achieve profitability.

Our operating results have also been adversely affected by litigation resulting from the restatement of our financial statements for fiscal 1999, requiring the use of both financial resources and management’s time and focus. The final claim against us related to this matter was resolved in December 2003 when an arbitration panel ruled in our favor.

Our independent auditors issued a going concern qualification on our financial statements for each fiscal year since the fiscal 2000 results were reported. The going-concern qualification, which expressed substantial doubt about our ability to continue as a going concern, was based on the significant operating losses reported in fiscal 2003 and 2002 and a lack of external financing to fund working capital and debt requirements.

On December 30, 2003, we filed a Registration Statement on Form S-3 to register the shares issued and issuable pursuant to the conversion of our senior secured Note and exercise of the related warrants. Tonga may accelerate the Note if the Registration Statement is not declared effective by the Securities and Exchange Commission (“SEC”) on or before May 28, 2004, which is 150 days after the filing date. If a registration statement is not effective on or before May 28, 2004, Tonga may accelerate the Note.

The Note was originally recorded at $1.664 million reflecting a discount after giving effect to the $336,000 estimated fair value of the derivative features, which were recorded as current liabilities. The carrying value is being accreted to face value as we record interest expense over the Note’s three-year term at a rate of $28,000 per fiscal quarter and the $336,000 current liability will be increased or decreased to reflect the fair value of the derivatives at the end of each fiscal quarter. The liability will be reduced to $0 upon maturity or other disposition of the Note, and we will recognize net other income totaling $336,000 during the term of the Note, but not in accordance with the rate at which we record interest expense. The adjustments will result in other income or expense and will fluctuate in accordance with the changes in the fair value of our common stock. Accordingly, our quarterly results will vary in accordance with these fluctuations as we record non-cash expense or gains as a result of the increase or decrease in the fair value of the derivative features.

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We recognize revenue using the percentage of completion method of accounting on a cost-to-cost basis. For each contract, an estimate of total production costs is determined and these estimates are reevaluated monthly. Production costs consist of internal costs, primarily salaries and wages, and external costs, primarily subcontractor costs. Internal and external production costs may vary considerably among projects and during the course of completion of each project. At each accounting period, the percentage of completion is based on production costs incurred to date as a percentage of total estimated production costs for each of our contracts. This percentage is then multiplied by the contract’s total value to calculate the sales revenue to be recognized. The percentage of completion is affected by any factors that influence either the estimate of future productivity or the production cost per hour used to determine future costs. We recognize losses on contracts in the period such loss is determined. Sales and marketing expenses associated with obtaining contracts are expensed as incurred.

We experience annual and quarterly fluctuations in production costs, salaries, wages and related benefits and subcontractor costs. These fluctuations are the result of various factors, including: worker utilization and productivity; availability and quality of customer required deliverables and information; customer responsiveness and turnaround on inquires and deliveries; and weather conditions that impact ground survey requirements. We utilize InfoTech Enterprises Ltd., an India-based company, for more than 90% of our offshore production services. These offshore services currently represent less than 10% of our total production costs.

Backlog increases when new contracts are signed and decreases as revenues are recognized. As of March 31, 2004, our backlog was $7.2 million, $5 million of which we expect to fill in the remaining six months of fiscal 2004. Backlog totaled $7.9 million at September 30, 2003 and $9.7 million at December 31, 2003. We believe backlog levels reflect changes in macroeconomic and industry market conditions. Adverse market conditions were first encountered in fiscal 2000 that have continued through fiscal 2004.

We have been awarded several projects that are greater than $2 million or longer than two years in duration, which can increase our risk due to inflation, as well as changes in schedule, customer expectations and funding availability. Our contracts are generally terminable on short notice, and while in our experience such termination is rare, there is no assurance that we will receive all of the revenue anticipated under signed contracts.

We engage in research and development activities, however these amounts are not significant and represent less than $100,000 per year. The majority of these activities occur as we develop software or design a product for a particular contract. These efforts are typically included as an integral part of our services for the particular project and, accordingly, the associated costs are charged to that project. Such custom-designed software can often be applied to projects for other customers. We retain ownership of such proprietary software or products. These amounts are not significant and represent less than 5% of our total operating expense.

We streamlined our operations throughout fiscal year 2002 and 2003, and consolidated our four main production centers to two solution centers in Texas and Wisconsin. On January 2, 2003,

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we relocated our headquarters from Indianapolis, Indiana, to our lower-cost facility in San Antonio, Texas. Beginning in 2003 and through the first two quarters of fiscal 2004, we reduced the number of corporate and administrative staff by 40%, including a reduction in the number of highly compensated administrative personnel. We currently employ approximately 117 full-time employees. We have reduced our legal and professional fees as we settled litigation against the Company. On March 22, 2004 Wayne Fuquay was appointed President and Chief Executive Officer. Livingston Kosberg, our Chairman, had served as acting Chief Executive Officer since the resignation of Norman Rokosh on February 29, 2004. We have made several changes to our management team and strengthened our focus on operations and future strategies.

Results of Operations

The following table sets forth, for the periods indicated, selected consolidated statements of operations data expressed as a percentage of sales:

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Three and Six Months Ended March 31, 2004 and 2003

Revenues. We recognize revenues as services are performed. Our revenues remained relatively constant at $3.7 million for the three month period ended March 31, 2004, as compared to the same period in fiscal 2003. Our revenues decreased 20% for the six-month period ended March 31, 2004, and totaled $6.2 million as compared to $8 million for the same period in fiscal 2003, a decrease of $1.8 million. The decrease in revenues is due to a lower number of active contracts in the fiscal 2004 period, as well as the impact of a change in the estimated percentage of completion on several contracts. The level of new contract signings in fiscal 2002 and 2003 was lower than in previous years and, as a result, revenues have decreased as well. We believe this decrease in contract signings is attributable to lower demand for and reduced spending levels in information technology products and services both in general and specific to the GIS industry.

Salaries, Wages and Related Benefits. Salaries, wages and related benefits include employee compensation for production, marketing, selling, and administrative and executive employees. Salaries, wages and related benefits decreased $720,000 and $1,602,000 for the three- and six-month periods ended March 31, 2004, respectively, as compared to the same period in fiscal 2003. The decrease was a result of reductions in our workforce related to reduced revenue volume, our decision to subcontract a portion of our production work to offshore subcontractors, and our use of domestic subcontractors to manage fluctuating labor needs.

Subcontractor Costs. Subcontractor costs include production costs incurred through the use of third parties for production tasks such as data conversion services to meet contract requirements, and field survey services. The use of domestic subcontractors enables us to better manage the fluctuations in labor requirements as we complete and begin new projects as well as during the various phases of contracts. Subcontractor costs increased $829,000 and $1,003,000 for the three- and six-month periods ended March 31, 2004, as compared to the same periods in fiscal 2003 due to our increased use of subcontractors on certain projects. A decrease in production salaries, wages and related benefits offset the increase.

Other General and Administrative Costs. Other general and administrative costs include rent, maintenance, travel, supplies, utilities, insurance and professional services. Such costs increased $15,000 and decreased $283,000 for the three- and six-month periods ended March 31, 2004, respectively, from the comparable periods in fiscal 2003. The decrease was a result of the implementation of controls, the reduced cost related to fewer locations and general and administrative employees, and lower professional fee expenses.

Depreciation. Depreciation decreased $60,000 and $119,000 in the second quarter of fiscal 2004 as compared to the fiscal 2003 quarter due to some equipment becoming fully depreciated. The replacement cost on computer equipment is significantly lower than the replaced items. Additionally, we have been able to upgrade existing equipment, which has minimized our need to purchase new equipment. Accordingly, depreciation expense has decreased in recent periods.

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Severance and Related Costs. We incurred severance expense of $115,000 and $137,000 for the three- and six-month periods ended March 31, 2004, as compared to $54,000 and $307,000 for the same periods in fiscal 2003. The expense in the fiscal 2003 periods was incurred as a result of the termination of an employment contract that provided for a significant severance payment. Severance expense in the fiscal 2004 periods was incurred as a result of changes in several positions, but lower total expense.

Interest Expense. Interest expense increased $149,000 and $314,000 in the three- and six-month periods ended March 31, 2004 as compared to the same periods in fiscal 2003. We incurred non-cash interest expense related to the senior secured promissory note and the preferred convertible stock of $181,000 and $383,000 for the three- and six-month periods ended March 31, 2004, as compared to $28,000 and $56,000 for the same periods in fiscal 2003. The increase was a result of our adoption of SFAS No. 150 effective July 1, 2003, which required that the accretion, or the increase in the carrying value, of the preferred stock, to be classified as interest expense. Prior to July 1, 2003, the accretion was recorded as a charge to retained earnings. See Note 6. We incurred interest expense on the Note that is payable only upon conversion or maturity of the Note totaling $21,000 and $44,000 for the three- and six- month periods ending March 31, 2004, as compared to $25,000 and $50,000 for the same periods in fiscal 2003. The decrease was a result of the partial conversion of the Note in October 2003. Other interest expense is related to various other debt instruments.

Other Income (Loss). Other income (expense) is incurred as a result of the increase or decrease in the fair market values of the derivative features of the Note that change proportionately with the change in the market value of our common stock. This income or expense is non-cash and non-operational in nature. We recorded other income totaling $56,000 and $3,000 for the three- and six-month periods ending March 31, 2004, as a result of the decrease in the fair market value of the derivative features of the Note at the end of each period. We recorded other expense totaling $402,000 and $338,000 as a result of the increase in the fair market value of these features for the comparable periods in fiscal 2003.

Income Taxes. Federal income tax expense for fiscal year 2004 is projected to be zero. Accordingly, an effective federal income tax rate of 0% was recorded for the three- and six-months ended March 31, 2004 and 2003. As a result of the uncertainty that sufficient future taxable income can be recognized to realize additional deferred tax assets, no income tax benefit has been recognized for the three and six months ended March 31, 2004, and 2003.

Net Loss. Our net loss of $902,000 in the second quarter of fiscal 2004 was $363,000 lower compared to the $1,265,000 net loss from the same quarter of fiscal 2003. The lower net loss is principally a result of the other expense incurred in the second quarter of fiscal 2003 as a result of marking the derivative features of the Note to fair value. Our net loss of $2,203,000 in the first six months of fiscal 2004 was slightly higher than the $2,029,000 net loss incurred in the six month 2003 period principally due to the lower level of revenue in 2004 period.

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Liquidity and Capital Resources

Table Of Contractual Obligations. Below is a schedule (by period due) of the future payments (in thousands) which we are obligated to make based on agreements in place as of March 31, 2004. The Note which matures in 2005, carries a mandatory redemption clause that provides for its conversion into Common Stock at the then-current conversion rate. See Note 5.