Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the Fiscal Year ended September 30, 2004

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)

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

SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: COMMON STOCK

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 if registrant is an accelerated filer (as defined in Rule 12 B-2 of the Act). Yes    ¨  No    x

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant is $2,500,022, based on the closing price of the Common Stock on March 31, 2004.

The number of shares outstanding of the registrant’s Common Stock, as of December 6, 2004, was 2,805,522.

Documents incorporated by reference: None

Table of Contents

TABLE OF CONTENTS

Table of Contents

PART I

Item 1. Business

Overview

Analytical Surveys, Inc. (“ASI”, “we”, “our” or the “Company”), formed in 1981, provides customized data conversion, spatial data management and technical services for the geographic information systems market. Geographic information systems (“GIS”) consist of computer software, hardware, data, and personnel that are designed to help manipulate, analyze, and present information that is tied to a spatial (geographic) location. GIS benefits users in various ways. Business and industry rely on GIS to promote enhanced infrastructure management and decision support for planning and analysis, and to provide focused development of operational needs based on efficient modeling techniques. Such systems are used by federal, state and local governments, utilities, telecommunications companies, emergency services, and other businesses to present multi-dimensional information about the physical location and characteristics of their diverse assets. We help customers by transforming or updating raw, often confusing information from multiple sources (maps, blueprints, construction drawings, databases, aerial photography, field inventory of asset attributes, satellite imagery, etc.) into a high-resolution, large-scale, richly detailed digital and visual representation on which organizations can rely to make better decisions with speed and confidence. We have historically targeted our services to utilities and state and local governments, and are implementing strategies to expand the range of GIS-related spatial data management and technical services offered to these markets.

We believe that the market for GIS systems and GIS-related services has grown due to growing awareness of the benefits of GIS technology coupled with lower hardware prices and increased software capability. Our customers today use GIS technology to:

We believe that GIS outsourcing is a growing trend that enables our customers to focus on their core competencies. We believe this trend provides us with the opportunity to leverage our GIS expertise into longer-term program contracts allowing us to maintain existing GIS systems in addition to our traditional contracts to build new GIS systems. Many utilities invested in GIS technology in the late 1990s resulting in improvements in operations and customer service levels. Our belief is that while many of these same companies desire new levels of improvement and maintenance of quality information, they are challenged to do so because of the cost of training and retaining highly specialized GIS technicians. We are GIS specialists and we believe that we are well positioned to provide such specialized services to these companies.

Our ongoing involvement with technology leaders such as Intergraph and ESRI, has kept our employees abreast of the latest GIS technology. We think that by entering into long-term outsourcing contracts with us, our customers can spare the expense and risk of developing the internal resource capability necessary to provide them with higher cost savings through an efficient implementation of the latest GIS technologies.

Global economic conditions have slowed the rate of growth in the GIS market since 2000. It is our belief that there will be delays in growth consistent with other technology-related companies until our utility customers resume significant spending on information technology products and services, but there is no guarantee that such spending will resume. Newer competition, primarily from service firms with a large labor content in India, has resulted in lower margins and increased competition in the industry. The technologies utilized by our GIS customer base continue to advance and demand a current and accurate depiction of their spatially located assets. We believe, therefore, that the long-term outlook for the GIS industry is positive and that we are well positioned to serve evolving customer needs.

We enter into long-term fixed price contracts. Payments for these contracts are often spread throughout the term of the contract and may be based on successful interim data deliveries or milestone payments. We attempt to negotiate new contracts to minimize negative cash flow and be self-funding throughout the life of the contract.

1

Table of Contents

Strategy

Our objective is to maintain and enhance our competitive position in the data conversion and digital mapping industry. This objective is reflected in the following summary of our strategy:

Turnaround Efforts. Our near-term strategy is to return to profitability and positive cash flow. To achieve this goal, we have:

Expand Business in Existing Markets. We have expanded our products and services to our existing customer base to include outsourcing services for our utility and municipal customers. We will continue to promote our services to potential customers to capitalize on the increasing sophistication and number of GIS users in our core utilities markets. In addressing our market, we have adopted a more technical focus and consultative approach to marketing and business development.

Continue to Maintain and Develop Technological and Operational Leadership. We developed and acquired proprietary software and procedures that automate portions of otherwise labor-intensive data conversion processes. This has enabled us to provide cost-effective and high-quality services on a timely basis. We will continue to develop new technology and improve existing technology and procedures. These activities will enhance our ability to expand into additional markets and further improve our production capacity and productivity. See “Research and Development”.

ASI Services

We offer a full range of services to create digital land base maps and databases of related geo-referenced information used in GIS. We use specialized computers and internally developed proprietary software to create land surveys and legal descriptions. These base maps are created using photogrammetric and cadastral mapping technologies. Once the base map is produced, links to tabular databases are created, and other geo-referenced data, such as buildings, telephone poles and zoning restrictions, are collected, verified, converted into digital format and added to the base map to create a GIS. We provide an experienced field inventory staff to collect and verify information and use computerized and manual techniques to verify and digitize data from paper sources and legacy electronic systems. Once a GIS is completed, users can view the base map and any or all of the layers of data on a computer screen and can retrieve selected data concerning any desired location appearing on the screen or all data matching one or more variables. We maintain these databases for customers on an as-needed basis.

Dispositions and Facility Consolidations and Relocations

In April 2001, we sold substantially all of our assets of the Colorado Springs, Colorado-based digital orthophotography and photogrammetric mapping facility to Sanborn Map Company for a total consideration of $10.1 million. The sale agreement contains clauses that prohibit us from competing directly with the buyer in the orthophotography and photogrammetric markets for three years. Both companies agreed to cooperate to complete customer contracts where services are provided by more than one of our production facilities. The sale allowed us to reduce debt and to refocus attention on utility and municipal mapping services.

In March 2002, we consolidated our Cary, North Carolina facility and transferred existing project work to our Texas and Wisconsin facilities. The principal activity of the North Carolina facility had been cadastral and photogrammetric mapping.

2

Table of Contents

In June 2002, we consolidated and relocated our Indianapolis, Indiana office to smaller office space. We consolidated offices in response to reduced demand for technology services in the government and utility marketplace. Existing project work in Indiana was also transferred to our Texas and Wisconsin facilities.

On January 1, 2003, we moved our corporate headquarters from Indianapolis, Indiana to San Antonio, Texas, so that the executive team could be closer in proximity to the production staff. The Indianapolis, Indiana, office was closed effective January 2, 2003.

Customers

We derive revenues primarily from two core markets: utilities and state and local governments. We also serve commercial businesses. Four of our current customers accounted for 67% of our consolidated revenues in fiscal 2004 (KeySpan Corporate Services LLC (“KeySpan”), 27%; Worldwide Services, Inc, and Intergraph (“WWS”), 16%; LogicaCNG, Inc., 12%; and Michigan Consolidated Gas Company, 12%). All four of these customers fall within our utility market. Two customers, KeySpan and WWS, accounted for 11% and 58%, respectively, or 69%, of total accounts receivable and revenue in excess of billings at September 30, 2004. The loss of any of these customers would have a material adverse effect on us. See “Risk Factors — Our customer contracts may be adversely modified, changed or terminated prior to the expiration of the contract terms” and “— Our business comes from two core markets and adverse changes in those markets could cause a reduction in the demand for our services,” and Note 9 to the consolidated financial statements.

Sales and Marketing

We market our products and services in domestic and international markets primarily through an internal sales force. We augment direct sales efforts by:

Our sales cycle is generally lengthy, as customers normally take several months to go through the bidding/planning and award phases of a GIS project. Once awarded, it generally takes 30 to 60 days until the final contract is signed. Most projects take from 6 to 24 months to complete. See “Risk Factors — We receive some business from referrals and any reduction in those referrals could effect our business”.

Subcontractors

We use subcontractors when necessary to expand capacity, meet deadlines, reduce production costs and manage workload. We engage domestic subcontractors on a project-by-project basis. In September 2004, our five-year exclusive supply agreement with InfoTech Enterprises, Ltd., an India-based company, to provide production capacity for data conversion and other related services expired. We utilized InfoTech to provide more than 90% of our offshore subcontractor services. We will continue to utilize InfoTech for offshore conversion capacity but will also engage alternate sources of labor in India. This may increase our cost of offshore services in the short term as we train a new supplier. We intend to continue to utilize offshore subcontractors for a large percentage of certain data entry production work (which work constitutes less than 10% of our total production costs) in fiscal 2005 to reduce production costs and develop new services. We also employ certain select foreign and domestic subcontractors for tasks outside our expertise, or to augment in-house capacity (such as field data surveying). See “Risk Factors — The unavailability or unsatisfactory performance of our subcontractors may affect our ability to deliver quality services to our customers,” and “ — The unsatisfactory performance or unavailability of overseas subcontractors may impact our ability to profitably perform services under existing contracts”.

Research and Development

We continue to develop new technology and to improve existing technology and procedures to enhance our ability to expand into additional markets and further improve our production capacity and productivity. Most of these activities occur as we develop software or design a product or process 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

3

Table of Contents

be applied to projects for other customers. Approximately three employees are substantially engaged in research and development efforts. The amount that we have spent on research and development over the last three fiscal years is immaterial. See “Risk Factors — We may be unable to protect our proprietary rights, permitting competitors to duplicate our products and services,” and “ — We may need to invest in research and development to remain competitive and to obtain new business”.

Competition

The GIS services business is highly competitive and highly fragmented. Competitors include small regional firms, independent firms, and large companies with GIS services divisions, customer in-house operations and international low-cost providers of data conversion services. Two of our nationally recognized competitors for conversion services are Avineon and Rolta. We also compete with numerous regional firms for conversion services and field data collection services. Because our competitors are all privately owned companies, it is difficult to determine the relative ranking in the market between our competitors and us.

We seek to compete on the basis of:

We use internally developed proprietary production software and commercially available software to automate much of the otherwise labor-intensive GIS production process. We believe this automated approach enables us to achieve more consistent quality and greater efficiencies than more manually intensive methods.

To compete against low-cost providers, we minimize costs by using offshore subcontractors for a large percentage of certain data entry production work, which work constitutes less than 10% of our total production costs. See “Risk Factors— The unavailability or unsatisfactory performance of our subcontractors may affect our ability to deliver quality services to our customers”.

Personnel

At September 30, 2004, we had approximately 109 employees compared to 135 at September 30, 2003. We reduced the workforce to align our headcount with our production and administration requirements.

We believe that retention of highly qualified managers and executive officers is critical to our ability to compete in the GIS data conversion industry. Almost all of our employees work on a full-time basis. We do not have a collective bargaining agreement with any of our employees and generally consider relations with our employees to be good. See “Risk Factors — The market for our services is highly competitive and such competition within our industry can lead to lower profit margins and reduced volume of new work,” and “ — If we are unable to retain the members of our senior management team our business operations may be adversely impacted.”

RISK FACTORS

In addition to the other information set forth in this Form 10-K the issues and risks described below should be considered carefully in evaluating our outlook and future.

Our cash flow may be insufficient to meet our operating and capital requirements.

We currently do not have a line of credit with any lender and rely solely on cash flow from operations to fund future operations and expenditures. There is no assurance that the cash flow from operations will be sufficient to meet our capital requirements. We must convert accounts receivable and amounts earned not billed to cash in excess of our operating expenses in order to meet our debt payments. On or before December 27, 2004, we must make a cash payment totaling approximately $129,500 to redeem a portion of our Series A Preferred Stock.

4

Table of Contents

Our current and former independent auditors have expressed that there is substantial doubt about our ability to continue as a going concern.

During fiscal years 2000 through 2004, we experienced significant operating losses with corresponding reductions in working capital and net worth, excluding the impact of debt forgiveness. Our revenues and backlog have also decreased substantially during the same period. Our independent auditors issued a going concern qualification on our financial statements for fiscal 2004, based on the significant operating losses reported in fiscal 2004 and prior years and a lack of external financing. Our former independent auditors issued a going concern qualification on our financial statements for fiscal 2000, 2001, 2002, and 2003. 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. As of September 30, 2004, the amount of our accumulated deficit is approximately $30 million.

Successful implementation of our turnaround efforts is required to return the Company to profitability.

The successful implementation of our turnaround efforts requires the cooperation of customers, subcontractors, vendors, lenders, outside professionals and employees. There can be no assurance that the specific strategies designed to return our operations to profitability and positive cash flow can be implemented to the extent and in the timeframe planned. We have implemented financial and operational restructuring plans designed to improve operating efficiencies, reduce and eliminate cash losses and position ourselves for profitable operations. Delays and difficulties in achieving sales targets, realizing cost savings, retaining employees and other turnaround efforts could result in continued operating losses and a decrease or loss in the value of our common stock.

The market for our services is highly competitive and such competition within our industry can lead to lower profit margins and reduced volume of new work.

As the GIS services industry evolves, additional competitors may enter the industry. In addition, other improvements in technology could provide competitors or customers with tools to perform the services we provide and lower the cost of entry into the GIS services industry. We are facing increased price competition, particularly in the utilities market, from relatively new entrants to the market, which perform their work utilizing mostly offshore labor. A number of our competitors or potential competitors may have capabilities and resources greater than ours.

Our customer contracts may be adversely modified, changed or terminated prior to the expiration of the contract terms.

Most of our revenue is earned under long-term, fixed-price contracts. Our contractual obligations typically include large projects that will extend over six months to two years. These long-term contracts entail significant risks, including:

5

Table of Contents

We experience quarterly variations in our operating results due to external influences beyond our control, such variations could result in a decreased stock value.

Our quarterly operating results vary significantly from quarter to quarter, depending upon factors such as the following:

For these reasons, period-to-period comparisons of our results of operations are not and will not be necessarily a reliable indication of future performance. The fluctuations of our operating results could result in a decreased value of our stock. We also could experience inconsistent quarterly revenues as a result of general weak economic conditions as customers defer projects or cancel planned expenditures.

We may need to invest in research and development to remain competitive and obtain new business.

We have devoted various resources to developing and acquiring specialized data collection and conversion hardware and software. In order to remain competitive, we must continue to select, invest in, acquire and develop new and enhanced technology on a timely basis. If competitors introduce new products and services embodying new technologies, or if we fail to adopt or develop new technologies or to adapt our products and services to emerging industry standards, we may be unable to obtain new business or maintain existing business. There can be no assurance that we will be successful in these efforts or in anticipating developments in data conversion technology.

We may be unable to protect our proprietary rights, permitting competitors to duplicate our products and services.

We do not have any patent protection for our products or technology. Third parties could independently develop technology similar to ours, obtain unauthorized access to our proprietary technology or misappropriate technology to which we have granted access. Because our means of protecting our intellectual property rights may not be adequate, it may be possible for a third party to copy, reverse engineer or otherwise obtain and use our technology without authorization. Unauthorized copying, use or reverse engineering of our products could result in the loss of current or future customers.

Our business comes from two core markets and adverse changes in those markets could cause a reduction in the demand for our services.

We derive our revenues primarily from two core markets, utilities and state and local governments. The ongoing consolidation and reduced technology budgets of the utilities industry has and may continue to increase competition and reduce profitability for the GIS projects of current and potential customers. Also, to the extent that utilities remain regulated, legal, financial and political considerations may constrain the ability of utilities to fund geographic information systems. Many state and municipal entities are subject to legal constraints on spending, and a multi-year contract with any such entity may be subject to termination in any subsequent year if the entity does not choose to appropriate funds for such contracts in that year. Moreover, fundamental changes in the business practices or capital spending policies of any of these customers, whether due to budgetary, regulatory, technological or other developments or changes in the general economic conditions in the industries in which they operate, could cause a material reduction in demand by such customers for the services we offer. Any such reduction in demand could have a significant adverse impact on our net revenue levels.

6

Table of Contents

The unavailability of a skilled labor force may hinder our ability to produce accurate, cost-effective solutions to meet the terms of our contracts.

Our business is labor-intensive and requires trained employees. We compete for qualified personnel against numerous companies, including more established companies with significantly greater financial resources than ours. Our business, financial condition and results of operations could be materially adversely affected if we are unable to hire qualified personnel or if we are unable to retain qualified personnel in the future. High turnover among our employees could increase our recruiting and training costs, could affect our ability to perform services and earn revenues on a timely basis and could decrease operating efficiencies and productivity. In addition, a significant portion of our costs consists of wages to hourly workers. An increase in hourly wages, costs of employee benefits or employment taxes could increase our other general and administrative costs and thereby reduce our net income.

If we are unable to retain the members of our senior management team our business operations may be adversely impacted.

Our success depends upon the continued service of our key employees: Wayne Fuquay, Chief Executive Officer, Lori Jones, Chief Financial Officer, and Hamid Akhavan, Senior Vice President – Operations. Our ability to retain our management team is an important factor in our turnaround program and our ability to pursue our overall business plan. While we have employment agreements with Mr. Fuquay and Ms. Jones, there is no assurance that we will be able to retain the services of such key personnel. We do not maintain any key personal life insurance policies. Layoffs in recent years may impair our ability to retain and recruit other key personnel. The loss or interruption of the services of Mr. Fuquay, Ms. Jones, or Mr. Akhavan could have a material adverse effect on our business, financial condition and results of operations. Our future financial results will also depend upon our ability to attract and retain highly skilled technical, managerial and marketing personnel.

The unavailability or unsatisfactory performance of our subcontractors may affect our ability to deliver quality services to our customers.

Certain of our services require us to perform tasks that are outside our expertise such as the acquisition of aerial photography. We are dependent upon the continued availability of third party subcontractors for such production tasks. We also use subcontractors for work similar to that performed by our own employees such as field data acquisition. The insufficient availability of, or unsatisfactory performance by, these unaffiliated third-party subcontractors could have a material adverse effect on our business, financial condition and results of operations due to delays in project schedules, product quality and increased costs of production.

The unsatisfactory performance or unavailability of overseas subcontractors may impact our ability to profitably perform services under existing contracts.

We utilize subcontractors in India and may from time to time use subcontractors in other overseas locations to perform certain tasks such as data conversion and photogrammetric interpretation at lower costs than could be achieved in the United States. Our ability to perform services under some existing contracts on a profitable basis is dependent upon the continued availability of our overseas subcontractors and the quality of their work. For example, India has in the past experienced significant inflation, civil unrest and regional conflicts. Events or governmental actions that would impede or prohibit the operations of our subcontractors could have a material adverse effect on us. In September 2004, we concluded a five-year exclusive agreement with InfoTech Enterprises, Ltd., an India-based company, which provided production capacity for data conversion and other related services. During the term of the agreement, InfoTech provided more than 90% of our offshore subcontractor services (which services constituted less than 10% of our total production costs). We will continue to utilize InfoTech’s services and additionally, we will obtain alternate sources of labor in India. This may increase our cost of offshore services in the short term as we train a new supplier.

We receive some business from referrals and any reduction in those referrals could affect our business.

A portion of our sales is the result of referrals derived, either directly or indirectly, from engineers, software developers and consultants in the GIS industry. We believe that our continued success in the GIS services market is dependent, in part, on our ability to maintain current relationships and to cultivate additional relationships with other industry participants. Such participants could acquire a GIS data collection or data conversion business or businesses or form other relationships with our competitors. There can be no assurance that relationships with GIS consultants will continue to be a source of business for us. Our inability to maintain such relationships or to form new relationships could reduce our ability to obtain new business and maintain existing business, thereby reducing our revenue.

We have outstanding preferred stock and “blank check” preferred stock that could be issued resulting in the dilution of share ownership.

Our Articles of Incorporation allow the Board of Directors to issue up to 2,500,000 shares of preferred stock and to fix the rights, privileges and preferences of those shares without any further vote or action by the shareholders. Our outstanding preferred

7

Table of Contents

stock holds dividend priority and liquidation preferences over shares of our common stock (“Common Stock”). However, because the outstanding preferred stock is not convertible to Common Stock, it has no potential dilutive effect on our outstanding shares of Common Stock. Nonetheless, the Common Stock will be subject to dilution if our Board of Directors utilizes its right to issue additional shares of preferred stock that is convertible into Common Stock. The rights of the holders of Common Stock are and will be subject to, and may be adversely affected by, the rights of the holders of the 258,900 shares of preferred stock that we have previously issued and any preferred stock that we may issue in the future. Any such issuance could be used to discourage an unsolicited acquisition proposal by a third party.

Our stock price is highly volatile and the purchase or sale of relatively few shares can disproportionately influence the share price.

The trading price and volume of our Common Stock has been and may continue to be subject to significant fluctuations in response to:

The trading price of our Common Stock may vary without regard to our operating performance. Historically, we have been a thinly traded stock, therefore relatively few shares traded can disproportionately influence share price.

Item 2. Property

We operate two offices in the United States. We lease approximately 17,000 square feet in San Antonio, Texas, and approximately 8,100 square feet in Waukesha, Wisconsin.

Item 3. Litigation

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, Inc., 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. The case was dismissed on January 30, 2004. Our insurer reimbursed $1.8 million of the defense costs which totaled approximately $2.1 million.

Robert Montgomery, a former officer of ASI, 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 have responded to the lawsuit and we are vigorously defending this action.

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.

8

Table of Contents

Item 4. Submission Of Matters To A Vote Of Shareholders

On September 23, 2004, at the annual meeting of shareholders, our shareholders reelected four directors to the Board of Directors and ratified the appointment of Pannell Kerr Forster of Texas, P.C. as our independent registered public accounting firm for the fiscal year ended September 30, 2004.

The following table provides the number of votes cast on each matter:

9

Table of Contents

PART II.

Item 5. Market For The Registrant’s Common Stock And Related Shareholder Matters

Since June 6, 2002 our common stock (“Common Stock”) has traded on the NASDAQ SmallCap Market under the symbol “ANLT.” As of October 1, 2004, we had approximately 4,800 holders of record. The following table sets forth the high and low closing bid prices for our Common Stock as reported on NASDAQ. Prices have been adjusted to reflect the one-for-ten reverse split effective October 2, 2002.

The high and low bid prices reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

Our April 2, 2002, we issued a senior secured convertible promissory note (“Old Note”) to Tonga Partners, L.P. (“Tonga”) in the original principal amount of $2.0 million and a warrant (“Warrant”) to purchase 500,000 shares of our Common Stock. The sale and issuance of such securities were deemed to be exempt from registration under Section 4(2) of the Securities Act of 1933. In connection with the transaction, Tonga established to our satisfaction that it is an accredited investor.

On October 29, 2003, Tonga converted $300,000 principal of the Old Note. We issued 261,458 shares of our Common Stock pursuant to the partial conversion and interest due thereon at a conversion price of $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. The $2 million note was exchanged for the shares and a $1.7 million note (“Second Note”) 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.

On June 30, 2004, we restructured the Second Note to cure an event of default that was triggered when the our Registration Statement on Form S-3 filed with the SEC on December 30, 2003, was not declared effective by the SEC as required by the terms of the Second Note. See Note 3 to the consolidated financial statements. The maturity date of the restructured $1.7 million senior secured convertible promissory note (the “Restructured Note”) and bears interest at a rate of 5% per annum with such interest accruing beginning on November 4, 2003. (The Old Note, Second Note, and Restructured Note are sometimes collectively referred to as the “Note.”) The principal amount of the Restructured Note, together with accrued and unpaid interest, is due and payable at Tonga’s option in cash or shares of our Common Stock on January 2, 2006. Tonga retained the ability to convert the Restructured Note for shares of our Common Stock at any time, waived approximately $134,000 of accrued interest on the Second Note, waived its rights to assess liquidated damages pursuant to the Second Note, relinquished its rights under the Warrant and canceled the Warrant.

On November 10, 2004, Tonga converted the Restructured Note and accrued interest into shares of our Common Stock. As provided by the terms of the Restructured Note, the conversion price was equal to 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, we issued 1,701,349 shares at the conversion price of $1.05 per share. The newly issued shares increased our total common shares outstanding from 1,104,173 to 2,805,522. Tonga owned 67% of our outstanding shares immediately after the conversion. As of November 15, 2004, Tonga had liquidated all of its holdings of our Common Stock. See Note 15 to the consolidated financial statements.

Dividends

Under the terms of our Restructured Note, we were prohibited from paying dividends on our Common Stock without consent from Tonga. As a result of Tonga’s conversion of the Restructured Note, Tonga’s consent is no longer required to pay dividends. Since

10

Table of Contents

becoming a public company, we have not declared or paid cash dividends on our Common Stock and do not anticipate paying cash dividends in the foreseeable future. We presently expect that we will retain all future earnings, if any, for use in our operations and the expansion of our business.

Equity Compensation Plan Information

The following table gives information about equity awards under our equity compensation plans. The table includes inducement options that were issued in fiscal 2004.

11

Table of Contents

Item 6. Selected Financial Data

The following selected consolidated financial data as of and for the years ended September 30, 2004, 2003, 2002, 2001, and 2000 are derived from our audited consolidated financial statements. Our historical consolidated financial statements as of September 30, 2004 and 2003 and for the years ended September 30, 2004, 2003, and 2002 are contained elsewhere in this Form 10-K. The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and the related notes thereto and with Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Form 10-K. (Amounts in thousands, except for per share data.)

12

Table of Contents

Item 7. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

The discussion of our 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-K. This Form 10-K contains forward-looking statements that involve risk and uncertainties. The statements contained in this Form 10-K 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-K, or in the documents incorporated by reference into this Form 10-K, 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 in “ Business – Overview and – Risk Factors” and statements relating to competition, management of growth, our strategy, future sales, future expenses and future liquidity and capital resources. All forward-looking statements in this Form 10-K are based upon information available to us on the date of this Form 10-K, and we assume no obligation to update any such forward-looking statements. Our actual results could differ materially from those discussed in this Form 10-K. Factors that could cause or contribute to such differences include, but are not limited to, the resolution or outcome of the lawsuits described in “Litigation” above, the effect of changes in our management and the ability to retain qualified individuals to serve in key management positions, and those discussed below, in “ Business— Risk Factors,” and elsewhere in this Form 10-K.

Overview

Founded in 1981, we are a provider of data conversion and digital mapping services to users of customized geographic information systems.

Our independent auditors, Pannell Kerr Forster of Texas, P.C., issued a going concern qualification on our financial statements for the fiscal year ended September 30, 2004. The going-concern qualification, which expressed substantial doubt about our ability to continue as a going concern, is based on the significant operating losses reported in fiscal 2004 and 2003, and a lack of external financing. Our former independent auditors, KPMG, LLP, issued a going concern qualification on our financial statements for the fiscal years ended September 30, 2003, 2002, 2001, and 2000, based on the significant operating losses reported in those fiscal years and a lack of external financing to fund working capital and debt requirements.

The conversion of the Restructured Note could have a material impact on our results for the first quarter of 2005. Management is currently evaluating the financial statement impact of the conversion. (See Note 4 and Note 15 to the consolidated financial statements.)

We experience yearly and quarterly fluctuations in production costs, salaries, wages and related benefits and subcontractor costs. These costs may vary as a percentage of sales from period to period. In September 2004, our five-year exclusive supply agreement with InfoTech Enterprises, Ltd., an India-based company, to provide production capacity for data conversion and other related services expired. We utilized InfoTech to provide more than 90% of our offshore subcontractor services (which work constitutes less than 10% of our total production costs). We will continue to utilize InfoTech for offshore conversion capacity but will also engage alternate sources of offshore subcontractor services in India. This may increase our cost of offshore services in the short term as we train a new supplier. We intend to continue to utilize offshore subcontractors for a large percentage of certain data entry production work in fiscal 2005 to reduce production costs and develop new services.

Our backlog has been impacted by changes in macroeconomic and industry market conditions. These conditions, first encountered in fiscal 2000 and which have continued through fiscal 2004, include interest rate and exchange rate stability, public sector spending levels, and the size of investment spending. We believe these adverse market conditions were and continue to be primarily caused by the recessionary economic climate, consolidation in the utility industry, and increased competition from companies with offshore operations. Backlog increases when new contracts are signed and decreases as revenues are recognized. The changes in macroeconomic and industry market conditions have resulted in a reduction of the execution of new contracts and the renewal of expiring contracts, thus causing a decrease in our backlog. At September 30, 2004, backlog was $6.5 million, $5.5 million of which we expect to fill in fiscal 2005. At September 30, 2003, backlog was $7.9 million.

A number of the projects awarded to us are greater than $2 million or longer than two years in duration, which can increase risk due to inflation, as well as changes in customer expectations and funding availability. Our contracts are generally terminable on short notice, and while we rarely experience such termination, there is no assurance that we will receive all of the revenue anticipated under signed contracts. See Item 1. “Business — Risk Factors – Our customer contracts may be adversely modified, changed or terminated prior to the expiration of the contract terms”.

Critical Accounting Policies

Revenue Recognition. 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. The estimation process requires substantial judgments on the costs over the life of the contract, which are inherently uncertain. The duration of the contracts and the technical challenges included in certain contracts affect our ability to estimate costs precisely. Production costs consist of

13

Table of Contents

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 the 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 which 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. If we underestimate the total cost to complete a project we would recognize a disproportionately high amount of revenue in the earlier stages of the contract, which would result in disproportionately high profit margins in the same period. Conversely, if we overestimate the cost to complete a project, a disproportionately low amount of revenue would be recognized in the early stages of a contract. While our contracts generally contain termination clauses they also provide for reimbursement of costs incurred to date in the event of termination.

Valuation of Accounts Receivable. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Management routinely assesses the financial condition of our customers and the markets in which these customers participate. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required.

Litigation. We are subject to various claims, lawsuits and administrative proceedings that arise from the ordinary course of business. Liabilities and costs associated with these matters require estimates and judgment based on professional knowledge and experience of management and our legal counsel. When estimates of our exposure for claims or pending or threatened litigation matters meet the criteria of SFAS No. 5, amounts are recorded as charges to operations. The ultimate resolution of any exposure may change as further facts and circumstances become known.

Income Taxes. The year 2002 was the only year out of the last three in which we have reported net income (and taxable income), and we reported a net loss in fiscal 2003 and 2004. The current and prior year losses have generated a sizeable federal tax net operating loss, or NOL, carryforward which totals approximately $25 million as of September 30, 2004.

U.S. generally accepted accounting principles require that we record a valuation allowance against the deferred tax asset associated with this NOL if it is “more likely than not” that we will not be able to utilize it to offset future taxes. Due to the size of the NOL carryforward in relation to our recent history of unprofitable operations and due to the continuing uncertainties surrounding our future operations as discussed above, we have not recognized any of this net deferred tax asset. We currently provide for income taxes only to the extent that we expect to pay cash taxes (primarily state taxes and the federal alternative minimum tax) on current taxable income.

It is possible, however, that we could be profitable in the future at levels which cause management to conclude that it is more likely than not that we will realize all or a portion of the NOL carryforward. Upon reaching such a conclusion, we would immediately record the estimated net realizable value of the deferred tax asset at that time and would then provide for income taxes at a rate equal to our combined federal and state effective rates, which would approximate 39% under current tax rates. Subsequent revisions to the estimated net realizable value of the deferred tax asset could cause our provision for income taxes to vary significantly from period to period, although our cash tax payments would remain unaffected until the benefit of the NOL is utilized.

Results Of Operations

The following table sets forth, for the fiscal years ended September 30, 2004, 2003, and 2002, selected consolidated statement of operations data expressed as a percentage of sales:

14

Table of Contents

Fiscal Years Ended September 30, 2004 and 2003

Revenues. We recognize revenues as services are performed. Revenues recorded in a period are reported net of adjustments to reflect changes in estimated profitability of each project. Revenues decreased 22.5% or $3.4 million to $11.6 million for fiscal 2004 from $15 million for fiscal 2003. The decrease in revenues is due to a lower number of active contracts in the fiscal 2004 period. 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 Benefits. Salaries, wages and benefits include employee compensation for production, marketing, selling, administrative, and executive employees. Salaries, wages and benefits decreased 32.1% to $6.0 million for fiscal 2004 from $8.9 million for 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 4.9% to $3.7 million for fiscal 2004 from $3.5 million for fiscal 2003, and to 32.0% from 23.6%, respectively, as a percentage of revenues. The increase was due to our increased use of domestic subcontractors on certain projects. A decrease in production salaries, wages and related benefits offset the increase.

Other General and Administrative. Other general and administrative expenses include rent, maintenance, travel, supplies, utilities, insurance and professional services. Such expenses decreased 25.4% to $3.5 million for fiscal 2004 from $4.7 million for fiscal 2003. The decrease was attributable to decreases in travel and supplies that varied with the general decrease in personnel in fiscal 2004 and a reduction in professional fee expenses in fiscal 2004 as compared to fiscal 2003. Additionally, upon settlement with our insurer we released a reserve for legal fees relating to an arbitration hearing that was settled in our favor in December 2003, which resulted in a reduction to general and administrative expenses by approximately $234,000.

Depreciation and Amortization. Depreciation and amortization for fiscal 2004 decreased 43.4% to $273,000 from $482,000 for fiscal 2003 due to 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.

Severance and Related Costs. We incurred severance expense of $164,000 in fiscal 2004 and $410,000 in fiscal 2003. The expense in fiscal 2003 was incurred as a result of the termination of an employment contract that provided for a significant severance payment. Severance expense in fiscal 2004 was incurred as a result of the termination of several positions, but lower individual severance payments and lower total expense.

Other Income (Expense). Other income (expense) is comprised primarily of interest expense and other income resulting from the change in the fair value of the derivative features of the Note. Interest expense increased to $681,000 for fiscal 2004 from $401,000 in fiscal year 2003. We incurred interest expense on the Second Note and the Restructured Note that is payable only upon its conversion or maturity totaling $86,000 and $100,000 in fiscal 2004 and 2003, respectively. We also incurred non-cash interest expense related to the Note and the Preferred Stock of $104,000 and $112,000 in fiscal 2004 and 2003, respectively. Additionally, we incurred non-cash interest expense related to the dividends accrued and accretion of the Preferred Stock totaling $486,000 in fiscal 2004 as compared to $174,000 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, be classified as interest expense. Prior to July 1, 2003, the accretion was recorded as a charge to retained earnings. See Note 4 to the consolidated financial statements. Other interest expense is related to various other debt instruments.

15

Table of Contents

Other income (expense) is earned (incurred) as a result of the decrease or increase in the fair market values of the derivative features, which change proportionately with the change in the market value of our Common Stock. We recorded other income totaling $75,000 and $39,000 in fiscal 2004 and 2003, respectively, as a result of the decrease in the fair market value of the derivative features of the Restructured Note at the end of each period.

Gain on Extinguishment of Debt, Net of Tax. We recorded a $1,475,000 gain on the early redemption of 1,341,000 shares of our Preferred Stock. We paid the holders of these preferred shares a payment totaling $251,456, to redeem the shares. The carrying value of the shares on the redemption dates was approximately $1,535,000. Accrued dividends totaling approximately $191,000 were forgiven in the redemption agreement. The early redemption resulted in a gain totaling $1,475,000 and reduced the mandatory redemption payment due in December 2004, to the holders of the Preferred Stock from $800,000 to $129,450.

Income Tax Benefit. Federal income tax expense for fiscal year 2004 is projected to be zero and accordingly, we recorded an effective federal income tax rate of 0%. Federal income tax expense for fiscal year 2003 was zero. 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 fiscal 2004 and 2003.

Net Loss. Net loss available to common shareholders of $1.2 million in fiscal 2004 is a $2.7 million decrease from the $3.9 million net loss in fiscal 2003. We reduced our loss from operations in fiscal 2004 as compared to 2003 by approximately $950,000. The remainder of the decrease was a result of the $1.475 million gain on extinguishment of debt that we recorded in fiscal 2004 and the reduced accretion of the preferred stock in 2004 as compared to fiscal 2003.

Fiscal Years Ended September 30, 2003 and 2002

Revenues. We recognize revenues as services are performed. Revenues recorded in a period are reported net of adjustments to reflect changes in estimated profitability of each project. Revenues decreased 21.5% or $4.1 million to $15.0 million for fiscal 2003 from $19.1 million for fiscal 2002. This decrease was primarily due to a decline in the number and size of customer contracts.

Salaries, Wages and Benefits. Salaries, wages and benefits include employee compensation for production, marketing, selling, administrative, and executive employees. Salaries, wages and benefits decreased 31.9% to $8.9 million for fiscal 2003 from $13.1 million for fiscal 2002. This decrease was primarily due to across-the-board staff reductions. As a percentage of revenues, salaries, wages and benefits decreased to 59.6% for fiscal 2003 from 68.6% for fiscal 2002.

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, aerial photography and ground and airborne survey services. Subcontractor costs decreased 2.1% to $3.5 million for fiscal 2003 from $3.6 million for fiscal 2002. This decrease was due to a decreased number

of contracts, completing backlog that utilized subcontractor labor and the sale of our Colorado office. Subcontractor costs increased as a percentage of revenues to 23.6% for fiscal 2003 from 19.0% for fiscal 2002 principally as a result of our use of domestic subcontractors in fiscal 2003 as compared to offshore subcontractors in fiscal 2002.

Other General and Administrative. Other general and administrative expenses includes rent, maintenance, travel, supplies, utilities, insurance and professional services. Such expenses decreased 13.9% to $4.7 million for fiscal 2003 from $5.5 million for fiscal 2002. The decrease was primarily attributable to decreases in travel, supplies and certain professional services expenses, which varied with the general decrease in personnel in fiscal 2003. As a percentage of revenues, other general and administrative expenses increased slightly to 31.6% for fiscal 2003 from 28.9% for fiscal 2002.

Depreciation and Amortization. Depreciation and amortization for fiscal 2003 decreased 47.3% to $482,000 from $915,000 for fiscal 2002 due to equipment becoming fully depreciated and the consolidation from four production centers to two. As a percentage of revenues, depreciation and amortization was 3.2% for fiscal 2003 and 4.8% for fiscal 2002.

Severance and Related Costs. We incurred severance expense of $410,000 in fiscal 2003 and $97,000 in fiscal 2002. These costs represented 2.7% and 0.5% of revenues in fiscal 2003 and fiscal 2002, respectively. The expense in fiscal 2003 was incurred as a result of the termination of an employment contract that provided for a significant severance payment.

Other Income (Expense). Other income (expense) is comprised primarily of interest expense and other income resulting from the change in the fair value of the derivative features of the Note. Interest expense increased to $401,000 for fiscal 2003 from $300,000 in fiscal year 2002. This increase is due to the recognition of accretion and discount on our preferred stock as interest expense during the fourth quarter of 2003 as required by FSAS No. 150, offset by a decrease in interest paid on bank debt as a result of the

16

Table of Contents

extinguishment of bank debt in the first six months of fiscal 2002. Most of the interest expense in fiscal 2003 is non-cash in nature as it relates to accretion of discount or payment is deferred. We incurred non-cash interest expense related to the Note of $112,000 and $56,000 in fiscal 2003 and 2002, respectively. We also recorded $174,000 of non-cash interest expense in fiscal 2003 as 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 4 to the consolidated financial statements. We incurred interest expense on the Note that is payable only upon its conversion or maturity totaling $100,000 and $50,000 in fiscal 2003 and 2002, respectively. Other interest expense is related to various other debt instruments.

Other income (expense) is earned (incurred) as a result of the decrease or increase in the fair market values of the derivative features, which change proportionately with the change in the market value of our Common Stock. We recorded other income totaling $39,000 and $90,000 in fiscal 2003 and 2002, respectively, as a result of the decrease in the fair market value of the derivative features of the Note at the end of each period.

Gain on Extinguishment of Debt, Net of Tax. We recognized a gain on the extinguishment of debt of $11.7 million in fiscal 2002. Such gain is a result of the debt forgiveness related to a $1.95 million cash payment, the issuance of a $175,000 unsecured promissory note and the issuance of non-convertible preferred stock with an original fair value of $300,000 to fully retire debt of $14.1 million. This gain reflects net tax of $0 due to our estimated effective tax rate for the year.

Income Tax Benefit. We recorded an income tax benefit of $1.2 million in fiscal 2002 as a result of a recent change in federal tax regulations. We recorded zero tax expense for fiscal 2003 and 2002. Also, as a result of the uncertainty that sufficient future taxable income can be recognized to realize additional deferred tax assets, no additional income tax benefit has been recognized for fiscal 2003 and 2002.

Cumulative Effect of a Change in Accounting Principle. We elected early adoption of FSAS No. 142, Accounting for Goodwill and Other Intangible Assets, as of October 1, 2001. We determined that goodwill had been impaired under the provisions of FSAS No. 142 and we recognized a loss of $3.6 million as the cumulative effect of this change in accounting principle during fiscal 2002.

Net Earnings (Loss). Net loss available to common shareholders of $3.9 million in fiscal 2003 is an $8.5 million decrease from the $4.6 million net earnings in fiscal 2002. As discussed above, one-time non-operational items accounted for the majority of the variance.

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 over the next five years based on agreements in place as of September 30, 2004.

Historically, the principal source of our liquidity consisted of cash flow from operations supplemented by secured lines-of-credit and other borrowings. At September 30, 2004, our debt obligations included a Restructured Note (as defined below), redeemable preferred stock with a redemption value of $362,460, and other miscellaneous borrowings. A mandatory redemption payment of $129,450 is due on December 28, 2004. We do not have a line of credit and we are generally restricted from additional borrowings or issuing additional equity securities without the consent of Tonga, the holder of the Restructured Note. Tonga also has a right of first refusal as to certain subsequent financings. In November 2004, Tonga converted the Restructured Note and liquidated its holdings of our Common Stock. The conversion eliminated our obligations under the Restructured Note as disclosed below and our restrictions from seeking additional securities or issuing additional equity securities. However, there is no assurance that we will be able to obtain additional borrowings should we seek to do so.

17

Table of Contents

Our debt is summarized as follows (in thousands).

On April 2, 2002, we completed the sale of the Old Note and Warrant to purchase 500,000 shares of our Common Stock to Tonga. The Old Note, which carried a face value of $2 million, matured on April 2, 2005, and accrued interest on its face value at an annual rate of 5.00%. Accrued interest was to be converted into Common Stock upon the Old Note’s voluntary conversion date or maturity. We recorded the Old Note at $1.664 million reflecting a discount after giving effect to the $200,000 and $136,000 estimated fair value of the Warrant and the conversion feature, respectively, (“derivative features”) which were recorded as current liabilities.

On October 29, 2003, we received a notice of conversion from Tonga for $300,000 in principal of the Old 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 of accrued interest on the converted principal. The Old Note was exchanged for the shares and the $1.7 million Second Note 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.

On May 28, 2004, an event of default was triggered under the Second Note when our Registration Statement on Form S-3 filed with the SEC on December 30, 2003 to register shares of our Common Stock that were issued or are issuable pursuant to the Old Note, the Second Note, and the Warrant was not declared effective by the SEC.

On June 30, 2004, the event of default was cured when we restructured the Second Note. The $1.7 million Restructured Note bears interest at a rate of 5% per annum with such interest accruing beginning on November 4, 2003. The principal amount of the Restructured Note, together with accrued and unpaid interest, is due and payable at Tonga’s option in cash or shares of our Common Stock on January 2, 2006. Tonga retained the right to convert the Restructured Note for shares of our Common Stock at any time. Tonga waived accrued interest on the Second Note through November 3, 2004, which totaled $134,000. Tonga also waived its rights to assess liquidated damages pursuant to the Second Note, relinquished its rights under the Warrant and canceled the Warrant.

The carrying value of the Second Note immediately prior to the execution of the Restructured Note was $1.616 million, which reflected the $1.7 million face value less the $84,000 unamortized discount. Additionally, immediately prior to the execution of the Restructured Note, the fair value of the Warrant totaled approximately $67,000, and the fair value of the conversion feature of the Second Note totaled approximately $62,000. As a result of the extended term of the Restructured Note, the estimated fair value of the conversion feature increased to approximately $119,000. We recorded the Restructured Note at $1.581 million reflecting a discount for the $119,000 estimated fair value of the conversion feature, which was recorded as a current liability. This transaction resulted in a net decrease in total liabilities of approximately $180,000. The decrease consisted of $134,000 of waived interest, the $67,000 fair value of the canceled Warrant, and a $35,000 decrease in the carrying value of the Restructured Note, offset by a $57,000 increase in the fair value of the conversion feature. We recorded the $180,000 decrease in liabilities as a capital contribution pursuant to Staff Accounting Bulletin Topic 1:B.

Prior to the issuance of the Restructured Note, the carrying value of the Second Note was accreted to its face value as we recorded interest expense over its three-year term at a rate of $28,000 per quarter. The effective rate of interest on the Second Note was 12.5%. The $336,000 current liability was increased or decreased to reflect the fair value of the derivatives at the end of each quarter. The $1.581 million carrying value of the Restructured Note will be accreted to its face value as we record interest expense over the remaining eighteen-month term at a rate of approximately $20,000 per quarter. The effective interest of the Restructured Note is 12.14%. Additionally, the $119,000 current liability will be increased or decreased to reflect the fair value of the conversion feature at the end of each quarter until the Restructured Note is paid in full or is converted into Common Stock.

The fair value of the derivative features of the Second Note decreased from $207,000 on September 30, 2003, to $129,000 on June 30, 2004, prior to issuance of the Restructured Note. The fair value of the derivative feature of the Restructured Note increased $3,000

18

Table of Contents

from approximately $119,000 on June 30, 2004 to $122,000 on September 30, 2004. Accordingly, we recorded other income totaling approximately $75,000 in fiscal 2004. The fair value of the derivative features decreased from $246,000 on September 30, 2002, to $207,000 on September 30, 2003. Accordingly, we recorded other income totaling $39,000 in fiscal 2003.

On November 11, 2004, we received a notice of conversion dated November 10, 2004, from Tonga to convert the outstanding principal and accrued interest into our Common Stock at the conversion price set forth in the Restructured Note. The conversion price was $1.05, and was equal to 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 November 10, 2004. The newly issued shares increased our total common shares outstanding from 1,104,173 to 2,805,522. Tonga owned 67% of our outstanding shares immediately after the conversion. According to filings made by Tonga under Section 16 of the Exchange Act, Tonga liquidated its holdings of our Common Stock by November 15, 2004. See Note 15 to the consolidated financial statements.

The Restructured Note was secured by all of our assets. As part of the transaction, for a period of three years from the date of the Old Note, Tonga received 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. However, upon the conversion of the Restructured Note, which released all of our assets, and upon the subsequent sale of Tonga’s holdings of our Common Stock, Tonga relinquished its right to appoint directors, which may result in the appointment by us of new independent directors and relinquishment of Tonga’s control.

At September 30, 2004, 258,900 shares of Preferred Stock are outstanding and which are redeemable on or before December 28, 2006. Until December 27, 2004, we are entitled to redeem these shares at $1.40 per share, or $362,460. The redemption price increases $0.20 per year to $1.60 on December 28, 2004 ($414,240), $1.80 on December 28, 2005 ($466,020), and $2.00 on December 28, 2006 ($517,800).

On December 28, 2004, we must redeem $129,450 of the outstanding Preferred Stock. Since its issuance, we have accrued but not declared or paid dividends on the Preferred Stock. If we pay the $129,450 mandatory redemption payment on or before December 27, 2004, the redemption price will be $1.40, and we will redeem 92,464 shares of the Preferred Stock. If we redeem the remaining outstanding shares on December 27, 2006, we will redeem 166,436 shares at $1.80 per share, totaling $299,585. 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. Since its issuance, we have accrued but not declared or paid dividends on the Preferred Stock. Accrued dividends at September 30, 2004, totaled approximately $42,000.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Since fiscal 2000, we have experienced significant operating losses with corresponding reductions in working capital. Our revenues and backlog decreased significantly during that time. These factors, among others, have resulted in our independent auditors issuing an audit opinion on the September 30, 2004, financial statements that expressed substantial doubt about our ability to continue as a going concern.

To address the going concern issue, management implemented financial and operational restructuring plans designed to improve operating efficiencies, reduce and eliminate cash losses, and position us for profitable operations. Financial steps included restructuring our bank debt through the issuance of preferred stock and convertible debt, subsequent collection of the federal income tax refund and sale of non-core assets. Operational steps included the consolidation of production services to two solution centers, reduction of corporate and non-core spending activities, outsourcing certain components of projects, and deploying a new sales and marketing team. In fiscal 2004, we retired 84% of our preferred stock for 12% of its redemption value and accrued dividends. We also restructured our convertible debt by issuing the Restructured Note to cure an event of default and reduced the total interest payable thereon. Tonga’s conversion of the Restructured Note in November 2004 eliminated liabilities totaling approximately $1,786,000. We will further reduce our occupancy expenses in fiscal 2005 when the lease on our corporate headquarters expires and we are able to relocate to more efficient and appropriate facilities.

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, we believe that our turnaround efforts, if successful, will improve operations and generate sufficient cash to meet our obligations in a timely manner.

In the absence of a line of credit and because of our inability to secure debt on terms that would be considered reasonable based on our recent operating history, we depend on internal cash flow to sustain operations. Internal cash flow is significantly affected by customer contract terms and progress achieved on projects. Fluctuations in internal cash flow are reflected in three contract-related accounts: accounts receivable; revenues in excess of billings; and billings in excess of revenues. Under the percentage of completion method of accounting:

19

Table of Contents

These accounts, which represent a significant investment by us in our business, affect our cash flow as projects are signed, performed, billed and collected. At September 30, 2004, we had multiple contracts with four customers, the aggregate of which accounted for 67% of our consolidated revenues in fiscal 2004. Revenues from these four customers accounted for 68% of our consolidated revenues in fiscal 2003. Two customers accounted for 69% of total accounts receivable and revenue in excess of billings at September 30, 2004 (Worldwide Services (58%) and Keyspan (11%)). Worldwide Services also represented 58% of the total balance of net accounts receivable and revenue in excess of billings at September 30, 2003. Billing terms are negotiated in a competitive environment and, as stated above, are based on reaching project milestones. We anticipate that sufficient billing milestones will be achieved during fiscal 2005 such that revenue in excess of billings for these customer contracts will begin to decline.

In order to meet our short-term cash requirements we must collect more cash from our customers than we pay to our employees and suppliers. To meet our long-term cash requirements, we must complete certain projects in fiscal 2005 and 2006 that are related to the balance of revenues in excess of billings at September 30, 2004, in order to generate sufficient cash flow to fund operations and expenditures and to meet our debt requirements. We anticipate that the successful completion of these projects will reduce the balance of unearned revenue and generate cash sufficient to meet both our short-term and long-term debt obligations. We expect that we will be able to complete a majority of these contracts by June 30, 2005, but there can be no assurance that market conditions or other factors may prevent us from doing so or that the cash generated will be equal to the amount that we currently anticipate. If we are unable to complete the contracts and generate cash by earning and collecting our unearned revenues, we will be forced to obtain additional financing and/or restrict capital and operating expenditures to match available resources. If these actions are not sufficient, and we are not able to meet our commitments when due, then we will be forced to liquidate assets and repay our secured creditors with the proceeds.

Our operating activities used $757,000 and $753,000 cash in fiscal 2004 and 2003, respectively, and provided positive cash flow of $2.3 million in fiscal 2002. Contract-related accounts described in the previous paragraph declined $3.0 million, $1.5 million, and $6.0 million in fiscal 2004, 2003, and 2002, respectively. Accounts payable and accrued expenses decreased $1.8 million in fiscal 2004, increased $0.5 million in fiscal 2003 and decreased $2.0 million in fiscal 2002. Prepaid expenses remained relatively constant in fiscal 2004 and 2003 and decreased by $0.5 million in fiscal 2002.

Cash provided by investing activities principally consisted of proceeds from sales of assets, offset by the purchases of equipment and leasehold improvements. We purchased equipment and leasehold improvements totaling $23,000, $156,000, and $434,000 in 2004, 2003, and 2002, respectively. In fiscal 2002, we generated $452,000 cash from the sale of assets.

Cash used by financing activities for fiscal years 2004, 2003, and 2002, was $310,000, $271,000, and $561,000, respectively. Financing activities in 2004 included the early redemption of our preferred stock, using $251,000 cash to retire the debt instruments and accrued dividends that had a carrying value of $1.7 million. Financing activities in 2002 consisted of a final note payment on our bank debt and payments on miscellaneous borrowings of approximately $2.6 million.

Selected quarterly financial data for the years ended September 30, 2004 and 2003 (in thousands, except per share amounts):

20

Table of Contents

Impact Of Recently Issued Accounting Pronouncements

In December 2002, the 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 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 the disclosures, not our financial results. See Note 7 to the consolidated financial statements.

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. Effective July 1, 2003, we adopted SFAS No. 150, which resulted in the reclassification of $1.3 million of redeemable preferred stock issued prior to May 31, 2003, to debt. Future preferred stock dividends will be classified as interest expense.

There may be potential new accounting pronouncements or regulatory rulings which may have an impact on our future financial position and results of operations, in particular, an accounting pronouncement or other regulatory ruling related to the accounting for employee stock options and employee stock purchase plans as an expense. On March 31, 2004, the FASB issued an Exposure Draft, “Share-Based Payment – An Amendment of FASB Statements No. 123 and 95” (proposed FAS 123R), which currently is expected to be effective for public companies in periods beginning after June 15, 2005. We would be required to implement the proposed standard no later than the quarter that begins July 1, 2005. The cumulative effect of adoption, if any, applied on a modified prospective basis, would be measured and recognized on July 1, 2005. FAS 123R would eliminate the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25 (or APB 25), “Accounting for Stock Issued to Employees,” and would instead require companies to recognize compensation expense using a fair-value based method, for costs related to share-based payments including stock options and employee stock purchase plans. The FASB expects to issue a final standard by December 31, 2004. The adoption of FAS 123R could materially impact our results of operations.

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

We may from time to time employ risk management techniques such as interest rate swaps and foreign currency hedging transactions. None of these techniques is used for speculative or trading purposes and the amounts involved are not considered material. Short-term interest rate changes would have little impact on interest expense due to our lack of any material variable interest rate debt.

Item 8. Financial Statements And Supplementary Data

21

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Analytical Surveys, Inc.

We have audited the accompanying consolidated balance sheet of Analytical Surveys, Inc. and Subsidiaries as of September 30, 2004, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Analytical Surveys, Inc. and Subsidiaries as of September 30, 2004, and the results of their operations and their cash flows for the year then ended in conformity with U. S. generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 14 to the consolidated financial statements, the Company has suffered significant operating losses in 2004 and prior years and does not currently have external financing in place to fund working capital requirements, which raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to this matter are also described in Note 14. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ PANNELL KERR FORSTER OF TEXAS, P.C.

November 19, 2004

Houston, Texas

22

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Analytical Surveys, Inc.:

We have audited the accompanying consolidated balance sheet of Analytical Surveys, Inc. and subsidiaries as of September 30, 2003, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for the years ended September 30, 2003 and 2002. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 financial position of Analytical Surveys, Inc. and subsidiaries as of September 30, 2003, and the results of their operations and their cash flows for the years ended September 30, 2003 and 2002, in conformity with U.S. generally accepted accounting principles.

As discussed in note 1(e) to the consolidated financial statements, the Company changed its method of accounting for goodwill in 2002.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 14 to the consolidated financial statements, the Company has suffered significant operating losses in 2003 and 2002 and does not currently have any external financing in place to fund working capital and debt requirements, which raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to this matter are also described in note 14. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

KPMG LLP

San Antonio, Texas

December 22, 2003

23

Table of Contents

ANALYTICAL SURVEYS, INC.

AND SUBSIDIARIES

Consolidated Balance Sheets

September 30, 2004 and 2003

(In thousands)

See accompanying notes to consolidated financial statements.

24

Table of Contents

ANALYTICAL SURVEYS, INC.

AND SUBSIDIARIES

Consolidated Statements of Operations

Years ended September 30, 2004, 2003, and 2002

(In thousands, except per share amounts)