CASPIAN SERVICES INC - FORM 10-Q

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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, 2010

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

For the Transition Period From ________ to _________

Commission File Number 000-33215

CASPIAN SERVICES, INC.

(Exact name of registrant as specified in its charter)

Nevada			87-0617371
(State or other jurisdiction of			(I.R.S. Employer
incorporation or organization)			Identification No.)

257 East 200 South, Suite 490
Salt Lake City, Utah			84111
(Address of principal executive offices)			(Zip Code)

(801) 746-3700

(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 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	o

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	o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)
		Yes	o	No	o

Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, a non-accelerated filer or a smaller public company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reportng company)	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)	Yes	o	No	x

As of May 14, 2010, the registrant had 51,523,542 shares of common stock, par value $0.001, issued and outstanding.

CASPIAN SERVICES, INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements		Page

	Condensed Consolidated Balance Sheets (Unaudited) as of March 31, 2010 and September 30, 2009	3

	Condensed Consolidated Statements of Operations (Unaudited) for the
	three and six months ended March 31, 2010 and 2009	4

	Condensed Consolidated Statements of Cash Flows (Unaudited) for the
	six months ended March 31, 2010 and 2009	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17

Item 3. Qualitative and Quantitative Disclosures About Market Risk		31

Item 4. Controls and Procedures		32

PART II — OTHER INFORMATION

Item 1. Legal Proceedings		33

Item 1A. Risk Factors		34

Item 6. Exhibits		34

Signatures		34

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

CASPIAN SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands, except share and per share data)
		March 31,		September 30,
		2010		2009
ASSETS
Current Assets
Cash	$	12,607	$	29,222
Trade accounts receivable, net of allowance of $2,299 and $887, respectively		13,949		26,403
Trade accounts receivable from related parties, net of allowance of $2,802 and $2,731, respectively		898		812
Other receivables, net of allowance of $287 and $236, respectively		1,820		638
Notes receivable from related parties		16		99
Inventories		1,454		1,255
Inventories held for sale, net of allowance of $385 and $375, respectively		1,632		1,596
Prepaid taxes		1,481		1,000
Advances paid		1,693		438
Deferred tax assets		2,606		975
Prepaid expenses and other current assets		1,451		693
Total Current Assets		39,607		63,131
Vessels, equipment and property, net		84,193		77,191
Drydocking costs, net		937		1,316
Goodwill		4,497		4,383
Intangible assets, net		142		129
Long-term prepaid taxes		4,913		3,400
Investments		611		443
Long-term other receivables, net of current portion		1,165		1,124
Total Assets	$	136,065	$	151,117

LIABILITIES AND EQUITY
Current Liabilities
Accounts payable	$	4,524	$	6,432
Accounts payable to related parties		68		5,676
Accrued expenses		1,399		1,530
Accrued taxes		1,415		2,735
Deferred revenue		-		45
Long-term debt - current portion		1,233		7,308
Total Current Liabilities		8,639		23,726
Long-term debt - net of current portion		53,528		53,110
Long-term derivative put option liability		10,000		10,000
Long-term deferred revenue		3,355		-
Long-term deferred income tax liability		1,268		1,299
Total Liabilities		76,790		88,135
Equity
Common stock, $0.001 par value per share; 150,000,000 shares authorized;
51,523,542 and 51,527,542 shares issued and outstanding, respectively		52		52
Additional paid-in capital		64,520		64,415
Retained earnings		8,530		14,821
Accumulated other comprehensive loss		(13,899)		(16,048)
Equity (deficit) attributable to Caspian Services, Inc. Shareholders		59,203		63,240
Equity attributable to noncontrolling interests		72		(258)
Total Equity		59,275		62,982
Total Liabilities and Equity	$	136,065	$	151,117

See accompanying notes to the condensed consolidated financial statements.

CASPIAN SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share data)

		For the Three Months Ended March 31			For the Six Months Ended March 31,
	2010		2009		2010		2009
Revenues
Vessel revenues (which includes $4 and $1,699, respectively for the three months and $661 and $1,930, respectively for the six months ended March 31, 2010 from related parties)	$	3,939	$	2,127	$	9,090	$	11,415
Geophysical service revenues		6,176		4,656		14,083		18,634
Marine base service revenues and product sales		420		256		780		571
Total Revenues		10,535		7,039		23,953		30,620

Operating Expenses
Vessel operating costs		3,838		4,214		8,323		11,057
Cost of geophysical service revenues (which includes $0 and $0, respectively for the three months and $0 and $3,596, respectively for the six months ended March 31, 2010 to related parties)		2,188		3,301		6,530		12,414
Cost of marine base service and product sold		172		164		372		352
Depreciation and amortization of dry-dock costs		2,269		2,186		4,008		4,813
General and administrative expense		4,250		3,825		9,001		8,078
Total Costs and Operating Expenses		12,717		13,690		28,234		36,714
Loss from Operations		(2,182)		(6,651)		(4,281)		(6,094)

Other Income (Expense)
Interest expense		(1,299)		(704)		(1,971)		(1,309)
Foreign currency transaction loss		(556)		(477)		(1,038)		(764)
Interest income		5		124		10		125
Income/(loss) from equity method investees		99		(22)		154		(128)
Other non-operating income, net		62		153		44		582
Net Other Expense		(1,689)		(926)		(2,801)		(1,494)

Loss Before Income Tax		(3,871)		(7,577)		(7,082)		(7,588)
Benefit from (provision for) income tax		(114)		1,065		888		481
Net loss		(3,985)		(6,512)		(6,194)		(7,107)
Net loss (income) attributable to noncontrolling interests		403		189		(97)		334
Net loss attributable to Caspian Services, Inc	$	(3,582)	$	(6,323)	$	(6,291)	$	(6,773)
Basic Loss per Share	$	(0.07)	$	(0.12)	$	(0.12)	$	(0.13)
Diluted Loss per Share	$	(0.07)	$	(0.12)	$	(0.12)	$	(0.13)

See accompanying notes to the condensed consolidated financial statements.

CASPIAN SERVICES, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
	For the Six Months
	Ended March 31,
	2010		2009
Cash flows from operating activities:
Net loss	$	(6,194)	$	(7,107)
Adjustments to reconcile net loss to net cash provided by/(used in) operating activities:
Depreciation and amortization of drydocking costs		4,008		4,813
Loss on sale of property and equipment		323		36
Net (income)/loss in equity method investees		(154)		128
Foreign currency transaction loss		1,038		764
Stock based compensation		105		285
Changes in current assets and liabilities:
Trade accounts receivable		12,997		2,416
Trade accounts receivable from related parties		286		1,848
Other receivables		(1,181)		88
Inventories		(159)		2,500
Deferred expenses		-		(455)
Prepaid expenses and other current assets		(5,429)		(4,714)
Accounts payable and accrued expenses		(1,736)		(1,321)
Accounts payable to related parties		(6,237)		(879)
Accrued taxes		(1,439)		(533)
Deferred revenue		3,273		3,717
Net cash provided by/(used in) operating activities	$	(499)	$	1,586

Cash flows from investing activities:
Investment in joint venture		-		(1,376)
Purchase of intangible assets		(31)		-
Collections on notes receivable		101		-
Proceeds from sale of property and equipment		-		20
Payments to purchase vessels, equipment and property		(6,673)		(11,442)
Net cash used in investing activities	$	(6,603)	$	(12,798)

Cash flows from financing activities:
Proceeds from issuance of put option liability		-		10,000
Proceeds from issuance of long-term debt		5,000		31,100
Principal payments on notes payable - related parties		-		(600)
Principal payments on long-term debt		(12,657)		(5,429)
Net cash provided by/(used in) financing activities	$	(7,657)	$	35,071
Effect of exchange rate changes on cash		(1,856)		741
Net change in cash		(16,615)		24,600
Cash at beginning of year		29,222		4,461
Cash at end of year	$	12,607	$	29,061

Supplemental disclosure of cash flow information:
Cash paid for interest	$	42	$	366
Cash paid for income tax	$	2,075	$	1,324

Supplemental disclosure of non-cash investing and financing information:
Capitalized interest	$	895	$	803
Foreign currency translation loss capitalized into Marine Base	$	1,389	$	-

See accompanying notes to the condensed consolidated financial statements.

CASPIAN SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010 (UNAUDITED)

(Dollars in thousands, except share and per share data)

NOTE 1 — THE COMPANY AND BASIS OF PRESENTATION

Interim Financial Information — The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they are condensed and do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair and comparable presentation have been included and are of a normal recurring nature. The accompanying financial statements should be read in conjunction with the Company’s most recent annual financial statements included in the Company’s annual report on Form 10-K filed with the SEC on December 29, 2009. Operating results for the six-month period ended March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending September 30, 2010.

Principles of Consolidation — The accompanying consolidated financial statements are presented in conformity with accounting principles generally accepted in the United States of America and include operations and balances of Caspian Services, Inc. and its wholly-owned subsidiaries: Caspian Services Group Limited (“CSGL”), Caspian Services Group LLP (“Caspian LLP”), TatArka LLP (“TatArka”), Caspian Real Estate, Ltd (“CRE”), Caspian Geophysics, Ltd (“CGEO”); and include majority owned subsidiaries: CJSC Bauta (“Bauta”), Balykshi LLP (“Balykshi”) and Kazmorgeophysica CJSC (“KMG”), collectively “Caspian” or the “Company”. KMG owns a 50% non-controlling interest in Veritas-Caspian LLP (“Veritas-Caspian”). Balykshi owns a 20% interest in a joint venture, Mangistau Oblast Boat Yard LLP (“MOBY”). Ownership of 20% to 50% non-controlling interests are accounted for by the equity method. Intercompany balances and transactions have been eliminated in consolidation.

Noncontrolling Interests – The Company adopted the Financial Accounting Standards Board’s (“FASB”) revised standard on accounting for noncontrolling interests on October 1, 2009. This standard established accounting and reporting requirements for the noncontrolling interest (formerly “minority interest”) in a subsidiary and for the deconsolidation of a subsidiary. A noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity and is reported as equity in the consolidated financial statements.

Nature of Operations — The Company’s business consists of three major business segments:

Vessel Operations – Vessel operations consist of chartering a fleet of shallow draft offshore support vessels to customers performing oil and gas exploration activities in the Kazakhstan Sector of the North Caspian Sea.

Geophysical Services – Geophysical services consist of providing seismic data acquisition services to oil and gas companies operating both onshore in Kazakhstan and offshore in the Kazakhstan sector of the North Caspian Sea and the adjacent transition zone.

Marine Base Services – Marine Base Services consists of a partially completed and partially operational marine base located at the Port of Bautino on the North Caspian Sea, an operating water desalinization and bottling plant and the sale of potable water.

CASPIAN SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010 (UNAUDITED)

(Dollars in thousands, except share and per share data)

Basic and Diluted Loss Per Share – Basic loss per common share is calculated by dividing net loss by the weighted-average number of common shares outstanding. Diluted loss per common share is calculated by dividing net loss by the weighted-average number of common shares outstanding giving effect to potentially dilutive issuable common shares.

For the three and six months ended March 31, 2010, the Company had 3,607,775 options and warrants outstanding, 248,006 non-vested restricted shares outstanding and 15,969,130 potential shares related to convertible debt that were not included in the computation of diluted loss per common share because they would be anti-dilutive.

For the three and six months ended March 31, 2009, the Company had 4,500,108 options and warrants outstanding, 1,192,708 non-vested restricted shares outstanding and 14,122,609 potential shares related to convertible debt that were not included in the computation of diluted loss per common share because they would be anti-dilutive.

The following data shows the amounts used in computing basic and diluted weighted-average number of shares outstanding at March 31, 2010 and 2009:

	For the Three Months Ended		For the Six Months Ended
	March 31,		March 31,
	2010	2009	2010	2009
Basic weighted-average shares outstanding	51,523,542	51,135,042	51,523,542	51,135,042
Effect of dilutive securities and convertible debt:
Options	n/a	n/a	n/a	n/a
Non-vested restricted stock grant	n/a	n/a	n/a	n/a
Convertible debt	n/a	n/a	n/a	n/a
Diluted weighted-average shares outstanding	51,523,542	51,135,042	51,523,542	51,135,042

Concentrations of Credit Risk — The Company’s vessel operations are contracted primarily to Agip KCO service providers. Loss of this customer could have a material negative effect on the Company. Vessel charter services provided are under contract with varying terms and through various dates in 2010. However, it is possible that a loss of business could occur in the short or long term. While management expects to renew the contracts periodically, there is no assurance that this customer will renew, or will renew on terms favorable to the Company.

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables, trade receivables from related parties, other receivables and notes receivable. The Company manages its exposure to risk through ongoing credit evaluations of its customers; however, the Company generally does not require collateral. In some cases when dealing with new customers the Company requires advance payments. The Company maintains an allowance for doubtful accounts for potential losses.

CASPIAN SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010 (UNAUDITED)

(Dollars in thousands, except share and per share data)

Fair Value of Financial Instruments – The carrying amounts reported in the accompanying consolidated financial statements for other receivables, accounts and notes receivables from related parties, accounts payable to related parties and accrued expenses approximate fair values because of the immediate nature or short-term maturities of these financial instruments. The carrying amount of long-term debts and the long-term derivative put option approximates fair value due to the stated interest rates approximating prevailing market rates.

Reclassifications — Certain reclassifications have been made to the fiscal year 2009 financial statements to conform to the fiscal year 2010 presentation. The reclassifications had no effect on net loss. In accordance with the adoption of the new standards for noncontrolling interests, the Company allocated $2,022 of other comprehensive income to the noncontrolling interests.

Recent Accounting Pronouncements — In March 2009, the FASB issued guidance for revenue arrangements with multiple deliverables by providing guidance on accounting for revenue arrangements that provide for multiple payment streams. This guidance is effective for the Company for revenue arrangements entered into or materially modified after September 30, 2010. The adoption of this standard is not expected to have a material impact on the Company’s financial position or results of operations.

In June 2009, the FASB issued accounting guidance on the consolidation of variable interest entities (VIEs). This new guidance revises previous guidance by eliminating the exemption for qualifying special purpose entities, by establishing a new approach for determining who should consolidate a variable-interest entity and by changing when it is necessary to reassess who should consolidate a variable-interest entity. This guidance is effective for the Company after September 30, 2010. The adoption of this standard is not expected to have a material impact on the Company’s financial position or results of operations.

In January 2010, the FASB issued guidance that requires entities to:

·	Separately disclose the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe reasons for the transfers.

·	Present separately information about purchases, sales, issuances and settlements, on a gross basis, rather than on one net number, in the reconciliation for fair value measurements using significant unobservable inputs (Level 3).

·	Provide fair value measurement disclosures for each class of assets and liabilities.

·	Provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for fair value measurements that fall in either Level 2 or level 3.

CASPIAN SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010 (UNAUDITED)

(Dollars in thousands, except share and per share data)

This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for the Company after September 30, 2010. The adoption of this standard is not expected to have a material impact on the Company’s financial position or results of operations.

In January 2010, the FASB issued guidance related to escrowed share arrangement and the presumption of compensation. This update provides clarification when escrowed shares are considered compensation or in substance an inducement made to facilitate certain transactions. This guidance was effective upon issuance. The Company has adopted this guidance which had no impact on the Company’s operations, financial position, cash flow or disclosures.

NOTE 2 — DEVELOPMENT OF MARINE BASE

Development of Marine Base – The Company continues with development of the marine base in Bautino Bay. Construction commenced in the first fiscal quarter 2008. The first phase of the project was commissioned in November 2009 and now the base is partially operational. The official commissioning of the base is anticipated at the end of May 2010; however further construction works are expected until December 2010. The Company is currently assessing the final configuration of the base and the services to be provided to customers.

The Company has funded construction through a combination of debt and equity financing. In June 2007, the Company entered into a series of agreements with the European Bank for Reconstruction and Development (“EBRD”) under which EBRD agreed to provide $32,000 of debt financing and make an equity investment in the marine base in the amount of $10,000 in exchange for a 22% equity interest in Balykshi. The scope of the base was subsequently revised which reduced anticipated base construction costs. In response, the Company returned a portion of the funds borrowed from EBRD to reduce the anticipated total amount of the EBRD loan to $18,600. The Company expects the total cost of the base to be approximately $71,800. Funds not raised from EBRD were provided by the Company. Balykshi’s and CRE’s assets were pledged as collateral under the EBRD agreement (including bank accounts).

During the six months ended March 31, 2010 and 2009, the Company incurred construction costs of $7,846 and $7,517, respectively. The Company capitalized interest costs related to the development of the marine base in the amount of $895 and $803 for the six months ended March 31, 2010 and 2009, respectively.

The Company recognized long-term deferred revenue of $3,355 and $0 for the six months ended March 31, 2010 and 2009, respectively. This revenue represents the payment made by our MOBY joint-venture in November 2009 for the rent of land, which is occupied by MOBY’s plant. This revenue will be amortized during a 20-year period.

NOTE 3 – LONG-TERM DEBT

In fiscal 2009 the Company borrowed $23,600 from EBRD to finance construction of the marine base. The note is collateralized by property and bank accounts of Balykshi. The loan bore interest at 5.5% per annum plus the LIBOR rate at the date of interest calculation and is due in May 2015. The interest rate changed to 7% per annum starting October 2009. In November 2009 the Company repaid $11,800. During March 2010 the Company borrowed an additional $5,000 from EBRD.

CASPIAN SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010 (UNAUDITED)

(Dollars in thousands, except share and per share data)

Long-term debt consists of the following:

	March 31,		September 30,
	2010		2009
Bank loan and accrued interest at 6% plus interest calculation
base (8.80% at March 31, 2010); due July 2010; secured by	$	857	$	1,714
corporate guarantee issued by TatArka and seismic equipment

Unsecured convertible loans and accrued interest from		18,664		17,550
institutions other than banks at 13% due June 2011

Unsecured convertible loans and accrued interest from		18,065		16,960
institutions other than banks at 13% due December 2011

Bank loan and accrued interest at 7% due May 2015;		17,175		24,194
secured by property and bank accounts

Total Long-term Debt		54,761		60,418
Less: Current Portion		1,233		7,308
Long-term Debt - Net of Current Portion	$	53,528	$	53,110

NOTE 4 – STOCK BASED COMPENSATION PLANS

The Company accounts for issuances of stock-based compensation to employees in accordance with U.S. generally accepted accounting principles, which require the recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements and is measured based on the grant date fair value of the award. Compensation expense is recognized over the period during which an employee is required to provide service in exchange for the award (the vesting period).

The Company has made certain stock grants that vest as follows: i) 50% on the grant date; ii) 25% on the first anniversary of the grant date, and iii) 25% on the second anniversary of the grant date. The stock granted is also subject to a six month holding period during which the shares may not be sold.

Compensation expense charged against income for stock-based awards during the three and six months ended March 31, 2010 was $(25) and $105, as compared to $222 and $366 during the three and six months ended March 31, 2009, and is included in general and administrative expense in the accompanying financial statements.

CASPIAN SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010 (UNAUDITED)

(Dollars in thousands, except share and per share data)

A summary of the non-vested stock under the Compensation Plan at March 31, 2010 follows:

	Non-Vested	Weighted Average Grant
	Shares	Date Fair Value Per Share

Non-vested at September 30, 2009	248,006	$1.63
Stock granted	-	-
Stock vested	-	-
Stock forfeited	-	-
Non-vested at March 31, 2010	248,006	$1.63

The value of the non-vested stock under the plan at March 31, 2010 is $87. As of March 31, 2010 unrecognized stock-based compensation was $33 and will be recognized over the weighted average remaining term of 0.58 years.

NOTE 5 - EQUITY ATTRIBUTABLE TO CASPIAN SERVICES INC. AND NONCONTROLLING INTERESTS

The Company adopted the revised standard on accounting for noncontrolling interests on October 1, 2009, pursuant to which noncontrolling interests are considered a component of equity. The standard also changes the presentation and accounting for noncontrolling interests, and requires that equity/(deficit) presented in the consolidated financial statements include amounts attributable to Caspian Services, Inc. stockholders and the noncontrolling interests. The following schedule presents changes in consolidated equity attributable to Caspian Services, Inc. and the noncontrolling interests:

	FY 2010						FY 2009
			Equity						Equity
	Equity		Attributable to				Equity		Attributable to
	Attributable		Noncontrolling		Total		Attributable		Noncontrolling		Total
	To CSI		Interests		Equity		To CSI		Interests		Equity
Beginning balance, September 30, 2008 and 2009	$	63,240	$	(258)	$	62,982	$	78,284	$	2,576	$	80,860
Comprehensive income (loss):
Net income (loss)		(6,291)		97		(6,194)		(6,628)		(334)		(6,962)
Currency translation adjustment		2,149		233		2,382		(18,005)		(2,170)		(20,175)
Total comprehensive income (loss)		(4,142)		330		(3,812)		(24,633)		(2,504)		(27,137)
Amortization of unearned compensation		105		-		105		368		-		368
Ending balance, March 31, 2010 and 2009	$	59,203	$	72	$	59,275	$	54,019	$	72	$	54,091

NOTE 6 — COMMITMENTS AND CONTINGENCIES

Economic Environment — In recent years, Kazakhstan has undergone substantial political and economic change. As an emerging market, Kazakhstan does not possess a well-developed business infrastructure, which generally exists in a more mature free market economy. As a result, operations carried out in Kazakhstan can involve significant risks, which are not typically associated with those in developed markets. Instability in the market reform process could subject the Company to unpredictable changes in the basic business infrastructure in which it currently operates. Uncertainties regarding the political, legal, tax or regulatory environment, including the potential for adverse changes in any of these factors could affect the Company’s ability to operate commercially. Management is unable to estimate what changes may occur or the resulting effect of such changes on the Company’s financial condition or future results of operations.

CASPIAN SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010 (UNAUDITED)

(Dollars in thousands, except share and per share data)

Legislation and regulations regarding taxation, foreign currency translation, and licensing of foreign currency loans in the Republic of Kazakhstan continue to evolve as the central government manages the transformation from a command to a market-oriented economy. The various legislation and regulations are not always clearly written and their interpretation is subject to the opinions of the local tax inspectors. Instances of inconsistent opinions between local, regional and national tax authorities are not unusual.

Purchase Commitments – During fiscal 2008 Balykshi entered into agreements with third parties for construction services and supply of equipment related to the development of the marine base. As of March 31, 2010 the amount of purchase commitments was equal to $3,016.

NOTE 7 – RELATED PARTY TRANSACTIONS

During the six months ended March 31, 2010 and 2009 the Company incurred expenses from an entity related through common ownership (Veritas-Caspian) of $0 and $3,596, respectively for seismic services. The Company also recognized revenue from the same entity of $661 and $1,930 for vessel rental and cost reimbursement during the six months ended March 31, 2010 and 2009, respectively.

During the three months ended March 31, 2010 and 2009 the Company incurred expenses from an entity related through common ownership (Veritas-Caspian) of $0 and $0, respectively for seismic services. The Company also recognized revenue from the same entity of $0 and $0 for vessel rental and cost reimbursement during the three months ended March 31, 2010 and 2009, respectively.

Accounts receivable from related parties consist of the following:

Related Party's Name	Description		March 31, 2010		September 30, 2009

Bolz LLP	Seismic services	$	3,314	$	3,230
Erkin Oil	Geological services		238		232
Others	Services provided		148		81
	Allowance for doubtful accounts		(2,802)		(2,731)
TOTAL		$	898	$	812

The Company has reviewed the accounts receivable from related parties as of March 31, 2010 on a case by case basis. The Company provided a general allowance for doubtful accounts of $2,802 and $2,731 at March 31, 2010 and September 30, 2009, respectively, based on existing economic conditions. The Company believes that most of the receivables will be paid, but, in view of the difficult credit climate which has been affecting the Company’s customers, concluded it should recognize the additional risk attached to these debts.

CASPIAN SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010 (UNAUDITED)

(Dollars in thousands, except share and per share data)

Accounts payable due to related parties consist of the following:

Related Party's Name	Description		March 31, 2010		September 30, 2009

Veritas Caspian	Seismic services	$	2	$	5,313
Officers	Payroll, travel and compensation		19		293
Others	Services received		47		70
TOTAL		$	68	$	5,676

NOTE 8 – FAIR VALUE MEASUREMENTS

Effective October 1, 2009, we adopted new guidance that affected our accounting and reporting of fair value.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, a hierarchy has been established which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data.

Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

The Company uses fair value to measure certain assets and liabilities on a recurring basis when fair value is the primary measure for accounting. This is done primarily for put option liability. Fair value is used on a nonrecurring basis to measure certain assets when applying lower of cost or market accounting or when adjusting carrying values. Fair value is also used when evaluating impairment on certain assets, including goodwill, intangibles, and long-lived assets.

The Company has one liability measured at fair value on a recurring basis. The put option liability is a level 3 measurement and is based on the underlying value of Balykshi using third party valuations and discounted cash flow analysis. The fair value of the put option liability was $10,000 at March 31, 2010 and September 30, 2009 respectively.

CASPIAN SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010 (UNAUDITED)

(Dollars in thousands, except share and per share data)

The Company has one asset measured at fair value on a nonrecurring basis. The inventory held for sale is a level 3 measurement and is based on third party valuations and then further discounted to reflect marketing costs and potential volatility in realizable values. Inventory held for sale had a fair value of $1,632 and $1,596 at March 31, 2010 and September 30, 2009, respectively.

NOTE 9 – SEGMENT INFORMATION

Accounting principles generally accepted in the United States of America establish disclosures related to components of a company for which separate financial information is available and evaluated regularly by a company’s chief operating decision makers in deciding how to allocate resources and in assessing performance. They also require segment disclosures about products and services as well as geographic area.

The Company has operations in three segments of its business, namely: Vessel Operations, Geophysical Services and Marine Base Services (formerly entitled Infrastructure Development). The Vessel Operations, Geophysical Services and Marine Base Services are located in the Republic of Kazakhstan. Corporate administration is located in the United States of America. Further information regarding the operations and assets of these reportable business segments follows:

	For the Three Months				For the Six Months
	Ended March 31,				Ended March 31,
		2010		2009		2010		2009
Capital Expenditures
Vessel Operations	$	367	$	3,102	$	1,221	$	3,468
Geophysical Services		481		51		740		691
Marine Base Services		1,313		4,630		6,995		7,283
Total segments		2,161		7,783		8,956		11,442
Corporate assets		-		-		-		-
Less intersegment investments		-		-		-		-
Total consolidated	$	2,161	$	7,783	$	8,956	$	11,442

CASPIAN SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010 (UNAUDITED)

(Dollars in thousands, except share and per share data)

	For the Three Months				For the Six Months
	Ended March 31,				Ended March 31,
		2010		2009		2010		2009
Revenues
Vessel Operations	$	3,939	$	2,125	$	9,090	$	11,536
Geophysical Services		6,176		4,656		14,083		18,634
Marine Base Services		492		263		853		589
Total segments		10,607		7,044		24,026		30,759
Corporate revenue		-		-		-		-
Less intersegment revenues		(72)		(5)		(73)		(139)
Total consolidated	$	10,535	$	7,039	$	23,953	$	30,620

Depreciation and Amortization
Vessel Operations	$	(1,037)	$	(1,081)	$	(1,994)	$	(2,131)
Geophysical Services		(775)		(1,010)		(1,541)		(2,478)
Marine Base Services		(456)		(93)		(470)		(201)
Total segments		(2,268)		(2,184)		(4,005)		(4,810)
Corporate depreciation and amortization		(1)		(2)		(3)		(3)
Total consolidated	$	(2,269)	$	(2,186)	$	(4,008)	$	(4,813)

Interest expense
Vessel Operations	$	-	$	-	$	-	$	6
Geophysical Services		(21)		(142)		(52)		(243)
Marine Base Services		(644)		-		(644)		-
Total segments		(665)		(142)		(696)		(237)
Corporate interest expense		(634)		(562)		(1,275)		(1,072)
Total consolidated	$	(1,299)	$	(704)	$	(1,971)	$	(1,309)

Income/(Loss) from Equity Method Investees
Vessel Operations	$	-	$	-	$	-	$	-
Geophysical Services		-		-		-		-
Marine Base Services		99		(22)		154		(128)
Total segments		99		(22)		154		(128)
Corporate income (loss)		-		-		-		-
Total consolidated	$	99	$	(22)	$	154	$	(128)

Income/(Loss) Before Income Tax
Vessel Operations	$	(3,405)	$	(3,831)	$	(5,624)	$	(3,997)
Geophysical Services		1,841		(2,924)		1,643		(1,628)
Marine Base Services		(1,413)		(88)		(1,404)		(416)
Total segments		(2,977)		(6,843)		(5,385)		(6,041)
Corporate loss		(894)		(734)		(1,697)		(1,547)
Total consolidated	$	(3,871)	$	(7,577)	$	(7,082)	$	(7,588)

CASPIAN SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010 (UNAUDITED)

(Dollars in thousands, except share and per share data)

	For the Three Months				For the Six Months
	Ended March 31,				Ended March 31,
		2010		2009		2010		2009
Benefit from (Provision for) Income Tax
Vessel Operations	$	517	$	1,334	$	1,323	$	1,301
Geophysical Services		(631)		(269)		(435)		(820)
Marine Base Services		-		-		-		-
Total segments		(114)		1,065		888		481
Corporate provision for income tax		-		-		-		-
Total consolidated	$	(114)	$	1,065	$	888	$	481

Income/(Loss) attributable to Noncontrolling Interests
Vessel Operations	$	-	$	-	$	-	$	-
Geophysical Services		117		123		(402)		217
Marine Base Services		286		66		305		117
Total segments		403		189		(97)		334
Corporate noncontrolling interest		-		-		-		-
Total consolidated	$	403	$	189	$	(97)	$	334

Net Loss attributable to Caspian Services Inc.
Vessel Operations	$	(2,888)	$	(2,497)	$	(4,301)	$	(2,696)
Geophysical Services		1,327		(3,070)		806		(2,231)
Marine Base Services		(1,127)		(22)		(1,099)		(299)
Total segments		(2,688)		(5,589)		(4,594)		(5,226)
Corporate loss		(894)		(734)		(1,697)		(1,547)
Total consolidated	$	(3,582)	$	(6,323)	$	(6,291)	$	(6,773)

		March 31,		September 30,
Segment Assets		2010		2,009
Vessel Operations	$	30,873	$	45,643
Geophysical Services		35,651		33,544
Marine Base Services		69,120		71,777
Total segments		135,644		150,964
Corporate assets		89,208		87,719
Less intersegment investments		(88,787)		(87,566)
Total consolidated	$	136,065	$	151,117

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

All dollar amounts stated in this Item 2 are presented in thousands, unless stated otherwise.

The following discussion is intended to assist you in understanding our results of operations and our present financial condition. Our Consolidated Financial Statements and the accompanying notes included in this Quarterly Report on Form 10-Q contain additional information that should be referred to when reviewing this material and this report should be read in conjunction with our Annual Report on Form 10-K for the year ended September 30, 2009.

Statements in this discussion may be forward-looking. These forward-looking statements involve risks and uncertainties, including those discussed below, which could cause actual results to differ from those expressed.

Forward Looking Information and Cautionary Statements

In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, we note that this Quarterly Report on Form 10-Q and the information incorporated herein by reference contain certain forward-looking statements which reflect our current view with respect to future events and financial performance. Any such forward-looking statements are subject to risks and uncertainties, and our future results of operations could differ materially from our historical results or current expectations. Some of these risks are discussed in this report and include, without limitation, fluctuations in worldwide energy demand and oil and gas prices; growth of our competitors and industry overcapacity; changes in capital spending by customers in the energy industry for offshore and onshore exploration, development and production; changing customer demands for different vessel specifications, which may make some of our older vessels technologically obsolete for certain customer projects or in certain markets; development of and demand for our marine base, our ability to obtain future governmental approvals; instability of global financial markets and difficulty in accessing credit or capital; our ability to repay our debt obligations as they become due; acts of terrorism and piracy; significant weather conditions; unsettled political conditions, war, civil unrest and governmental actions, especially in higher risk countries of operations; foreign currency fluctuations; and enforcement of laws related to the environment, labor and foreign corrupt practices.

Forward-looking statements, which can generally be identified by the use of such terminology as “may,” “expect,” “anticipate,” “estimate,” “forecast,” “believe,” “think,” “could,” “continue,” “intend,” “seek,” “plan,” and similar expressions contained in this report, are predictions and not guarantees of future performance or events. Forward-looking statements are based on current industry, financial and economic information, which we have assessed but which by its nature is dynamic and subject to rapid and possibly abrupt changes. Our actual results could differ materially from those stated or implied by such forward-looking statements due to risks and uncertainties associated with our business. While management believes that these forward-looking statements are reasonable when made, there can be no assurance that future developments that affect us will be those that we anticipate and have identified. The forward-looking statements should be considered in the context of the risk factors listed and discussed herein and in our Annual Report on Form 10-K for the year ended September 30, 2009, filed with the Securities and Exchange Commission (“SEC”) on December 29, 2009 and elsewhere in this Quarterly Report on Form 10-Q. You are cautioned not to place undue reliance on such forward-looking statements. We disclaim any obligation to update or revise the forward-looking statements contained herein to reflect new information, future events or developments.

Recent Developments

We are continuing with development of the marine base in Bautino Bay through our subsidiary Balykshi LLP. Construction commenced in the first fiscal quarter 2008. The initial phase of the marine base facilities, including dredging, breakwater, wharf front and general site area was working commissioned in November 2009, as expected. The official commissioning of the base is anticipated at the end of May; however further construction works are expected until December 2010. Cost to construct the marine base is expected to be approximately $71,800. We are funding this project through a combination of debt and equity financing. The European Bank for Reconstruction and Development (“EBRD”) contributed a $10,000 equity investment in exchange for a 22% equity interest in Balykshi LLP. In addition, we initially received $23,600 from EBRD as partial debt financing. We subsequently revised the scope of the project and returned $11,800 to EBRD. In March, 2010 we drew down an additional $5,000. The total agreed amount of EBRD loan is anticipated to be $18,600. We provided the remainder of the funds required for base construction.

Business Review

Each year from November to April our vessels are usually not engaged in active operations due to weather conditions in the north Caspian Sea. As a result we realize much lower revenues during our first and second fiscal quarters each year and we experience significantly increased revenues in the third and fourth fiscal quarters, as the work season in the Caspian Sea reopens.

We believe 2010 will be a year of contraction, but expect activity to rise in 2011, followed by even faster expansion from 2012 onwards. Development of the Kashagan field has now been revised and the project has been split between a number of major international oil companies. The transition has caused some delays as each contractor refines its plans, but there is every indication that the new focus will lead to more rapid development in the future. We are receiving inquiries which could allow us to participate in activities and business segments where we have not previously been presented. Our impression is that the main contractors in the Kashagan and other fields now see that development of the fields is imminent and there is a renewed sense of urgency as they make more concrete plans. Therefore, we expect 2010 to be a period of consolidation, but remain optimistic about future prospects.

During the three and six months ended March 31, 2010, we operated three business segments: Vessel Operations, Geophysical Services and Marine Base Services.

	For the Three Months						For the Six Months
	Ended March 31,						Ended March 31,
		2010		2009	% change		2010		2009	% change

VESSEL OPERATIONS
Operating Revenue	$	3,939	$	2,125	85%	$	9,090	$	11,536	-21%
Pretax Operating Loss		(3,405)		(3,831)	11%		(5,624)		(3,997)	-41%

GEOPHYSICAL SERVICES
Operating Revenue	$	6,176	$	4,656	33%	$	14,083	$	18,634	-24%
Pretax Operating Income/(Loss)		1,841		(2,924)	163%		1,643		(1,628)	201%

MARINE BASE SERVICES
Operating Revenue	$	492	$	263	87%	$	853	$	589	45%
Pretax Operating Loss		(1,413)		(88)	-1506%		(1,404)		(416)	-238%

CORPORATE ADMINISTRATION
Operating Revenue	$	-	$	-	n/a	$	-	$	-	n/a
Pretax Operating Loss		(894)		(734)	-22%		(1,697)		(1,547)	-10%

Summary of Operations

Three months ended March 31, 2010 compared to the three months ended March 31, 2009

Total revenue during the three months ended March 31, 2010 was $10,535 compared to $7,039 during the three months ended March 31, 2009, an increase of 50%. Most of this increase can be attributed to the fact that during the quarter ended March 31, 2009 no standby vessel revenues were received from the major CMOC contract due to the specific character of that contract (revenue was generated based on the volume of seismic data acquired versus usual daily rates). While the difficult credit situation continues to inhibit our customers’ ability to obtain financing for seismic projects; geophysical services revenue showed 33% improvement.

Reduced operating costs was the primary factor contributing to the 43% decrease in net loss, as we realized a net loss of $3,582 during the three months ended March 31, 2010 compared to $6,323 during than last year’s second fiscal quarter. We are currently negotiating to put most of our vessels into operation once the season reopens, so we expect to see the normal trend of improved results in quarters three and four.

Vessel Operations

Second fiscal quarter revenue from vessel operations of $3,939 was 85% higher than the previous year’s figure thanks to standby revenues, which accounted for the majority of our revenues in the second fiscal quarter of this year. We are currently seeking to fully utilize our vessels once the work season commences.

During the three months ended March 31, 2010 vessel operating costs of $3,838 were 91% of the previous year’s costs. We were able to reduce our costs by 9%, as crews not required were sent home, with the intention of employing them again once the new season is under way.

Despite improving margins, we still were not able to improve our net result for vessel operations as general and administrative expenses attributable to this segment increased by $840. This is primarily due to our accruing $340 for tax penalties imposed by local Customs Committee based on the result of a Customs inspection coupled with a one-time savings of tax expenses of $430 we realized during the second fiscal quarter 2009, as a result of a tax reconciliation, which reduced operating costs during that period. As a result, our loss from vessel operations grew to $2,888, compared to a loss of $2,497 in the second fiscal quarter of 2009.

Geophysical Services

Second fiscal quarter geophysical services revenue of $6,176 was 33% higher than the previous year’s figure. The local market is still depressed as a result of the difficulty in obtaining credit and we continue to struggle to obtain payment from overdue accounts. We are taking legal action where possible but this is an expensive option in Kazakhstan, as taxes must be paid up front, and it is not always easy to determine whether there are assets which can be seized.

We reduced our geophysical operating costs by 34% despite the increase in revenue, mostly thanks to extensive use of more efficient outsourced services.

As a result of the improved margins, the net income from geophysical operations was $1,327, compared to loss of $3,070 in 2009.

Marine Base Services

Construction of our marine base, which commenced in the first quarter of fiscal 2008, is now partially completed; the first phase was commissioned in November 2009. The initial phase of the marine base facilities includes dredging, breakwater, wharf front and general site area and our MOBY joint venture has begun limited operations.

The partial commencement of operational activities at the marine base took place during the second fiscal quarter 2010. However, our revenues for the initial period of operations were insufficient to cover our fixed costs, including depreciation. This caused our marine base services loss to grow to $1,127, compared to a loss of $22 in the second fiscal quarter of 2009. As our marine base was not operational during the second fiscal quarter 2009, our $22 loss for that period reflects only the operations of our water-bottling facility.

The official commissioning of the base is anticipated at the end of May 2010; however further construction works are expected until December 2010. We are currently negotiating with a number of parties for use of the base.

Corporate Administration

During the quarter ended March 31, 2010 net loss from corporate administration was $894 compared to a net loss of $734 during the quarter ended March 31, 2009. This increase is mostly attributable to increased interest expense related to marine base services.

General and Administrative Expenses

General and administrative expenses in the second fiscal quarter 2010 were $4,250, which is $425 or 11% more than prior year second fiscal quarter results of $3,825. This increase is mostly caused by accrual of $340 made in the second fiscal quarter 2010 for tax penalties imposed by local Customs Committee based on the result of a Customs inspection.

Depreciation

Depreciation expense increased from $2,186 to $2,269, or by 4%, during the second fiscal quarter 2010. This was caused by partial completion of the marine base, where depreciation has partially commenced. Capital expenditure in other divisions and dry docking costs were much lower than in the previous year.

Interest Expense

Interest expense was $1,299 or $595 higher during the three months ended March 31, 2010 compared to the three months ended March 31, 2009. This increase was principally the result of interest accrued on the EBRD loan and expensed, proportionally to the completed part of the marine base.

Foreign Currency Transaction Loss

During the second fiscal quarter 2010 we realized an exchange loss of $556, compared to an exchange loss of $477 in 2009. This was caused mainly by a decline in the value of the Euro and the fact that most of our vessels revenues were in Euros. It is our policy to try and match Euro costs with Euro income and we were able to reduce some of the loss because Euro costs for vessel rental were also lower. It is not our business to speculate on currency movements and we have not historically engaged in currency hedging.

Net Other Expenses

Net other expenses increased 82% to $1,689 during the second fiscal quarter 2010. In addition to the increases in interest expense and foreign currency exchange loss discussed above, net other expenses also increased as a result of lower interest income and other non-operating income which was partially offset by increased income from equity method investees.

Benefit from (provision for) income tax

During the three months ended March 31, 2010 we made provision for income tax of $114 compared to realizing a benefit for income tax of $1,065 during the three months ended March 31, 2009. This difference was caused by a more significant taxable loss recognized during the three months ended March 31, 2009, as we recognized a deferred tax asset for that loss.

Net Loss Attributable to Caspian Services, Inc.

As a result of the aforementioned factors, during our second fiscal quarter 2010 we realized a net loss attributable to Caspian Services, Inc. of $3,582 or $0.07 per share on a basic and diluted basis. By comparison, during the second fiscal quarter 2009 we realized a net loss attributable to Caspian Services, Inc. of $6,323 or $0.12 per share on a basic and diluted basis.

Six months ended March 31, 2010 compared to the six months ended March 31, 2009

Total revenue during the six months ended March 31, 2010 was $23,953 compared to $30,620 during the six months ended March 31, 2009, a decrease of 22%. Most of this reduction can be attributed to the fact that 2009 results were boosted by the CMOC contract. This contract also included revenue which was passed on to our subcontractor. The CMOC contract was successfully concluded ahead of schedule in fiscal 2009. This made it difficult to redeploy these vessels on new contracts just before the winter shutdown. Our other vessels continued to work and also generate winter standby revenue. We are currently negotiating to put our vessels that were under contract to CMOC into operation once the season reopens. Geophysical revenues were down, particularly in land seismic, whereas offshore seismic showed an improvement. The difficult credit situation continues to inhibit financing for seismic projects.

Total operating expenses during the six months ended March 31, 2010 decreased by $8,480 or 23%, which is in line with the decrease in revenue.

As we were able to reduce our operating costs our net loss of $6,291 was 7% lower than last year’s six month net loss of $6,773. We currently have the major units of the large accommodation barge and attendant tugs, and the cable layer under contract, and are awaiting the outcome of several tenders that would result in the remainder of the fleet to proceed on charter.

Vessel Operations

During the six months ended March 31, 2010 revenue from vessel operations of $9,090 decreased by 20%. The successful and early completion of the CMOC project has left us well placed to tender for future business with the major internationals as all the safety, environmental and quality assurance programs established in connection with the CMOC project remain in place in preparation for future work. The early completion of the CMOC project also meant we were unable to secure long-term contracts for these vessels just before the Caspian Sea closed for winter leaving us with no winter standby revenue on the vessels that were used in the CMOC project. Our other vessels have continued to work and are providing winter standby revenues. They account for the majority of our revenues during the six months ended March 31, 2010. We are currently seeking to fully utilize our vessels once the season recommences.

During the six months ended March 31, 2010 vessel operating costs of $8,323 were 75% of costs during the same period 2009. We reduced our costs in line with our reduced revenues, as crews not required were sent home, with the intention of employing them again once the new season is under way.

Despite operating cost savings, we still were not able to improve our net result from vessel operations as general and administrative expenses attributable to this segment increased. The increase was primarily due to our accruing $340 for tax penalties imposed by the local Customs Committee during the six months ended March 31, 2010 coupled with a one-time savings of tax expenses of $430 during the six months ended March 31, 2009, as a result of a tax reconciliation which decreased operating costs during that period. As a result, our loss from vessel operations grew to $4,301, compared to a loss of $2,696 during the six months ended March 31, 2009.

Geophysical Services

During the six months ended March 31, 2009 we collected funds on behalf of our subcontractor, Veritas-Caspian, and remitted these funds to them. This increased both our revenues and costs by $3,596. Deducting the effects of this transaction, revenue from geophysical services decreased by $955 or 6% during the six months ended March 31, 2010 compared to the same period ended March 31, 2009. Operating costs decreased by $2,288 or 25% during the six months ended March 31, 2010 compared to the same period ended March 31, 2009. Land seismic was in line with our expectations of a sluggish market, and was well down compared to last year, whereas offshore seismic saw an improvement. The local market is still depressed by the difficulty in obtaining credit and we continue to struggle to obtain payment from overdue accounts. We are taking legal action where possible but this is an expensive option in Kazakhstan, as taxes must be paid up front, and it is not always easy to determine whether there are assets which can be seized. During the six months ended March 31, 2010, we made provision for an additional $1,534 for accounts which have now become unacceptably delayed.

Net income from geophysical operations was $806, compared to a net loss of $2,231 in 2009.

Marine Base Services

Construction of our marine base, which commenced in the first quarter of fiscal 2008, is now partially complete; the first phase was commissioned in November 2009. The official commissioning of the base is anticipated at the end of May; however further construction works are expected until December 2010. Our MOBY joint venture commenced limited operations in January, 2010. We are currently negotiating with a number of parties for use of the base.

The partial commencement of operational activities on the marine base took place during the second fiscal quarter 2010. However, our revenues for the initial period of operations were insufficient to cover our fixed costs, including depreciation. This caused our marine base services loss to grow to $1,099, compared to a loss of $299 during the six months ended march 31, 2009. Because the marine base was not operational during the six months ended March 31, 2009, the loss during that period reflects only the result of operations of our water-bottling facility only.

Corporate Administration

During the six months ended March 31, 2010 net loss from corporate administration was $1,697 compared to $1,547 during the same period ended March 31, 2009. The increase in net loss during the six months ended March 31, 2010 is mainly attributable to increased interest costs related to marine base services.

General and Administrative Expenses

General and administrative expense increased by $923, or 11% for the six months ended March 31, 2010 compared to the same period ended March 31, 2009. However, excluding bad debt provision of $1,534 made in 2010 and $791 made in 2009, our administrative costs increased by just 2%, from $7,287 to $7,467 during the six months ended March 31, 2010 compared to the same period of last year. The reduction was notable in the Geophysical division, where employee numbers were decreased at the end of calendar 2009.

Depreciation

Depreciation expense decreased by $805 or 17% to $4,008 during the six months ended March 31, 2010 compared to the same period ended March 31, 2009. This was caused by diverting most of our capital expenditures toward completion of the marine base and decreasing other expenditures, such as dry docking costs, which resulted in lower depreciation expense.

Interest Expense

Interest expense during the six months ended March 31, 2010 increased to $1,971, or 51% compared to the six months ended March 31, 2009. This increase was the result of interest beginning to accrue on the EBRD loan with the commencement of partial operations at the marine base.

Foreign Currency Transaction Loss

During the six months ended March 31, 2010 we realized an exchange loss of $1,038 compared to an exchange loss of $764 during the same period ended March 31, 2009. This was caused mainly by a decline in the value of the Euro and the fact that, most of our vessels revenues were in Euros. It is our policy to try and match Euro costs with Euro income and we were able to reduce some of the loss as Euro costs for vessel rental were also lower. It is not our business to speculate on currency movements and we have not historically engaged in currency hedging.

Net Other Expenses

Net other expenses increased 87% to $2,801 during the six months ended March 31, 2010. In addition to the increases in interest expense and foreign currency exchange loss discussed above, net other expenses also increased as a result of lower interest income and other non-operating income which was partially offset by increased income from equity method investees.

Benefit from (provision for) income tax

During the six months ended March 31, 2010 we realized a benefit from income taxes of $888 compared to $481 during the six months ended March 31, 2009. This $407 increase in benefit from income taxes was the result of a more significant taxable loss recognized during the six months ended March 31, 2010, as we recognized a deferred tax asset for that loss.

Net Loss Attributable to Caspian Services, Inc.

As a result of the aforementioned factors, during six months ended March 31, 2010 net loss attributable to Caspian Services, Inc. decreased 7% to $6,291or $0.12 per share on a basic and diluted basis. By comparison, during the second fiscal quarter 2009 we realized a net loss attributable to Caspian Services, Inc. of $6,773 or $0.13 per share on a basic and diluted basis.

Liquidity and Capital Resources

At March 31, 2010, we had cash on hand of $12,607 compared to cash on hand of $29,222 at September 30, 2009. Much of the change in cash for the six months to March 31, 2010 was due to the partial repayment of EBRD loan in the amount of $11,800 in November 2009. However, we further draw from them $5,000 in March 2010. Another major outflow of cash resulted from capital expenditures for marine base construction. At March 31, 2010 total current assets exceeded current liabilities by $30,968. We believe vessel and geophysical revenue and cash on hand will be adequate to meet our capital needs for the upcoming quarter.

Cash Flows

We typically realize decreasing cash flows during our first fiscal quarter and limited cash flow during our second fiscal quarter as weather conditions in the north Caspian Sea region dictate when oil and gas exploration and development work can be performed. Usually, the work season commences in late March or early April and continues until the Caspian Sea ices over in November. As a result, other than TatArka, which can continue to provide some onshore geophysical services between November and March and the receipt of winter standby rates on vessels, we generate very little revenue from November to March each year.

The following table provides an overview of our cash flow during the six months ended March 31, 2010 and 2009.

	Period ended March 31,
	2010			2009

Net cash provided by / (used in) operating activities	$	(499)	$	1,586
Net cash used in investing activities		(6,603)		(12,798)
Net cash provided by / (used in) financing activities		(7,657)		35,071
Effect of exchange rate changes on cash		(1,856)		741

Net Change in Cash	$	(16,615)	$	24,600

Net cash flow from operations for the six months ended March 31, 2010 was negative, as substantial cash inflow from our customers of $12,997 was more than off-set by the decrease in accounts payable, prepaid expenses and accrued taxes of $14,841.

Net cash used in investing activities in the six months ended March 31, 2010 mostly represents a capital expenditure in continuing construction of the marine base.

We had net cash outflow from financing activities in the six months ended March 31, 2010 due to partial repayment of EBRD loan. Much of the change in cash for the six months ended March 31, 2009 was attributable to proceeds from the EBRD equity investment in Balykshi in the amount of $10,000, proceeds from EBRD loan amounted $23,600 and receipt of partial funding of the loan from Great Circle in the amount of $7,500. Major cash outflow during this period represents the repayment of the $5,000 Petrolinvest loan.

Financing

For details regarding recent financing activities please refer to Note 3 to our Condensed Consolidated Financial Statements.

Summary of Material Contractual Commitments


	Payment Period
		Less than			After
Contractual Commitments	Total	1 Year	1-3 Years	3-5 Years	5 years

Other debt	$ 857	$ 857	$ -	$ -	$ -
Loans from Altima Central Asia	18,664	-	18,664	-	-
Loans from Great Circle	18,065	-	18,065	-	-
Loans from EBRD	17,175	-	6,675	8,400	2,100
Long-term derivative put option	10,000	-	-	-	10,000
Operating leases - vessels	6,978	5,526	1,452	-	-
Operating leases - other than vessels	1,237	1,237	-	-	-
Purchase commitments	3,263	3,263	-	-	-
Total	$ 76,239	$ 10,883	$ 44,856	$ 8,400	$12,100

Off-Balance Sheet Financing Arrangements

In January 2008 Balykshi, Kyran Holdings Limited and NMSC Kazmortransflot Joint Stock Company formed a joint venture named Mangistau Oblast Boat Yard LLP (“MOBY”), to operate a boat repair and drydocking services yard located at our marine base. Balykshi owns a 20% interest in MOBY. In August 2008 MOBY entered into a Loan Agreement with EBRD. The Loan Agreement provided that EBRD would loan MOBY the amount of $12.3 million (the “Loan”).

In June 2009 in connection with the Loan Agreement, EBRD required certain parties, including Caspian Services, Inc. as the parent company of Balykshi, to execute a Deed of Guarantee and Indemnity (the “Guarantee”), which guarantees the repayment of the Loan. The Loan funded and the Company became liable for the obligations under the Guarantee as of September 3, 2009. The Guarantee constitutes a direct financial obligation of the Company.

Pursuant to and in accordance with the Guarantee, we have agreed to guarantee payment to EBRD, on demand, all monies and liabilities which have been advanced or which shall become due, owing or incurred by MOBY to or in favor of EBRD when such shall become due. Our guarantee obligation is limited, however, to the “Caspian Pro-rata Percentage.” The Caspian Pro-rata Percentage is an amount equal to our percentage ownership of Balykshi at any time multiplied by Balykshi’s percentage ownership of MOBY, expressed as a percentage. Currently, we own a 78% interest in Balykshi and Balykshi owns a 20% interest in MOBY. Therefore, the Caspian Pro-rata Percentage is currently 15.6%, or $2,679.

We also agreed as a separate and independent obligation and liability to indemnify EBRD on demand against all losses, costs and expenses suffered or incurred by EBRD should any of the financing agreements between EBRD and MOBY be or become unlawful, void, voidable or unenforceable, ineffective or otherwise not recoverable on the basis of the guarantee, provided again our obligation is limited to the Caspian Pro-rata Percentage of such losses, costs and expenses.

As a guarantor, we agreed to advance to MOBY at any time on demand of EBRD any additional amount required by MOBY to enable it to comply with its obligations under the financing agreements and to carry out the project. Our obligation in this context is limited to 20% of the total amount.

Pursuant to and in accordance with the Guarantee, EBRD is not obliged before taking steps to enforce any of its rights and remedies under the Guarantee to make any demand or seek to enforce any right against MOBY or any other person, to obtain judgment in any court against MOBY or any other person or to file any claim in bankruptcy, liquidation or similar proceedings.

The Guarantee provides that each guarantor agrees to pay interest to EBRD on all unpaid sums demanded under the Guarantee at a rate of LIBOR plus 5.6%. The Guarantee also provides that each guarantor shall, on demand and on a full indemnity basis, pay to EBRD, the amount of all costs and expenses, including legal and out-of-pocket expenses and any VAT on such costs and expenses which EBRD incurs in connection with: a) the preparation, negotiation, execution and delivery of the Guarantee; b) any amendment, variation, supplement, waiver or consent under or in connection with the Guarantee; c) any discharge or release of the Guarantee; d) the preservation or exercise of any rights or in connection with the Guarantee; and e) any stamping or registration of the Guarantee; provided that our obligation in this context is limited to the Caspian Pro-rata Percentage.

Recent Accounting Pronouncements

For details of applicable new accounting standards, please, refer to Note 1 to our Condensed Consolidated Financial Statements.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting standards generally accepted in the United States requires management to make estimates and assumptions that affect both the recorded values of assets and liabilities at the date of the financial statements and the revenues recognized and expenses incurred during the reporting period. Our estimates and assumptions affect our recognition of deferred expenses, bad debts, income taxes, the carrying value of our long-lived assets and our provision for certain contingencies. We evaluate the reasonableness of these estimates and assumptions continually based on a combination of historical information and other information that comes to our attention that may vary our outlook for the future. Actual results may differ from these estimates under different assumptions.

We suggest that our Summary of Significant Accounting Policies, as described in Note 1 of Notes to Consolidated Financial Statements in our most recent Annual Report on Form 10-K be read in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations. We believe the critical accounting policies that most impact our consolidated financial statements are described below.

Fair Value of Financial Instruments – The carrying amounts reported in the accompanying consolidated financial statements for other receivables, accounts and notes receivables from related parties, accounts payable to related parties and accrued expenses approximate fair values because of the immediate nature of short-term maturities of these financial instruments. The carrying amount of long-term debt approximates fair value due to the stated interest rates approximating prevailing market rates.

Revenue Recognition — Vessel revenues are usually derived from time charter contracts on a rate-per-day of service basis; therefore, vessel revenues are recognized on a daily basis throughout the contract period. These time charter contracts are generally on a term basis, ranging from three months to three years. The base rate of hire for a contract is generally a fixed rate; however, these contracts often include clauses to recover specific additional costs and mobilization and demobilization costs which are billed on a monthly basis. In 2008 we commenced and completed in 2009 a major contract with CMOC / Shell where revenue is derived from kilometers of seismic data acquired, rather than from a daily rate. Revenue under this contract was recognized when services were actually performed.

Geophysical service revenue is recognized when services are rendered, accepted by the customer and collectibility is reasonably assured. Direct costs are charged to each contract as incurred along with allocated indirect costs for the specific period of service. Losses on contracts are recognized during the period in which the loss first becomes probable and reasonably estimated. Due to the nature of some of the geophysical services provided, certain customers have prepaid their contract services. These prepayments have been deferred and are recognized as revenue as the services are provided.

Marine base service revenue is recognized when services are rendered, accepted by the customer and collectibility is reasonably assured.

Product sales revenue is recorded upon delivery or shipment of bulk or bottled water to the customer.

Receivables — In the normal course of business, we extend credit to our customers on a short-term basis. Our principal customers are major oil and natural gas exploration, development and production companies. Credit risks associated with these customers are considered minimal. Dealings with smaller, local companies, particularly with the current difficulties in equity and credit markets, pose the greatest risks. For new geophysical services customers, we typically require an advance payment and we retain the seismic data generated from these services until payment is made in full. We routinely review our accounts receivable balances and make provisions for doubtful accounts as necessary. Accounts are reviewed on a case by case basis and losses are recognized in the period if we determine it is likely that receivables will not be fully collected. We may also provide a general provision for accounts receivables based on existing economic conditions.

Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of — Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount that the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. At March 31, 2010, we reviewed our long-lived assets and determined no impairment was necessary.

Income Taxes — Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences in assets and liabilities and their respective tax bases and attributable to operating loss carry forwards. Differences generally result from the calculation of income under accounting principles generally accepted in the United States of America and the calculation of taxable income calculated under Kazakhstan income tax regulations.

The current regime of penalties and interest related to reported and discovered violations of Kazakhstan’s laws, decrees and related regulations can be severe. Penalties include confiscation of the amounts in question for currency law violations, as well as fines of generally 100% of the unpaid taxes. Interest is assessable at rates of generally 0.06% per day. As a result, penalties and interest can result in amounts that are multiples of any unreported taxes. No interest or penalties have been accrued as a result of any tax positions taken. In the event interest or penalties are assessed, we will include these amounts related to unrecognized tax benefits in income tax expense.

A deferred tax liability is not recognized for the following types of temporary differences unless it becomes apparent that those temporary differences will reverse in the foreseeable future:

(a) An excess of the amount for financial reporting over the tax basis of an investment in a foreign subsidiary or a foreign corporate joint venture, that is essentially permanent in duration; or

(b) Undistributed earnings of a domestic subsidiary or a domestic corporate joint venture that is essentially permanent in duration.

Dry-docking Costs — Our vessels must be periodically dry-docked and pass certain inspections to maintain their operating classification, as mandated by certain maritime regulations. Costs incurred to dry-dock the vessels for certification are deferred and amortized over the period until the next dry-docking, generally 24 months. Dry-docking costs are comprised of painting the vessels, hulls and sides, recoating cargo and fuel tanks, and performing other engine and equipment maintenance activities to bring the vessels into compliance with classification standards.

Effects of Inflation

Day-to-day operating costs are generally affected by inflation. However, because the energy services industry requires specialized goods and services, it is usually less affected by these trends. The major impact on operating costs is the level of offshore exploration, development and production spending by energy exploration and production companies. As spending increases, prices of goods and services used by the energy industry and the energy services industry increase.

Future increases in vessel day rates may help to shield us from the inflationary effects on operating costs and we will quote for seismic work based on our costs at that time.

Item 3. Qualitative and Quantitative Disclosures About Market Risk

Our primary market risks are fluctuations in commodity prices, in that they affect the operations of our customers, foreign currency risk and bad debt risk.

Commodity Price Risk

Our revenues, profitability and future growth depend substantially on prevailing prices for crude oil. As oil prices decrease demand for our services and correspondingly our cash flows may decrease. Historically, and recently, crude oil prices have been subject to significant volatility in response to changes in supply, market uncertainty and a variety of other factors beyond our control. Crude oil prices are likely to continue to be volatile and this volatility makes it difficult to predict future oil price movements with any certainty. Declines in oil prices could reduce our revenues. As a result, this could have a material adverse effect on our business, financial condition and results of operations.

Foreign Currency Risk

To the extent that business transactions in Kazakhstan are denominated in the Kazakh Tenge we are exposed to transaction gains and losses that could result from fluctuations in the U.S. Dollar—Kazakh Tenge exchange rate. Some of our expenditures, particularly capital expenditures, can be in Euros. We attempt to offset the currency risk by negotiating some contract revenues in Euros. We do not engage in hedging transactions to protect us from such risk.

Our foreign-denominated monetary assets and liabilities are revalued on a monthly basis with gains and losses on revaluation reflected in net income. A hypothetical 10% favorable or unfavorable change in foreign currency exchange rate at March 31, 2010 would have affected our net loss by less than $200.

Risk of Bad Debt

The world economic slowdown has restricted credit available to some of our customers. We believe this has exposed us to greater risk of not getting paid for work performed. This is most evident in our geophysical division, where most of the customers are local and rely on Kazakh banks for financing. In an effort to control this credit risk, we will turn away customers who we believe expose us unnecessarily to such risk and we are targeting international companies for new business.

We review our receivable balances as of the end of each reporting period. A hypothetical 10% favorable or unfavorable change in bad debts at March 31, 2010 would have affected our net income by approximately $540.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of March 31, 2010. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2010, our disclosure controls and procedures were effective in (1) recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and (2) ensuring that information disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management's Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the company’s principal executive officer and principal financial officer and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

•	pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
•	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
•	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework. Based on this assessment, our management concluded that as of March 31, 2010, our internal control over financial reporting is effective based on those criteria.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2010 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

During the second fiscal quarter 2010 we filed a judicial appeal in Kazakhstan, challenging the Company’s obligations for VAT and customs duties related to vessels’ customs declarations dating back to years 2005-2006 imposed on the Company as a result of the regular five year audit conducted by the Customs Committee of the Ministry of Finance of the Republic of Kazakhstan. The Customs Committee claimed VAT and related penalties amount to approximately $550. Some of this amount is likely to be off-set by Agip KCO under our agreement with them during the time period in question.

If the court determines that customs VAT is owed, we could be subject to fines and penalties totaling up to as much as 50% of our customs obligation. The first hearing in our case is scheduled for May 19, 2010 and it may take up to three months before the decision is issued.

Item 1A. Risk Factors

During the quarter ended March 31, 2010 there were no material changes in the risk factors previously described in Item 1A of our Annual Report on Form 10-K filed on December 29, 2009.

Item 6. Exhibits

Exhibits. The following exhibits are included as part of this report:


	Exhibit 31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	Exhibit 31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	Exhibit 32.1	Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	Exhibit 32.2	Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date:	May 17, 2010	By:	/s/ Andrey Yuryev
			Andrey Yuryev
			Interim Chief Financial Officer

CASPIAN SERVICES, INC.

May 17, 2010

/s/ Kerry Doyle

Kerry Doyle

Chief Executive Officer