8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): October 27, 2004

Input/Output, Inc.

(Exact name of registrant as specified in its charter)

Delaware	1-12961		22-2286646
(State or other jurisdiction of incorporation)	(Commission File Number)		(IRS Employer Identification No.)
12300 Parc Crest Dr. Stafford, TX		77477
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (281) 933-3339

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02.  Results of Operations and Financial Condition

On October 27, 2004, Input/Output, Inc. (the “Company”) issued a press release regarding its results of operations for the third quarter of 2004, a copy of which is furnished as Exhibit 99.1 hereto.

Item 7.01.  Regulation FD Disclosure

On October 28, 2004, the Company held a conference call with analysts. A copy of prepared remarks made during the call by Robert P. Peebler, President and Chief Executive Officer, and J. Michael Kirksey, Executive Vice President and Chief Financial Officer, are furnished (simultaneously therewith in accordance with Rule 100 under Regulation FD) as Exhibit 99.2 hereto.

The information contained in this report and such exhibits (i) is not to be considered “filed” under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and (ii) shall not be incorporated by reference into any previous or future filings made by or to be made by the Company with the Securities and Exchange Commission under the Securities Act of 1933, as amended, or the Exchange Act.

The information contained in this report and such exhibits contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934.  These forward-looking statements include statements concerning estimated future revenues, gross margin, EBITDA, net income per share and earnings per share for the fourth quarter of 2004 and for the full year 2004.  Actual results may vary materially from those described in these forward-looking statements. All forward-looking statements reflect numerous assumptions and involve a number of risks and uncertainties.  These risks and uncertainties include the timing and development of the Company’s products and services and market acceptance of the Company’s new and revised product offerings; risks associated with competitors’ product offerings and pricing pressures resulting therefrom; the Company’s inability to produce products to preserve and increase market share; risks associated with the Company’s restructuring and corporate repositioning program; risks of significant payment defaults under extended financing arrangements with customers; risks of losing significant customers; and risks of technological and marketplace changes affecting the Company’s product line and service offerings.  Additional risk factors, which could affect actual results, are disclosed by the Company from time to time in its filings with the Securities and Exchange Commission.

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SIGNATURES

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

Date:	October 28, 2004
		Input/Output, Inc.
		(Registrant)
		By:	/s/ J. Michael Kirksey
			Name:	J. Michael Kirksey
			Title:	Executive Vice President and Chief Financial Officer

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INDEX TO EXHIBITS

Exhibit No.	Description
99.1	Press Release, dated October 27, 2004, issued by Input/Output, Inc.
99.2	Input/Output, Inc. October 28, 2004 Conference Call Prepared Remarks of Robert P. Peebler, President and Chief Executive Officer, and J. Michael Kirksey, Executive Vice President and Chief Financial Officer.

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EX-99.1

Exhibit 99.1

NEWS RELEASE	CONTACTS:	J. Michael Kirksey
		Chief Financial Officer
		Input/Output (281) 879-3672
FOR IMMEDIATE RELEASE		Jack Lascar, Partner
		Karen Roan, Vice President
		DRG&E (713) 529-6600

I/O REPORTS THIRD QUARTER 2004 RESULTS

•Third quarter 2004 revenues of $80.9 million

•Company records a $5.2 million reserve ($0.07 per share) for a Russian receivable

•New System Four Analog System continues to penetrate market

HOUSTON – October 27, 2004 – Input/Output, Inc. (NYSE: IO) today announced third quarter 2004 net loss of $5.0 million, or $(0.07) per share, on revenues of $80.9 million compared to a net loss of $4.8 million, or $(0.09) per share, on revenues of $30.3 million for the same period a year ago. Included in the third quarter results is a $(0.07) per share loss related to a Russian receivable.

Bob Peebler, I/O’s President and Chief Executive Officer, said, “As indicated in our October 5^th conference call, the third quarter financial results were impacted by a number of events that negatively affected earnings.  Project delays, unexpected new product start-up costs and a product mix with lower overall margins occurred simultaneously to affect our business. While the quarter’s results are disappointing, the fundamental drivers of our business model remain solid. Top line revenues increased by $51 million or 167% over the year ago period as the demand for seismic work continues to grow. Our new products are gaining market acceptance and our technology portfolio is focused on the highest value added segments of our markets.”

THIRD QUARTER 2004

Third quarter revenues of $80.9 million were in line with the October 5^th guidance of approximately $80 million. Excluding GXT and Concept Systems, revenues increased almost 100%. GX Technology, which was acquired in June of this year, contributed revenues of $17.5 million during the quarter.  Land imaging revenues increased to $38.4 million compared to $20.7 million a year ago, and marine imaging revenues more than doubled to $19.1 million compared to $7.6 million a year ago. The land imaging division

continued to enjoy acceptance of System Four Analog with its first sale in the international market.  The marine imaging division completed the final sale of this year’s VectorSeis Ocean contract.

Gross margin in the third quarter improved to 24% compared to 17% for the same period a year ago. However, third quarter margins were lower than expected as delays in higher margin system sales and data library sales were replaced with lower margin sales of vibrator trucks and other older technology based products.  In addition, startup expenses on new products impacted the overall gross margin by nearly 2 percentage points.  Operating expenses as a percentage of revenues for the third quarter fell to 28%   compared to 38% for the third quarter of last year.  During this quarter, I/O sold its Alvin, Texas facility, which was made redundant by the major outsourcing initiative of the Company.  The Company recorded a gain of $2.4 million from this sale.

In recent days, the increasing financial difficulties of one of its Russian customers have led the Company to provide a reserve for the exposure to receivables due from a subsidiary of Yukos.  These receivables were collateralized by the equipment, which was sold to the customer in late 2001 through early 2003. The majority of the equipment has been recovered.  However, the difference between the receivables and the estimated fair market value, net of refurbishment cost, of the recovered equipment is $5.2 million, or ($0.07 per share), which the Company  recorded in the third quarter.

Loss from operations in the quarter was $3.3 million, including the Russian reserve, compared to a loss from operations of $6.4 million in the third quarter of 2003.  EBITDA (earnings before net interest expense, taxes, depreciation and amortization) for the third quarter was $4.3 million compared to a negative $1.9 million for the third quarter of last year.  You can find a reconciliation of EBITDA to reported earnings at the end of this press release.

YEAR-TO-DATE 2004

Revenues for the nine months ended September 30, 2004 increased 69% to $179.5 million compared to $106.0 million in the comparable period of 2003.  Approximately half of this increase is due to better performance within the land and marine imaging

divisions, while the remaining increase is due to the acquisitions of GX Technology and Concept Systems.

Gross margin for the first nine months of 2004 rose to 30% compared to 16% in the first nine months of 2003.  EBITDA for the first nine months of 2004 was $17.5 million compared to a negative $12.9 million for the first nine months of 2003. Income from operations increased to $3.3 million compared to a loss from operations in the prior year of $21.8 million.  For the nine months ended September 30, 2004, I/O recorded a net loss of $1.3 million, or ($0.02) per share, compared to a net loss of $23.8 million, or $(0.46) per share in the prior year.

OUTLOOK

The following statements are based on our current expectations.  These statements are forward looking and actual results may differ materially.  Factors affecting these forward-looking statements are detailed below.

Mr. Peebler stated, “Looking at 2004 to date, I/O has accomplished a great deal.  We have launched two major next-generation product lines on time and continue to increase market penetration of our full-wave VectorSeis technology. VectorSeis sales are expected to grow in both the land and marine environments as acceptance of this new technology continues. The additions of GX Technology and Concept Systems have added the necessary key pieces we needed to build a seismic solutions company.  While we have a lot more work to do, these are major steps in the first year of our plan.”

Mike Kirksey, Executive Vice President and Chief Financial Officer, added,  “Based on our current view of fourth quarter orders in the pipeline and our judgment on expected shipments, we expect 2004 revenues to range between $260 and $270 million.  Much of our projected top line growth in the fourth quarter is expected to come from continued market penetration of our new field acquisition systems and continued growth of GX Technology’s Integrated Seismic Solutions offering.  We expect full year 2004 gross margin to be approximately 30% and EBITDA to range between $30 and $35 million. Excluding the Russian reserve, we expect earnings per share to range between $0.14 and $0.20 for 2004. As a result, for the fourth quarter of 2004, we expect revenues

to range between $80 and $90 million and earnings per share to range between $0.08 and $0.14.”

CONFERENCE CALL

I/O has scheduled a conference call for Thursday, October 28, 2004, at 9:30 a.m. eastern time.  To participate in the conference call, dial 303-262-2142 at least 10 minutes before the call begins and ask for the Input/Output conference call.  A replay of the call will be available approximately two hours after the live broadcast ends and will be accessible until November 4, 2004.  To access the replay, dial 303-590-3000 and use pass code 11011606.

Investors, analysts and the general public will also have the opportunity to listen to the conference call live over the Internet by visiting www.i-o.com.  Also, an archive of the web cast will be available shortly after the call on the company’s website for approximately 90 days.

I/O is a leading seismic services provider. The company provides cutting-edge seismic acquisition equipment, software, and planning and seismic processing services to the global oil and gas industry. The company’s technologies are applied in both land and marine environments, in traditional 2D and 3D surveys, and in rapidly growing areas like time-lapse (4D) reservoir monitoring and full-wave imaging. I/O has offices in the United States, Canada, Europe, China, Russia and the Middle East. Additional information is available at http://www.i-o.com.

The information included herein contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  These forward-looking statements include statements concerning capital outlays by E&P companies and seismic contractors, future VectorSeis revenues, and fourth quarter revenues, gross margin, and net income per share.  Actual results may vary materially from those described in these forward-looking statements. All forward-looking statements reflect numerous assumptions and involve a number of risks and uncertainties.  These risks and uncertainties include the timing and development of the Company’s products and services and market acceptance of the Company’s new and revised product offerings; risks associated with competitor’s product offerings and pricing pressures resulting there from; the Company’s inability to produce products to preserve and increase market share; and technological and marketplace changes affecting the Company’s product line.  Additional risk factors, which could affect actual results, are disclosed by the Company from time to time in its filings with the Securities and Exchange Commission.

Tables to follow

INPUT/OUTPUT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Net sales	$	80,861		$	30,307		$	179,475		$	106,046
Cost of sales	61,722			25,088			126,275			89,396
Gross profit	19,139			5,219			53,200			16,650
Operating expenses:
Research and development	6,108			4,458			15,563			14,931
Marketing and sales	7,342			3,015			15,656			8,851
General and administrative	11,530			4,359			22,074			13,786
Gain on sale of assets	(2,498		)	(244		)	(3,394		)	(280		)
Impairment of long-lived assets	—			—			—			1,120
Total operating expenses	22,482			11,588			49,899			38,408
Income (loss) from operations	(3,343		)	(6,369		)	3,301			(21,758		)
Interest expense	(1,623		)	(954		)	(4,616		)	(3,142		)
Interest income	261			428			1,020			1,544
Fair value adjustment of warrant obligation	—			1,829			—			988
Write-down of investment	—			—			—			(2,036		)
Other income	36			113			193			777
Income (loss) before income taxes	(4,669		)	(4,953		)	(102		)	(23,627		)
Income tax expense (benefit)	305			(133		)	1,243			158
Net loss	$	(4,974	)	$	(4,820	)	$	(1,345	)	$	(23,785	)
Basic and diluted net loss per common share	$	(0.07	)	$	(0.09	)	$	(0.02	)	$	(0.46	)
Weighed average number of common shares  outstanding	76,419,362			51,235,269			61,923,823			51,219,179

INPUT/OUTPUT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

	September 30, 2004			December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents.	$	31,917		$	59,507
Restricted cash	1,026			1,127
Accounts receivable, net	68,549			34,270
Current portion notes receivable, net	11,609			14,420
Income tax receivable	1,149			—
Unbilled revenue	7,987			—
Inventories	59,042			53,551
Prepaid expenses and other current assets	6,420			3,703
Total current assets	187,699			166,578
Notes receivable	6,123			6,409
Net assets held for sale	—			3,331
Property, plant and equipment, net	42,712			27,607
Multi-client data library, net	14,517			—
Deferred income taxes	—			1,149
Goodwill	149,324			35,025
Intangible and other assets, net	73,475			9,105
Total assets	$	473,850		$	249,204
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt	$	7,506		$	2,687
Accounts payable	38,052			12,531
Accrued expenses	23,649			15,833
Deferred revenue	10,402			2,060
Total current liabilities	79,609			33,111
Long-term debt, net of current maturities	80,484			78,516
Other long-term liabilities	3,321			3,813
Stockholders’ equity:
Common stock	784			522
Additional paid-in capital	478,120			296,663
Accumulated deficit	(159,882		)	(158,537		)
Accumulated other comprehensive income	216			1,292
Treasury stock	(5,833		)	(5,826		)
Unamortized restricted stock compensation	(2,969		)	(350		)
Total stockholders’ equity	310,436			133,764
Total liabilities and stockholders’ equity	$	473,850		$	249,204

Reconciliation of EBITDA to Net Income

(Non-GAAP Measures)

(In thousands)

(Unaudited)

EBITDA is a non-GAAP measurement that is presented as an additional indicator of operating performance and is not a substitute for net income (loss) or income (loss) per share calculated under generally accepted accounting principles (GAAP).  We believe that EBITDA provides useful information to investors because it is an indicator of the strength and performance of our ongoing business operations, including our ability to service our debt. The calculation of EBITDA shown below is based upon amounts derived from the company’s financial statements prepared in conformity with GAAP.

	Three Months Ended September 30,							Nine Months Ended September 30,
	2004				2003			2004			2003
Net loss	$	(4,974		)	$	(4,820	)	$	(1,345	)	$	(23,785	)
Interest expense	1,623				954			4,616			3,142
Interest income	(261			)	(428		)	(1,020		)	(1,544		)
Income tax expense (benefit)	305				(133		)	1,243			158
Depreciation and amortization expense	7,593				2,484			14,014			9,093
EBITDA	$		4,286		$	(1,943	)	$	17,508		$	(12,936	)

EX-99.2

Exhibit 99.2

INPUT/OUTPUT, INC. OCTOBER 28, 2004 CONFERENCE CALL
PREPARED REMARKS OF ROBERT P. PEEBLER,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
AND
J. MICHAEL KIRKSEY,
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

Moderator:

Good morning and welcome to Input/Output’s third quarter conference call.  We appreciate you joining us today.

Your hosts today are Bob Peebler, President and Chief Executive Officer, and Mike Kirksey, Executive Vice President and Chief Financial Officer.

Before I turn the call over to management, I have a few items to go over.

If you would like to be on an email distribution or fax list to receive future news releases or experienced a technical problem and didn’t receive yours yesterday, please call DRG&E and relay that information.  That number is 713-529-6600.

If you would like to listen to a replay of today’s call, it is available via web cast by going to the investor relations section of the Company’s website at www.i-o.com, or via a recorded instant replay until November 4, 2004. To use the replay feature, call area code 303-590-3000 and use the pass code 11011606.

Information reported on this call speaks only as of today, October 28, 2004, and therefore, you are advised that time-sensitive information may no

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longer be accurate as of the time of any replay.

Management is going to discuss today certain topics that will contain forward-looking information that are based on management’s beliefs, as well as assumptions made by and information currently available to management.

Forward-looking information includes statements regarding expected revenues, gross margin, EBITDA and earnings per share for the fourth quarter and full year 2004.  Although the company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct.

Furthermore, as we start this call, please refer to the statement regarding “forward looking statements” incorporated in our press release issued yesterday and please note that the contents of our conference call this morning are covered by this statement.

Risks that the Company faces are discussed in greater detail in the company’s filings with the Securities and Exchange Commission including the company’s report on Form 10-K for the year ended December 31, 2003. Please also note that you can find reconciliation to reported numbers for non-GAAP measures that we will discuss on this call in our press release.

I’d like to turn the call over now to Bob Peebler.

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Bob Peebler:

Good morning and thank you for joining us.

The Agenda this morning will include:

Review of the major third quarter events and progress against our goals

A review of the third quarter financial results

A look at the remainder of 2004

followed by –

A Question & Answer Period

Highlights of Q3

The expression, when it rains it pours, is a good way to describe our third quarter.  We had an unfortunate confluence of events that pushed our results significantly below our original guidance. Our gross product margin of 24% was negatively impacted by a lower margin product mix, unexpected  costs associated with launching new systems, and customers delaying purchase commitments. In addition we recognized the write down of the Yukos subsidiary, Large Geophysical, receivable.  Before Mike goes into the specific financial details of the quarter,   I would like to step back and give you the bigger picture of my views of I/O’s business, including what we are doing to improve our performance going forward.  Even though we are all disappointed to not hit our numbers in this quarter, there are several positive facts that are important to highlight. These include:

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•Strong top-line growth that resulted in revenues of $80.9 million in line, with our guidance of $75 to 85 million.

•Year over year growth of 167%, and almost 100% when acquisitions of GXT and Concept Systems are excluded.

•Operating costs as percent of revenue at 24%, excluding unusual items, compared to 38% for Q3, 2003.

•Final shipment of VectorSeis Ocean to our launch partner, RXT and we are now in the early shake-down phase on an initial shoot.

•Significant VectorSeis expansion pool sold to the Chinese contractor BGP for a very large VectorSeis shoot in China.  The opportunity was driven by working directly with the Chinese Oil Company, Synopec, which also included GXT processing.  This is an excellent example of our businesses coming together to solve an oil company problem that drives business for everyone and another validation of our strategy.

•Strong growth in GXT data library pipeline that is being driven by multiple projects around the world.

•Good progress towards R&D integration between I/O Imaging Systems, Concept, and GXT that is targeting both image quality and productivity gains via a systems approach.

•On track with our growth targets for VectorSeis systems approaching $40 million for the year compared to approximately $20 million in 2003.

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•EBITDA of $9.5 million, excluding the Russia write-down, compared to a negative EBITDA of (1.9 million) in Q3-2003.

Mike Kirksey will go into more details of the quarter, but I would like to make the point that excluding the expenses related to our system introductions, we mainly suffered from a poor product and service mix.  We had the expected top-line revenue, but fell far short of what we expected in gross margin, mainly due to lower data library sales at GXT and lower margin product sales in our Land Division.  We feel this was an anomaly versus a trend and look forward to significantly improved gross margin in Q4.  That being said, we can do better in managing our business and would like to provide you with three key areas that we are redoubling our efforts:

•The first is sales management that can give us better visibility into the status of our pipeline of opportunities including probability and timing of closing.  Over the last few months we have combined two privately held companies, Concept Systems and GXT, with I/O.  The fact that we are in a growth mode, coupled with the needed quarterly discipline of a public company has strained our sales management systems. I am confident that we can make significant improvements over the medium term, but  I would caution that  even with better sales management systems, we are always going to be challenged on a quarter by quarter basis since the mix of our sales include very

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large deals that can swing earnings by several cents – one way or the other.

•The second is product engineering/manufacturing with a goal to significantly improve quality and lower costs.  Although we are delighted to be in the position of bringing two new major systems into the market this year, we are having too many unplanned start-up and cost issues that could have been prevented with better quality assurance programs from the beginning.  We are already learning from our experiences and are adjusting to do better in the future.  In the meantime, we are aggressively tackling any short term product related issues to help assure that we satisfy both the oil companies and our launch partner contractors.  We will spare no effort to make sure our new products are successful in the market.

•The third is a renewed focus on ways to get additional manufacturing costs out of our existing products and to strengthen our pricing when possible.  We have multiple programs to improve margins, and even though we fell short of our Q3 targets, we have made substantial progress over last year where our gross margin was 16% compared to 24% for the third quarter of this year.  We look forward to progress that carries on into 2005.

Now to our view on the overall market.  It’s our expectation that 2005 will see a substantial increase in oil company exploration spending.  Most of the

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larger companies are currently in the planning phase for next year and the feedback we are getting is they are bullish, mainly due to their growing belief about the sustainability of higher commodity prices. Many are also prospect short and that should drive increases in exploration and development spending for seismic services. We expect to see some normal year-end spending, but I don’t believe that the higher commodity prices are translating into significantly higher exploration spending for the balance of this year.  The large oil companies seem to be sticking to their original exploration plans to emphasize financial discipline, with the increases coming through their new 2005 plans.  We have also seen some portfolio shuffling due to the higher prices that has actually delayed some short term spending until they sort out what assets they plan to sell.  We still have the view that the international markets, including new ones like Libya are going to be our main growth engines with limited expansion in North America.  I’m frankly bullish on next year’s overall industry activity and believe that the service sector should benefit from increasing business and firming up of prices.  This obviously helps us if our customer contractors return to stronger profitability.

In summary, I view our third quarter as mainly hitting a speed bump, rather than any systemic or market problems.  I’m very confident of our strategy and our key programs to deliver results. We expect to do better in Q4 and look forward to a strong 2005. Most importantly, with the acquisitions of Concept Systems and GXT, I/O is now a leader in new

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seismic Imaging technologies and has built the strategic foundation for a technology based seismic solutions company.  The technologies that we have launched along with the game changing technologies we have in our R&D plans can change the face of our industry in the years ahead.  Full Wave Digital systems, advanced marine positioning technology, leading edge processing tools, and advanced data integration capabilities all form the backbone of the future of I/O.  I couldn’t be more confident in our future.

I will now turn it over to Mike.

Thank you, Bob.

Results of Operations

As indicated in our press release, second quarter sales were $80.9 million.  GX Technology accounted for $17.5 million of which $4 million were library sales.

Before I go into division by division details let me summarize the impact on our margins of the Q3 issues Bob referred to.  The unexpected start-up costs for new products impacted gross margins by 2.5 points.  This is unfortunate but when we launch new technologies we are going to over deliver service to make sure our launch partners are well taken care of. Lower revenues from both high margin data library sales and system sales reduced our gross margin about 4 points compared to our expectations.  Some of these will materialize in Q4. An unfavorable Product mix reduced

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the gross margin approximately 1.5 points.  All of these items had an overall EPS impact of approximately 11 cents. If these items had not impacted Q3, our results would have been within our original guidance provided in July.

Now to the division details, in our land group, sales were $38.4 million compared to $36.6 million in Q2 and $20.7 million last year.  Gross margins were 22% in the land group compared to 28% in Q2.  As stated earlier, a combination of product mix and unexpected start-up costs reduced gross profit from expected levels.  The Sensor geophone division continues to be a strong performer in our land group, on pace for a record year with $16.4 million in sales in Q3.

The marine division continued its good year with sales of $19.1 million in Q3 compared to $13.1 million in Q2 and $7.6million a year ago.  Positioning products and VectorSeis Ocean both continue to add handsomely to the marine revenues.  The final VectorSeis Ocean shipment for 2004 was made in Q3 bringing total shipments of VSO this year to approximately $17 million.  Gross margins in Marine were 29% for Q3 compared to 38 % in Q2.  Like land, unexpected start-up expenses dropped margins from expected levels.

GXT gross margins were 11%.  We expected more library sales which carry attractive margins but these did not materialize in Q3. We expect Q4 library sales to be somewhat larger.  Also, GXT’s processing business was somewhat slow in Q3, matching their historical business pattern.  This is expected to pick up in Q4 and on into 2005 as the Gulf of Mexico heats up with pending lease sales and expansion into international markets.

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Operating expenses were 28% of sales (24% of sales, excluding the building gain and the Russia reserve) down from 38% of sales in Q3 of last year.  We continue to leverage our existing infrastructure which was built for higher sales levels we are now starting to achieve.

Events in Russia concerning the Yukos subsidiary, Large geophysical, which owed us $11 million, came to a head recently when we were informed by Yukos that this subsidiary would likely not continue to operate.  All related vendors started taking action under their individual contracts.  Our receivables were secured by the equipment.  A majority of the equipment has been recovered but the whereabouts of some is still unknown and some is damaged.  While we will continue to pursue all our avenues of recovery, the Company believes the reserve of $5.2 million is appropriate at this time and should cover any exposure related to the receivables.  This amount is reflected in G&A expenses.

The low taxes for Q3 continue to reflect the use of our U.S. net operating loss carried forward. The lower rate is likely to continue into 2005 as U.S. profitability continues to improve.

Balance Sheet

Our balance sheet finished the third quarter with approximately $32 million in cash. Capex in Q3 was $2 million.

I will now turn it back to Bob for some closing comments.

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Preliminary outlook at 2004

Looking at the rest of 2004, we expect continued acceptance of our new products and major systems which is reflected in our pipeline going into Q4. Customer interest in System Four and in VectorSeis-based systems generally, continues to grow, for example, with significant customer interest at the latest society of exploration geophysicist (SEG) convention in October. The ramp-up of System Four Analog sales was slower than expected due to start-up issues during Q3, but we believe most of those are behind us and we are now renewing our sales efforts in Q4.  We now have the advantage of a much more competitive offering in the analog land system market and look forward to improving our market share over the next several quarters.  An additional advantage of System Four Analog is it’s hybrid capability that allows  the recording of both Analog and/or VectorSeis digital full-wave, depending on the desires of the oil company customer. Because of this hybrid capability,  every System Four Analog sale creates a future opportunity to sell VectorSeis Full Wave digital into the market.  We recently sold a 6,000 channel System Four Analog to BGP to be used initially in the Chinese domestic market.  This is a good start on our goal to gain marketshare in our international markets.

Our Sensor group in Holland is enjoying a record year that is carrying on into Q4.  We believe that the sensor business is a good indicator of over-all seismic land business since they have a large marketshare and sell geophones that are used with both I/O and competitor land systems. Their pipeline continues to look good for this quarter and into 2005.

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The Integrated Seismic Services and processing offerings of GXT, including the Axis service line, are positioned to have excellent results,  going forward. Several multi-client projects are ongoing that will come into the market in Q4 and beyond.  The market is rapidly shifting from spec data purchases to specific reprocessing requirements and custom shoots, both proprietary and multi-client sponsored.  The increasing need for custom-designed surveys and high-end imaging should benefit I/O moving forward, as these non-commodity imaging solutions are the focus of GXT.

In addition to this ISS business, GXT excels in ultra-deep depth imaging, which is critical in assessing regional petroleum systems.  As we have stated before, in the Gulf of Mexico specifically, approximately 3000 blocks will likely change hands over the next 3 years. This turnover will drive demand for ultra-deep data licenses along with tailored seismic acquisition and processing, again a major future driver for business related to the Gulf of Mexico that we expect will start becoming a major business driver for GXT.

Looking ahead, based on our current pipeline of business, we expect 2004 revenues to be in the $260 to $270 million range. We expect consolidated gross margins to be approximately 30%. Based on the expected level of revenues and gross margin, EBITDA should be $30 to $35 million. Excluding the impact of the Russian write-off, earnings per share should range from 14 to 20 cents.

The third quarter is traditionally a weaker quarter with the fourth quarter and first quarter being the strongest.  Because of the large individual sales

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in our pipeline, we have widened the traditional range in order to better demonstrate the impact of timing and product mix within our overall expectations.  As a result, we expect fourth quarter revenue to be in the $80 to $90 million range and earnings per share to range between 8 cents to 14 cents.

Conclusion

In summary, Q3 was a difficult one for us. We learned some lessons. We have dealt with the old Russian receivable problem from a financial reporting perspective but will continue to pursue recovery.  We remain confident that we have laid the strategic foundation for a profitable future. We will now open for questions:

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