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FORM 10-Q/A

(AMENDMENT NO. 1 TO FORM 10-Q)

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001

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

COMMISSION FILE NUMBER 1-13402

INPUT/OUTPUT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

12300 PARC CREST DR., STAFFORD, TEXAS 77477
(Address of principal executive offices) (Zip Code)

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

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: [ ]

At September 30, 2001 there were 51,322,067 shares of common stock, par value
$0.01 per share, outstanding.

INPUT/OUTPUT, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q/A
FOR THE QUARTER ENDED SEPTEMBER 30, 2001

PAGE
----

PART I. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets
September 30, 2001 (Restated) and December 31, 2000...............................4

Consolidated Statements of Operations
Three and nine months ended September
30, 2001 and September 30, 2000...................................................5

Consolidated Statements of Cash Flows
Nine months ended September 30, 2001 (Restated) and
September 30, 2000................................................................6

Notes to Unaudited Consolidated Financial Statements..............................7

Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition...............................................12

Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................20

PART II. Other Information.

Item 6. Exhibits and Reports on Form 8-K.................................................20
</Table>

PRELIMINARY NOTE:

This Form 10-Q/A is being filed to reflect the restatement of certain previously
reported information as more fully described in Note 12 of Notes to Unaudited
Consolidated Financial Statements contained herein. Portions of Part 1 - Item 1
- - "Financial Statements" and Part I - Item 2 - "Management's Discussion and
Analysis of Results of Operations and Financial Condition" have been amended to
reflect the restatement. The remaining information in this amended Form 10-Q has
not been updated to reflect any changes in information that may have occurred
subsequent to the date of the reporting period to which the Form 10-Q relates.

INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

RESTATED
ASSETS SEPTEMBER 30,
CURRENT ASSETS: 2001 DECEMBER 31,
(UNAUDITED) 2000
------------- ------------

Cash and cash equivalents ................................... $ 96,060 $ 92,376
Restricted cash ............................................. 249 1,115
Accounts receivable, net .................................... 57,864 30,920
Current portion notes receivable, net ....................... 2,628 7,889
Inventories ................................................. 76,066 67,646
Deferred income tax asset ................................... 12,785 12,081
Prepaid expenses ............................................ 2,011 2,217
------------ ------------
Total current assets ................................ 247,663 214,244
Long-term notes receivable ..................................... 5,895 6,150
Deferred income tax asset ...................................... 42,440 42,771
Property, plant and equipment, net ............................. 42,522 51,267
Goodwill, net .................................................. 46,132 47,098
Other assets, net .............................................. 7,661 4,103
------------ ------------
Total assets ........................................ $ 392,313 $ 365,633
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ........................ $ 2,565 $ 1,207
Accounts payable ............................................ 14,418 8,283
Accrued expenses ............................................ 20,088 23,388
------------ ------------
Total current liabilities ........................... 37,071 32,878
Long-term debt, net of current maturities ...................... 20,402 7,077
Other long-term liabilities .................................... 680 275

Stockholders' equity:
Cumulative convertible preferred stock, $0.01 par value;
authorized 5,000,000 shares; issued and outstanding
55,000 shares at the end of both periods (liquidation
value of $55 million) ..................................... 1 1
Common stock, $0.01 par value; authorized 100,000,000 shares;
outstanding 51,322,067 shares and 50,936,420 shares,
respectively .............................................. 516 512
Additional paid-in capital .................................. 358,802 352,294
Accumulated deficit ......................................... (16,354) (19,422)
Accumulated other comprehensive loss ........................ (5,928) (5,353)
Treasury stock, at cost, 281,398 shares and 243,500 shares,
respectively .............................................. (2,162) (1,737)
Unamortized restricted stock compensation ................... (715) (892)
------------ ------------
Total stockholders' equity ............................... 334,160 325,403
------------ ------------
Total liabilities and stockholders' equity .......... $ 392,313 $ 365,633
============ ============
</Table>

See accompanying notes to unaudited consolidated financial statements and
accompanying independent accountants' review report.

INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------

Net sales .................................... $ 58,647 $ 30,355 $ 160,924 $ 97,020
Cost of sales ................................ 40,111 23,129 104,668 87,605
------------ ------------ ------------ ------------
Gross profit ........................ 18,536 7,226 56,256 9,415
------------ ------------ ------------ ------------

Operating expenses:
Research and development .................. 6,699 6,246 21,895 20,578
Marketing and sales ....................... 3,869 2,413 10,688 7,753
General and administrative ................ 4,491 3,293 14,101 13,967
Amortization and impairment of
intangibles ............................ 1,225 910 3,546 36,566
------------ ------------ ------------ ------------
Total operating expenses ........... 16,284 12,862 50,230 78,864
------------ ------------ ------------ ------------

Earnings (loss) from operations .............. 2,252 (5,636) 6,026 (69,449)

Interest expense ............................. (55) (288) (645) (695)
Interest income .............................. 1,388 1,587 3,874 4,052
Other income ................................. 158 141 58 1,634
------------ ------------ ------------ ------------
Earnings (loss) before income taxes .......... 3,743 (4,196) 9,313 (64,458)
Income tax (benefit) expense ................. (352) 2,970 2,044 5,126
------------ ------------ ------------ ------------
Net earnings (loss) .......................... 4,095 (7,166) 7,269 (69,584)
Preferred dividend ........................... 1,416 1,279 4,201 3,617
------------ ------------ ------------ ------------
Net earnings (loss) applicable to
common shares ............................. $ 2,679 $ (8,445) $ 3,068 $ (73,201)
============ ============ ============ ============

Basic earnings (loss) per common share ....... $ 0.05 $ (0.17) $ 0.06 $ (1.44)
============ ============ ============ ============
Weighted average number of
common shares outstanding ................. 51,319,419 50,918,674 51,179,516 50,823,408
============ ============ ============ ============

Diluted earnings (loss) per common share ..... $ 0.05 $ (0.17) $ 0.06 $ (1.44)
============ ============ ============ ============
Weighted average number of diluted
common shares outstanding ................. 52,413,427 50,918,674 52,444,450 50,823,408
============ ============ ============ ============
</Table>

See accompanying notes to unaudited consolidated financial statements and
accompanying independent accountants' review report.

INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
2001
(RESTATED) 2000
------------- -------------

Cash flows from operating activities:
Net earnings (loss) ....................................... $ 7,269 $ (69,584)

Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization ............................. 13,123 16,818
Amortization of restricted stock and other
stock compensation ....................................... 177 (805)
Impairment or loss on disposal of fixed assets ............ -- 4,143
Bad debt collections and loan losses ...................... (514) (4,552)
Deferred income tax ....................................... (385) (2,196)
Inventory obsolescence .................................... -- 8,700
Impairment of intangibles and other assets ................ -- 31,596

Changes in assets and liabilities, net of above provisions:
Accounts and notes receivable ............................. (18,682) (233)
Inventories ............................................... (5,767) 14,714
Leased equipment .......................................... 4,384 --
Accounts payable and accrued expenses ..................... 3,493 (943)
Income taxes payable (receivable) ......................... (1,842) 3,588
Other assets and liabilities .............................. 351 838
------------- -------------
Net cash provided by operating activities ........... 1,607 2,084
------------- -------------

Cash flows from investing activities:
Purchase of property, plant and equipment ................. (4,646) (2,621)
Cash paid for acquisitions, net of cash acquired .......... (5,191) --
------------- -------------
Net cash used in investing activities ............... (9,837) (2,621)
------------- -------------

Cash flows from financing activities:
Proceeds from issuance of debt ............................ 18,837
Payments on long-term debt ................................ (8,842) (828)
Payments of preferred dividends ........................... (413) (413)
Proceeds from exercise of stock options ................... 1,956 1,747
Proceeds from issuance of common stock to Employee
Stock Purchase Plan ..................................... 768 --
Purchase of treasury stock ................................ (425) 317
------------- -------------
Net cash provided by financing activities ........... 11,881 823
------------- -------------

Effect of change in foreign currency exchange
rates on cash and cash equivalents ..................... 33 1,751
------------- -------------
Net increase in cash and cash equivalents ................. 3,684 2,037
Cash and cash equivalents at beginning of period .......... 92,376 82,749
------------- -------------
Cash and cash equivalents at end of period .......... $ 96,060 $ 84,786
============= =============
</Table>

See accompanying notes to unaudited consolidated financial statements and
accompanying independent accountants' review report.

INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(1) BASIS OF PRESENTATION

The consolidated balance sheet of Input/Output, Inc. and its subsidiaries
(collectively referred to as the "Company" or "I/O") at December 31, 2000 has
been derived from the Company's audited consolidated financial statements at
that date. The consolidated balance sheet at September 30, 2001, and the
consolidated statements of operations for the three and nine months ended
September 30, 2001 and 2000, and the consolidated statements of cash flows for
the nine months ended September 30, 2001 and 2000, have been prepared by the
Company without audit. In the opinion of management, all adjustments, consisting
of normal and recurring adjustments, which are necessary to present fairly the
consolidated financial position, results of operations and cash flows have been
made. The results of operations for the three and nine months ended September
30, 2001 are not necessarily indicative of the operating results for a full year
or of future operations.

These consolidated financial statements have been prepared using accounting
principles generally accepted in the United States for interim financial
information and the instructions to Form 10-Q and applicable rules of Regulation
S-X of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements presented in accordance
with accounting principles generally accepted in the United States have been
omitted. The accompanying consolidated financial statements should be read in
conjunction with the Company's Transition Report on Form 10-K for the seven
months ended December 31, 2000. Certain amounts previously reported in the
consolidated financial statements have been reclassified to conform to the
current period's presentation.

(2) SEGMENT INFORMATION

The Company evaluates and reviews results based on two segments, Land and
Marine, to allow for increased visibility and accountability of costs and more
focused customer service and product development. The Company measures segment
operating results based on earnings (loss) from operations. A summary of segment
information for the three and nine months ended September 30, 2001 and 2000 is
as follows (in thousands):

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
Net sales: 2001 2000 2001 2000
------------ ------------ ------------ ------------

Land ..................... $ 48,063 $ 22,748 $ 120,104 $ 59,331
Marine ................... 10,584 7,607 40,820 37,689
------------ ------------ ------------ ------------
Total .................... $ 58,647 $ 30,355 $ 160,924 $ 97,020
============ ============ ============ ============

Earnings (loss) from
operations:
Land .................... $ 5,564 $ 518 $ 11,545 $ (15,124)
Marine .................. 1,603 (2,416) 8,587 (30,213)
Corporate ............... (4,915) (3,738) (14,106) (24,112)
------------ ------------ ------------ ------------
Total ................... $ 2,252 $ (5,636) $ 6,026 $ (69,449)
============ ============ ============ ============
</Table>

<Table>
<Caption>
RESTATED REPORTED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
Total assets: 2001 2001 2000
------------- ------------- -------------

Land ......................... $ 142,828 $ 142,828 $ 116,554
Marine ....................... 68,012 68,012 69,897
Corporate .................... 181,473 164,458 179,182
------------- ------------- -------------
Total ........................ $ 392,313 $ 375,298 $ 365,633
============= ============= =============
</Table>

Intersegment sales are insignificant for all periods presented. Corporate
assets include all assets specifically related to corporate personnel and
operations, substantially all cash and cash equivalents, all facilities and
manufacturing machinery and equipment that are jointly utilized by segments and
all income taxes receivable and deferred income tax assets.

(3) INVENTORIES

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

SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- -------------

Raw materials ................ $ 45,746 $ 39,988
Work-in-process .............. 10,574 6,774
Finished goods ............... 19,746 20,884
------------- -------------
$ 76,066 $ 67,646
============= =============
</Table>

(4) ACCOUNTS AND NOTES RECEIVABLE

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

SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- -------------

Accounts receivable, principally trade ...... $ 59,514 $ 32,491
Less allowance for doubtful accounts ........ (1,650) (1,571)
------------- -------------
Accounts receivable, net .................... $ 57,864 $ 30,920
============= =============
</Table>

The recorded investment in notes receivable for which an allowance for loan
loss has been recognized was $11.4 million at September 30, 2001. A summary of
notes receivable and allowance for loan loss is as follows (in thousands):

SEPTEMBER 30, DECEMBER 31,
2001 2000
--------------- ---------------

Notes receivable ............................ $ 19,398 $ 24,986
Less allowance for loan loss ................ (10,875) (10,947)
--------------- ---------------
Notes receivable, net ....................... 8,523 14,039
Current portion notes receivable, net ....... 2,628 7,889
--------------- ---------------
Long-term notes receivable .................. $ 5,895 $ 6,150
=============== ===============
</Table>

(5) EARNINGS (LOSS) PER COMMON SHARE

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

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------

Net earnings (loss) applicable to common shares ....... $ 2,679 $ (8,445) $ 3,068 $ (73,201)

Weighted average number of common shares
outstanding ...................................... 51,319,419 50,918,674 51,179,516 50,823,408

Effect of dilutive stock options and other common
stock equivalents ................................ 1,094,008 -- 1,264,934 --
------------ ------------ ------------ ------------

Weighted average number of diluted common shares
outstanding ...................................... 52,413,427 50,918,674 52,444,450 50,823,408
============ ============ ============ ============

Basic earnings (loss) per common share ................ $ 0.05 $ (0.17) $ 0.06 $ (1.44)
============ ============ ============ ============

Diluted earnings (loss) per common share .............. $ 0.05 $ (0.17) $ 0.06 $ (1.44)
============ ============ ============ ============
</Table>

At September 30, 2001 and 2000, 4,971,315 and 4,949,308 common shares
subject to stock options were considered anti-dilutive and not included in the
calculation of diluted earnings (loss) per common share. In addition, the
outstanding convertible preferred stock is considered anti-dilutive for all
periods shown and is not included in the calculation of diluted earnings (loss)
per common share.

(6) LONG TERM DEBT AND LEASE OBLIGATIONS

In August 1996, the Company obtained a $12.5 million, ten-year term loan
collateralized by certain land and buildings. The term loan bore interest at a
fixed rate of 7.875% per year and was repayable in equal monthly installments of
principal and interest of $151,439. On August 20, 2001, the Company sold the
same land and buildings for $21 million (Note 12). As part of the transaction,
the Company repaid the ten-year term loan. Simultaneous to the sale and loan
repayment, the Company entered into a non-cancelable lease with the purchaser of
the property. The lease has a twelve year term with three consecutive options to
extend the lease for five years each. As a result of the lease terms, the
commitment is recorded as a twelve year $21 million lease obligation with an
implicit interest rate of 9.1%. The Company paid $1.7 million in commissions and
professional fees which have been recorded as deferred financing costs and are
being amortized over the twelve year term of the obligation.

On January 3, 2001, in connection with the acquisition of Pelton Company,
Inc. ("Pelton") (Note 9), the Company entered into a $3 million two-year
unsecured promissory note payable to the former shareholder of Pelton, bearing
interest at 8.5% per year. Principal is payable in quarterly payments of $0.4
million plus interest, with final payment due in February 2003.

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

YEARS ENDED DECEMBER 31,
--------------------------

2001...................... $ 567
2002...................... 2,312
2003...................... 1,264
2004...................... 973
2005...................... 1,184
2006...................... 1,470
2007 and thereafter....... 15,197
--------
Total..................... $ 22,967
========
</Table>

(7) COMPREHENSIVE EARNINGS (LOSS)

The components of comprehensive earnings (loss) are as follows (in
thousands):

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------

Net earnings (loss) ......................... $ 4,095 $ (7,166) $ 7,269 $ (69,584)
Foreign currency translation adjustment ..... 2,310 (884) (575) (2,705)
------------ ------------ ------------ ------------
Comprehensive earnings (loss) ............... $ 6,405 $ (8,050) $ 6,694 $ (72,289)
============ ============ ============ ============
</Table>

(8) COMMITMENTS AND CONTINGENCIES

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

(9) ACQUISITION

On January 3, 2001, the Company acquired all of the outstanding capital
stock of Pelton for approximately $6 million in cash and a $3 million two-year
unsecured promissory note. Pelton is based in Ponca City, Oklahoma and designs,
manufactures and sells seismic vibrator control systems, vibrator positioning
systems and explosive energy control systems.

The acquisition was accounted for by the purchase method, with the purchase
price allocated to the fair value of assets purchased and liabilities assumed.
The preliminary allocation of the purchase price as of September 30, 2001,
including related direct costs, for the acquisition of Pelton is as follows (in
thousands):

<Table>

Fair values of assets and liabilities
Net current assets ............................... $ 5,719
Property, plant and equipment .................... 373
Intangible assets ................................ 4,131
-----------
Total allocated purchase price .............. 10,223
Less non-cash consideration - note payable ............ 3,000
Less cash of acquired business ........................ 2,032
-----------
Cash paid for acquisition, net of cash acquired ....... $ 5,191
===========
</Table>

The consolidated results of operations of the Company include the results of
Pelton from the date of acquisition. Pro forma results prior to the acquisition
date were not material to the Company's consolidated results of operations.

(10) SIGNIFICANT AND UNUSUAL CHARGES AND RECOVERIES

Significant and unusual pre-tax charges of $4.5 million, net, were recorded
during the three months ended March 31, 2000 and included $8.7 million of
inventory charges (included in cost of sales) related to the Company's decision
to commercialize VectorSeis(R) digital sensor products having higher technical
standards than the products that were previously produced. The Company had
decided to commercialize these earlier VectorSeis products which were since
proven not to be commercially feasible based on data gathered from VectorSeis
digital sensor surveys, the anticipated longer-term market recovery for new
seismic instrumentation and current and expected market conditions. Other
charges were $4.2 million of an inventory write-down in the Marine Division
(included in cost of sales); $2.4 million of bad debt expense (included in
general and administrative expense); $1.3 million of charges related to the
reduction in workforce worldwide (included in general and administrative
expense); and $0.7 million of charges related to legal settlements (included in
cost of sales -- $0.3 million, and in general and administrative expense -- $0.4
million). These charges were offset in part by $12.8 million of recoveries
attributable to a more favorable than anticipated resolution of a customer's
bankruptcy settlement, consisting of a $10.2 million reduction in allowance for
loan loss (recorded as a reduction to general and administrative expense) and a
$2.6 million reversal of warranty reserves based on this bankruptcy settlement
(recorded as a reduction to cost of sales).

Significant and unusual pre-tax charges of $41.9 million were recorded
during the three months ended June 30, 2000 and included a charge of $31.9
million to amortization and impairment of intangibles, reflecting the impairment
of certain goodwill recorded in conjunction with the acquisition of
manufacturing assets of Western Geophysical in 1995 and the acquisition of
CompuSeis, Inc. in 1998. The impairment of the Western Geophysical goodwill
principally reflected the then-diminished outlook for the marine towed array
seismic sector in general, evidenced by customers' decisions to reduce the size
of their marine fleets, and changes in customers' preferences and technology for
certain products within that sector. The impairment of the CompuSeis goodwill
reflects the result of certain technological changes relating to land seismic
systems. Additionally, $10.0 million was charged to general and administrative
expense consisting of a $5.0 million charge for settlement of litigation, a $3.6
million loan loss expense, $0.7 million related to the sale of certain idle
manufacturing capacity in Europe, and $0.7 million of charges related to
employee severance and continued cost reduction efforts worldwide.

In response to prevailing seismic industry conditions, the Company, during
2000, began concentrating on lowering its cost structure, consolidating product
offerings and reorganizing into a products-based operating structure. The
Company continues to evaluate additional restructuring and cost control
solutions. Implementing these solutions could result in additional charges
against future earnings.

(11) CHANGE IN FISCAL YEAR

During 2000, the Company changed its fiscal year end from May 31 to a fiscal
year ending December 31 of each year. The Company filed a Transition Report on
Form 10-K for the transition period ended December 31, 2000. The Company
commenced reporting on a calendar year basis with the filing of the Form 10-Q
for the quarter ended March 31, 2001.

(12) RESTATEMENT OF FINANCIALS

The Company has restated its previously reported consolidated balance sheet
at September 30, 2001 and its consolidated statement of cash flows for the nine
months ended September 30, 2001 after evaluating the accounting treatment for a
previously-reported

sale/leaseback of its Stafford facilities completed in August 2001. The Company
has restated these unaudited financial statements in order to record the lease
as a financing transaction rather than as a sale/leaseback of the facilities as
previously reported in the Company's Form 10-Q for the quarter ended September
30, 2001. This restatement of the sale/leaseback transaction had no effect on
the Company's previously reported earnings for the third quarter of 2001 nor
will it materially impact the Company's results of operations over the life of
the lease. The restatement results in a net increase to both assets and
liabilities by $17.0 million by reporting the leased Stafford facilities as an
asset classified as property, plant and equipment and by reporting the
discounted present value of the future lease payments as a long-term obligation.
The restatement also has no impact on the future obligations under the lease,
which were previously disclosed. The reported and restated balance sheets are as
follows (in thousands, except share data):

RESTATED REPORTED
SEPTEMBER 30, SEPTEMBER 30,
ASSETS 2001 2001
CURRENT ASSETS: (UNAUDITED) (UNAUDITED)
------------- -------------

Cash and cash equivalents ..................................... $ 96,060 $ 96,060
Restricted cash ............................................... 249 249
Accounts receivable, net ...................................... 57,864 57,864
Current portion notes receivable, net ......................... 2,628 2,628
Inventories ................................................... 76,066 76,066
Deferred income tax asset ..................................... 12,785 12,785
Prepaid expenses .............................................. 2,011 2,011
------------- -------------
Total current assets .................................. 247,663 247,663
Long-term notes receivable ....................................... 5,895 5,895
Deferred income tax asset ........................................ 42,440 42,440
Property, plant and equipment, net ............................... 42,522 27,275
Goodwill, net .................................................... 46,132 46,132
Other assets, net ................................................ 7,661 5,893
------------- -------------
Total assets .......................................... $ 392,313 $ 375,298
============= =============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt .......................... $ 2,565 $ 1,750
Accounts payable .............................................. 14,418 14,418
Accrued expenses .............................................. 20,088 20,136
------------- -------------
Total current liabilities ............................. 37,071 36,304
Long-term debt, net of current maturities ........................ 20,402 500
Other long-term liabilities ...................................... 680 4,334

Stockholders' equity:
Cumulative convertible preferred stock, $0.01 par value;
authorized 5,000,000 shares; issued and outstanding 55,000
shares at the end of both periods (liquidation
value of $55 million) ....................................... 1 1
Common stock, $0.01 par value; authorized 100,000,000
shares; outstanding 51,322,067 shares and 50,936,420
shares, respectively ........................................ 516 516
Additional paid-in capital .................................... 358,802 358,802
Accumulated deficit ........................................... (16,354) (16,354)
Accumulated other comprehensive loss .......................... (5,928) (5,928)
Treasury stock, at cost, 281,398 shares and 243,500
shares, respectively ........................................ (2,162) (2,162)
Unamortized restricted stock compensation ..................... (715) (715)
------------- -------------
Total stockholders' equity ................................. 334,160 334,160
------------- -------------
Total liabilities and stockholders' equity ............ $ 392,313 $ 375,298
============= =============
</Table>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION

Traditionally our net sales have been directly related to the level of
worldwide oil and gas exploration activity and the profitability and cash flows
of oil and gas companies and seismic contractors. These factors are affected by
expectations regarding the supply and demand for oil and natural gas, energy
prices, and discovery and development costs. Despite the increase in oil and gas
prices in the last few years, the seismic industry continues to rely on surplus
seismic data, principally marine "spec" data, to generate exploration prospects
rather than new exploration activity. Reliance on "spec" data has caused demand
for our products to increase at a slower rate than the demand for other oilfield
equipment and service providers. Other factors which may limit the demand for
our products may include, but are not limited to, those described below in
"Cautionary Statement for Purposes of Forward-Looking Statements".

Our results of operations and financial condition have been affected by
acquisitions of businesses and significant charges during prior periods, which
may affect the comparability of our financial information. The following
discussion and analysis of results of operations and financial condition should
be read in conjunction with our consolidated financial statements and the
accompanying notes included elsewhere in this Form 10-Q and the Transition
Report on Form 10-K for the seven months ended December 31, 2000.

SUMMARY REVIEW AND OUTLOOK

We are uncertain about the development of demand for seismic services and
equipment in the near term. Recent world events and a potentially weakening
world economy coupled with continuing equipment oversupply in the marine seismic
fleets indicates that demand for seismic equipment in the near term will be less
robust than the earlier part of this year. However, we still believe that our
fourth quarter operating results will be breakeven or slightly positive on
somewhat lower revenues than this quarter and we will be modestly profitable for
2001. Although we are unable to provide any definitive guidance for next year,
we currently believe that revenue and operating profits for the first half of
2002 will be slightly lower than the last half of 2001. However, we believe long
term fundamentals for the sector remain strong and that we should be
well-positioned to benefit from new product sales and potentially strengthening
sector fundamentals by the second half of next year.

Our key strategies remain optimizing the performance of our core business,
bringing our key technology initiatives to fruition, monetizing our
underutilized assets and growing our business through acquisitions and
alliances. We are continuing to invest resources and seek improvements in
seismic data acquisition technology. Our goals for 2002 include commercializing
our VectorSeis technology, further development of our land seismic ground and
central electronics, commencing development of a next generation marine seismic
data acquisition system, and development of new product offerings in hydrocarbon
reservoir monitoring and characterization.

We commenced commercialization of our VectorSeis line of products by
building the first VectorSeis fleet of approximately 3,000 stations for
deployment this winter. Veritas DGC, our commercialization partner, conducted
fifteen pilot surveys this year using prototype VectorSeis units. Feedback from
Veritas and the end-users has been favorable.

We previously announced an agreement in principle to form an alliance with
Thomson Marconi P/L to jointly develop a next generation marine seismic data
acquisition system. Despite the best efforts of the parties, however, we and
Thomson Marconi have been unable to agree on final terms of the alliance. We are
making alternate plans, including having discussions with other potential
partners, to bring to market our next generation marine system within the next
18 months.

With regards to our proposed activities described above, no assurances can
be made that we will implement any of these actions, and if so, whether any of
them will prove successful or the degree of that success.

FISCAL YEAR CHANGE

During 2000, we changed our fiscal year end from May 31 to a fiscal year
ending December 31 of each year. We filed a Transition Report on Form 10-K for
the transition period ended December 31, 2000. We commenced reporting on a
calendar year basis with the filing of the Form 10-Q for the quarter ended March
31, 2001.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2001 Compared to Three Months Ended September
30, 2000

Net Sales: Net sales of $58.6 million for the three months ended September
30, 2001 increased $28.3 million, or 93%, compared to the corresponding period
last year. The increase is primarily due to increased demand for products
produced by our Land Division. Our Land Division's net sales increased $25.3
million to $48.0 million, or 111%, as a result of improving industry conditions
and our acquisition of Pelton. Our Marine Division's net sales increased $3.0
million to $10.6 million, or 39%, compared to the corresponding period last
year.

Cost of Sales and Gross Profit: Cost of sales of $40.1 million for the three
months ended September 30, 2001 increased $17.0 million, or 73%, compared to the
corresponding period last year due to the increased net sales. Cost of sales of
the Land Division was $34.4 million and cost of sales of the Marine Division was
$5.7 million. Gross profit of $18.5 million for the three months ended September
30, 2001 increased $11.3 million compared to the corresponding period last year.
Gross profit percentage for the three months ended September 30, 2001 was 32%
compared to 24% during the corresponding period last year. The return to a more
normal pricing regime, success in reducing costs and improving absorption of
fixed and semi-fixed overhead, as well as the continued elimination from our
sales mix of products that had been highly discounted during recent periods of
weaker demand contributed to the higher 2001 gross profit percentage.

Research and Development: Research and development expense of $6.7 million
for the three months ended September 30, 2001 increased $0.5 million, or 7%,
compared to the corresponding period last year. Research and development expense
has remained relatively constant due to the increase in VectorSeis development
costs partially offset by a significantly narrowed focus on a smaller number of
technology developments for land, marine and reservoir applications.

Marketing and Sales: Marketing and sales expense of $3.9 million for the
three months ended September 30, 2001 increased $1.5 million, or 60%, compared
to the corresponding period last year. The increase is primarily related to
higher sales in certain foreign jurisdictions where we owe commissions to
independent sales representatives. Compensation expense to our in-house sales
force also increased because of the higher net sales and gross profit percentage
compared to the same period last year.

General and Administrative: General and administrative expense of $4.5
million for the three months ended September 30, 2001 increased $1.2 million, or
36%, compared to the corresponding period last year. This increase in general
and administrative expense is primarily attributable to increased compensation
expense, reflecting estimated accruals for profit-based bonuses this year, and
the inclusion of Pelton in the current quarter's results.

Amortization and Impairment of Intangibles: Amortization and impairment of
intangibles of $1.2 million for the three months ended September 30, 2001
increased $0.3 million, or 35%, compared to the corresponding period last year.
The increase in amortization and impairment of intangibles primarily related to
additional amortization of goodwill from the Pelton acquisition.

Total Net Interest and Other Income: Total net interest and other income of
$1.5 million for the three months ended September 30, 2001 increased $0.01
million, or 4%, compared to the corresponding period last year.

Income Tax (Benefit) Expense: Income tax benefit of ($0.4) million for the
three months ended September 30, 2001 represents a net change of $3.3 million
from an income tax expense in the corresponding period last year. Income tax
(benefit) expense decreased from the prior period despite higher earnings before
income taxes because: (i) we returned to profitability and are currently
recording an income tax provision that reflects the anticipated year-end
effective tax rate, (ii) during the prior period we were profitable in certain
foreign tax jurisdictions but recognized no offsetting benefit from domestic net
operating losses, and (iii) we favorably resolved certain tax issues and
received a $1.6 million current period benefit. This benefit is not expected to
recur in future periods. Excluding this benefit, income tax expense for the
current period reflects an estimated 39% effective rate for the year.

In assessing the realizability of our deferred income tax assets, we
considered whether it is more likely than not that some portion or all of the
deferred income tax assets will be realized. The ultimate realization of
deferred income tax assets is dependent upon the generation of future taxable
income during the periods in which those deferred income tax assets become
deductible. We considered the scheduled reversal of deferred income tax
liabilities and projected future taxable income in making this assessment.

1996 through 1998 aggregated approximately $128 million. Regardless, the
ultimate realization of the net deferred tax assets, prior to the expiration of
the net operating loss carry-forward in the next 19-20 years, will require a
return to sustained profitability.

Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30,
2000

Net Sales: Net sales of $160.9 million for the nine months ended September
30, 2001 increased $63.9 million, or 66%, compared to the corresponding period
last year. The increase is primarily due to increased demand for products
produced by our Land Division. Our Land Division's net sales increased $60.8
million to $120.1 million, or 102%, as a result of improving industry conditions
and our acquisition of Pelton. Our Marine Division's net sales increased $3.1
million to $40.8 million, or 8%, compared to the corresponding period last year.

Cost of Sales and Gross Profit: Cost of sales of $104.7 million for the nine
months ended September 30, 2001 increased $17.1 million, or 19%, compared to the
corresponding period last year. Cost of sales of our Land Division was $82.3
million and cost of sales of our Marine Division was $22.4 million. Results for
the nine months ended September 30, 2000 included $10.6 million, net, in
significant and unusual charges for inventory write-downs partially offset by
favorable legal settlements. Excluding the effect of these significant and
unusual net charges, cost of sales increased $27.7 million, or 36%, compared to
the corresponding period last year, due to higher levels of net sales. Gross
profit of $56.3 million for the nine months ended September 30, 2001 increased
$46.8 million compared to the corresponding period last year. Gross profit
percentage for the nine months ended September 30, 2001 was 35%. Excluding the
effect of significant and unusual charges in the prior period, gross profits for
the nine months ended September 30, 2001 increased $36.2 million compared to the
corresponding period last year. Excluding the effect of these significant and
unusual charges, gross profit percentage for the nine months ended September 30,
2000 was 21%. The return to a more normal pricing regime, success in reducing
costs and improving absorption of fixed and semi-fixed overhead, as well as the
continued elimination from the sales mix of products that had been highly
discounted during recent periods of weaker demand contributed to the higher 2001
gross profit percentage.

Research and Development: Research and development expense of $21.9 million
for the nine months ended September 30, 2001 increased $1.3 million, or 6%,
compared to the corresponding period last year. Research and development expense
has remained relatively constant due to increased VectorSeis development costs
partially offset by a significantly narrowed focus on a smaller number of
technology developments for land, marine and reservoir applications.

Marketing and Sales: Marketing and sales expense of $10.7 million for the
nine months ended September 30, 2001 increased $2.9 million, or 38%, compared to
the corresponding period last year. The increase is primarily related to higher
sales in certain foreign jurisdictions where we owe commissions to independent
sales representatives. Compensation expense to our in-house sales force also
increased because of the higher net sales and gross profit percentage compared
to the same period last year.

General and Administrative: General and administrative expense of $14.1
million for the nine months ended September 30, 2001 increased $0.1 million, or
1%, compared to the corresponding period last year. Results for the nine months
ended September 30, 2000 included significant and unusual net charges of $3.9
million relating to bad debt expense, work-force reductions, unfavorable legal
settlements, loan loss expense and loss on the sale of idle facilities, offset
by favorable legal settlements. Excluding the effect of these significant and
unusual net charges in the prior period, general and administrative expense
increased $4 million in 2001. This increase in general and administrative
expense is partially attributable to increased compensation expense, reflecting
estimated accruals for profit-based bonuses this year, and the inclusion of
Pelton in the current period's results.

Amortization and Impairment of Intangibles: Amortization and impairment of
intangibles of $3.5 million for the nine months ended September 30, 2001
decreased $33.0 million, or 90%, compared to the corresponding period last year.
The decrease is primarily due to the impairment of $31.9 million of goodwill
recorded during the nine months ended September 30, 2000. This decrease is
slightly offset by an increase in amortization and impairment of intangibles
primarily related to additional amortization of goodwill from the Pelton
acquisition.

Total Net Interest and Other Income: Total net interest and other income of
$3.3 million for the nine months ended September 30, 2001 decreased $1.7
million, or 34%, compared to the corresponding period last year primarily due to
declining interest rates on lower cash balances and lower interest-bearing note
receivable balances.

Income Tax Expense: Income tax expense of $2.0 million for the nine months
ended September 30, 2001 decreased $3.1 million compared to the corresponding
period last year. Income tax expense decreased from the prior period despite
higher income before taxes because: (i) we returned to profitability and are
currently recording an income tax provision that reflects the anticipated
year-end

effective tax rate, (ii) during the prior period we were profitable in certain
foreign tax jurisdictions but recognized no offsetting benefit from domestic net
operating losses, and (iii) we resolved certain tax issues and received a $1.6
million current period benefit. This benefit is not expected to recur in future
periods. Excluding this benefit, income tax expense for the current period
reflects an estimated 39% effective rate for the year.

In order to fully realize the deferred income tax assets, we will need to
generate future U.S. taxable income of approximately $133 million over the next
19-20 years. Although we have experienced significant losses in recent fiscal
years, taxable income for the years 1996 through 1998 aggregated approximately
$128 million. Regardless, the ultimate realization of the net deferred tax
assets, prior to the expiration of the net operating loss carry-forward in the
next 19-20 years, will require a return to sustained profitability.

Preferred Dividends: Preferred stock dividends for the three and nine months
ended September 30, 2001 and 2000 are related to outstanding Series B and Series
C Preferred Stock. We recognize the dividends as a charge to retained earnings
at the rate of 8% per year, compounded quarterly (of which 7% is accounted for
as a charge to additional paid-in capital and 1% is paid as a quarterly cash
dividend). The preferred stock dividend charge for the three months ended
September 30, 2001 was $1.4 million, compared to $1.3 million for the
corresponding period last year. The preferred stock dividend charge for the nine
months ended September 30, 2001 was $4.2 million, compared to $3.6 million for
the corresponding period last year.

LIQUIDITY AND CAPITAL RESOURCES

We have typically financed operations from internally generated cash and
funds from equity financings. Cash and cash equivalents were $96.1 million at
September 30, 2001, an increase of $3.7 million, or 4%, compared to December 31,
2000. The increase is due to cash flows provided by operating activities and
financing activities, offset by cash flows used in investing activities. Net
cash provided by operating activities was $1.6 million for the nine months ended
September 30, 2001 compared to the net cash provided by operating activities of
$2.1 million for the corresponding period last year. The changes in working
capital items for the nine months ended September 30, 2001 represented a $18.1
million use of cash, due primarily to increases in receivables as a result of
increased net sales and increases in inventories. The various working capital
accounts can vary in amount substantially from period to period, depending upon
timing and levels of sales, product mix sold, demand for products, percentages
of cash versus credit sales, collection rates, inventory levels, and general
economic and industry factors. Excluding changes in working capital items,
operating cash flow was a positive $19.7 million.

Net cash flow used in investing activities was $9.8 million for the nine
months ended September 30, 2001, an increase of $7.2 million, or 275%, compared
to the corresponding period last year. The principal investing activities were
capital expenditure projects and the acquisition of Pelton. Planned capital
expenditures for 2001 are approximately $8.0 million, including the purchase of
advanced manufacturing machinery and additions to our rental equipment fleet.

Cash flow provided by financing activities was $11.9 million for the nine
months ended September 30, 2001, an increase of $11.1 million compared to the
corresponding period last year. The principal source was proceeds from the
financing transaction related to the sale of our Stafford facilities, offset by
repayments of other long-term debt and the purchase of treasury stock.

In October 2001 our Board of Directors authorized management to repurchase
up to 1,000,000 shares of our common stock at such prices and at such times as
management deems appropriate. As of November 14, 2001, we had repurchased 86,600
shares at an average price of $7.92 per share.

We believe the combination of existing working capital, current cash on hand
and access to other financing sources will be adequate to meet anticipated
capital and liquidity requirements for the foreseeable future.

RECENT ACCOUNTING PRONOUNCEMENTS

SFAS No. 141, entitled "Business Combinations", was issued in June 2001 and
becomes effective July 1, 2001. SFAS No. 141 requires that all business
combinations be accounted for using the purchase method of accounting, which
requires that acquisitions be

recorded at fair value as of the date of acquisition. The pooling-of-interests
method of accounting allowed under prior standards, which reflected business
combinations using historical financial information, is now prohibited.

SFAS No. 142, entitled "Goodwill and Other Intangible Assets", was also
issued in June 2001, in concert with SFAS No. 141. SFAS No. 142 becomes
effective for us on January 1, 2002. On that date, goodwill will no longer be
amortized, but will be tested for impairment using a fair value approach.
Currently existing goodwill ($46.1 million at September 30, 2001) will continue
to be amortized through December 31, 2001. Any goodwill recorded by us from an
acquisition during the remainder of 2001 will not be subject to amortization.
SFAS No. 142 requires goodwill to be tested for impairment at a level referred
to as a reporting unit, generally one level lower than our reportable segments.
SFAS No. 142 requires us to perform the first goodwill impairment test on all
reporting units within six months of adoption. The first step is to compare the
fair value with the book value of a reporting unit. If the fair value of the
reporting unit is less than its book value, the second step will be to calculate
the impairment loss, if any. Any impairment loss from the initial adoption of
SFAS No. 142 will be recognized as a change in accounting principle. After the
initial adoption, we will test goodwill for impairment on an annual basis and
between annual tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying
amount.

We are still reviewing SFAS No. 142 to determine the effect, if any, of the
initial goodwill impairment testing. During the year ended December 31, 2000 and
the nine months ended September 30, 2001, we recorded goodwill amortization of
$4.5 million and $2.9 million, respectively. These amounts, less related income
tax effects, would not have been recorded under SFAS No. 142.

CONVERSION TO THE EURO CURRENCY

On January 1, 1999, certain members of the European Union established fixed
conversion rates between their existing currencies and the European Union's
common currency, the Euro. We own facilities and manufacture components for
systems in one member country. The transition period for the introduction of the
Euro is between January 1, 1999 and June 30, 2002. We continue to address the
issues involved with the introduction of the Euro. The more important issues
include: converting information technology systems; reassessing currency risk;
and processing tax and accounting records. Based on progress to date in
reviewing this matter, we believe that the introduction of the Euro has not and
will not have a significant impact on our business affairs and our processing of
business and accounting records.

CREDIT RISK

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

Our combined gross trade accounts receivable and notes receivable balance as
of September 30, 2001 from customers in Russia and other former Soviet Union
countries was approximately $5.4 million and was approximately $9.5 million from
customers in Latin American countries. As of September 30, 2001 the total
allowance for doubtful accounts (foreign and United States) was $1.7 million and
the allowance for loan losses was $10.9 million. During the nine months ended
September 30, 2001, there were $16.1 million of sales to customers in Russia and
other former Soviet Union countries, $1.9 million of sales to customers in Latin
American countries and $10.6 million of sales to customers in China
(substantially all sales to Russia and China were backed by irrevocable letters
of credit). All terms of sale for these foreign receivables are denominated in
United States dollars. Russia and certain Asian and Latin America countries have
experienced economic problems and uncertainties and devaluations of their
currencies in recent years. To the extent that economic conditions negatively
affect future sales to customers in those regions or the collectibility of
existing receivables, future results of operations, liquidity and financial
condition may be adversely affected.

CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS

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

o our expected revenues, operating profit and net income for 2001 and for
2002;

o future demand for seismic equipment and services;

o future economic conditions, including conditions in Russia and certain Asian
and Latin American countries;

o anticipated timing of commercialization and capabilities of our products
under development;

o potential alliances with strategic partners for development of new products;

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

o our expectations regarding realization of our deferred tax assets;

o the anticipated effects of changes in accounting standards;

o the effect of the introduction of the Euro;

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

o our future levels of capital expenditures.

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

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

We may not gain rapid market acceptance for our new products which could
materially and adversely affect our results of operations. Seismic exploration
requires sensitive scientific instruments capable of withstanding harsh
operating environments. In addition, our customers demand broad functionality
from our products. We require long development and testing periods before
releasing major new product enhancements and new products. We currently intend
to release for commercial use our VectorSeis sensor, our next generation land
seismic data acquisition system and our next generation marine seismic data
acquisition system by the end of 2002. If our anticipated product introductions
are delayed, our customers may turn to alternate suppliers and our anticipated
results of operations and financial condition will be adversely affected. We
have on occasion experienced delays in the scheduled introduction of new and
enhanced products. In addition, products as complex as those we offer sometimes
contain undetected errors or bugs when first introduced that, despite our
rigorous testing program, are not discovered until the product is purchased and
used by a customer. If our customers deploy our new products and they do not
work correctly, our relationship with our customers may be materially and
adversely affected. We cannot assure you that errors will not be found in future
releases of our products, or that these errors will not impair the market
acceptance of our products. If our new products are not accepted by our
customers as rapidly as we anticipate, our business and results of operations
may be materially and adversely affected.

The rapid pace of technological change in the seismic industry requires us
to make substantial capital expenditures and could make our products obsolete.
The markets for our products are characterized by rapidly changing technology
and frequent product introductions. We must invest substantial capital to
maintain our leading edge in technology with no assurance that we will receive
an adequate rate of return on such investments. If we are unable to develop and
produce successfully and timely new and enhanced products, we will be unable to
compete in the future and our business and results of operations will be
materially and adversely affected.

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

Our competitors have expanded or improved their product lines which has
adversely affected our results of operations. For instance, one competitor
recently introduced a lightweight land seismic system which we believe has made
our current land system more difficult to sell at acceptable margins. In
addition, one of our competitors has introduced a marine solid streamer product
that competes with our oil-filled product. Our net sales of marine streamers
have been, and will continue to be, adversely affected by customer preferences
for solid products. We had been negotiating an alliance with Thomson Marconi to
develop a next generation marine system that would have incorporated Thomson
Marconi's solid streamer technology. Because we were unable to agree on certain
commercial terms, we are currently exploring other alternatives to offer a
marine solid streamer. We can not assure you that we will find a cost-effective
way to market a solid streamer product or that we will be able to compete
effectively in the future for sales of marine streamers.

Further consolidation among our significant customers could materially and
adversely affect us. A relatively small number of customers account for the
majority of our net sales in any period. During the nine months ended September
30, 2001, four customers (Western Geco, Veritas DGC, Schlumberger and PGS)
accounted for approximately 54% of our net sales. In recent years, our customers
have been rapidly consolidating, shrinking the demand for our products. The loss
of any of our significant customers to further consolidation or otherwise could
materially and adversely affect our results of operations and financial
condition.

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

o pricing pressures from our customers and competitors;

o product mix sold in a period;

o inventory obsolescence;

o unpredictability of warranty costs;

o changes in sales and distribution channels;

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

o absorption of manufacturing costs through volume production.

We must establish our expenditure levels for product development, sales and
marketing and other operating expenses based, in large part, on our expected
future net sales and gross margin. As a result, if net sales or gross margins
fall below our initial expectations, our operating results and financial
condition are likely to be adversely affected because only a relatively small
portion of our expenses vary with our revenues.

We may be unable to obtain broad intellectual property protection for our
current and future products which may significantly erode our competitive
advantage. We rely on a combination of patent, copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to protect
our proprietary technologies. We believe that the technological and creative
skill of our employees, new product developments, frequent product enhancements,
name recognition and reliable product maintenance are the foundations of our
competitive advantage. Although we have a considerable portfolio of patents,
copyrights and trademarks, these property rights offer us only limited
protection. Our competitors may attempt to copy aspects of our products despite
our efforts to protect our proprietary rights, or may design around the
proprietary features of our products. Policing unauthorized use of our

proprietary rights is difficult and we are unable to determine the extent to
which such use occurs. Our difficulties are compounded in certain foreign
countries where the laws do not offer as much protection for proprietary rights
as the laws of the United States.

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

We derive a substantial amount of our revenues from foreign sales which pose
additional risks. Sales to foreign customers accounted for approximately 59% of
our consolidated revenues for the nine months ended September 30, 2001. United
States export restrictions affect the types and specifications of products we
can export. Additionally, to complete certain sales U.S. laws may require us to
obtain export licenses and there can be no assurance that we will not experience
difficulty in obtaining such licenses. Operations and sales in countries other
than the United States are subject to various risks peculiar to each country.
With respect to any particular country, these risks may include:

o expropriation and nationalization;

o political and economic instability;

o armed conflict and civil disturbance;

o currency fluctuations, devaluations and conversion restrictions;

o confiscatory taxation or other adverse tax policies;

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

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

The majority of our foreign sales are denominated in U.S. dollars. While
this practice protects the value of our assets as reported on our consolidated
financial statements, an increase in the value of the dollar relative to other
currencies will make our products more expensive, and therefore less
competitive, in foreign markets.

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

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

We are highly dependent on certain key personnel. Our future success depends
upon the continued contributions of personnel, particularly management
personnel, many of whom would be difficult to replace. Our success will also
depend on our ability to attract and retain skilled employees. Changes in
personnel, particularly technical personnel, could adversely affect operating
results and continued changes in management personnel could have a disruptive
effect on employees which could, in turn, adversely affect operating results.

Our strategy of pursuing acquisitions and alliances has risks that can
materially and adversely affect our business, results of operations and
financial condition. One of our business strategies is to acquire operations and
assets that are complementary to our existing business, or to enter strategic
alliances that will extend our existing business. Acquisitions and alliances
involve financial, operational and legal risks, including:

o increased levels of goodwill subject to potential impairment;

o increased interest expense or increased dilution from issuance of equity;

o disruption of existing and acquired business from our integration efforts;
and

o loss of uniformity in standards, controls, procedures and policies.

In addition, other potential buyers could compete with us for acquisitions
and strategic alliances. Competition could cause us to pay a higher price for an
acquisition than we otherwise might have to pay or reduce the available
strategic alternatives. We might be unsuccessful in identifying attractive
acquisition candidates, completing and financing additional acquisitions on
favorable terms or integrating the acquired businesses or assets into our
operations.

Our operations are subject to numerous government regulations which could
adversely limit our operating flexibility. Our operations are subject to laws,
regulations, government policies and product certification requirements
worldwide. Changes in such laws, regulations, policies or requirements could
affect the demand for our products or result in the need to modify products,
which may involve substantial costs or delays in sales and could have an adverse
effect on our future operating results. Certain countries are subject to
restrictions, sanctions and embargoes imposed by the United States government.
These restrictions, sanctions and embargoes prohibit or limit us from
participating in certain business activities in those countries.

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We may, from time to time, be exposed to market risk, which is the potential
loss arising from adverse changes in market prices and rates. We traditionally
have not entered into significant derivative or other financial instruments. We
are not currently a borrower under any material credit arrangements which
feature fluctuating interest rates. Market risk could arise from changes in
foreign currency exchange rates.

PART II - OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) List of Documents Filed.

10.28 Lease Agreement dated as of August 20, 2001, between NL Ventures III
Stafford, L.P. and Input/Output, Inc. filed as Exhibit 10.28 to our
Report on Form 10-Q for the nine months ended September 30, 2001,
and incorporated herein by reference.

15.1 Acknowledgement Letter Regarding Unaudited Interim Financial
Information from PricewaterhouseCoopers LLP.

99.1 Independent Accountants' Review Report.

(b) Reports on Form 8-K.

On September 21, 2001, we filed a Current Report on Form 8-K reporting
under Item 4. Changes in Registrant's Certifying Accountants concerning
the engagement of PricewaterhouseCoopers LLP as our independent
accountant, effective September 14, 2001 and the dismissal of our former
independent accountant, KPMG LLP effective September 14, 2001.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of
Stafford, State of Texas, on May 9, 2002.

INPUT/OUTPUT, INC.

May 9, 2002 By /s/ MARTIN DECAMP
-----------------------
Vice President-Accounting

EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION
- ------ -----------

15.1 Acknowledgement Letter Regarding Unaudited Interim Financial
Information from PricewaterhouseCoopers LLP.

99.1 Independent Accountants' Review Report.
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