The oil and natural gas industry is expected to spend approximately $137 billion in 2006 to discover and produce oil and natural gas reserves, according to PennWell Corporation. Oil and natural gas companies base their exploration and production spending on their ability to predict whether subsurface geological formations contain oil or natural gas and to determine whether reserves can be extracted in a cost-effective manner.

The process of finding, extracting and producing oil and natural gas requires large capital and operating expenditures with no certainty of success. Oil and natural gas companies must analyze and evaluate subsurface data in order to make intelligent investment decisions, realize greater returns and capitalize on their investment. Companies make these decisions during all market conditions, including during periods of low commodity prices, when exploration and production capital budgets are constrained, and during periods of high commodity prices, when extraction activities must be maximized. In addition, oil and natural gas companies face other significant challenges relating to the exploration and production processes.

To address these and other challenges, oil and natural gas companies have increased their reliance on technical analyses of the Earth\'s subsurface. According to the 2005 IT Spending Survey research report published by Energy Insights, an IDC Company, total spending on software by the oil and natural gas industry in 2005 was approximately $8 billion and is expected to grow to more than $11 billion by 2009. The increasing complexity of oil and natural gas extraction requires more sophisticated technical analyses and process optimization to ensure efficient production activities with adequate financial returns. To assist with these requirements, oil and natural gas companies are allocating increased amounts of their technology spending to software and services that assist them in making these exploration and production investment decisions.

The Company’s Rock and Fluid Imaging solutions provide its customers with advanced seismic processing and imaging technology. The Company’s software processes and translates hundreds of terabytes of field data per reservoir into high-resolution images of the Earth\'s subsurface using cost-effective, server-based computing. The Company’s applications reduce data processing time and optimize the underlying data to create detailed subsurface images of potential drilling locations. The Company’s key software applications within these solutions include Focus and GeoDepth.

The Company’s Rock and Fluid Interpretation solutions allow its customers to analyze the relationships of various data types, including but not limited to seismic data, satellite images, well logs, seismic sensor data, and well and production data. These combined data sets are used to create subsurface models for the interpretation and analysis of prospects for oil and natural gas wells. The Company’s key software applications within these solutions include VoxelGeo, SeisEarth, GOCAD and Explorer.

The Company’s Rock and Fluid Characterization solution bridges the geological, geophysical and petrophysical properties of the earth model, by providing a four-dimensional subsurface model. These four-dimensional models provide three-dimensional images over a period of time, providing a greater understanding of the relationship between the subsurface reservoir and the fluids in the reservoir. The Company’s key software applications within these solutions include Stratimagic and Geolog.

The Company’s Rock and Fluid Well Planning and Drilling solutions enable production and drilling engineers to rapidly engineer and plan the most effective and cost-efficient well path for the extraction of oil and natural gas, including the ability to monitor real-time drilling progress in the earth model. The Company’s key software application within these solutions is Sysdrill.

The Company’s software modules and workflows are built around its proprietary common integration framework, Epos Data Sharing and Application Interoperability Framework. Epos is a middleware platform developed using industry open standards. It allows the Company’s software applications to share and analyze data across its software suite.

Total cost of revenues was $27.0 million for the six months ended June 30, 2006, representing an increase of $6.3 million or 30%, as compared to $20.7 million for the six months ended June 30, 2005.

Sales and marketing expense was $9.8 million for the first six months ended June 30, 2006, representing an increase of $1.0 million or 11%, as compared to $8.8 million for the first six months ended June 30, 2005.

Research and development expense was $9.8 million for the six months ended June 30, 2006, representing an increase of $0.4 million or 4%, as compared to $9.4 million for the six months ended June 30, 2005.

Interest expense, net was $2.2 million in the six months ended June 30, 2006, representing a decrease of $0.7 million or 24%, as compared to $2.9 million in the six months ended June 30, 2005.

Other expense, net was $0.2 million in both the six months ended June 30, 2006 and the six months ended June 30, 2005.