NOTE 5: Debt and Capital Lease Obligations

        The Company's long-term debt and capital lease obligations were as follows (in thousands):

Revolving Credit Facilities

        PNC Credit Facility.    Until February 12, 2010, the Company had a Revolving Credit, Term Loan and Security Agreement with PNC Bank, National Association ("PNC"), as lead lender, which provided the Company with a $70.0 million revolving credit facility ("Revolver") maturing May 24, 2012. At December 31, 2009, the Company had a balance of $44.6 million drawn under the Revolver. The rate of the PNC facility was the prime rate plus 1.5%, 4.75% at December 31, 2009. On February 12, 2010, the Company's Revolver balance of $45.8 million was repaid in connection with the closing of the PGS Onshore acquisition. The Company recorded a loss of $1.2 million on the redemption of the facility which consisted of $1 million related to the acceleration of costs that were being amortized over the expected life of the facility, and approximately $0.2 million related to prepayment penalties.

        RBC Credit Facility.    On February 12, 2010, Geokinetics Holdings completed the closing of a revolving credit facility and letters of credit for the account of Geokinetics Holdings under the terms of a Credit Agreement with RBC (the "RBC Facility" or the "revolving credit facility"), which matures on February 12, 2013. Effective June 30, 2010, the Company amended the RBC Facility to, among other things, provide greater flexibility in meeting financial covenants for the quarters ending June 30, 2010 and September 30, 2010. In addition, the permitted outstanding borrowing under the revolver was reduced from $50 million to $40 million. Borrowings outstanding under the revolving credit facility bear interest at a floating rate based on the greater of: (i) 3% per year, (ii) Prime Rate, (iii) 0.5% above the Federal Funds Rate, or iv) 1% above one month LIBOR; plus an applicable margin from 4.5% to 6.5% depending on the Company's total leverage ratio. The rate was 7.5% at June 30, 2010. Financial covenants include a maximum total leverage ratio of 8.6 and an interest coverage ratio of 1.0 at June 30, 2010 and 6.3 and 2.25 respectively at September 30, 2010. In addition, at September 30, 2010, a fixed charge coverage ratio may not be less than 1.0. The RBC Facility also contains restrictions on liens, investments, indebtedness, mergers and acquisitions, dispositions, certain payments, and other specific transactions. As of June 30, 2010, the Company was in compliance with these covenants. The outstanding balance of this revolving credit facility was $9.0 million as of June 30, 2010 and $21.0 million on August 6, 2010.

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GEOKINETICS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 5: Debt and Capital Lease Obligations (Continued)

        Borrowings under the RBC Facility are guaranteed by Geokinetics and each of its existing and each subsequently acquired or organized wholly-owned U.S. direct or indirect subsidiary of Geokinetics. Each of the entities guaranteeing the revolving credit facility will secure the guarantees on a first priority basis with a lien on substantially all of the assets of such guarantor. Borrowings under the RBC Facility are deemed Priority Bank Debt under the inter-creditor agreement with the holders of the Notes, defined below, and so the Notes will be effectively subordinated to borrowings under the revolving credit facility pursuant to such inter-creditor agreement.

        Based on our current forecast, we believe that it is likely that we will not be able to maintain the covenants required at the September 30, 2010 measurement date, and possibly beyond. We expect to need to use the RBC Facility to fund capital expenditures and crew mobilizations. If we are unable to remedy this situation, we may be forced to delay capital expenditures and/or decline opportunities for new work that requires significant working capital. As such, we are currently in discussions to amend the facility or receive a waiver to address this situation. There can be no assurance that we will be successful in doing so on commercially reasonable terms, if at all.

Senior Secured Notes Due 2014

        On December 23, 2009, Geokinetics Holdings, a wholly owned subsidiary of the Company, issued $300 million of 9.75% Senior Secured Notes due 2014 (the "Notes") in a private placement to institutional buyers at an issue price of 98.093% of the principal amount. The net proceeds the Company received in connection with the issuance of the Notes have been recorded in long-term debt ($294.3 million) in the consolidated financial statements. The discount is being accreted as an increase to interest expense over the term of the Notes. At June 30, 2010, the effective interest rate on the Notes was 10.2%, which includes the effect of the discount accretion.

        The Notes bear interest at the rate of 9.75% per year, payable semi-annually in arrears on June 15 and December 15 of each year. The Notes are fully and unconditionally guaranteed, by the Company, and by each of the Company's current and future domestic subsidiaries (other than Geokinetics Holdings, which is the issuer of the Notes).

        Until the second anniversary following their issuance, the Company may redeem up to 10% of the original principal amount of the Notes during each 12-month period at 103% of the principal amount plus accrued interest. Thereafter, the Company may redeem all or part of the Notes at a prepayment premium which will decline over time. The Company will be required to make an offer to repurchase the Notes at 101% of the principal amount plus accrued interest if the Company experiences a change of control. The indenture for the Notes contains customary covenants for non-investment grade indebtedness, including restrictions on the Company's ability to incur indebtedness, to declare or pay dividends and repurchase its capital stock, to invest the proceeds of asset sales, and to engage in transactions with affiliates. The Company is also required under the Notes to file a shelf registration statement with the Securities and Exchange Commission ("SEC") and make best efforts to cause the shelf registration statement be declared effective by the SEC on or prior to 270 days after the original issue. If the Company and the Guarantors fail to file the registration statements required by the Notes on or before September 19, 2010, the Company will pay additional interest of 0.25% per annum on the principal amount of the Notes for the first 90-day period immediately following the occurrence of the default.

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GEOKINETICS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 5: Debt and Capital Lease Obligations (Continued)

Capital Lease Obligations

        The Company had several equipment lease agreements with CIT Group Equipment Financing, Inc. ("CIT") on seismic and other transportation equipment with terms of up to 36 months and various interest amounts. The original amount of the leases was approximately $39.9 million and the balance at December 31, 2009 was approximately $12.1 million. These amounts were repaid on February 12, 2010 in connection with the closing of the PGS Onshore acquisition. The Company recorded a loss of $0.3 million on the redemption of these obligations related to prepayment penalties.

        The Company also has four equipment lease agreements with Bradesco Leasing in Brazil with terms of 36 months at a rate of 10.1% per year. The original amount of the leases was approximately $3.0 million and the balance at June 30, 2010 was approximately $1.6 million.

Other

        The Company had vendor financing arrangements to purchase certain equipment. The total balance of vendor financing arrangements at December 31, 2009, was approximately $9.9 million. These amounts were repaid on February 12, 2010 in connection with the closing of the PGS Onshore acquisition. The Company recorded a loss of $1.0 million on the redemption of these financing arrangements related to prepayment penalties.

        The Company maintains various foreign bank line of credit and overdraft facilities used to fund short-term working capital needs. At June 30, 2010, the balance of the foreign line of credit facilities was $1.5 million. There were no outstanding balances under the overdraft facilities at June 30, 2010, and the Company had approximately $6.8 million of availability.

NOTE 6: Preferred and Common Stock

Preferred Stock

        On December 15, 2006, in connection with the repayment of the $55.0 million subordinated loan, the Company issued 228,683 shares of its Series B Preferred Stock, $10.00 par value, pursuant to the terms of the Securities Purchase Agreement dated September 8, 2006, with Avista Capital Partners, L.P. ("Avista"), an affiliate of Avista and another institutional investor ("the Series B-1 Preferred Stock").

        On July 28, 2008, the Company issued 120,000 shares of its Series B Preferred Stock, $10.00 par value ("the Series B-2 Preferred Stock") and warrants to purchase 240,000 shares of Geokinetics common stock to Avista and an affiliate of Avista for net proceeds of $29.1 million. The Company recorded the preferred stock net of the fair value of the warrants issued and recorded the fair value of the warrants for approximately $1.5 million as additional paid in capital. Effective January 1, 2009 the company adopted ASC 815-15 which requires the Company to bifurcate the embedded derivative relating to the conversion feature in the Company's preferred stock (see accounting policy relating to derivative liabilities in Note 2).

        At the Company's option, each share of Series B Preferred Stock is convertible into shares of common stock, immediately upon the sale of common stock at a price per share yielding net proceeds to the Company of not less than $35.00 per share in an under written public offering pursuant to an effective registration statement under the Securities Act of 1933 (the "Securities Act"), which provides net proceeds to the Company and selling stockholders, if any, of not less than $75 million.

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GEOKINETICS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 6: Preferred and Common Stock (Continued)

        As long as at least 55,000 shares of Series B Preferred Stock are outstanding, the consent of the holders of a majority of the Company's Series B Preferred Stock is required to, among other things, make any material change to the Company's certificate of incorporation or by-laws, declare a dividend on the Company's common stock, enter into a business combination, increase or decrease the six members of its board of directors and the holders are allowed to elect one member of the board of directors.

        If the Company authorizes the issuance and sale of additional shares of its common stock other than pursuant to an underwritten public offering registered under the Securities Act, or for non-cash consideration pursuant to a merger or consolidation approved by its board of directors, the Company must first offer in writing to sell to each holder of its Series B Preferred Stock an equivalent pro rata portion of the securities being issued. The conversion price in the preferred stock is subject to a down-round provision whereby subsequent equity issuances at a price below the existing conversion price will result in a downward adjustment to the conversion price.

        On December 18, 2009, the holders of the Series B-1 Preferred Stock and the Company, as a condition of the common stock offering on the same date and agreement for the issuance of shares in connection with the closing of the PGS Onshore acquisition, agreed to the following changes:

•

the conversion price was reduced from the previous $25 to $17.436;



•

the Company will be able to pay dividends in kind until December 15, 2015;



•

the Company will not be required to redeem the series B-1 preferred stock until December 15, 2015; and



•

the Company increased the dividend rate on the series B-1 preferred stock from 8% to 9.75%;



•

the Company paid a cash fee of 2% of the liquidation amount, $2.1 million, plus accrued and unpaid dividends of the series B-1 and B-2 preferred stock

        As of June 30, 2010, the series B-1 preferred stock is presented as mezzanine equity due to the series B preferred stock characteristics described below:

        Each holder of Series B-1 Preferred Stock is also entitled to receive cumulative dividends at the rate of 9.75% per annum on the liquidation preference of $250 per share, compounded quarterly. At the Company's option through December 15, 2015, dividends may be paid in additional shares of Series B-1 Preferred Stock. After such date, dividends are required to be paid in cash if declared.

        After December 15, 2015, holders of not less than a majority of outstanding shares of Series B-1 Preferred Stock may require payment, upon written notice of the redemption of all outstanding shares of Series B-1 Preferred Stock, in cash, at a price equal to $250 per share, plus any accrued dividends.

        Dividends on the Series B Preferred Stock have been paid in kind exclusively to date.

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GEOKINETICS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 6: Preferred and Common Stock (Continued)

Mandatorily Redeemable Preferred Stock

        In December, 2009, in conjunction with the structuring of the PGS Onshore acquisition, the Company agreed to exchange its series B-2 preferred stock for new series C redeemable preferred stock plus the issuance of 750,000 shares of common stock. The fair value of the series C preferred stock at the date of exchange was $32.1 million.

        The series C redeemable preferred stock were issued to Avista, and have an aggregate liquidation preference equal to the liquidation preference of the series B-2 preferred stock ($32.8 million), and are not required to be redeemed until one year after the maturity date of the Senior Secured Notes. The series C preferred stock accrue dividends at a rate of 11.75%. Dividends may accrue or may be paid in kind with additional shares of series C preferred stock, at the election of Avista, until December 13, 2015. The series C preferred stock is not convertible or exchangeable for the Company's common stock. This stock is classified as long-term liability as it is considered a mandatorily redeemable financial instrument in accordance with ASC Topic 480, "Distinguishing liabilities from equity." Dividends paid will be reflected as interest expense in results of operations.

Common Stock

        The holders of common stock have full voting rights on all matters requiring stockholder action, with each share of common stock entitled to one vote. Holders of common stock are not entitled to cumulate votes in elections of directors. No stockholder has any preemptive right to subscribe to an additional issue of any stock or to any security convertible into such stock.

        In addition, as long as any shares of the Series B-1 and C Preferred Stock discussed above are outstanding, the Company may not pay or declare any dividends on common stock unless the Company has paid, or at the same time pays or provides for the payment of, all accrued and unpaid dividends on the Series B-1 Preferred Stock. In addition, the credit facilities restrict the Company's ability to pay dividends on common stock. No dividends on common stock have been declared for any periods presented.

        On December 18, 2009, the Company issued 4,000,000 shares of its common stock at a public offering price of $9.25 per share. In addition, the Company issued 750,000 shares to Avista in connection with the exchange of the Series B-2 preferred stock for the new series C preferred stock.

        On February 12, 2010, the Company issued 2,153,616 shares of its common stock to PGS in connection with the Acquisition of PGS Onshore.

Common Stock Warrants

        As part of the Trace acquisition in December 2005, the Company issued 274,105 warrants at an exercise price of $20.00, which expire on December 1, 2010.

        As part of the issuance of Series B-2 Preferred Stock on July 28, 2008, the Company issued additional 240,000 warrants at an exercise price of $20.00, which expire on July 28, 2013. The exercise price of these warrants is subject to a down-round provision whereby subsequent equity issuances at a

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GEOKINETICS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 6: Preferred and Common Stock (Continued)

price below the existing exercise price will result in a downward adjustment to the exercise price and may extend the expiration date of the warrants.

        On December 18, 2009, the exercise price of the July 28, 2008 warrants was adjusted to $9.25 per share as a result of the issuance in December 2009 of common stock in accordance with price adjustment provisions. At June 30, 2010, there are 514,105 warrants outstanding.

NOTE 7: Income per Common Share

        The following table sets forth the computation of basic and diluted earnings per common share (in thousands, except per share data):

        The denominator used for the calculation of diluted earnings per common share for the three months and six months ended June 30, 2009 and 2010, excludes the effect of any stock options, restricted stock, warrants and convertible preferred stock because the effect is anti-dilutive. At June 30, 2010, there were options to purchase 234,638 shares of common stock, 460,222 shares of unvested restricted stock, warrants to purchase 514,105 shares of common stock, and preferred stock convertible into 4,366,204 shares of common stock.

        The numerator used for the calculation of diluted earnings per share for the three and six months ended June 30, 2009 and 2010, is "Income applicable to common stockholders" as the convertible preferred stock was deemed to be anti-dilutive in that period.

NOTE 8: Segment Information

        The Company has two reportable segments: seismic data acquisition and seismic data processing and interpretation. The Company further breaks down its seismic data acquisition segment into two geographic reporting units: North American seismic data acquisition and international seismic data acquisition. The North American reporting unit acquires data for customers by conducting seismic shooting operations in the United States and Canada; and the international seismic data acquisition reporting unit operates in Latin America (including Mexico), Africa, the Middle East, Australia, New Zealand and the Far East. The data processing and interpretation segment operates processing centers in Houston, Texas and London, United Kingdom to process seismic data for oil and gas exploration companies worldwide.

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GEOKINETICS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 8: Segment Information (Continued)

        The Company's reportable segments are strategic business units that offer different services to customers. Each segment is managed separately, has a different customer base, and requires unique and sophisticated technology. The accounting policies of the segments are the same as those described in Note 2: "Basis of Presentation and Significant Accounting Policies." The Company evaluates performance based on earnings or loss before interest, taxes, other income (expense), depreciation and amortization. There are no significant inter-segment sales or transfers.

        The following unaudited table sets forth significant information concerning the Company's reportable segments and geographic reporting units as of and for the three and six months ended June 30, 2009 and 2010 (in thousands):

NOTE 9: Income Taxes

        The provision for income tax for the three and six months ended June 30, 2009 was $11,593 and $16,799 compared to $1,869 and $2,314 for the three and six months ended June 30, 2010, respectively. While the Company had pretax losses during the three and six months ended June 30, 2010 the income

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GEOKINETICS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9: Income Taxes (Continued)

tax provision for these periods relate primarily to taxes due in countries with deemed profit tax regimes, withholding taxes and the release of valuation allowance in certain foreign jurisdictions with current year operating profits based on the Company's reevaluation of the realizability of these future tax benefits.

        The following summarizes changes in the Company's uncertain tax positions for the six months ended June 30, 2010 (in thousands):

        All additions or reductions to the above liability affect the Company's effective tax rate in the respective period of change. The Company accounts for any applicable interest and penalties on uncertain tax positions, which was $0.4 million for the six months ended June 30, 2010, as a component of income tax expense. At December 31, 2009, and June 30, 2010, the Company had $1.2 million and $1.6 million of accrued interest related to unrealized tax benefits, respectively. The tax years that remain subject to examination by major tax jurisdictions are from 2004 to 2010.

NOTE 10: Fair Value of Financial Instruments

        The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable and short-term debt approximate their fair value due to the short maturity of those instruments, and therefore, have been excluded from the table below. The fair value of the Notes is determined by multiplying the principal amount by the market price. The fair value of the mandatorily redeemable preferred stock and the Series B Preferred stock was calculated by using the discounted cash flow method of the income approach. In addition, the Monte-Carlo Pricing Model was used to determine the value of the conversion feature of the Series B Preferred stock. The following table sets forth the fair value of the Company's remaining financial assets and liabilities as of December 31, 2009 and June 30, 2010 (in thousands):

        The Company is not a party to any hedge arrangements, commodity swap agreement or other derivative financial instruments.

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GEOKINETICS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 10: Fair Value of Financial Instruments (Continued)

        The Company's seismic data acquisition and seismic data processing segments utilize foreign subsidiaries and branches to conduct operations outside of the United States. These operations expose the Company to market risks from changes in foreign exchange rates.

NOTE 11: Commitments & Contingencies

        The Company is involved in various claims and legal actions arising in the ordinary course of business. Management is of the opinion that none of the claims and actions will have a material adverse impact on the Company's financial position, results of operations, or cash flows.

NOTE 12: Related Party Transactions

        During fiscal 2009, the Company received food, drink, and other catering services for its crews in one of its international locations from a company that was substantially owned by certain employees and former employees of the Company. For the six months ended June 30, 2009 the Company spent approximately $3.3 million with this Company. The Company believes that all transactions were arms-length on terms at least as favorable as market rates. The Company stopped receiving services from this Company in the third quarter of 2009.

        PGS owns 2,153,616 shares or approximately 12% of the Company's common shares outstanding. In connection with the Acquisition, the Company entered into a transition services agreement with PGS effective February 12, 2010 for up to a maximum of 120 days. This agreement includes office facilities, accounting, information, payroll and human resource services. The services provided by PGS totaled approximately $1.4 million and $3.2 million for the three and six months ended June 30, 2010 which are included in the Company's general and administrative expenses for the same period. The Company stopped receiving services from PGS as of June 30, 2010.

        In addition, PGS and the Company have agreed to reimburse each other for certain amounts resulting from adjustments from the Acquisition as follows (in thousands):

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GEOKINETICS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 13: Condensed Consolidating Financial Information

        On February 12, 2010, upon completion of the PGS Onshore acquisition, the $300 million Notes due 2014 became fully and unconditionally guaranteed, jointly and severally, by the Company, and by each of the Company's current and future domestic subsidiaries (other than Geokinetics Holdings, which is the issuer of the Notes). The non-guarantor subsidiaries consist of all subsidiaries and branches outside of the United States. Separate condensed consolidating financial statement information for the parent, guarantor subsidiaries and non-guarantor subsidiaries as of December 31, 2009 and June 30, 2010 and for the three and six months ended June 30, 2009 and 2010 is as follows (in thousands):