**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**Form 10-Q**

 

**(Mark One)**
| **ý** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d)**                                                                                                                                                                           |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | **OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                          |
|       |       |                                                                                                                                                                                                                                 |   |   |
|       |       | **For the quarterly period ended January 31,  2005**                                                                                                                                                                            |
|       |       |                                                                                                                                                                                                                                 |   |   |
|       |       | **OR**                                                                                                                                                                                                                               |
|       |       |                                                                                                                                                                                                                                 |   |   |
| **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d)**                                                                                                                                                                          |
| ** ** | ** ** | **OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                          |
| ** ** | ** ** | ** **                                                                                                                                                                                                                           |
| ** ** | ** ** | **For the transition period from                to                ** |

 

**Commission file number 1-7427**

 

**Veritas DGCInc.**

(Exact name of registrant as specified in itscharter)

 
| **Delaware**                                                    | ** ** | **76-0343152**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction  of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |                                  |
| **10300 Town Park**                                             |       |                                  |
| **Houston, Texas**                                              | ** ** | **77072**                             |
| (Address of principal  executive offices)                       |       | (Zip Code)                            |

 

**(832) 351-8300**

(Registrant’s telephone number, including areacode)

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes o No ý

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act). Yes ý No o

 

The number of shares of theCompany’s common stock, $.01 par value, outstanding at May 31, 2005 was33,849,816 (including 155,370 Veritas Energy Services Inc. exchangeable shareswhich are identical to the company’s common stock in all material respects).

 

 

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**TABLE OF CONTENTS**

 

**FORM 10-Q**

 
| **PART I.  FINANCIAL INFORMATION**                                                                                              |   |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                      |   |
| ITEM 1. FINANCIAL STATEMENTS                                                                                                         |   |
| Consolidated  Statements of Operations and Comprehensive Income (Loss) for the Three and  Six Months Ended January 31, 2005 and 2004 |   |
| Consolidated Balance Sheets  as of January 31, 2005 and July 31, 2004                                                           |   |
| Consolidated  Statements of Cash Flows for the Six Months Ended January 31, 2005 and  2004                                           |   |
| Notes to  Consolidated Financial Statements                                                                                               |   |
| ITEM  2. MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                 |   |
| ITEM  3. QUANTITATIVE AND  QUALITATIVE DISCLOSURES REGARDING MARKET RISK                                                             |   |
| ITEM  4. CONTROLS AND PROCEDURES                                                                                                     |   |
|                                                                                                                                      |   |
| **PART II.   OTHER INFORMATION**                                                                                                |   |
|                                                                                                                                      |   |
| ITEM  6. EXHIBITS                                                                                                                    |   |
| SIGNATURES                                                                                                                                |   |

 

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# **PART I.  FINANCIAL INFORMATION**

# ** **

## **Item 1.**                                       Financial Statements

## ** **

**VERITAS DGC INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVEINCOME (LOSS)**

**(Unaudited)**

** **
| ** **                                                          | ** ** | **Three  Months Ended  January 31,**     | ** ** | **Six  Months Ended****January 31,** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                          | ** ** | **2005**                                      | ** ** | **Restated****2004**                      | ** ** | **2005** | ** ** | **Restated****2004** | ** ** |
| ** **                                                          | ** ** | **(In  thousands, except per share amounts)** | ** ** |
|                                                                |       |                                          |       |                                      |       |   |   |   |   |
| Revenues                                                            |       | $                                             | 192,228    |                                      | $          | 145,056 |   | $ | 321,809 |   | $ | 247,463 |   |
| Cost  of services                                                   |       | 144,950                                       |       | 112,864                                   |       | 260,952 |   | 228,714 |   |
| Research  and development                                           |       | 5,020                                         |       | 3,695                                     |       | 9,114 |   | 7,140 |   |
| General  and administrative                                         |       | 8,595                                         |       | 6,392                                     |       | 14,954 |   | 12,583 |   |
| Operating  income (loss)                                            |       | 33,663                                        |       | 22,105                                    |       | 36,789 |   | (974 | ) |
| Interest  expense                                                   |       | 906                                           |       | 4,197                                     |       | 1,663 |   | 8,476 |   |
| Other  (income), net                                                |       | (1,011                                        | )          | (347                                      | )          | (1,589 | ) | (505 | ) |
| Income  (loss) before provision for income taxes                    |       | 33,768                                        |       | 18,255                                    |       | 36,715 |   | (8,945 | ) |
| Provision  for income taxes                                         |       | 16,400                                        |       | 4,661                                     |       | 18,369 |   | 4,446 |   |
| Net  income (loss)                                                  |       | $                                             | 17,368     |                                      | $          | 13,594 |   | $ | 18,346 |   | $ | (13,391 | ) |
|                                                                |       |                                          |       |                                      |       |   |   |   |   |
| Net  income (loss) per share:                                       |       |                                          |       |                                      |       |   |   |   |   |
| Basic:                                                              |       |                                          |       |                                      |       |   |   |   |   |
| Net  income (loss) per common share                                 |       | $                                             | .51        |                                      | $          | .40 |   | $ | .54 |   | $ | (.40 | ) |
| Weighted  average common shares (including exchangeable shares)     |       | 33,783                                        |       | 33,745                                    |       | 33,767 |   | 33,668 |   |
|                                                                |       |                                          |       |                                      |       |   |   |   |   |
| Diluted:                                                            |       |                                          |       |                                      |       |   |   |   |   |
| Net  income (loss) per common share                                 |       | .51                                           |       | $                                         | .40        |   | $ | .53 |   | $ | (.40 | ) |
| Weighted  average common shares (including exchangeable shares)     |       | 34,318                                        |       | 34,003                                    |       | 34,323 |   | 33,668 |   |
|                                                                |       |                                          |       |                                      |       |   |   |   |   |
| Comprehensive  income (loss):                                       |       |                                          |       |                                      |       |   |   |   |   |
| Net  income (loss)                                                  |       | $                                             | 17,368     |                                      | $          | 13,594 |   | $ | 18,346 |   | $ | (13,391 | ) |
| Other  comprehensive income (loss) (net of tax, $0 in all periods): |       |                                          |       |                                      |       |   |   |   |   |
| Foreign  currency translation adjustments                           |       | (697                                          | )          | 584                                       |       | 6,588 |   | 6,027 |   |
| Other  unrealized gain (loss)                                       |       | 142                                           |       | (691                                      | )          | 226 |   | (604 | ) |
| Total  other comprehensive income (loss)                            |       | (555                                          | )          | (107                                      | )          | 6,814 |   | 5,423 |   |
| Comprehensive  income (loss)                                        |       | $                                             | 16,813     |                                      | $          | 13,487 |   | $ | 25,160 |   | $ | (7,968 | ) |

 

See Notes to Consolidated Financial Statements

 

1

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**VERITAS DGC INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(Dollars in thousands, except par value)**

 
| ** **                                                                                                                                                          | ** ** | **January 31,****2005** | ** ** | **July 31,****2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------|------------|
| ** **                                                                                                                                                          | ** ** | **(Unaudited)**              | ** ** | ** **                | ** ** |
| ASSETS                                                                                                                                                              |       |                         |       |                      |       |
| Current  assets:                                                                                                                                                    |       |                         |       |                      |       |
| Cash  and cash equivalents                                                                                                                                          |       | $                            | 205,230    |                      | $          | 116,299 |   |
| Restricted  cash investments                                                                                                                                        |       | 236                          |       | 111                       |       |
| Accounts  and notes receivable (net of allowance of $875 at January and $1,109 at  July)                                                                       |       | 176,271                      |       | 166,810                   |       |
| Materials  and supplies inventory                                                                                                                                   |       | 4,319                        |       | 4,198                     |       |
| Prepayments  and other                                                                                                                                              |       | 18,007                       |       | 15,599                    |       |
| Income  taxes receivable                                                                                                                                            |       | —                       |       | 12,617                    |       |
| Total  current assets                                                                                                                                               |       | 404,063                      |       | 315,634                   |       |
|                                                                                                                                                                |       |                         |       |                      |       |
| Property  and equipment                                                                                                                                             |       | 485,131                      |       | 479,639                   |       |
| Less  accumulated depreciation                                                                                                                                      |       | 375,045                      |       | 357,976                   |       |
| Property  and equipment, net                                                                                                                                        |       | 110,086                      |       | 121,663                   |       |
|                                                                                                                                                                |       |                         |       |                      |       |
| Multi-client  data library                                                                                                                                          |       | 295,700                      |       | 313,153                   |       |
| Deferred  tax asset                                                                                                                                                 |       | 1,669                        |       | 1,223                     |       |
| Other  assets                                                                                                                                                       |       | 24,856                       |       | 24,573                    |       |
| Total                                                                                                                                                               |       | $                            | 836,374    |                      | $          | 776,246 |   |
|                                                                                                                                                                |       |                         |       |                      |       |
| LIABILITIES AND STOCKHOLDERS’  EQUITY                                                                                                                          |       |                         |       |                      |       |
| Current  liabilities:                                                                                                                                               |       |                         |       |                      |       |
| Trade  accounts payable                                                                                                                                             |       | $                            | 57,590     |                      | $          | 44,907 |   |
| Accrued  and deferred income taxes                                                                                                                                  |       | 12,799                       |       | 7,145                     |       |
| Other  accrued liabilities                                                                                                                                          |       | 77,181                       |       | 67,650                    |       |
| Total  current liabilities                                                                                                                                          |       | 147,570                      |       | 119,702                   |       |
| Non-current  liabilities:                                                                                                                                           |       |                         |       |                      |       |
| Long-term  debt                                                                                                                                                     |       | 155,000                      |       | 155,000                   |       |
| Other  non-current liabilities                                                                                                                                      |       | 16,429                       |       | 11,854                    |       |
| Total  non-current liabilities                                                                                                                                      |       | 171,429                      |       | 166,854                   |       |
| Stockholders’  equity:                                                                                                                                         |       |                         |       |                      |       |
| Common  stock, $.01 par value; issued: 35,014,376 shares and 34,821,298 shares,  respectively (excluding Exchangeable Shares of 155,370 and 185,921,  respectively) |       | 350                          |       | 348                       |       |
| Additional  paid-in capital                                                                                                                                         |       | 444,623                      |       | 441,982                   |       |
| Accumulated  earnings                                                                                                                                               |       | 81,490                       |       | 63,144                    |       |
| Accumulated  other comprehensive income:                                                                                                                            |       |                         |       |                      |       |
| Cumulative  foreign currency translation adjustment                                                                                                                 |       | 13,919                       |       | 7,331                     |       |
| Other  comprehensive income (loss)                                                                                                                                  |       | (657                         | )          | (883                      | )          |
| Unearned  compensation                                                                                                                                              |       | (691                         | )          | (604                      | )          |
| Treasury  stock, at cost; 1,319,005 shares and 1,317,532 shares, respectively                                                                                       |       | (21,659                      | )          | (21,628                   | )          |
| Total  stockholders’ equity                                                                                                                                    |       | 517,375                      |       | 489,690                   |       |
| Total                                                                                                                                                               |       | $                            | 836,374    |                      | $          | 776,246 |   |

 

See Notes to Consolidated Financial Statements

 

2

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**VERITAS DGC INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                                              | ** ** | **Six  Months Ended January 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                              | ** ** | **2005**                               | ** ** | **Restated****2004** | ** ** |
| ** **                                                                                              | ** ** | **(In  thousands)**                    | ** ** |
| Cash  flows from operating activities:                                                                  |       |                                   |       |   |   |
| Net  income (loss)                                                                                      |       | $                                      | 18,346     |   | $ | (13,391 | ) |
| Non-cash  items included in net income (loss):                                                          |       |                                   |       |   |   |
| Depreciation  and amortization, net (other than multi-client)                                           |       | 22,195                                 |       | 20,059 |   |
| Amortization  of multi-client library                                                                   |       | 84,403                                 |       | 105,446 |   |
| Loss  (gain) on disposition of property and equipment                                                   |       | (356                                   | )          | 480 |   |
| Equity  in loss of joint venture                                                                        |       | —                                 |       | 613 |   |
| Deferred  taxes                                                                                         |       | (616                                   | )          | 4,142 |   |
| Amortization  of unearned compensation                                                                  |       | 178                                    |       | 240 |   |
| Change  in operating assets/liabilities:                                                                |       |                                   |       |   |   |
| Accounts  and notes receivable                                                                          |       | (7,333                                 | )          | (39,284 | ) |
| Materials  and supplies inventory                                                                       |       | (115                                   | )          | 1,003 |   |
| Prepayments  and other                                                                                  |       | (2,151                                 | )          | (2,477 | ) |
| Income  tax payable                                                                                     |       | 18,827                                 |       | 1,080 |   |
| Accounts  payable and other accrued liabilities                                                         |       | 20,907                                 |       | 14,468 |   |
| Other                                                                                                   |       | 7,377                                  |       | (3,437 | ) |
| Net  cash provided by operating activities                                                              |       | 161,662                                |       | 88,942 |   |
|                                                                                                    |       |                                   |       |   |   |
| Cash  flows from investing activities:                                                                  |       |                                   |       |   |   |
| Increase  in restricted cash                                                                            |       | (124                                   | )          | 190 |   |
| Investment  in multi-client data library, net cash                                                      |       | (58,896                                | )          | (70,337 | ) |
| Purchase  of property and equipment                                                                     |       | (17,152                                | )          | (13,557 | ) |
| Sale  of property and equipment                                                                         |       | 885                                    |       | 655 |   |
| Sale  of (RC)2 software operation                                                                       |       | —                                 |       | 2,000 |   |
| Net  cash used by investing activities                                                                  |       | (75,287                                | )          | (81,049 | ) |
|                                                                                                    |       |                                   |       |   |   |
| Cash  flows from financing activities:                                                                  |       |                                   |       |   |   |
| Payments  on long-term debt                                                                             |       | —                                 |       | (13,102 | ) |
| Net  proceeds from sale of common stock                                                                 |       | 1,918                                  |       | 1,524 |   |
| Net  cash provided (used) by financing activities                                                       |       | 1,918                                  |       | (11,578 | ) |
| Currency  gain on foreign cash                                                                          |       | 638                                    |       | 497 |   |
| Change  in cash and cash equivalents                                                                    |       | 88,931                                 |       | (3,188 | ) |
| Beginning  cash and cash equivalents balance                                                            |       | 116,299                                |       | 72,097 |   |
| Ending  cash and cash equivalents balance                                                               |       | $                                      | 205,230    |   | $ | 68,909 |   |
|                                                                                                    |       |                                   |       |   |   |
| **Schedule of non-cash transactions:**                                                             |       |                                   |       |   |   |
| Capitalization  of depreciation and amortization resulting in an increase in multi-client  data library |       | $                                      | 4,857      |   | $ | 9,915 |   |

 

See Notes to Consolidated Financial Statements

 

3

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**VERITAS DGC INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

(Unaudited)

 

###### **1.**              Summary ofsignificant accounting policies

###### ** **

***Restatement of Financial Statements***

*** ***

The historical financialinformation for the three and six month periods ended January 31, 2004 hasbeen restated due to accounting errors. In September 2004, we found various types of errors in our balancesheet related primarily to clerical and account reconciliation errorsassociated with the intercompany transfers of property and foreign currencyitems.  In addition, we found errors inthe accounting for certain customer contracts that contained provisions forcustomer payment of equipment mobilization fees, revenue sharing with customersand certain other contingencies. Correction of these errors resulted in a decrease of net income of $1.4million relating to the first three fiscal quarters of fiscal 2004 and $2.6million related to periods prior to fiscal 2004.  Since recording the required adjustments inthe fourth quarter of fiscal 2004 would have had a material impact on thefinancial statements of the fourth quarter and those of the full fiscal year,we determined that a restatement of our prior years’ financial statements wasappropriate.  The impact of the restatementresulted in a decrease in the net income and net income per share of $645,000and $0.02, respectively, for the three months ended January 31, 2004 andan increase in the net loss and net loss per common share of $1,283,000 and$0.04, respectively, for the six months ended January 31, 2004.  (See Note 10 for the details of thisrestatement.)

 

The restatement has notcaused us to be in default under any of our debt covenants or leaseagreements.  We obtained waivers from ourlenders under our Credit Facility extending the due date for our delivery offinancial statements to them to July 29, 2005.  Additionally, the restatement has delayed theregistration of our Convertible Senior Notes, resulting in our payment ofliquidated damages to the holders of the Convertible Senior Notes in the amountof $2,153 per day from August 31, 2004 until the registration iscompleted.

 

***Consolidation***

*** ***

The accompanyingconsolidated financial statements include our accounts and the accounts ofmajority-owned domestic and foreign subsidiaries. All material intercompanybalances and transactions have been eliminated. All material adjustments that, in the opinion of management, arenecessary for a fair statement of the results for the interim periods have beenreflected. These interim financial statements should be read in conjunctionwith our annual audited consolidated financial statements.

 

In December 2003,the Financial Accounting Standards Board issued FIN 46R, a revision to FIN 46 “*Consolidation of Variable Interest Entities*”.  FIN 46R replaces FIN 46 and providesadditional clarification on the application of ARB No. 51, “*Consolidated Financial Statements,*” tocertain entities in which equity investors do not have the characteristics of acontrolling financial interest or do not have sufficient equity at risk for theentity to finance its activities without additional subordinated financialsupport.  We adopted FIN 46R on April 30,2004.  Adoption did not have a materialeffect on our financial position or results of operations; however, it requiredconsolidation of our 80% owned Indonesian joint venture.  Prior to adoption of FIN 46R this jointventure was accounted for under the equity method.

 

***Use of estimates***

*** ***

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions.  These estimates and assumptions affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates.

 

4

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***Recent Accounting Pronouncements***

*** ***

In October 2004, theEmerging Issues Task Force of the Financial Accounting Standards Board issuedEITF 04-8, “*The Effect of ContingentlyIssuable Debt on Earnings per Share,”* which is effective for periodsending after December 15, 2004. This statement requires us to include shares of our stock issuable uponthe assumed conversion of our Convertible Senior Notes in the calculation ofdiluted weighted average common shares. We adopted the EITF during the first quarter of fiscal 2005, but adoptiondid not have a significant effect on our weighted average sharescalculation.  The contingently issuableshares related to our Convertible Senior Notes had no impact on our weightedaverage shares for the three and six months ended January 31, 2005, asissuance of the shares would have been anti-dilutive.

 

###### **2.**              Multi-client libraryaccounting change

###### ** **

Effective August 1,2003, we changed our minimum amortization policy with regard to multi-clientdata and recorded a charge of $22.1 million in the first quarter of fiscal2004, included in cost of services in our Consolidated Statement ofOperations.  Under the prior method,capitalized costs of multi-client surveys were charged to cost of services inthe period sales occurred, using the sales forecast method, over an estimatedfive-year useful life.  However, duringthe last 24 months of a survey’s useful life, amortization was the greater ofthe amount resulting from the sales forecast method or straight-lineamortization of the remaining book value over the remaining portion of theoriginal five-year estimated useful life. Under the new method, capitalized costs of multi-client surveys arecharged to cost of services over an estimated five-year useful life based uponthe greater of the result (higher expense) under the sales forecast method orcumulative straight-line amortization from survey completion. Notwithstandingthis change, the sales forecast method remains our primary method ofcalculating cost of services.  The totalamortization period that concludes sixty months after survey completionrepresents the minimum period over which the surveys are expected to provideeconomic benefits.  We believe thatcommencing the minimum amortization upon survey completion, as opposed to ourprior method of doing so only during the last twenty four months of the survey’slife, better reflects the potential diminution of survey value with the passageof time.

 

###### **3.**              Other (income), net

###### ** **

Other (income) expense,net consists of the following:

 
| ** **                                 | ** ** | **Three  Months Ended****January 31,** | ** ** | **Six  Months Ended****   January 31,** | ** ** |
|--------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                 | ** ** | **2005**                                    | ** ** | **Restated****2004**                              | ** ** | **2005** | ** ** | **Restated****2004** | ** ** |
| ** **                                 | ** ** | **(In  thousands)**                         | ** ** |
|                                       |       |                                        |       |                                              |       |   |   |   |   |
| Interest  income                           |       | $                                           | (708       | )                                                 | $          | (250 | ) | $ | (1,527 | ) | $ | (484 | ) |
| Net  foreign currency exchange (gain) loss |       | (100                                        | )          | (274                                              | )          | 218 |   | (253 | ) |
| Loss  from unconsolidated joint venture    |       | —                                      |       | 364                                               |       | — |   | 613 |   |
| Other                                      |       | (203                                        | )          | (187                                              | )          | (280 | ) | (381 | ) |
| Total                                      |       | $                                           | (1,011     | )                                                 | $          | (347 | ) | $ | (1,589 | ) | $ | (505 | ) |

 

5

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###### **4.**              Earnings per commonshare

###### ** **

Basic and dilutedearnings per common share are computed as follows:

 
| ** **                                                      | ** ** | **Three  Months Ended****January 31,**   | ** ** | **Six  Months Ended****January 31,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                      | ** ** | **2005**                                      | ** ** | **Restated****2004**                      | ** ** | **2005** | ** ** | **Restated****2004** | ** ** |
| ** **                                                      | ** ** | **(In  thousands, except per share amounts)** | ** ** |
|                                                            |       |                                          |       |                                      |       |   |   |   |   |
| Net  income (loss)                                              |       | $                                             | 17,368     |                                      | $          | 13,594 |   | $ | 18,346 |   | $ | (13,391 | ) |
|                                                            |       |                                          |       |                                      |       |   |   |   |   |
| **Basic:**                                                      |       |                                          |       |                                      |       |   |   |   |   |
| Weighted  average common shares (including exchangeable shares) |       | 33,783                                        |       | 33,745                                    |       | 33,767 |   | 33,668 |   |
| Income  (loss) per share                                        |       | $                                             | .51        |                                      | $          | .40 |   | $ | .54 |   | $ | (.40 | ) |
|                                                            |       |                                          |       |                                      |       |   |   |   |   |
| **Diluted:**                                                    |       |                                          |       |                                      |       |   |   |   |   |
| Weighted  average common shares (including exchangeable shares) |       | 33,783                                        |       | 33,745                                    |       | 33,767 |   | 33,668 |   |
| Shares  issuable from assumed exercise of options               |       | 500                                           |       | 258                                       |       | 514 |   | — |   |
| Shares  issuable from assumed vesting of restricted stock       |       | 35                                            |       | —                                    |       | 42 |   | — |   |
| Total                                                           |       | 34,318                                        |       | 34,003                                    |       | 34,323 |   | 33,668 |   |
| Income  (loss) per share                                        |       | $                                             | .51        |                                      | $          | .40 |   | $ | .53 |   | $ | (.40 | ) |

 

The Convertible SeniorNotes were not convertible as of January 31, 2005 and the shares issuablefrom such conversion, while considered, are not included in this income pershare calculation as they are anti-dilutive (See Note 5 for a description ofour Convertible Senior Notes.)

 

The following options topurchase common shares have been excluded from the computation assumingdilution because the exercise prices of the options exceeded the average marketprice of the underlying common shares or the options are anti-dilutive due to anet loss.

 
| ** **            | ** ** | **Three  Months Ended****January 31,** | ** ** | **Six  Months Ended****   January 31,** | ** ** |
|-----------------------|------------|---------------------------------------------|------------|---------------------------------------------------|------------|
| ** **            | ** ** | **2005**                                    | ** ** | **2004**                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Number  of options    |       | 743,032                                     |       | 3,438,173                                         |       | 743,032 |   | 4,269,195 |   |
| Exercise  price range |       | $22.84-55.13                                |       | $10.71-55.13                                      |       | $22.84-55.13 |   | $5.25-55.13 |   |
| Expiring  through     |       | March 2012                             |       | March 2012                                   |       | March 2012 |   | March 2012 |   |

 

###### **5.**              Long-term debt

###### ** **

As of January 31,2005, our long-term debt outstanding consisted of $155.0 million of ConvertibleSenior Notes due 2024.  In addition, wehave a Credit Facility consisting primarily of a revolving loan facilitypermitting borrowings of up to $55.0 million and various unsecured lines ofcredit totaling $8.5 million which may be used exclusively for letters of creditand bank guarantees.

 

The Convertible SeniorNotes bear interest at a per annum rate which equals the three-month LIBORrate, adjusted quarterly, minus a spread of 0.75%.  The current interest rate on the ConvertibleSenior Notes, from March 15, 2005 through June 14, 2005, equates to2.26%.  The Convertible Senior Notes areour senior unsecured obligations and are convertible under certaincircumstances into a combination of cash and our common stock.  In general, upon conversion of a note, theholder of such note will receive cash equal to the principal amount of the

 

6

----

 

note and shares of ourcommon stock for the note’s conversion value in excess of such principalamount.  We entered into a registrationrights agreement in which we agreed to file a registration statement with theSecurities and Exchange Commission within 90 days of March 3, 2004 toregister resales of the notes and the associated shares of common stock.  We filed a registration statement on May 28,2004 in compliance with the registration rights agreement; however, theregistration statement is not yet effective. Because our registration statement was not effective on August 31,2004 as required by the indenture, we have been incurring liquidated damages inthe amount of $2,153 per day since August 31, 2004.  We will continue to incur these damages untilregistration is effective.

 

Under certain circumstances andat the option of the holder, the Convertible Senior Notes are convertible prior to the maturity date into cash andshares of our common stock.  Certain ofthese circumstances may result in classification of the Convertible SeniorNotes as current on our balance sheet. These circumstances include:

 

1.                                       theclosing sale price of our common stock is over 120% of the conversion price,which is currently $24.03 (with 120% being $28.84) for 20 trading days in theperiod of 30 consecutive trading days ending on the last trading day of thefiscal quarter preceding the quarter in which the conversion occurs;

 

2.                                       ifwe called the notes for redemption and the redemption has not occurred;

 

3.                                       theoccurrence of a five consecutive trading day period in which the trading priceof the notes was less than 95% of the closing sale price of our common stock onsuch day multiplied by the number of shares of our common stock issuable uponconversion of the notes; or

 

4.                                       theoccurrence of specified corporate transactions.

 

Should any of thesecircumstances occur, the Convertible Senior Notes would be convertible at thethen current stock price times the conversion ratio of 41.6146. This amountwould be payable in cash equal to the principal amount of the notes, the parvalue adjusted for dividends or other equity transactions, with the additionalamount payable in shares of our common stock. Currently, the maximum amount payable by us on conversion is $155million in cash plus approximately 6.5 million shares. For clarity, conversionat a $40 stock price would result in our payment of $155 million in cash and2.575 million shares of common stock. This settlement method is prescribed in the indenture and is notoptional at the discretion of any party. The shares issuable from such conversion are considered in thecalculation of diluted earnings per share.

 

As of January 31,2005, there were no borrowings and $2.1 million in letters of creditoutstanding under the Credit Facility. Borrowings under the Credit Facility, including swing-line loans, bearinterest at a variable rate determined on the date of borrowing that is relatedto various base rates and margins depending upon our leverage ratio and thelocation of the borrowing.  The CreditFacility expires in February 2006. Borrowings under the Credit Facility are secured by substantially all ofthe assets of the company.

 

We obtained waivers fromour lenders under our Credit Facility extending the due date for our deliveryof financial statements to them to July 29, 2005.  If we are unable to meet this deadline or areunable to extend it further, our ability to borrow under the Credit Facilitywill be restricted.

 

We have various unsecuredlines of credit, with lending institutions that operate in geographic areas notcovered by the lending institutions in our revolving loan facility, totaling$8.5 million that may be used exclusively for the issuance of letters of creditand bank guarantees.  As of January 31,2005, $3.3 million in letters of credit were outstanding under these lines.

 

7

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###### ** **

###### **6.**              Pensionplan

 

We maintain acontributory defined benefit pension plan for eligible participating employeesin the United Kingdom.  The following isthe net periodic benefit cost by component:

 
| ** **                                        | ** ** | **Three  Months Ended****January 31,** | ** ** | **Six  Months Ended****   January 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                        | ** ** | **2005**                                    | ** ** | **2004****Restated**                              | ** ** | **2005** | ** ** | **2004****Restated** | ** ** |
| ** **                                        | ** ** | **(In  thousands)**                         | ** ** |
|                                              |       |                                        |       |                                              |       |   |   |   |   |
| Service  cost (benefits earned during the period) |       | $                                           | 153        |                                              | $          | 135 |   | $ | 304 |   | $ | 261 |   |
| Interest  cost on projected benefit obligation    |       | 311                                         |       | 262                                               |       | 619 |   | 508 |   |
| Expected  return on plan assets                   |       | (222                                        | )          | (196                                              | )          | (441 | ) | (379 | ) |
| Amortization  of prior service cost               |       | (37                                         | )          | (35                                               | )          | (74 | ) | (68 | ) |
| Amortization  of net gain (loss)                  |       | 78                                          |       | 82                                                |       | 156 |   | 159 |   |
| Amortization  of transition obligation            |       | 2                                           |       | 2                                                 |       | 4 |   | 3 |   |
| Net  periodic benefit costs                       |       | $                                           | 285        |                                              | $          | 250 |   | $ | 568 |   | $ | 484 |   |

 

We expect to makecontributions of approximately $1.0 million to this pension plan in fiscal2005.  As of January 31, 2005, wehave made contributions to the Plan in accordance with the schedule ofcontributions upon which this estimated service cost was based.

 

###### **7.**              Hedgetransactions

###### ** **

From time to time weenter into contracts with customers whereby payment is not in US Dollars, ourfunctional currency.  During the sixmonths ended January 31, 2005, we entered into contracts with customerswhereby payments were to be made in the British Pound Sterling and theNorwegian Kroner.  To protect us againstexposure to exchange rate risk, we entered into currency exchange contractswith financial institutions; however, at January 31, 2005, there were nosuch contracts outstanding.

 

8

----

 

###### **8.**              Segmentinformation

###### ** **

Beginning in fiscal 2005,we organized the company into three geographic regions: North and South America(NASA); Europe, Africa, the Middle East and CIS (EAME); and Asia Pacific(APAC).  Our regions offer a common suiteof products and services to their customers, although each product or servicemay be adapted to meet the needs of the local markets.  This segmentation of our company isrepresentative of the manner in which it is viewed and managed by our seniormanagers and our Board of Directors.  Theinformation related to the three and six months ended January 31, 2004 hasbeen restated to reflect the new segment structure.  A reconciliation of the reportable segments’results to those of the total enterprise is given below:

 
| ** **               | ** ** | **For the  Three Months Ended January 31, 2005** | ** ** |
|--------------------------|------------|-------------------------------------------------------|------------|
| ** **               | ** ** | **NASA**                                              | ** ** | **EAME** | ** ** | **APAC** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **               | ** ** | **(In  thousands)**                                   | ** ** |
| Revenues                 |       | $                                                     | 135,107    |   | $ | 33,076 |   | $ | 24,045 |   | $ | — |   | $ | 192,228 |   |
| Operating  income (loss) |       | 35,425                                                |       | 4,402 |   | 2,251 |   | (8,415 | ) | 33,663 |   |
| Assets                   |       | 494,333                                               |       | 105,945 |   | 48,700 |   | 187,396 |   | 836,374 |   |
|                          |            |                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **               | ** ** | **For the  Three Months Ended January 31, 2004****Restated** | ** ** |
|--------------------------|------------|-------------------------------------------------------------------|------------|
| ** **               | ** ** | **NASA**                                                          | ** ** | **EAME** | ** ** | **APAC** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **               | ** ** | **(In  thousands)**                                               | ** ** |
| Revenues                 |       | $                                                                 | 108,477    |   | $ | 23,647 |   | $ | 12,932 |   | $ | — |   | $ | 145,056 |   |
| Operating  income (loss) |       | 28,609                                                            |       | 213 |   | 2,362 |   | (9,079 | ) | 22,105 |   |
| Assets                   |       | 556,005                                                           |       | 115,606 |   | 35,514 |   | 85,275 |   | 792,400 |   |
|                          |            |                                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **               | ** ** | **For the  Six Months Ended January 31, 2005** | ** ** |
|--------------------------|------------|-----------------------------------------------------|------------|
| ** **               | ** ** | **NASA**                                            | ** ** | **EAME** | ** ** | **APAC** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **               | ** ** | **(In  thousands)**                                 | ** ** |
| Revenues                 |       | $                                                   | 214,857    |   | $ | 64,851 |   | $ | 42,101 |   | $ | — |   | $ | 321,809 |   |
| Operating  income (loss) |       | 43,057                                              |       | 7,500 |   | 1,116 |   | (14,884 | ) | 36,789 |   |
| Assets                   |       | 494,333                                             |       | 105,945 |   | 48,700 |   | 187,396 |   | 836,374 |   |
|                          |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **               | ** ** | **For the  Six Months Ended January 31, 2004****Restated** | ** ** |
|--------------------------|------------|-----------------------------------------------------------------|------------|
| ** **               | ** ** | **NASA**                                                        | ** ** | **EAME** | ** ** | **APAC** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **               | ** ** | **(In  thousands)**                                             | ** ** |
| Revenues                 |       | $                                                               | 179,215    |   | $ | 45,521 |   | $ | 22,727 |   | $ | — |   | $ | 247,463 |   |
| Operating  income (loss) |       | 16,411                                                          |       | (1,922 | ) | 1,277 |   | (16,740 | ) | (974 | ) |
| Assets                   |       | 556,005                                                         |       | 115,606 |   | 35,514 |   | 85,275 |   | 792,400 |   |
|                          |            |                                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Corporate operatingincome (loss) includes certain general and administrative and research anddevelopment expenses not allocated to the segments.  Corporate assets consist primarily of cashand cash equivalents.

 

9

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###### **9.**              Stock basedcompensation

###### ** **

We account forstock-based employee compensation using the intrinsic method prescribed inAccounting Principles Board Opinion No. 25 and have adopted the disclosureonly provisions of Statement of Financial Accounting Standards (SFAS) No. 148.  As required by SFAS No. 148, we disclosethe effect on net income and earnings per share of equity-based employeecompensation, including stock options, that would have been recorded using thefair value based method.  SFAS No. 123R,which will become effective for us beginning with our first quarter of fiscal2006, will require us to record the cost of this equity-based compensation inour income statement based on the estimated fair value of the awards.

 
| ** **                                                                                                                                  | ** ** | **Three  Months Ended****January 31,** | ** ** | **Six  Months Ended****January 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                                  | ** ** | **2005**                                    | ** ** | **Restated****2004**                      | ** ** | **2005** | ** ** | **Restated****2004** | ** ** |
| ** **                                                                                                                                  | ** ** | **(In  thousands)**                         | ** ** |
|                                                                                                                                        |       |                                        |       |                                      |       |   |   |   |   |
| Net  income (loss) as reported                                                                                                              |       | $                                           | 17,368     |                                      | $          | 13,594 |   | $ | 18,346 |   | $ | (13,391 | ) |
| Add:  Compensation expense, net of related tax effects                                                                                      |       | 96                                          |       | 149                                       |       | 179 |   | 240 |   |
| Less:  Total stock-based employee compensation expense determined under fair value  based method for all awards, net of related tax effects |       | (675                                        | )          | (1,712                                    | )          | (1,354 | ) | (3,436 | ) |
| Pro  forma net income (loss)                                                                                                                |       | $                                           | 16,789     |                                      | $          | 12,031 |   | $ | 17,171 |   | $ | (16,587 | ) |
|                                                                                                                                        |       |                                        |       |                                      |       |   |   |   |   |
| Earnings  (loss) per share:                                                                                                                 |       |                                        |       |                                      |       |   |   |   |   |
| Basic:                                                                                                                                      |       |                                        |       |                                      |       |   |   |   |   |
| As  reported                                                                                                                                |       | $                                           | .51        |                                      | $          | .40 |   | $ | .54 |   | $ | (.40 | ) |
| Pro-forma                                                                                                                                   |       | .50                                         |       | .36                                       |       | .51 |   | (.49 | ) |
|                                                                                                                                        |       |                                        |       |                                      |       |   |   |   |   |
| Diluted:                                                                                                                                    |       |                                        |       |                                      |       |   |   |   |   |
| As  reported                                                                                                                                |       | $                                           | .51        |                                      | $          | .40 |   | $ | .53 |   | $ | (.40 | ) |
| Pro-forma                                                                                                                                   |       | .49                                         |       | .35                                       |       | .50 |   | (.49 | ) |

 

10

----

 

###### **10.**       Restatement

###### ** **

The historical financialinformation in this document for the three and six month periods ended January 31,2004 has been restated due to accounting errors.  Theseerrors were discovered during two separate reviews, a comprehensive review ofour balance sheet and a review of specific types of our customer contracts.

 

**Balance Sheet Review**

 

During our fiscal 2004year-end balance sheet review, we found various types of clerical and accountreconciliation errors related primarily to the intercompany transfer ofproperty and foreign currency items.  Thefixed asset errors of approximately $1.9 million affected depreciation andamortization charges over the past seven years. We corrected all matters identified in the balance sheet review in ourrestatement, although such items were not individually material.

 

**Contract Review**

 

We also reviewed ouraccounting for our customer contracts, including those that contain provisionsfor customer payment of mobilization fees, revenue sharing with customers andcertain date contingencies.  Because ourcontracts vary widely in terms and conditions, we reviewed the deliverables ofeach type of contract and, where required, applied the guidance of EITF 00-21.  We determined that our accounting treatmentfor certain of these customer contracts was not in accordance with generallyaccepted accounting principles and adjusted our accounts accordingly.  We had recognized mobilization fees asrevenue during the period of mobilization rather than during the period ofseismic data acquisition, as required by Staff Accounting Bulletin (SAB) No. 104.  In contracts with revenue sharing clauses anddate contingencies, we recognized revenue before the price to be ultimatelypaid by the related customer was fixed or determinable under SAB No.104.  In all cases, our errors related to customercontracts were related to the timing of revenue recognition.

 

The following is asummary of the effect of the restatement adjustments on our previously reportednet income, earnings per share and total assets:

 
| ** **                                                    | ** ** | **Increase  / (Decrease) from Previously  Reported Amounts for the** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **Three  Months  Ended****January 31, 2004**                    | ** ** | **Six  Months****Ended  January 31, 2004** | ** ** |
| ** **                                                    | ** ** | **(In  thousands, except per share amounts)**                        | ** ** |
| ** **                                                    | ** ** | ** **                                                           | ** ** | ** ** | ** ** |
| Net  income (loss) as previously reported                     |       | $                                                                    | 14,239     |   | $ | (12,108 | ) |
| Pretax  adjustments resulting from:                           |       |                                                                 |       |   |   |
| The  balance sheet review                                     |       | $                                                                    | (620       | ) | $ | (901 | ) |
| The  contract review                                          |       | (2                                                                   | )          | (487 | ) |
| Total  pretax adjustments                                     |       | (622                                                                 | )          | (1,388 | ) |
| Tax  effect of restatement adjustments                        |       | 23                                                                   |       | (105 | ) |
| Total  net adjustments                                        |       | (645                                                                 | )          | (1,283 | ) |
| Net  income (loss) restated                                   |       | $                                                                    | 13,594     |   | $ | (13,391 | ) |
|                                                          |       |                                                                 |       |   |   |
| Net  income (loss) per common share — basic and diluted: |       |                                                                 |       |   |   |
| As  reported                                                  |       | $                                                                    | .42        |   | $ | (.36 | ) |
| Effect  of the net adjustments                                |       | (.02                                                                 | )          | (.04 | ) |
| As  restated                                                  |       | $                                                                    | .40        |   | $ | (.40 | ) |
|                                                          |       |                                                                 |       |   |   |
| Total  assets as reported                                     |       | $                                                                    | 786,485    |   |   |   |
| Adjustments                                                   |       | 5,915                                                                |       |   |   |
| Total  assets as adjusted                                     |       | $                                                                    | 792,400    |   |   |   |

 

The following are therestated financial statements for the three and six month periods ended January 31,2004 compared to the previously reported amounts:

 

11

----

 

**RESTATED**

**CONSOLIDATED STATEMENTS OFOPERATIONS AND COMPREHENSIVE INCOME (LOSS)**

**(UNAUDITED)**

 
| ** **                                                         | ** ** | **Three  Months Ended January 31, 2004** | ** ** | **Six  Months Ended January 31, 2004** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                         | ** ** | **As  Reported**                              | ** ** | **Adjustments**                             | ** ** | **Restated** | ** ** | **As  Reported** | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| ** **                                                         | ** ** | **(In  thousands, except per share amounts)** | ** ** |
| **Statement of Operations**                                        |       |                                          |       |                                        |       |   |   |   |   |   |   |   |   |
| Revenues                                                           |       | $                                             | 147,770    |                                        | $          | (2,714 | ) | $ | 145,056 |   | $ | 252,120 |   | $ | (4,657 | ) | $ | 247,463 |   |
| Cost  of services                                                  |       | 114,988                                       |       | (2,124                                      | )          | 112,864 |   | 232,005 |   | (3,291 | ) | 228,714 |   |
| Research  and development                                          |       | 3,695                                         |       | —                                      |       | 3,695 |   | 7,140 |   | — |   | 7,140 |   |
| General  and administrative                                        |       | 6,383                                         |       | 9                                           |       | 6,392 |   | 12,574 |   | 9 |   | 12,583 |   |
| Operating  income (loss)                                           |       | 22,704                                        |       | (599                                        | )          | 22,105 |   | 401 |   | (1,375 | ) | (974 | ) |
| Interest  expense                                                  |       | 4,197                                         |       | —                                      |       | 4,197 |   | 8,475 |   | 1 |   | 8,476 |   |
| Other  (income) expense, net                                       |       | (370                                          | )          | 23                                          |       | (347 | ) | (517 | ) | 12 |   | (505 | ) |
| Income  (loss) before provision for income taxes                   |       | 18,877                                        |       | (622                                        | )          | 18,255 |   | (7,557 | ) | (1,388 | ) | (8,945 | ) |
| Income  taxes                                                      |       | 4,638                                         |       | 23                                          |       | 4,661 |   | 4,551 |   | (105 | ) | 4,446 |   |
| Net  income (loss)                                                 |       | $                                             | 14,239     |                                        | $          | (645 | ) | $ | 13,594 |   | $ | (12,108 | ) | $ | (1,283 | ) | $ | (13,391 | ) |
|                                                               |       |                                          |       |                                        |       |   |   |   |   |   |   |   |   |
| **Net income (loss), per share:**                                  |       |                                          |       |                                        |       |   |   |   |   |   |   |   |   |
| **Basic:**                                                         |       |                                          |       |                                        |       |   |   |   |   |   |   |   |   |
| Income  (loss) per common share                                    |       | $                                             | .42        |                                        | $          | (.02 | ) | $ | .40 |   | $ | (.36 | ) | $ | (.04 | ) | $ | (.40 | ) |
| Weighted  average common shares (including exchangeable shares)    |       | 33,745                                        |       | —                                      |       | 33,745 |   | 33,668 |   | — |   | 33,668 |   |
|                                                               |       |                                          |       |                                        |       |   |   |   |   |   |   |   |   |
| **Diluted:**                                                       |       |                                          |       |                                        |       |   |   |   |   |   |   |   |   |
| Income  (loss) per common share                                    |       | $                                             | .42        |                                        | $          | (.02 | ) | $ | .40 |   | $ | (.36 | ) | $ | (.04 | ) | $ | (.40 | ) |
| Weighted  average common shares (including exchangeable shares)    |       | 34,003                                        |       | —                                      |       | 34,003 |   | 33,668 |   | — |   | 33,668 |   |
|                                                               |       |                                          |       |                                        |       |   |   |   |   |   |   |   |   |
| **Comprehensive income (loss):**                                   |       |                                          |       |                                        |       |   |   |   |   |   |   |   |   |
| Net  income (loss)                                                 |       | $                                             | 14,239     |                                        | $          | (645 | ) | $ | 13,594 |   | $ | (12,108 | ) | $ | (1,283 | ) | $ | (13,391 | ) |
| Other  comprehensive income (loss) (net of tax, $0 in all periods) |       | —                                        |       | —                                      |       | — |   | — |   | — |   | — |   |
| Foreign  currency translation adjustments                          |       | 570                                           |       | 14                                          |       | 584 |   | 5,935 |   | 92 |   | 6,027 |   |
| Other  unrealized gain (loss)                                      |       | (691                                          | )          | —                                      |       | (691 | ) | (604 | ) | — |   | (604 | ) |
| Total  other comprehensive income (loss)                           |       | (121                                          | )          | 14                                          |       | (107 | ) | 5,331 |   | 92 |   | 5,423 |   |
| Comprehensive  income (loss)                                       |       | $                                             | 14,118     |                                        | $          | (631 | ) | $ | 13,487 |   | $ | (6,777 | ) | $ | (1,191 | ) | $ | (7,968 | ) |

 

12

----

 

**RESTATED**

**CONSOLIDATED STATEMENTS OF CASHFLOWSFOR THE SIX MONTHS ENDED JANUARY 31, 2004**

**(UNAUDITED)**

 
| ** **                                                                                              | ** ** | **As  Reported**   | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------|------------|--------------|------------|
| ** **                                                                                              | ** ** | **(In thousands)** | ** ** |
| **Cash flows from operating activities:**                                                               |       |               |       |            |       |         |       |
| Net  income (loss)                                                                                      |       | $                  | (12,108    | )               | $          | (1,283       | )          | $ | (13,391 | ) |
| Non-cash  items included in net income (loss):                                                          |       |               |       |            |       |         |       |
| Depreciation  and amortization, net (other than multi-client)                                           |       | 19,869             |       | 190             |       | 20,059       |       |
| Amortization  of multi-client library                                                                   |       | 105,731            |       | (285            | )          | 105,446      |       |
| Loss  on disposition of property and equipment                                                          |       | 480                |       | —          |       | 480          |       |
| Equity  in loss of joint venture                                                                        |       | 613                |       | —          |       | 613          |       |
| Deferred  taxes                                                                                         |       | 717                |       | 3,425           |       | 4,142        |       |
| Amortization  of unearned compensation                                                                  |       | 240                |       | —          |       | 240          |       |
| Change  in operating assets/liabilities:                                                                |       |               |       |            |       |         |       |
| Accounts  and notes receivable                                                                          |       | (39,205            | )          | (79             | )          | (39,284      | )          |
| Materials  and supplies inventory                                                                       |       | 993                |       | 10              |       | 1,003        |       |
| Prepayments  and other                                                                                  |       | (462               | )          | (2,015          | )          | (2,477       | )          |
| Income  tax receivable                                                                                  |       | 1,360              |       | (280            | )          | 1,080        |       |
| Accounts  payable and other accrued liabilities                                                         |       | 14,467             |       | 1               |       | 14,468       |       |
| Other                                                                                                   |       | (3,693             | )          | 256             |       | (3,437       | )          |
| Net  cash provided by operating activities                                                              |       | 89,002             |       | (60             | )          | 88,942       |       |
| **Cash flows from investing activities:**                                                               |       |               |       |            |       |         |       |
| Decrease  in restricted cash investments                                                                |       | 190                |       | —          |       | 190          |       |
| Investment  in multi-client library, net cash                                                           |       | (70,315            | )          | (22             | )          | (70,337      | )          |
| Purchase  of property and equipment                                                                     |       | (13,557            | )          | —          |       | (13,557      | )          |
| Sale  of property and equipment                                                                         |       | 655                |       | —          |       | 655          |       |
| Sale  of (RC)(2) software operation                                                                     |       | 2,000              |       | —          |       | 2,000        |       |
| Total  cash used by investing activities                                                                |       | (81,027            | )          | (22             | )          | (81,049      | )          |
| **Cash flows from financing activities:**                                                               |       |               |       |            |       |         |       |
| Payments  on long-term debt                                                                             |       | (13,102            | )          | —          |       | (13,102      | )          |
| Net  proceeds from the sale of common stock                                                             |       | 1,524              |       | —          |       | 1,524        |       |
| Total  cash used by financing activities                                                                |       | (11,578            | )          | —          |       | (11,578      | )          |
| Currency  loss on foreign cash                                                                          |       | 497                |       | —          |       | 497          |       |
| Change  in cash and cash equivalents                                                                    |       | (3,106             | )          | (82             | )          | (3,188       | )          |
| Beginning  cash and cash equivalents balance                                                            |       | 72,626             |       | (529            | )          | 72,097       |       |
| Ending  cash and cash equivalents balance                                                               |       | $                  | 69,520     |            | $          | (611         | )          | $ | 68,909 |   |
|                                                                                                    |       |               |       |            |       |         |       |
| **Schedule of non-cash transactions:**                                                             |       |               |       |            |       |         |       |
| Capitalization  of depreciation and amortization resulting in an increase in multi-client  data library |       | $                  | 9,915      |            | $          | —       |       | $ | 9,915 |   |
|                                                                                                         |            |                    |            |                 |            |              |            |  |  |  |  |  |

 

13

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## **Item2.**                                       Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

 

*Thisreport on Form 10-Q and the documents incorporated by reference containforward-looking statements, within the meaning of Section 27A of the SecuritiesAct of 1933 and Section 21E of the Securities Exchange Act of 1934. Thesestatements include statements incorporated by reference to other documents wefile with the SEC. Forward-looking statements include, among other things,business strategy and expectations concerning industry conditions, marketposition, future operations, margins, profitability, liquidity and capitalresources. Forward-looking statements generally can be identified by the use ofterminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate”or “believe” or similar expressions or the negatives thereof. Theseexpectations are based on management’s assumptions and current beliefs based oncurrently available information. Although we believe that the expectations reflected in such statementsare reasonable, we can give no assurance that such expectation will be correct.You are cautioned not to place undue reliance on these*forward*-looking statements, which speak only as of the dateof this report on Form 10-Q. Our operations are subject to a number ofuncertainties, risks and other influences, many of which are outside ourcontrol, and any one of which, or a combination of which, could cause ouractual results of operations to differ materially from the forward-looking statements.Important factors that could cause actual results to differ materially from ourexpectations are disclosed in “Risk Factors” and elsewhere in our Annual Reporton Form 10-K.*

 

#### **Overview**

 

Webelieve that, overall, global exploration for oil and gas is increasing, evenin mature areas such as the North Sea and Nigeria.  We also see increasing interest in newseismic reservoir imaging techniques, such as multi- or wide-azimuthacquisition, which offer better delineation of complex structures.  We believe all of this to be promising forour business.

 

Oursecond quarter results for fiscal 2005 were outstanding and reflect recordquarterly revenue.  Our overallperformance during the period is the result of being well positioned to takeadvantage of the increased exploration spending.  This positioning includes having qualitymulti-client data in areas of current customer interest, data processingabilities that enable us to produce the best possible seismic images in difficultareas, and field operations that are capable of providing technical as well ashealth, safety and environmental excellence.

 

Dueto our selling and operational efforts and the robust seismic market, we haveseen our backlog increase $87 million from $147 million at July 31, 2004 to$234 million at April 30, 2005.  Weexpect to complete most of the work in backlog over the next twelvemonths.  It appears that our traditionalpattern of revenue generation will occur again during fiscal 2005, withrevenues in our second and third fiscal quarters being higher than in our firstand fourth quarters.  This pattern isdriven by end-of-year spending, which results in high multi-client data libraryrevenue in our second fiscal quarter, and high land acquisition activity duringour second and third fiscal quarters, corresponding with the winter seismicseason in Alaska and Canada.

 

Duringthe first quarter of fiscal 2005, we reorganized our company into threegeographic regions: North and South America (NASA), Europe, Africa, Middle Eastand CIS (EAME), and Asia Pacific (APAC). The managers of these regions are responsible for all facets of salesand operations and represent our customer interface.  Centrally managed processing, acquisition,and reservoir professionals support these managers from locations around theglobe.  We feel this new organizationallows our front-line managers to focus exclusively on their customers whileallowing our company to develop and deploy technology consistently across ourmarkets.  We have put processes in placethat will allow for the free movement of our seismic equipment across the threeregions so that we may maximize our return on investment.

 

#### **Restatement**

 

The historical financialinformation in this document has been restated for the first and secondquarters of fiscal 2004 due to accounting errors.  The impact of the restatement resulted in adecrease in the net income and net income per share of $645,000 and $0.02,respectively, for the three months ended January 31, 2004 and an increase inthe net loss and net loss per common share of $1,283,000 and $0.04,respectively, for the six months ended January 31, 2004.  (See Note 10 for the details of thisrestatement.)

 

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#### **Results of operations**

 

#### ***Threemonths ended January 31, 2005 compared with three months ended January 31, 2004(restated)***

 

*Revenues*.  Ourrevenues increased by 33% from $145.1 million in the second quarter offiscal 2004 to $192.2 million in the second quarter of fiscal 2005.  Each of our regions contributed to theincreased revenue, which was driven primarily by increased contract work.  NASA generated their $26.6 million revenueincrease through marine contract work in the Gulf of Mexico, where the VeritasVantage and two source boats acquired a wide-azimuth survey and through landcontract acquisition work in North America. Land contract revenue from South America was down significantly due toour decision to reduce our presence in that market.  APAC’s revenue increase was also generated inthe marine contract market, where we operated the Veritas Viking II, thePacific Sword and Veritas Searcher in Australia, India, Myanmar and NewZealand.  EAME generated their increasedrevenue through sales of licenses to multi-client data for offshore Africa andthe North Sea.

 

Revenues from ouroperating segments were as follows:

 
| ** **     | ** ** | **Three  Months Ended January 31,** | ** ** |
|----------------|------------|-------------------------------------|------------|
| ** **     | ** ** | ** **                          | ** ** | **Restated** | ** ** | **Change** | ** ** |
| ** **     | ** ** | **2005**                            | ** ** | **2004** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **     | ** ** | **(Dollars  in thousands)**         | ** ** |
| NASA           |       | $                                   | 135,107    |   | $ | 108,477 |   | $ | 26,630 |   | 25 | % |
| EAME           |       | 33,076                              |       | 23,647 |   | 9,429 |   | 40 | % |
| APAC           |       | 24,045                              |       | 12,932 |   | 11,113 |   | 86 | % |
| Total  Revenue |       | $                                   | 192,228    |   | $ | 145,056 |   | $ | 47,172 |   | 33 | % |

 

Revenues by contract typewere as follows:

 
| ** **          | ** ** | **Three  Months Ended January 31,** | ** ** |
|---------------------|------------|-------------------------------------|------------|
| ** **          | ** ** | ** **                          | ** ** | **Restated** | ** ** | **Change** | ** ** |
| ** **          | ** ** | **2005**                            | ** ** | **2004** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **          | ** ** | **(Dollars  in thousands)**         | ** ** |
| Multi-Client:       |       |                                |       |   |   |   |   |   |   |
| Land                |       | $                                   | 15,197     |   | $ | 15,479 |   | $ | (282 | ) | (2 | )% |
| Marine              |       | 72,470                              |       | 66,912 |   | 5,558 |   | 8 | % |
| Total  Multi-Client |       | 87,667                              |       | 82,391 |   | 5,276 |   | 6 | % |
| Contract:           |       |                                |       |   |   |   |   |   |   |
| Land                |       | 40,465                              |       | 29,587 |   | 10,878 |   | 37 | % |
| Marine              |       | 64,096                              |       | 33,078 |   | 31,018 |   | 94 | % |
| Total  Contract     |       | 104,561                             |       | 62,665 |   | 41,896 |   | 67 | % |
| Total  Revenue      |       | $                                   | 192,228    |   | $ | 145,056 |   | $ | 47,172 |   | 33 | % |

 

*Operating income (loss). *Operating income increasedfrom $22.1 million in the second quarter of fiscal 2004 to $33.7 million in thesecond quarter of fiscal 2005.  Cost ofservices as a percent of revenue fell from 78% to 75% in the comparativeperiods.  This decreasing cost andincreasing revenue yielded an increase in margin (revenue less cost ofservices) of $15.1 million.  Increasingresearch and development costs of $1.3 million and increasing general andadministrative expense of $2.2 million reduced the operating income increase to$11.6 million.

 

The research anddevelopment cost increase of $1.3 million was primarily related to our increasedfocus on multi-component (pressure and shear wave) acquisition and processing.

 

The general andadministrative cost increase of $2.2 million was primarily due to increasedcosts associated with the restatement of our financial statements and increasedefforts in the area of financial controls. Research and development expense and general and administrative expenseboth grew due to increased incentive compensation related to our improvedfinancial performance.

 

*Interestexpense*.  Interestexpense decreased from $4.2 million in the second quarter of fiscal 2004 to$0.9 million in the second quarter of fiscal 2005.  This decrease is due primarily to theissuance of our Convertible Senior Notes and the repayment of our term noteswith the proceeds from the issuance of our Convertible Senior Notes in thethird quarter of fiscal 2004.  Thisrefinancing resulted in a lower overall debt level and a significantly lower

 

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interest rate.  Our Convertible Senior Notes accrue interestat a rate of LIBOR less 0.75%, which currently equates to 2.26% and is muchlower than the various tranches of debt in place in fiscal 2004.

 

*Income taxes. *Income taxes in the secondquarter of fiscal 2005 were 49% of income before provision for income taxes dueprimarily to our inability to record deferred tax assets in certainjurisdictions because of historical losses generated in prior years.  This treatment is consistent with fiscal2004, however income earned by jurisdiction was different in fiscal 2004resulting in a lower overall tax rate than fiscal 2005.

 

#### ***Sixmonths ended January 31, 2005 compared with six months ended January 31, 2004(restated)***

 

*Revenues*.  Ourrevenues increased by 30% from $247.5 million in the first six months offiscal 2004 to $321.8 million in the first six months of fiscal 2005.  This increase was driven primarily byincreased marine contract work in NASA, EAME and APAC and higher sales oflicenses to marine multi-client data in EAME. Most of NASA’s marine contract revenue increase was generated by theacquisition of a “wide-azimuth” survey by the Veritas Vantage and two sourceboats.  EAME’s multi-client revenueincrease came from sales of data licenses offshore Africa and in the North Sea.

 

Revenues from ouroperating segments were as follows:

 
| ** **     | ** ** | **Six  Months Ended January 31,** | ** ** |
|----------------|------------|-----------------------------------|------------|
| ** **     | ** ** | ** **                        | ** ** | **Restated** | ** ** | **Change** | ** ** |
| ** **     | ** ** | **2005**                          | ** ** | **2004** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **     | ** ** | **(Dollars  in thousands)**       | ** ** | ** ** |
| NASA           |       | $                                 | 214,857    |   | $ | 179,215 |   | $ | 35,642 |   | 20 | % |
| EAME           |       | 64,851                            |       | 45,521 |   | 19,330 |   | 42 | % |
| APAC           |       | 42,101                            |       | 22,727 |   | 19,374 |   | 85 | % |
| Total  Revenue |       | $                                 | 321,809    |   | $ | 247,463 |   | $ | 74,346 |   | 30 | % |

 

Revenues by contract typewere as follows:

 
| ** **          | ** ** | **Six  Months Ended January 31,** | ** ** |
|---------------------|------------|-----------------------------------|------------|
| ** **          | ** ** | ** **                        | ** ** | **Restated** | ** ** | **Change** | ** ** |
| ** **          | ** ** | **2005**                          | ** ** | **2004** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **          | ** ** | **(Dollars  in thousands)**       | ** ** |
| Multi-Client:       |       |                              |       |   |   |   |   |   |   |
| Land                |       | $                                 | 26,013     |   | $ | 29,006 |   | $ | (2,993 | ) | (10 | )% |
| Marine              |       | 106,751                           |       | 92,373 |   | 14,378 |   | 16 | % |
| Total  Multi-Client |       | 132,764                           |       | 121,379 |   | 11,385 |   | 9 | % |
| Contract:           |       |                              |       |   |   |   |   |   |   |
| Land                |       | 76,962                            |       | 66,010 |   | 10,952 |   | 17 | % |
| Marine              |       | 112,083                           |       | 60,074 |   | 52,009 |   | 87 | % |
| Total  Contract     |       | 189,045                           |       | 126,084 |   | 62,961 |   | 50 | % |
| Total  Revenue      |       | $                                 | 321,809    |   | $ | 247,463 |   | $ | 74,346 |   | 30 | % |

 

*Operating income (loss). *Operating income increasedfrom a loss of $1.0 million in the first six months of fiscal 2004 to income of$36.8 million in the first six months of fiscal 2005.  During the first quarter of fiscal 2004, wechanged our multi-client amortization accounting policy to include a minimumamortization from the date of survey completion, instead of only during thelast 24 months of the survey’s book life. As a result of this change, we recorded a charge of $22.1 million incost of services in the first quarter of fiscal 2004.

 

Excluding the charge forthe change in our accounting method, our operating income in the first sixmonths of fiscal 2005 would have been $15.6 million greater than in the sameperiod last year.  Our margin (revenuesless cost of services) increased by $20.0 million due to our revenue increaseand a decrease in cost of services as a percent of revenue of approximately 2%.

 

Research and developmentcosts increased by $2.2 million from the prior year due in part to ourdevelopment of multi-component (pressure and shear wave) acquisition andprocessing.

 

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General and administrativeexpense increased by $2.4 million due partly to the expenses associated withthe restatement of our historical financial statements and our increasedefforts in the area of financial controls. Research and development expense and general and administrative expenseboth grew due to increased incentive compensation related to our improvedfinancial performance.

 

*Interestexpense*. Interest expense decreased from $8.5 million in thefirst six months of fiscal 2004 to $1.7 million in the first six months of fiscal2005.  This decrease is due primarily tothe issuance of our Convertible Senior Notes and the repayment of our termnotes with the proceeds from the issuance of our Convertible Senior Notes inthe third quarter of fiscal 2004.  Therefinancing resulted in a significantly lower interest rate. Our ConvertibleSenior Notes accrue interest at a rate of LIBOR less 0.75%, which currentlyequates to 2.26% and is much lower than the various tranches of debt in placein the comparable period in fiscal 2004. In addition, strong cash flows overthe past 12 months has allowed us to reduce overall levels of debt.

 

*Income taxes. *Income taxes in fiscal 2005were 50% of income before provision for income taxes due primarily to ourinability to record deferred tax assets in certain jurisdictions because ofhistorical losses generated in prior years. This treatment is consistent with fiscal 2004.

 

#### **Liquidity and capitalresources**

 

#### ***Cash flowand liquidity***

 

Our internal sources ofliquidity are cash on hand and cash flow from operations.  External sources include public financing,equity sales, equipment financing, our Credit Facility, and trade credit.  We believe that our current cash balance andcash flow from operations will be adequate to meet our liquidity needs over thenext twelve months. We expect our cash balance to continue to increase duringthe remainder of fiscal 2005.

 

Net cash provided byoperating activities increased by $72.7 million for the six months endedJanuary 31, 2005 compared to the six months ended January 31, 2004 primarily asa result of improvements in working capital. Net cash used by investing activities decreased by $5.8 million for thesix months ended January 31, 2005 compared to the six months ended January 31,2004 as a result of decreased investment in our multi client data library.  Our cash investment for fiscal 2005 isprojected to be approximately $225 million and includes capital expenditures toreplace and upgrade existing equipment of approximately $80 million, andinvestment in our data library of approximately $145 million.  Insurance proceeds are expected to coversubstantially all of the costs of the Veritas Viking’s replacementequipment.  We expect to fund theremainder of these investments from our current cash on hand and frominternally generated funds.

 

While we believe that wehave adequate sources of funds to meet our liquidity needs, our ability to meetour obligations depends on our future performance, which is subject to manyfactors beyond our control.  Key factorsaffecting future results include utilization levels of acquisition andprocessing assets and demand for multi-client library surveys, all of which aredriven by exploration spending and, ultimately, the underlying commodityprices.

 

#### ***Debtstructure***

 

As of January 31, 2005,our long-term debt outstanding consisted of $155.0 million of ConvertibleSenior Notes due 2024.  In addition, wehave a Credit Facility consisting primarily of a revolving loan facilitypermitting borrowings of up to $55.0 million and we have various unsecuredlines of credit totaling $8.5 million which may be used exclusively for lettersof credit and bank guarantees.

 

The Convertible SeniorNotes bear interest at a per annum rate which equals the three-month LIBORrate, adjusted quarterly, minus a spread of 0.75%.  The current interest rate on the ConvertibleSenior Notes, from March 15, 2005 through June 14, 2005, equates to 2.26%.  The Convertible Senior Notes are our seniorunsecured obligations and are convertible under certain circumstances into acombination of cash and our common stock. In general, upon conversion of a note, the holder of such note willreceive cash equal to the principal amount of the note and shares of our commonstock for the note’s conversion value in excess of such principal amount.  We entered into a registration rightsagreement in which we agreed to file a registration statement with theSecurities and Exchange Commission within 90 days of March 3, 2004 to registerresales of the notes and associated shares of

 

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common stock.  We filed a registration statement on May 28,2004 in compliance with the registration rights agreement; however, theregistration statement is not yet effective. Because our registration statement was not effective on August 31, 2004as required by the indenture, we have been incurring liquidated damages in theamount of $2,153 per day since August 31, 2004. We will continue to incur these damages until the registration iseffective.

 

Under certain circumstances andat the option of the holder, the Convertible Senior Notes are convertible priorto the maturity date into cash and shares of our common stock.  Certain of these circumstances may result inclassification of the Convertible Senior Notes as current on our balancesheet.  These circumstances include:

 

1.                                       theclosing sale price of our common stock is over 120% of the conversion price,which is currently $24.03 (with 120% being $28.84) for 20 trading days in theperiod of 30 consecutive trading days ending on the last trading day of thefiscal quarter preceding the quarter in which the conversion occurs;

 

2.                                       ifwe called the notes for redemption and the redemption has not occurred;

 

3.                                       theoccurrence of a five consecutive trading day period in which the trading priceof the notes was less than 95% of the closing sale price of our common stock onsuch day multiplied by the number of shares of our common stock issuable uponconversion of the notes; or

 

4.                                       theoccurrence of specified corporate transactions.

 

Should any of thesecircumstances occur, the Senior Notes would be convertible at the then currentstock price times the conversion ratio of 41.6146. This amount would be payablein cash equal to the principal amount of the notes, the par value adjusted fordividends or other equity transactions, and the additional amount payable inshares of our common stock.  Currently,the maximum amount payable by us on conversion is $155 million in cash plusapproximately 6.5 million shares. For clarity, conversion at a $40 stock pricewould result in our payment of $155 million in cash and 2.575 million shares ofcommon stock.  This settlement method isprescribed in the indenture and is not optional at the discretion of anyparty.  The shares issuable from suchconversion are considered in the calculation of diluted earnings per share.

 

As of January 31, 2005,there were no borrowings and $1.8 million in letters of credit outstandingunder the revolving loan facility. Borrowings under the Credit Facility, including swing-line loans, bearinterest at a variable rate determined on the date of borrowing that is relatedto various base rates and margins depending upon our leverage ratio and thelocation of the borrowing.  The CreditFacility expires in February 2006. Borrowings under the Credit Agreement are secured by substantially allof the assets of the company residing in the U.S. including the accountsreceivable from certain of our foreign subsidiaries.

 

We obtained waivers fromour lenders under our Credit Facility extending the due date for our deliveryof financial statements to them to July 29, 2005.  If we are unable to meet this deadline or areunable to extend it further, our ability to borrow under the Credit Facilitywill be restricted.

 

We have various unsecuredlines of credit, with lending institutions that operate in geographic areas notcovered by the lending institutions in our Credit Facility, totaling $8.5million that may be used exclusively for the issuance of letters of credit andbank guarantees.  As of January 31, 2005,$3.3 million in letters of credit were outstanding under these lines.

 

#### ***Criticalaccounting policies***

 

While all of ouraccounting policies are important in assuring that we adhere to currentaccounting standards, certain policies are particularly important due to theirimpact on our financial statements. These are described in detail in Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations - SignificantAccounting Policies included in our Annual Report on Form 10-K for the fiscalyear ended July 31, 2004 which description is incorporated herein by reference.

 

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## **Item3.**                                       Quantitative and Qualitative DisclosuresRegarding Market Risk

 

From time to time weenter into contracts with customers whereby payment is not in our US Dollars, functionalcurrency.  During the six months endedJanuary 31, 2005, we entered into such contracts with customers wherebypayments, to be received in November 2004 and January 2005 were to be made inthe British Pound and the Norwegian Kroner. To protect us against exposure to exchange rate risk, we entered intocurrency exchange contracts with financial institutions; however, at January31, 2005, there were no such contracts outstanding.

 

## **Item4.**                                       Controls and Procedures

 

**Evaluation of Disclosure Controls andProcedures**

 

We carried out anevaluation, under the supervision of and with the participation of ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as to the effectiveness, design and operation of our disclosure controls andprocedures (as defined in Rule 13a-15(e) under the Securities and Exchange Actof 1934, as amended) as of January 31, 2005. The evaluation considered our various procedures designed to ensure thatinformation required to be disclosed by us in reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported in thetime periods specified in the rules and forms of the Securities and ExchangeCommission.  Our Chief Executive Officerand Chief Financial Officer concluded, as a result of the material weaknessesdescribed below, that our disclosure controls and procedures were not effectiveas of January 31, 2005.

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting. Internal control over financial reporting is defined as aprocess designed to provide reasonable assurance to our management and Board ofDirectors regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles.

 

We have restated ourannual financial statements for fiscal periods of 2002 through 2003 due to ourfailure to properly record revenue and expenses in the appropriateperiods.  Based upon our investigationsand those of the Audit Committee of our Board of Directors, we believe theseaccounting errors are the result of mistakes and omissions, but the fact thatthey were not detected and corrected in a timely manner leads us to concludethat we had material weaknesses in the operation of our disclosure controls andprocedures and internal control over financial reporting as of the end of theperiod covered by this report.  Amaterial weakness in internal control over financial reporting is a significantdeficiency, or combination of significant deficiencies, that results in morethan a remote likelihood that a material misstatement of the financialstatements would not be prevented or detected on a timely basis by employees inthe normal course of their work.

 

Our inquiry into thesematters indicated that in our largest operating division:

 

•                  Reconciliationswere not always adequately performed or adequately reviewed, with suchreconciliations including:

 

•                  Sub-ledgerto general ledger

•                  Bankaccount to cash balance

•                  Taxprovision to tax return

 

•                  Discrepanciesidentified through reconciliation were not always addressed

 

•                  Periodicreviews of all balance sheet accounts by management personnel were notperformed.

 

A global contract reviewrevealed the following issues related to revenue recognition:

 

•                  Revenuegenerated through the mobilization of our seismic equipment was recognizedduring the period of mobilization, rather than over the period when theequipment was actually used for seismic data acquisition.

 

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•                  Revenuewas recognized on a proportional performance basis on projects where thegoverning contracts contained date contingencies that required the use ofcompleted contract method of revenue recognition.

 

•                  Revenuewas pre-maturely recognized from several arrangements where the customer couldshare in the proceeds from future sales of data licenses. Some, or all, of therevenue from the customer participating in the future revenue should have beendeferred until the net amount ultimately paid by that customer for the datalicense is known.  The periods ofdeferral range from a few months to an indefinite number of years, dependingupon the contractual terms.  In somearrangements, the period of deferral will also depend upon the pace of licensesales, with a high rate of sales shortening the effective deferral period.

 

It should be noted thatall of these revenue recognition issues involved only the timing of revenuerecognition.

 

**Changes in Internal Controls OverFinancial Reporting**

 

During the second quarterof fiscal 2005, we began to make the following changes to our internal controlover financial reporting that materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting:

 

•                  Increasedthe size and scope of our internal audit department

 

•                  Increasedour documentation, review and remediation efforts with regard to internalcontrols

 

•                  Increasedthe formality of our review processes, such as account reconciliation andcustomer contract review

 

•                  Increasedthe segregation of duties between individuals within each accounting function

 

•                  Installeda software-enabled system to effect monitoring and change management of ourinternal controls

 

•                  Required,on a quarterly basis, support certification regarding accounting and controlsfrom operational management and others with particular knowledge or span ofcontrol

 

•                  Selectedan external agency for our whistle-blower hotline

 

•                  Involvedcorporate finance in the hiring and review of divisional accounting personnel

 

•                  Establisheda formal evaluation and implementation process regarding changes in accountingrules

 

Within the division wherethe internal control deficiencies were noted we have:

 

•                  Replacedcertain accounting personnel

 

•                  Changedreporting relationships

 

•                  Reorganizedthe accounting function with increased segregation of duties

 

•                  Evaluatedand are addressing staffing requirements, including quantity and qualificationsof personnel

 

Due to the materialweaknesses noted above, in preparing our financial statements for the quarterended January 31, 2005, we performed additional procedures to ensure that thosefinancial statements are fairly stated in all material respects in conformitywith generally accepted accounting principles.

 

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**Section404**

 

Section 404 of theSarbanes-Oxley Act of 2002 requires that we document and test the internalcontrols over financial reporting and to assert in our Annual Report on Form10-K for the fiscal year ended July 31, 2005, whether the internal controlsover financial reporting at July 31, 2005 are effective.  Any material weakness in internal controlsover financial reporting existing at that date will preclude us from making apositive assertion.  We are currentlyundergoing a comprehensive effort to comply with Section 404 of the Sarbanes-OxleyAct.

 

In response to therequirements of the Sarbanes-Oxley Act and our material weakness in certainareas, we are formalizing our entire control framework and all of our controlprocedures.  We have done significantwork in evaluating, documenting, testing and remediating this framework andprocesses in a concerted effort to be in compliance with Section 404 by ourrequired deadline for fiscal 2005. During the course of these activities and in addition to the materialweakness in our disclosure controls described above, we have identified certaininternal control issues and deficiencies which we believe should be improvedand corrected.  We have a remediationplan for these issues and expect to have completed our remediation and testingprior to the end of fiscal 2005 in order to make a positive assertion as to theeffectiveness of internal controls over financial reporting, however, there canbe no assurance that all the identified issues and deficiencies or any otherissues that may arise from continued testing will be resolved in time to do so.

 

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# **PART II**.  OTHERINFORMATION

 

## **Item6**.                                       Exhibits

 

***Exhibits filed with this report:***

** **
| **Exhibit  No.** | ** ** | **Description**                                                                                      |
|------------------|------------|------------------------------------------------------------------------------------------------------|
| *31.1            | —     | Certification pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer. |
| *31.2            | —     | Certification pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer. |
| *32.1            | —     | Certification pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer. |
| *32.2            | —     | Certification pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer. |

 

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***  filed herewith**

 

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## **SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized, on the 10th day of June2005.

 
|   | **Veritas DGC Inc.** |
|--------|----------------------|
|   |                 |   |
|   | By:                  | /s/ Mark E. Baldwin |
|   |                 | mark E. Baldwin |
|   |                 | Executive Vice President, Chief Financial Officer  and Treasurer  (Principal Financial Officer) |
|   |                 |   |
|   |                 |   |
|   |                 | /s/ Vincent M. Thielen |
|   |                 | vincent m. thielen |
|   |                 | Vice President, Corporate Controller  (Chief Accounting Officer) |

 

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