**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

----

 

**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 April 30, 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 DGC Inc.**

(Exact name of registrant as specified in its charter)

 
| **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 area code)

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.  Yes 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).

 

 

----

 

**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  Nine Months Ended April 30, 2005 and 2004 |                                                                                        |
| Consolidated Balance Sheets  as of April 30, 2005 and July 31, 2004                                                                 |                                                                                        |
| Consolidated  Statements of Cash Flows for the Nine Months Ended April 30, 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 |     |

 

----

 

**PART I.  FINANCIAL INFORMATION**

 

## **Item1**.       FinancialStatements

 

**VERITAS DGC INC. ANDSUBSIDIARIES**

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

**(Unaudited)**

** **
| ** **                                                          | ** ** | **Three Months Ended  April 30,**             | ** ** | **Nine Months Ended  April 30,** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------|------------|
| ** **                                                          | ** ** | **2005**                                      | ** ** | **Restated  2004**               | ** ** | **2005** | ** ** | **Restated  2004** | ** ** |
| ** **                                                          | ** ** | **(In thousands, except per share  amounts)** | ** ** |
|                                                                |       |                                          |       |                             |       |   |   |   |   |
| Revenues                                                            |       | $                                             | 175,510    |                             | $          | 180,714 |   | $ | 497,319 |   | $ | 428,177 |   |
| Cost of services                                                    |       | 132,957                                       |       | 147,911                          |       | 393,898 |   | 376,625 |   |
| Research and development                                            |       | 4,676                                         |       | 4,118                            |       | 13,790 |   | 11,258 |   |
| General and administrative                                          |       | 8,632                                         |       | 7,240                            |       | 23,597 |   | 19,823 |   |
| Operating income                                                    |       | 29,245                                        |       | 21,445                           |       | 66,034 |   | 20,471 |   |
| Interest expense                                                    |       | 1,140                                         |       | 8,874                            |       | 2,803 |   | 17,350 |   |
| Other (income), net                                                 |       | (2,454                                        | )          | (562                             | )          | (4,043 | ) | (1,067 | ) |
| Income before provision for  income taxes                           |       | 30,559                                        |       | 13,133                           |       | 67,274 |   | 4,188 |   |
| Provision for income taxes                                          |       | 12,152                                        |       | 3,069                            |       | 30,521 |   | 7,515 |   |
| Net income (loss)                                                   |       | $                                             | 18,407     |                             | $          | 10,064 |   | $ | 36,753 |   | $ | (3,327 | ) |
|                                                                |       |                                          |       |                             |       |   |   |   |   |
| Net income (loss) per share:                                        |       |                                          |       |                             |       |   |   |   |   |
| Basic:                                                              |       |                                          |       |                             |       |   |   |   |   |
| Net income (loss) per common  share                                 |       | $                                             | .54        |                             | $          | .30 |   | $ | 1.09 |   | $ | (.10 | ) |
| Weighted average common shares  (including exchangeable shares)     |       | 33,792                                        |       | 33,455                           |       | 33,775 |   | 33,598 |   |
|                                                                |       |                                          |       |                             |       |   |   |   |   |
| Diluted:                                                            |       |                                          |       |                             |       |   |   |   |   |
| Net income (loss) per common  share                                 |       | .52                                           |       | $                                | .29        |   | $ | 1.05 |   | $ | (.10 | ) |
| Weighted average common shares  (including exchangeable shares)     |       | 35,131                                        |       | 34,601                           |       | 34,970 |   | 33,598 |   |
|                                                                |       |                                          |       |                             |       |   |   |   |   |
| Comprehensive income (loss):                                        |       |                                          |       |                             |       |   |   |   |   |
| Net income (loss)                                                   |       | $                                             | 18,407     |                             | $          | 10,064 |   | $ | 36,753 |   | $ | (3,327 | ) |
| Other comprehensive income  (loss) (net of tax, $0 in all periods): |       |                                          |       |                             |       |   |   |   |   |
| Foreign currency translation  adjustments                           |       | (889                                          | )          | (3,654                           | )          | 5,699 |   | 2,373 |   |
| Other unrealized gain (loss)                                        |       | (342                                          | )          | 19                               |       | (116 | ) | (585 | ) |
| Total other comprehensive  income (loss)                            |       | (1,231                                        | )          | (3,635                           | )          | 5,583 |   | 1,788 |   |
| Comprehensive income (loss)                                         |       | $                                             | 17,176     |                             | $          | 6,429 |   | $ | 42,336 |   | $ | (1,539 | ) |

 

See Notes to Consolidated Financial Statements

 

1

----

 

**VERITAS DGC INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(Dollars in thousands, except parvalue)**

(Unaudited)

 
| ** **                                                                                                                                                         | ** ** | **April 30,  2005** | ** ** | **July 31,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|--------------------|------------|
|                                                                                                                                                               |       |                |       |               |       |
| ASSETS                                                                                                                                                             |       |                |       |               |       |
| Current assets:                                                                                                                                                    |       |                |       |               |       |
| Cash and cash equivalents                                                                                                                                          |       | $                   | 238,453    |               | $          | 116,299 |   |
| Restricted cash investments                                                                                                                                        |       | 236                 |       | 111                |       |
| Accounts and notes receivable  (net of allowance of $858 and $1,109 respectively)                                                                                  |       | 144,727             |       | 166,810            |       |
| Materials and supplies  inventory                                                                                                                                  |       | 4,899               |       | 4,198              |       |
| Prepayments and other                                                                                                                                              |       | 11,493              |       | 15,599             |       |
| Income taxes receivable                                                                                                                                            |       | —              |       | 12,617             |       |
| Total current assets                                                                                                                                               |       | 399,808             |       | 315,634            |       |
|                                                                                                                                                               |       |                |       |               |       |
| Property and equipment                                                                                                                                             |       | 494,777             |       | 479,639            |       |
| Less accumulated depreciation                                                                                                                                      |       | 373,695             |       | 357,976            |       |
| Property and equipment, net                                                                                                                                        |       | 121,082             |       | 121,663            |       |
|                                                                                                                                                               |       |                |       |               |       |
| Multi-client data library                                                                                                                                          |       | 293,228             |       | 313,153            |       |
| Deferred tax asset                                                                                                                                                 |       | 1,513               |       | 1,223              |       |
| Other assets                                                                                                                                                       |       | 23,311              |       | 24,573             |       |
| Total                                                                                                                                                              |       | $                   | 838,942    |               | $          | 776,246 |   |
|                                                                                                                                                               |       |                |       |               |       |
| LIABILITIES AND STOCKHOLDERS’  EQUITY                                                                                                                         |       |                |       |               |       |
| Current liabilities:                                                                                                                                               |       |                |       |               |       |
| Trade accounts payable                                                                                                                                             |       | $                   | 49,274     |               | $          | 44,907 |   |
| Accrued and deferred income  taxes                                                                                                                                 |       | 12,946              |       | 7,145              |       |
| Other accrued liabilities                                                                                                                                          |       | 70,909              |       | 67,650             |       |
| Total current liabilities                                                                                                                                          |       | 133,129             |       | 119,702            |       |
| Non-current liabilities:                                                                                                                                           |       |                |       |               |       |
| Long-term debt                                                                                                                                                     |       | 155,000             |       | 155,000            |       |
| Other non-current liabilities                                                                                                                                      |       | 15,330              |       | 11,854             |       |
| Total non-current liabilities                                                                                                                                      |       | 170,330             |       | 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                                                                                                                                         |       | 445,470             |       | 441,982            |       |
| Accumulated earnings                                                                                                                                               |       | 99,897              |       | 63,144             |       |
| Accumulated other  comprehensive income:                                                                                                                           |       |                |       |               |       |
| Cumulative foreign currency  translation adjustment                                                                                                                |       | 13,030              |       | 7,331              |       |
| Other comprehensive income  (loss)                                                                                                                                 |       | (999                | )          | (883               | )          |
| Unearned compensation                                                                                                                                              |       | (606                | )          | (604               | )          |
| Treasury stock, at cost;  1,319,930 shares and 1,317,532 shares, respectively                                                                                      |       | (21,659             | )          | (21,628            | )          |
| Total stockholders’ equity                                                                                                                                    |       | 535,483             |       | 489,690            |       |
| Total                                                                                                                                                              |       | $                   | 838,942    |               | $          | 776,246 |   |

 

See Notes to Consolidated Financial Statements

 

2

----

 

**VERITAS DGC INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                                              | ** ** | **Nine Months Ended April 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                              | ** ** | **2005**                        | ** ** | **Restated  2004** | ** ** |
| ** **                                                                                              | ** ** | **(In thousands)**              | ** ** |
| Cash flows from operating  activities:                                                                  |       |                            |       |   |   |
| Net income (loss)                                                                                       |       | $                               | 36,753     |   | $ | (3,327 | ) |
| Non-cash items included in net  income (loss):                                                          |       |                            |       |   |   |
| Depreciation and amortization,  net (other than multi-client data library)                              |       | 33,164                          |       | 31,871 |   |
| Amortization of multi-client  data library                                                              |       | 103,559                         |       | 163,837 |   |
| Loss (gain) on disposition of  property and equipment                                                   |       | (638                            | )          | 137 |   |
| Equity in loss of joint  venture                                                                        |       | —                          |       | 959 |   |
| Deferred taxes                                                                                          |       | (372                            | )          | 782 |   |
| Amortization of unearned  compensation                                                                  |       | 263                             |       | 311 |   |
| Change in operating assets and  liabilities:                                                            |       |                            |       |   |   |
| Accounts and notes receivable                                                                           |       | 26,870                          |       | (39,379 | ) |
| Materials and supplies  inventory                                                                       |       | (696                            | )          | 1,814 |   |
| Prepayments and other                                                                                   |       | 4,013                           |       | 873 |   |
| Income tax payable                                                                                      |       | 19,632                          |       | 3,764 |   |
| Accounts payable and other  accrued liabilities                                                         |       | 6,637                           |       | (3,388 | ) |
| Other                                                                                                   |       | 10,625                          |       | (6,083 | ) |
| Net cash provided by operating  activities                                                              |       | 239,810                         |       | 152,171 |   |
|                                                                                                    |       |                            |       |   |   |
| Cash flows from investing  activities:                                                                  |       |                            |       |   |   |
| (Increase) decrease in  restricted cash                                                                 |       | (125                            | )          | 94 |   |
| Investment in multi-client  data library, net cash                                                      |       | (77,558                         | )          | (97,366 | ) |
| Purchase of property and  equipment                                                                     |       | (43,533                         | )          | (20,652 | ) |
| Sale of property and equipment                                                                          |       | 1,240                           |       | 1,225 |   |
| Sale of (RC)2 software  operation                                                                       |       | —                          |       | 2,000 |   |
| Net cash used by investing  activities                                                                  |       | (119,976                        | )          | (114,699 | ) |
|                                                                                                    |       |                            |       |   |   |
| Cash flows from financing  activities:                                                                  |       |                            |       |   |   |
| Borrowing of long-term debt                                                                             |       | —                          |       | 155,000 |   |
| Payments on long-term debt                                                                              |       | —                          |       | (167,238 | ) |
| Net proceeds from sale of  common stock                                                                 |       | 1,918                           |       | 9,119 |   |
| Purchase of treasury stock                                                                              |       | —                          |       | (20,000 | ) |
| Net cash provided (used) by  financing activities                                                       |       | 1,918                           |       | (23,119 | ) |
| Currency loss on foreign cash                                                                           |       | 402                             |       | 68 |   |
| Change in cash and cash  equivalents                                                                    |       | 122,154                         |       | 14,421 |   |
| Beginning cash and cash  equivalents balance                                                            |       | 116,299                         |       | 72,097 |   |
| Ending cash and cash  equivalents balance                                                               |       | $                               | 238,453    |   | $ | 86,518 |   |
|                                                                                                    |       |                            |       |   |   |
|                                                                                                    |       |                            |       |   |   |
| **Schedule of  non-cash transactions:**                                                                 |       |                            |       |   |   |
| Capitalization of depreciation  and amortization resulting in an increase in  multi-client data library |       | $                               | 7,015      |   | $ | 14,380 |   |

 

See Notes to Consolidated Financial Statements

 

3

----

 

**VERITAS DGC INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

(Unaudited)

 

###### **1.     Summary of significant accounting policies**

 

***Restatement of Financial Statements***

 

The historical financial information for the three andnine months ended April 30, 2004 have been restated due to accountingerrors.  In September 2004, we foundvarious types of errors in our balance sheet related primarily to clerical andaccount reconciliation errors associated with the intercompany transfers ofproperty and foreign currency items.  Inaddition, we found errors in the accounting for certain customer contracts thatcontained provisions for customer payment of equipment mobilization fees,revenue sharing with customers and certain other contingencies.  Correction of these errors resulted in adecrease of net income of $1.4 million relating to the first three fiscalquarters of fiscal 2004 and $2.6 million related to periods prior to fiscal2004.  Since recording the requiredadjustments in the fourth quarter of fiscal 2004 would have had a materialimpact on the financial statements of the fourth quarter and those of the fullfiscal year, we determined that a restatement of our prior years’ financialstatements was appropriate.  The impactof the restatement resulted in a decrease in the net income and net income pershare of $105,000 and $0.00, respectively, for the three months ended April 30,2004 and an increase in the net loss and net loss per common share of$1,388,000 and $0.04, respectively, for the nine months ended April 30, 2004.  (See Note 9 for the details of thisrestatement.)

 

The restatement has not caused us to be in defaultunder any of our debt covenants or lease agreements. We obtained waivers fromour lenders under our Credit Facility extending the due date for our deliveryof our third quarter financial statements to them to July 29, 2005.  Additionally, the restatement has delayed theregistration of our Convertible Senior Notes resulting in liquidated damages inthe amount of $2,153 per day from August 31, 2004 until the registration is completed.

 

***Consolidation***

 

The accompanying consolidated financial statementsinclude our accounts and the accounts of majority-owned domestic and foreignsubsidiaries. All material intercompany balances and transactions have beeneliminated.  All material adjustmentsconsisting only of normal recurring adjustments that, in the opinion ofmanagement, are necessary for a fair statement of the results for the interimperiods have been reflected. These interim financial statements should be readin conjunction with our annual audited consolidated financial statements.

 

In December 2003, the Financial Accounting StandardsBoard issued FIN 46R, a revision to FIN 46 “*Consolidationof Variable Interest Entities*.” FIN 46R replaces FIN 46 and provides additional clarification on theapplication of ARB No. 51, “*ConsolidatedFinancial Statements*”, to certain entities in which equity investorsdo not have the characteristics of a controlling financial interest or do nothave sufficient equity at risk for the entity to finance its activities withoutadditional subordinated financial support. We adopted FIN 46R on April 30, 2004. Adoption did not have a material effect on our financial position orresults of operations; however, it required consolidation of our 80% owned Indonesianjoint venture.  Prior to adoption of FIN46R this joint venture was accounted for under the equity method.

 

***Use of estimates***

 

The preparation of financial statements in conformitywith generally accepted accounting principles requires management to makeestimates and assumptions.  Theseestimates and assumptions affect the reported amounts of assets and liabilitiesand disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Actual results could differ from those estimates.

 

4

----

 

***Recent Accounting Pronouncements***

 

In October 2004, the Emerging Issues Task Force of theFinancial Accounting Standards Board issued EITF 04-8, “*The Effect of Contingently Issuable Debt on Earningsper Share”,* which is effective for periods ending after December 15,2004.  This statement requires us toinclude shares of our stock issuable upon the assumed conversion of ourConvertible Senior Notes in the calculation of diluted weighted average commonshares.  We adopted the EITF during thefirst quarter of fiscal 2005; however, the contingently issuable shares relatedto our Convertible Senior Notes had no impact on our weighted average sharescalculation for the three and nine month periods ended April 30, 2005, as thecalculation would have been anti-dilutive.

 

 

###### **2.     Multi-client library accounting change**

 

Effective August 1, 2003, we changed our minimumamortization policy with regard to multi-client data and recorded a charge of$22.1 million in the first quarter of fiscal 2004, included in cost of servicesin our Consolidated Statement of Operations. Under the prior method, capitalized costs of multi-client surveys werecharged to cost of services in the period sales occurred, using the salesforecast method, over an estimated five-year useful life.  However, during the last 24 months of asurvey’s useful life, amortization was the greater of the amount resulting fromthe sales forecast method or straight-line amortization of the remaining bookvalue over the remaining portion of the original five-year estimated usefullife.  Under the new method, capitalizedcosts of multi-client surveys are charged to cost of services over an estimatedfive-year useful life based upon the greater of the result (higher expense)under the sales forecast method or cumulative straight-line amortization fromsurvey completion over an estimated five-year useful life.  Notwithstanding this change, the salesforecast method remains our primary method of calculating cost ofservices.  The total amortization periodthat concludes sixty months after survey completion represents the minimumperiod over which the surveys are expected to provide economic benefits.  We believe that commencing the minimumamortization upon survey completion, as opposed to our prior method of doing soonly during the last twenty four months of the survey’s life, better reflectsthe potential diminution of survey value with the passage of time.

 

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

 

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

 
| ** **                              | ** ** | **Three Months Ended  April 30,** | ** ** | **Nine Months Ended  April 30,** | ** ** |
|-----------------------------------------|------------|-----------------------------------|------------|----------------------------------|------------|
| ** **                              | ** ** | **2005**                          | ** ** | **Restated  2004**               | ** ** | **2005** | ** ** | **Restated  2004** | ** ** |
| ** **                              | ** ** | **(In thousands)**                | ** ** |
|                                    |       |                              |       |                             |       |   |   |   |   |
| Interest income                         |       | $                                 | (1,553     | )                                | $          | (250 | ) | $ | (3,080 | ) | $ | (734 | ) |
| Net gain on foreign currency  exchange  |       | (308                              | )          | (492                             | )          | (90 | ) | (745 | ) |
| Loss from unconsolidated joint  venture |       | —                            |       | 345                              |       | — |   | 958 |   |
| Other                                   |       | (593                              | )          | (165                             | )          | (873 | ) | (546 | ) |
| Total                                   |       | $                                 | (2,454     | )                                | $          | (562 | ) | $ | (4,043 | ) | $ | (1,067 | ) |

 

5

----

 

###### **4.     Earnings per common share**

 

Basic and diluted earnings per common share arecomputed as follows:

 
| ** **                                                      | ** ** | **Three Months Ended  April 30,**             | ** ** | **Nine Months Ended  April 30,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------|------------|
| ** **                                                      | ** ** | **2005**                                      | ** ** | **Restated  2004**               | ** ** | **2005** | ** ** | **Restated  2004** | ** ** |
| ** **                                                      | ** ** | **(In thousands, except per share  amounts)** | ** ** |
|                                                            |       |                                          |       |                             |       |   |   |   |   |
| Net income (loss)                                               |       | $                                             | 18,407     |                             | $          | 10,064 |   | $ | 36,753 |   | $ | (3,327 | ) |
|                                                            |       |                                          |       |                             |       |   |   |   |   |
| **Basic:**                                                      |       |                                          |       |                             |       |   |   |   |   |
| Weighted average common shares  (including exchangeable shares) |       | 33,792                                        |       | 33,455                           |       | 33,775 |   | 33,598 |   |
| Income (loss) per share                                         |       | $                                             | .54        |                             | $          | .30 |   | $ | 1.09 |   | $ | (.10 | ) |
|                                                            |       |                                          |       |                             |       |   |   |   |   |
| **Diluted:**                                                    |       |                                          |       |                             |       |   |   |   |   |
| Weighted average common shares  (including exchangeable shares) |       | 33,792                                        |       | 33,455                           |       | 33,775 |   | 33,598 |   |
| Shares issuable from assumed  exercise of options               |       | 1,295                                         |       | 1,146                            |       | 1,149 |   | — |   |
| Shares issuable from assumed  vesting of restricted stock       |       | 44                                            |       | —                           |       | 46 |   | — |   |
| Total                                                           |       | 35,131                                        |       | 34,601                           |       | 34,970 |   | 33,598 |   |
| Income (loss) per share                                         |       | $                                             | .52        |                             | $          | .29 |   | $ | 1.05 |   | $ | (.10 | ) |

 

The Convertible Senior Notes were not convertible asof April 30, 2005 and the shares issuable from such conversion, whileconsidered, are not included in this income per share calculation as they areanti-dilutive (See Note 5 for a description of our Convertible Senior Notes.)

 

The following options to purchase common shares havebeen excluded from the computation assuming dilution because the exerciseprices of the options exceed the average market price of the underlying commonshares or the options are anti-dilutive due to a net loss.

 
| ** **           | ** ** | **Three Months Ended  April 30,** | ** ** | **Nine Months Ended  April 30,** | ** ** |
|----------------------|------------|-----------------------------------|------------|----------------------------------|------------|
| ** **           | ** ** | **2005**                          | ** ** | **2004**                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| Number of options    |       | 397,130                           |       | 1,012,682                        |       | 729,496 |   | 3,503,724 |   |
| Exercise price range |       | $27.81-55.13                      |       | $19.38-55.13                     |       | $24.44-55.13 |   | $5.25-55.13 |   |
| Expiring through     |       | March  2012                       |       | March  2012                      |       | March  2012 |   | March  2012 |   |

 

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

 

As of April 30, 2005, our long-term debt outstandingconsisted of $155.0 million of Convertible Senior Notes due 2024.  In addition, we have a Credit Facilityconsisting primarily of a revolving loan facility permitting borrowings of upto $55.0 million and various unsecured lines of credit totaling $8.5 millionwhich may be used exclusively for letters of credit and bank guarantees.

 

The Convertible Senior Notes bear interest at a perannum rate which equals the three-month LIBOR rate, adjusted quarterly, minus aspread of 0.75%.  The current interestrate on the Convertible Senior Notes from March 15, 2004 through June 14, 2005equated to 2.26% and equates to 2.66% for the subsequent three monthperiod.  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 noteand shares of our common stock for the note’s conversion

 

6

----

 

value in excess ofsuch principal amount.  We entered into aregistration rights agreement in which we agreed to file a registrationstatement with the Securities and Exchange Commission within 90 days of March3, 2004 to register resales of the notes and the associated shares of commonstock.  We filed a registration statementon May 28, 2004 in compliance with the registration rights agreement; however,the registration statement is not yet effective.  Because our registration statement was noteffective on or before August 31, 2004 as required by the indenture, we havebeen incurring liquidated damages in the amount of $2,153 per day since August31, 2004.  We will continue to incurthese damages until our registration statement 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 these circumstances occur, theConvertible Senior Notes would be convertible at the then current stock pricetimes the conversion ratio of 41.6146. This amount would be payable in cashequal to the principal amount of the notes, the par value adjusted fordividends or other equity transactions, with 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 April 30, 2005, there were no borrowings and$3.1 million in letters of credit outstanding under the Credit Facility.  Borrowings under the Credit Facility,including swing-line loans, bear interest at a variable rate determined on thedate of borrowing that is related to various base rates and margins dependingupon our leverage ratio and the location of the borrowing.  The Credit Facility expires in February2006.  Borrowings under the CreditFacility are secured by substantially all of our assets, including the accountsreceivable from certain of our foreign subsidiaries.

 

We obtained waivers from our lenders under our CreditFacility allowing us to deliver our required reports for the second and thirdquarters of fiscal 2005 to the lenders by no later than July 29, 2005.

 

We have various unsecured lines of credit, withlending institutions that operate in geographic areas not covered by thelending institutions in our Credit Facility, totaling $8.5 million that may beused exclusively for the issuance of letters of credit and bankguarantees.  As of April 30, 2005, $3.5million in letters of credit were outstanding under these lines.

 

7

----

 

###### **6.     Pension plan**

 

We maintain a contributory defined benefit pensionplan for eligible participating employees in the United Kingdom.  The following is the net periodic benefitcost by component:

 
| ** **                                        | ** ** | **Three Months Ended  April 30,** | ** ** | **Nine Months Ended  April 30,** | ** ** |
|---------------------------------------------------|------------|-----------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **2005**                          | ** ** | **2004**                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                        | ** ** | ** **                        | ** ** | **Restated**                     | ** ** | ** ** | ** ** | **Restated** | ** ** |
| ** **                                        | ** ** | **(In thousands)**                | ** ** |
|                                              |       |                              |       |                             |       |   |   |   |   |
| Service cost (benefits earned  during the period) |       | $                                 | 155        |                             | $          | 134 |   | $ | 459 |   | $ | 423 |   |
| Interest cost on projected  benefit obligation    |       | 316                               |       | 260                              |       | 935 |   | 824 |   |
| Expected return on plan assets                    |       | (225                              | )          | (194                             | )          | (666 | ) | (615 | ) |
| Amortization of prior service  cost               |       | (38                               | )          | (35                              | )          | (112 | ) | (110 | ) |
| Amortization of net gain                          |       | 79                                |       | 82                               |       | 235 |   | 258 |   |
| Amortization of transition  obligation            |       | 2                                 |       | 2                                |       | 6 |   | 5 |   |
| Net periodic benefit costs                        |       | $                                 | 289        |                             | $          | 249 |   | $ | 857 |   | $ | 785 |   |

 

We have made contributions to this plan based on theschedule of contributions on which the above service cost was based and expectto complete these contributions, totaling approximately $1.0 million for theyear, during fiscal 2005.

 

###### **7.     Segment information**

 

Beginning in fiscal 2005, we organized the companyinto three geographic regions: North and South America (NASA); Europe, Africa,the Middle East and CIS (EAME); and Asia Pacific (APAC).  Our geographic segments 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 nine months ended April 30, 2004 has beenrestated to reflect the new segment structure. A reconciliation of the reportable segments’ results to those of thetotal enterprise is given below:

 
| ** **              | ** ** | **For the Three Months Ended  April 30, 2005** | ** ** |
|-------------------------|------------|------------------------------------------------|------------|
| ** **              | ** ** | **NASA**                                       | ** ** | **EAME** | ** ** | **APAC** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **              | ** ** | **(In thousands)**                             | ** ** |
| Revenues                |       | $                                              | 115,478    |   | $ | 30,636 |   | $ | 29,396 |   | $ | — |   | $ | 175,510 |   |
| Operating income (loss) |       | 25,635                                         |       | 7,498 |   | 4,336 |   | (8,224 | ) | 29,245 |   |
| Assets                  |       | 472,130                                        |       | 103,251 |   | 51,508 |   | 212,053 |   | 838,942 |   |
|                         |            |                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **              | ** ** | **For the Three Months Ended  April 30, 2004** | ** ** |
|-------------------------|------------|------------------------------------------------|------------|
| ** **              | ** ** | **Restated**                                   | ** ** |
| ** **              | ** ** | **NASA**                                       | ** ** | **EAME** | ** ** | **APAC** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **              | ** ** | **(In thousands)**                             | ** ** |
| Revenues                |       | $                                              | 143,535    |   | $ | 17,169 |   | $ | 20,010 |   | $ | — |   | $ | 180,714 |   |
| Operating income (loss) |       | 28,573                                         |       | 790 |   | 1,405 |   | (9,323 | ) | 21,445 |   |
| Assets                  |       | 513,400                                        |       | 103,425 |   | 48,913 |   | 99,274 |   | 765,012 |   |
|                         |            |                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **              | ** ** | **For the Nine Months Ended April  30, 2005** | ** ** |
|-------------------------|------------|-----------------------------------------------|------------|
| ** **              | ** ** | **NASA**                                      | ** ** | **EAME** | ** ** | **APAC** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **              | ** ** | **(In thousands)**                            | ** ** |
| Revenues                |       | $                                             | 330,335    |   | $ | 95,487 |   | $ | 71,497 |   | $ | — |   | $ | 497,319 |   |
| Operating income (loss) |       | 68,692                                        |       | 14,998 |   | 5,453 |   | (23,109 | ) | 66,034 |   |
| Assets                  |       | 472,130                                       |       | 103,251 |   | 51,508 |   | 212,053 |   | 838,942 |   |
|                         |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

8

----

 
| ** **              | ** ** | **For the Nine Months Ended April  30, 2004** | ** ** |
|-------------------------|------------|-----------------------------------------------|------------|
| ** **              | ** ** | **Restated**                                  | ** ** |
| ** **              | ** ** | **NASA**                                      | ** ** | **EAME** | ** ** | **APAC** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **              | ** ** | **(In thousands)**                            | ** ** |
| Revenues                |       | $                                             | 322,750    |   | $ | 62,690 |   | $ | 42,737 |   | $ | — |   | $ | 428,177 |   |
| Operating income (loss) |       | 44,984                                        |       | (1,132 | ) | 2,682 |   | (26,063 | ) | 20,471 |   |
| Assets                  |       | 513,400                                       |       | 103,425 |   | 48,913 |   | 99,274 |   | 765,012 |   |
|                         |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Corporate operating income (loss) includes certaingeneral and administrative and research and development expenses not allocatedto the segments.  Corporate assetsconsist primarily of cash and cash equivalents.

 

###### **8.     Stock based compensation**

 

We account for stock based employee compensation usingthe intrinsic method prescribed in Accounting Principles Board Opinion No. 25and have adopted the disclosure only provisions of Statement of FinancialAccounting Standards (SFAS) No. 148.  Asrequired by SFAS No. 148, we disclose the effect on net income and earnings pershare of equity-based employee compensation, including stock options, thatwould have been recorded using the fair value based method.  SFAS No. 123R, which will become effectivefor us beginning with our first quarter of fiscal 2006, will require us torecord the cost of this equity-based compensation in our income statement basedon the estimated fair value of the awards.

 
| ** **                                                                                                                                  | ** ** | **Three Months Ended  April 30,** | ** ** | **Nine Months Ended  April 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                  | ** ** | **2005**                          | ** ** | **Restated  2004**               | ** ** | **2005** | ** ** | **Restated  2004** | ** ** |
| ** **                                                                                                                                  | ** ** | **(In thousands)**                | ** ** |
|                                                                                                                                        |       |                              |       |                             |       |   |   |   |   |
| Net income (loss) as reported                                                                                                               |       | $                                 | 18,407     |                             | $          | 10,064 |   | $ | 36,753 |   | $ | (3,327 | ) |
| Add: Compensation expense, net  of related tax effects                                                                                      |       | 84                                |       | 47                               |       | 263 |   | 203 |   |
| Less: Total stock-based  employee compensation expense determined under fair value based method for  all awards, net of related tax effects |       | (648                              | )          | (835                             | )          | (2,002 | ) | (4,187 | ) |
| Pro forma net income (loss)                                                                                                                 |       | $                                 | 17,843     |                             | $          | 9,276 |   | $ | 35,014 |   | $ | (7,311 | ) |
|                                                                                                                                        |       |                              |       |                             |       |   |   |   |   |
| Earnings (loss) per share:                                                                                                                  |       |                              |       |                             |       |   |   |   |   |
| Basic:                                                                                                                                      |       |                              |       |                             |       |   |   |   |   |
| As reported                                                                                                                                 |       | $                                 | .54        |                             | $          | .30 |   | $ | 1.09 |   | $ | (.10 | ) |
| Pro-forma                                                                                                                                   |       | .53                               |       | .28                              |       | 1.04 |   | (.22 | ) |
|                                                                                                                                        |       |                              |       |                             |       |   |   |   |   |
| Diluted:                                                                                                                                    |       |                              |       |                             |       |   |   |   |   |
| As reported                                                                                                                                 |       | $                                 | .52        |                             | $          | .29 |   | $ | 1.05 |   | $ | (.10 | ) |
| Pro-forma                                                                                                                                   |       | .51                               |       | .27                              |       | 1.00 |   | (.22 | ) |

 

9

----

 

###### **9.         Restatement**

 

The historical financial information in this documentfor the three and nine month periods ended April 30, 2004 has been restated dueto accounting errors.  These errors were discovered during twoseparate reviews, a comprehensive review of our balance sheet and a review ofspecific types of our customer contracts.

 

**Balance Sheet Review**

 

During our fiscal 2004 year-end balance sheet review,we found various types of clerical and account reconciliation errors relatedprimarily to the intercompany transfer of property and foreign currency items.  The fixed asset errors of approximately $1.9million affected depreciation and amortization charges over the past sevenyears.  We corrected all mattersidentified in the balance sheet review in our restatement, although such itemswere not individually material.

 

**Contract Review**

 

We also reviewed our accounting for our customercontracts, including those that contain provisions for customer payment ofmobilization fees, revenue sharing with customers and certain datecontingencies.  Because our contractsvary widely in terms and conditions, we reviewed the deliverables of each typeof 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 sharingclauses and date contingencies, we recognized revenue before the price to beultimately paid by the related customer was fixed or determinable under SABNo.104.  In all cases, our errors relatedto customer contracts were related to the timing of revenue recognition.

 

The following is a summary of the effect of therestatement adjustments on our previously reported net income, earnings pershare and total assets:

 

| ** **                                      | ** ** | **Increase / (Decrease) from Previously  Reported Amounts for the** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **Three Months  Ended  April 30, 2004**                             | ** ** | **Nine Months  Ended  April 30, 2004** | ** ** |
| ** **                                      | ** ** | **(In thousands, except per share  amounts)**                       | ** ** |
| ** **                                      | ** ** | ** **                                                          | ** ** | ** ** | ** ** |
| Net income (loss) as  previously reported       |       | $                                                                   | 10,169     |   | $ | (1,939 | ) |
| Pretax adjustments resulting  from:             |       |                                                                |       |   |   |
| Balance sheet review                            |       | 15                                                                  |       | (886 | ) |
| Contract review                                 |       | (172                                                                | )          | (659 | ) |
| Total pretax adjustments                        |       | (157                                                                | )          | (1,545 | ) |
| Tax effect of restatement  adjustments          |       | (52                                                                 | )          | (157 | ) |
| Total net adjustments                           |       | (105                                                                | )          | (1,388 | ) |
| Net Income (loss) restated                      |       | $                                                                   | 10,064     |   | $ | (3,327 | ) |
|                                            |       |                                                                |       |   |   |
| Income (loss) per common share  — diluted: |       |                                                                |       |   |   |
| As reported                                     |       | $                                                                   | .29        |   | $ | (.06 | ) |
| Effect of the net adjustments                   |       | .00                                                                 |       | (.04 | ) |
| As restated                                     |       | $                                                                   | .29        |   | $ | (.10 | ) |
|                                            |       |                                                                |       |   |   |
| Total assets as reported                        |       | $                                                                   | 763,316    |   |   |   |
| Adjustments                                     |       | 1,696                                                               |       |   |   |
| Total assets as adjusted                        |       | $                                                                   | 765,012    |   |   |   |

 

The following are excerpts from the restated financialstatements for the three and nine months ended April 30, 2004 compared to thepreviously reported amounts:

 

10

----

 

**RESTATED**

**CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)**

**(UNAUDITED)**

 

**(In thousands, except per shareamounts)**

** **
| ** **                                                          | ** ** | **Three Months Ended April 30,  2004** | ** ** | **Nine Months Ended April 30,  2004** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| ** **                                                          | ** ** | **As  Reported**                       | ** ** | **Adjustments**                       | ** ** | **Restated** | ** ** | **As  Reported** | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| **Statement of Operations:**                                        |       |                                   |       |                                  |       |   |   |   |   |   |   |   |   |
| Revenues                                                            |       | $                                      | 176,547    |                                  | $          | 4,167 |   | $ | 180,714 |   | $ | 428,667 |   | $ | (490 | ) | $ | 428,177 |   |
| Cost of services                                                    |       | 143,487                                |       | 4,424                                 |       | 147,911 |   | 375,492 |   | 1,133 |   | 376,625 |   |
| Research and development                                            |       | 4,118                                  |       | —                                |       | 4,118 |   | 11,258 |   | — |   | 11,258 |   |
| General and administrative                                          |       | 7,217                                  |       | 23                                    |       | 7,240 |   | 19,791 |   | 32 |   | 19,823 |   |
| Operating income (loss)                                             |       | 21,725                                 |       | (280                                  | )          | 21,445 |   | 22,126 |   | (1,655 | ) | 20,471 |   |
| Interest expense                                                    |       | 8,874                                  |       | —                                |       | 8,874 |   | 17,349 |   | 1 |   | 17,350 |   |
| Other income, net                                                   |       | (439                                   | )          | (123                                  | )          | (562 | ) | (956 | ) | (111 | ) | (1,067 | ) |
| Income (loss) before provision  for income taxes                    |       | 13,290                                 |       | (157                                  | )          | 13,133 |   | 5,733 |   | (1,545 | ) | 4,188 |   |
| Income taxes                                                        |       | 3,121                                  |       | (52                                   | )          | 3,069 |   | 7,672 |   | (157 | ) | 7,515 |   |
| Net income (loss)                                                   |       | $                                      | 10,169     |                                  | $          | (105 | ) | $ | 10,064 |   | $ | (1,939 | ) | $ | (1,388 | ) | $ | (3,327 | ) |
|                                                                |       |                                   |       |                                  |       |   |   |   |   |   |   |   |   |
| **Net income (loss), per share:**                                   |       |                                   |       |                                  |       |   |   |   |   |   |   |   |   |
| **Basic:**                                                          |       |                                   |       |                                  |       |   |   |   |   |   |   |   |   |
| Income (loss) per common share                                      |       | $                                      | .30        |                                  | $          | .00 |   | $ | .30 |   | $ | (.06 | ) | $ | (.04 | ) | $ | (.10 | ) |
| Weighted average common shares  (including exchangeable shares)     |       | 33,455                                 |       | —                                |       | 33,455 |   | 33,598 |   | — |   | 33,598 |   |
|                                                                |       |                                   |       |                                  |       |   |   |   |   |   |   |   |   |
| **Diluted:**                                                        |       |                                   |       |                                  |       |   |   |   |   |   |   |   |   |
| Income (loss) per common share                                      |       | $                                      | .29        |                                  | $          | .00 |   | $ | .29 |   | $ | (.06 | ) | $ | (.04 | ) | $ | (.10 | ) |
| Weighted average common shares  (including exchangeable shares)     |       | 34,601                                 |       | —                                |       | 34,601 |   | 33,598 |   | — |   | 33,598 |   |
|                                                                |       |                                   |       |                                  |       |   |   |   |   |   |   |   |   |
| **Comprehensive income (loss):**                                    |       |                                   |       |                                  |       |   |   |   |   |   |   |   |   |
| Net income (loss)                                                   |       | $                                      | 10,169     |                                  | $          | (105 | ) | $ | 10,064 |   | $ | (1,939 | ) | $ | (1,388 | ) | $ | (3,327 | ) |
| Other comprehensive income  (loss) (net of tax, $0 in all periods): |       |                                   |       |                                  |       |   |   |   |   |   |   |   |   |
| Foreign currency translation  adjustments                           |       | (3,541                                 | )          | (113                                  | )          | (3,654 | ) | 2,394 |   | (21 | ) | 2,373 |   |
| Other unrealized gain (loss)                                        |       | 19                                     |       | —                                |       | 19 |   | (585 | ) | — |   | (585 | ) |
| Total other comprehensive  income (loss)                            |       | (3,522                                 | )          | (113                                  | )          | (3,635 | ) | 1,809 |   | (21 | ) | 1,788 |   |
| Comprehensive income (loss)                                         |       | $                                      | 6,647      |                                  | $          | (218 | ) | $ | 6,429 |   | $ | (130 | ) | $ | (1,409 | ) | $ | (1,539 | ) |
|                                                                     |            |                                        |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

11

----

 

**RESTATED**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE NINE MONTHS ENDED APRIL 30, 2004**

**(UNAUDITED)**

 

(Dollars in thousands)

 
| ** **                                                                                             | ** ** | **As  Reported** | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------|------------|-----------------|------------|--------------|------------|
| **Cash flows from operating  activities:**                                                             |       |             |       |            |       |         |       |
| Net income (loss)                                                                                      |       | $                | (1,939     | )               | $          | (1,388       | )          | $ | (3,327 | ) |
| Non-cash items included in net  income (loss):                                                         |       |             |       |            |       |         |       |
| Depreciation and amortization,  net (other than multi-client)                                          |       | 31,655           |       | 216             |       | 31,871       |       |
| Amortization of multi-client  library                                                                  |       | 163,390          |       | 447             |       | 163,837      |       |
| (Gain) / loss on disposition  of property and equipment                                                |       | 137              |       | —          |       | 137          |       |
| Equity in loss of joint  venture                                                                       |       | 958              |       | 1               |       | 959          |       |
| Deferred taxes                                                                                         |       | 782              |       | —          |       | 782          |       |
| Amortization of unearned  compensation                                                                 |       | 311              |       | —          |       | 311          |       |
| Change in operating  assets/liabilities:                                                               |       |             |       |            |       |         |       |
| Accounts and notes receivable                                                                          |       | (39,730          | )          | 351             |       | (39,379      | )          |
| Materials and supplies  inventory                                                                      |       | 1,802            |       | 12              |       | 1,814        |       |
| Prepayments and other                                                                                  |       | 603              |       | 270             |       | 873          |       |
| Income tax receivable                                                                                  |       | 4,328            |       | (564            | )          | 3,764        |       |
| Accounts payable and other  accrued liabilities                                                        |       | (3,815           | )          | 427             |       | (3,388       | )          |
| Other                                                                                                  |       | (6,126           | )          | 43              |       | (6,083       | )          |
| Total cash provided by  operating activities                                                           |       | 152,356          |       | (185            | )          | 152,171      |       |
| **Cash flows from investing  activities:**                                                             |       |             |       |            |       |         |       |
| Decrease (increase) in  restricted cash investments                                                    |       | 94               |       | —          |       | 94           |       |
| Investment in multi-client  library, net cash                                                          |       | (97,333          | )          | (33             | )          | (97,366      | )          |
| Purchase of property and  equipment                                                                    |       | (20,652          | )          | —          |       | (20,652      | )          |
| Sale of property and equipment                                                                         |       | 1,225            |       | —          |       | 1,225        |       |
| Sale of (RC) (2) software  operating                                                                   |       | 2,000            |       | —          |       | 2,000        |       |
| Total cash used by investing  activities                                                               |       | (114,666         | )          | (33             | )          | (114,699     | )          |
| **Cash flows from financing  activities:**                                                             |       |             |       |            |       |         |       |
| Borrowing of long-term debt                                                                            |       | 155,000          |       | —          |       | 155,000      |       |
| Payments on long-term debt                                                                             |       | (167,238         | )          | —          |       | (167,238     | )          |
| Net proceeds from the sale of  common stock                                                            |       | 9,119            |       | —          |       | 9,119        |       |
| Purchase of treasury stock                                                                             |       | (20,000          | )          | —          |       | (20,000      | )          |
| Total cash provided by  financing activities                                                           |       | (23,119          | )          | —          |       | (23,119      | )          |
| Currency loss (gain) on  foreign cash                                                                  |       | 68               |       | —          |       | 68           |       |
| Change in cash and cash  equivalents                                                                   |       | 14,639           |       | (218            | )          | 14,421       |       |
| Beginning cash and cash  equivalents balance                                                           |       | 72,626           |       | (529            | )          | 72,097       |       |
| Ending cash and cash  equivalents balance                                                              |       | $                | 87,265     |            | $          | (747         | )          | $ | 86,518 |   |
|                                                                                                   |       |             |       |            |       |         |       |
| **Schedule of non-cash  transactions:**                                                                |       |             |       |            |       |         |       |
| Capitalization of depreciation  and amortization resulting in an increase in multi-client data library |       | $                | 14,380     |            | $          | —       |       | $ | 14,380 |   |

 

12

----

 

## **Item2**.       Management’s Discussion andAnalysis of Financial Condition and Results of Operations

 

*This report on Form 10-Q and thedocuments incorporated by reference contain forward-looking statements, withinthe meaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934. These statements include statementsincorporated by reference to other documents we file with the SEC.Forward-looking statements include, among other things, business strategy andexpectations concerning industry conditions, market position, futureoperations, margins, profitability, liquidity and capital resources.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-lookingstatements, which speak only as of the date of this report on Form 10-Q. Ouroperations are subject to a number of uncertainties, risks and otherinfluences, many of which are outside our control, and any one of which, or acombination of which, could cause our actual results of operations to differmaterially from the forward-looking statements. Important factors that couldcause actual results to differ materially from our expectations are disclosedin “Risk Factors” and elsewhere in our Annual Report on Form 10-K.*

 

#### **Overview**

 

We believe that, overall,global exploration for oil and gas is increasing, even in mature areas such asthe North Sea and Nigeria.  While seismichas traditionally been used purely as an exploration tool, we are seeing increasinginterest in new seismic reservoir imaging techniques, such as multi- orwide-azimuth acquisition, which offer better delineation of complex structuresand may advance the use of seismic in hydrocarbon production.  We believe all of this is promising for ourbusiness, although seismic spending will undoubtedly continue to fluctuate.

 

Our overall performanceduring the fiscal 2005 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 indifficult areas, and field operations that are capable of providing technicalas well as health, safety and environmental excellence.

 

Due to our selling andoperational efforts and the robust seismic market, we have seen our backlogincrease $117 million from $147 million at July 31, 2004 to $264 million at May31, 2005.  We expect to complete most ofthe work in backlog over the next twelve months.  It appears that our traditional pattern ofrevenue generation will occur again during fiscal 2005, with revenues in oursecond and third fiscal quarters being higher than in our first and fourthquarters.  This pattern is driven by end-of-yearspending, which results in high library revenue in our second fiscal quarter,and high land acquisition activity during our second and third fiscal quarters,corresponding with the winter seismic season in Alaska and Canada.

 

During the first quarter offiscal 2005, we reorganized our company into three geographic regions: Northand South America (NASA), Europe, Africa, Middle East and CIS (EAME), and AsiaPacific (APAC).  The managers of theseregions are responsible for all facets of sales and operations and representour customer interface.  Centrallymanaged processing, acquisition, and reservoir professionals support thesemanagers from locations around the globe. We feel this new organization allows our front-line managers to focusexclusively on their customers while allowing our company to develop and deploytechnology consistently across our markets. We have put processes in place that will allow for the free movement ofour seismic equipment across the three regions so that we may maximize ourreturn on investment.

 

#### **Restatement**

 

The historical financial information in this documenthas been restated for the three and nine months ended April 30, 2004 due toaccounting errors.  The impact of therestatement resulted in a decrease in the net income and net income per shareof $105,000 and $0.00, respectively, for the three months ended April 30, 2004and an increase in the net loss and net loss per common share of $1,388,000 and$0.04, respectively, for the nine months ended April 30, 2004.  (See Note 9 of the Notes to ConsolidatedFinancial Statements for the details of this restatement.)

 

13

----

 

#### **Results of operations**

 

#### ***Three months ended April 30, 2005compared with three months ended April 30, 2004 (restated)***

 

*Revenues*.  Ourrevenues decreased by 3% from $180.7 million in the third quarter offiscal 2004 to $175.5 million in the third quarter of fiscal 2005.  This decrease is the result of lower land andmarine multi-client data library license sales in the NASA, offset partially byan increase in contract marine work. Sales of completed multi-client data typically fluctuate during the yearand we do not believe this to be indicative of a trend.  NASA’s contract marine increase came from theGulf of Mexico, where the Veritas Vantage and two source boats acquired alarge, wide-azimuth survey.  The APACrevenue increase came from both marine contract acquisition and processing. Inmarine contract acquisition, the Veritas Viking II, the Pacific Sword andVeritas Searcher operated in Australia, India, Myanmar and New Zealand duringthe period. In processing, increased pricing and higher throughput due toincreased processing speed led to higher revenue.  EAME also generated increased marine contractrevenue, with its most notable acquisition project being an acquisition job inGhana.

 

Revenues from our operating segments were as follows:

 
| ** **    | ** ** | **Three Months Ended April 30,** | ** ** |
|---------------|------------|----------------------------------|------------|
| ** **    | ** ** | ** **                       | ** ** | **Restated** | ** ** | **Change** | ** ** |
| ** **    | ** ** | **2005**                         | ** ** | **2004** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **    | ** ** | **(Dollars in thousands)**       | ** ** |
| NASA          |       | $                                | 115,478    |   | $ | 143,535 |   | $ | (28,057 | ) | (20 | )% |
| EAME          |       | 30,636                           |       | 17,169 |   | 13,467 |   | 78 | % |
| APAC          |       | 29,396                           |       | 20,010 |   | 9,386 |   | 47 | % |
| Total Revenue |       | $                                | 175,510    |   | $ | 180,714 |   | $ | (5,204 | ) | (3 | )% |

 

Revenues by contract type were as follows:

 
| ** **         | ** ** | **Three Months Ended April 30,** | ** ** |
|--------------------|------------|----------------------------------|------------|
| ** **         | ** ** | ** **                       | ** ** | **Restated** | ** ** | **Change** | ** ** |
| ** **         | ** ** | **2005**                         | ** ** | **2004** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **         | ** ** | **(Dollars in thousands)**       | ** ** |
| Multi-Client:      |       |                             |       |   |   |   |   |   |   |
| Land               |       | $                                | 10,291     |   | $ | 24,327 |   | $ | (14,036 | ) | (58 | )% |
| Marine             |       | 37,359                           |       | 58,118 |   | (20,759 | ) | (36 | )% |
| Total Multi-Client |       | 47,650                           |       | 82,445 |   | (34,795 | ) | (42 | )% |
| Contract:          |       |                             |       |   |   |   |   |   |   |
| Land               |       | 56,981                           |       | 60,532 |   | (3,551 | ) | (6 | )% |
| Marine             |       | 70,879                           |       | 37,737 |   | 33,142 |   | 88 | % |
| Total Contract     |       | 127,860                          |       | 98,269 |   | 29,591 |   | 30 | % |
| Total Revenue      |       | $                                | 175,510    |   | $ | 180,714 |   | $ | (5,204 | ) | (3 | )% |

 

*Operating income (loss). *Operating income increasedfrom $21.4 in the third quarter of fiscal 2004 to $29.2 million in the thirdquarter of fiscal 2005.  Cost of servicesas a percent of revenue fell from 82% to 76% in the comparative periods as aresult of increased productivity, favorable mix of jobs and higherpricing.  Therefore, despite the decreasein revenue, our margin (revenue less cost of services) increased $9.8 million.Increased research and development costs of $0.6 million and increased generaland administrative expense of $1.4 million reduced the operating incomeincrease to $7.8 million.  We continuedto dedicate most of our research and development spending to advancedprocessing techniques.  General andadministrative costs increased in the third quarter of fiscal 2005 dueprimarily to costs related to the restatement of our financial statements andincreased efforts in the area of financial controls.

 

*Interest expense*.Interest expense decreased from $8.9 million in the third quarter of fiscal2004 to $1.1 million in the third quarter of fiscal 2005. This decrease is dueprimarily to the issuance of our Convertible Senior Notes and the repayment ofour term notes with the proceeds in the third quarter of fiscal 2004. Thisrefinancing resulted in a significantly lower interest rate.  Our Convertible Senior Notes accrue interestat a rate of LIBOR less 0.75%, which equated to 2.26% for the three monthsended June 15, 2005 and is much lower than the various tranches of debt inplace in fiscal 2004.  In addition,approximately $6.4 million of debt issuance costs were expensed in the third

 

14

----

 

quarter of fiscal2004 in connection with the retirement of the term notes.

 

*Income taxes. *Income taxes in the third quarter of fiscal 2005 were40% of income before provision for income taxes due primarily to our inabilityto record deferred tax assets arising in certain jurisdictions because oflosses in prior years.  This treatment isconsistent with fiscal 2004; however, income earned by jurisdiction wasdifferent in fiscal 2004 resulting in a lower overall tax rate.

 

#### ***Nine months ended April 30, 2005compared with nine months ended April 30, 2004 (restated)***

 

*Revenues*.  Ourrevenues increased by 16% from $428.2 million for the first nine monthsof fiscal 2004 to $497.3 million for the first nine months of fiscal 2005.  This increase was driven by increasedcontract work, primarily marine, in all regions and increased sales of licensesto multi-client data in EAME partially offset by lower sales of licenses tomulti-client data primarily in the U.S. and Canada.  NASA’s increase in contract marine work wasin the Gulf of Mexico, where the Veritas Vantage and two source boats acquireda wide-azimuth survey.  APAC’s revenueincrease was also generated by marine contract work, as we operated the VeritasViking II, the Pacific Sword and Veritas Searcher in Australia, India, Myanmarand New Zealand during the period.  EAMEgenerated most of its increased revenue through sales of licenses tomulti-client data for offshore Africa and the North Sea.

 

Revenues from our operating segments were as follows:

 
| ** **    | ** ** | **Nine Months Ended April 30,** | ** ** |
|---------------|------------|---------------------------------|------------|
| ** **    | ** ** | ** **                      | ** ** | **Restated** | ** ** | **Change** | ** ** |
| ** **    | ** ** | **2005**                        | ** ** | **2004** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **    | ** ** | **(Dollars in thousands)**      | ** ** |
| NASA          |       | $                               | 330,335    |   | $ | 322,750 |   | $ | 7,585 |   | 2 | % |
| EAME          |       | 95,487                          |       | 62,690 |   | 32,797 |   | 52 | % |
| APAC          |       | 71,497                          |       | 42,737 |   | 28,760 |   | 67 | % |
| Total Revenue |       | $                               | 497,319    |   | $ | 428,177 |   | $ | 69,142 |   | 16 | % |

 

Revenues by contract type were as follows:

 
| ** **         | ** ** | **Nine Months Ended April 30,** | ** ** |
|--------------------|------------|---------------------------------|------------|
| ** **         | ** ** | ** **                      | ** ** | **Restated** | ** ** | **Change** | ** ** |
| ** **         | ** ** | **2005**                        | ** ** | **2004** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **         | ** ** | **(Dollars in thousands)**      | ** ** |
| Multi-Client:      |       |                            |       |   |   |   |   |   |   |
| Land               |       | $                               | 36,303     |   | $ | 53,333 |   | $ | (17,030 | ) | (32 | )% |
| Marine             |       | 144,110                         |       | 150,491 |   | (6,381 | ) | (4 | )% |
| Total Multi-Client |       | 180,413                         |       | 203,824 |   | (23,411 | ) | (11 | )% |
| Contract:          |       |                            |       |   |   |   |   |   |   |
| Land               |       | 133,965                         |       | 126,542 |   | 7,423 |   | 6 | % |
| Marine             |       | 182,941                         |       | 97,811 |   | 85,130 |   | 87 | % |
| Total Contract     |       | 316,906                         |       | 224,353 |   | 92,553 |   | 41 | % |
| Total Revenue      |       | $                               | 497,319    |   | $ | 428,177 |   | $ | 69,142 |   | 16 | % |

 

*Operating income (loss). *Operating income increasedfrom $20.5 million for the first nine months of fiscal 2004 to $66.0 millionfor the first nine months of fiscal 2005. During the first quarter of fiscal 2004, we changed our multi-clientamortization accounting policy to include a minimum amortization from the dateof survey completion, instead of only during the last 24 months of the survey’sbook life.  As a result of this change,we recorded a charge of $22.1 million in cost of services in the first quarterof fiscal 2004.

 

Excluding the charge for the change in our accountingmethod, our operating income for the nine months of fiscal 2005 would have been$23.4 million greater than the comparable period last year.  Our margin (revenues less cost of services)would have increased by $29.7 million due to our revenue increase and adecrease in cost of services as a percent of revenue of approximately 4%.  Increased productivity, favorable mix of jobsand higher pricing contributed to the margin increase.

 

15

----

 

Research and development costs have increased by $2.5million from the comparable period in the prior year primarily due to ourdevelopment of multi component (pressure and shear wave) acquisition andprocessing and general increases in research spending.

 

General and administrative expense increased by $3.8million due to the expenses associated with the restatement of our historicalfinancial statements and those associated with our increased efforts in thearea of financial controls.  Research anddevelopment expense and general and administrative expense both grew due toincreased incentive compensation related to our improved financial performance.

 

*Interest expense*.Interest expense decreased from $17.4 million for the first nine months offiscal 2004 to $2.8 million for the first nine months 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.  Therefinancing resulted in a significantly lower interest rate. Our ConvertibleSenior Notes accrue interest at a rate of LIBOR less 0.75%, which currentlyequated to 2.26% for the three months ended June 15, 2005 and is much lowerthan the various tranches of debt in place in the comparable period in fiscal2004.  In addition, approximately $6.4million of debt issuance costs were expensed in the third quarter of fiscal2004 in connection with the retirement of the term notes.

 

*Income taxes. *Income taxes for the first nine months of fiscal 2005were 45% of income before provision for income taxes due primarily to ourinability to record deferred tax assets arising in certain jurisdictionsbecause of losses in prior years.  Thistreatment is consistent with fiscal 2004.

 

#### **Liquidity and capital resources**

 

#### ***Cash flow and liquidity***

 

Our internal sources of liquidity are cash on hand andcash flow from operations.  Externalsources include public financing, equity sales, equipment financing, our CreditFacility and trade credit.  We believethat our current cash balance and cash flow from operations will be adequate tomeet our liquidity needs over the next twelve months.

 

Net cash provided by operating activities increasedfrom $152.2 million for the first nine months of fiscal 2004 to $239.8 millionfor the first nine months of fiscal 2005 primarily due to improvedprofitability and improvements in working capital.  Net cash used by investing activitiesincreased slightly from $114.7 million for the first nine months of fiscal 2004to $120.0 million for the first nine months of fiscal 2005.  Our cash investment for fiscal 2005 isprojected to be approximately $218 million and includes capital expenditures toreplace and upgrade our existing equipment of approximately $79 million andinvestment in our data library of approximately $139 million.  We expect to continue to fund theseinvestments from our current cash and cash equivalents on hand and frominternally generated funds.

 

While we believe that we have adequate sources offunds to meet our liquidity needs, our ability to meet our obligations dependson our future performance, which is subject to many factors beyond ourcontrol.  Key factors affecting futureresults include utilization levels of acquisition and processing assets anddemand for multi-client library surveys, all of which are driven by explorationspending and, ultimately, the underlying commodity prices.

 

#### ***Debt structure***

 

As of April 30, 2005, our long-term debt outstandingconsisted of $155.0 million of Convertible Senior Notes due 2024.  In addition, we have a Credit Facilityconsisting primarily of a revolving loan facility permitting borrowings of upto $55.0 million and various unsecured lines of credit totaling $8.5 millionwhich may be used exclusively for letters of credit and bank guarantees.

 

The Convertible Senior Notes bear interest at a perannum rate which equals the three-month LIBOR rate, adjusted quarterly, minus aspread of 0.75%.  The interest rate onthe Convertible Senior Notes from March 15, 2005 through June 14, 2005 equatedto 2.26% and equates to 2.66% for the subsequent three month period.  The Convertible Senior Notes are our seniorunsecured obligations and are convertible under certain circumstances into a

 

16

----

 

combination ofcash and our common stock.  In general,upon conversion of a note, the holder of such note will receive cash equal tothe principal amount of the note and shares of our common stock for the note’sconversion 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 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 registration is effective.

 

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 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 these circumstances occur, theConvertible Senior Notes would be convertible at the then current stock pricetimes the conversion ratio of 41.6146. This amount would be payable in cashequal 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 April 30,2005, there were no borrowings and $3.1million in letters of credit outstanding under the revolving loanfacility.  Borrowings under the CreditFacility, including swing-line loans, bear interest at a variable ratedetermined on the date of borrowing that is related to various base rates andmargins depending upon our leverage ratio and the location of theborrowing.  The Credit Facility expiresin February 2006.  Borrowings under theCredit Agreement are secured by substantially all of our assets, including theaccounts receivable from certain of our foreign subsidiaries.

 

We obtained waivers from our lenders under the CreditFacility allowing us to deliver our required reports for the second and thirdquarters of fiscal 2005 to the lenders by no later than July 29, 2005.

 

We have various unsecured lines of credit, withlending institutions that operate in geographic areas not covered by thelending institutions in our Credit Facility, totaling $8.5 million that may beused exclusively for the issuance of letters of credit and bankguarantees.  As of April 30, 2005, $3.5million in letters of credit were outstanding under these lines.

 

#### ***Critical accounting policies***

 

While all of our accounting policies are important inassuring that we adhere to current accounting standards, certain policies areparticularly important due to their impact on our financial statements.  These are described in detail in Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations - Significant Accounting Policies included in our Annual Report onForm 10-K for the fiscal year ended July 31, 2004

 

17

----

 

which descriptionis incorporated herein by reference.

 

## **Item 3**.             Quantitativeand Qualitative Disclosures Regarding Market Risk

 

From time to time we enter into contracts withcustomers whereby payment is not in our functional currency.  To protect us against exposure to exchangerate risk, we entered into currency exchange contracts with financialinstitutions.  During the quarter endedApril 30, 2005, we did not enter into any such contracts and, as of April 30,2005, had no such contracts outstanding.

 

## **Item 4**.             Controlsand Procedures

 

Our management is responsible for establishing and maintainingadequate internal control over financial reporting. Internal control overfinancial reporting is defined as a process designed to provide reasonableassurance to our management and Board of Directors regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles.

 

We carried out an evaluation, under the supervision ofand with the participation of our management, including our Chief ExecutiveOfficer and Chief Financial Officer, as to the effectiveness, design andoperation of our disclosure controls and procedures (as defined in Rule13a-15(e) under the Securities and Exchange Act of 1934, as amended) as ofApril 30, 2005.  The evaluationconsidered our various procedures designed to ensure that information requiredto be disclosed by us in reports that we file or submit under the Exchange Actis recorded, processed, summarized and reported in the time periods specifiedin the rules and forms of the Securities and Exchange Commission.  Our Chief Executive Officer and ChiefFinancial Officer concluded, as a result of our failure to file this quarterlyreport by its due date of June 9, 2005 and our untested remediation ofpreviously disclosed material weaknesses, that our disclosure controls andprocedures were not effective as of April 30, 2005.

 

We have previously disclosed several weaknesses anddeficiencies related to reconciliations and revenue recognition.  As of June 17, 2005, we believe that we havesubstantially remediated those weaknesses and deficiencies as they affect ourfinancial reporting for the period ended April 30, 2005.  However, we have not completed our evaluationand testing of the remediated controls and, at this time, cannot conclude thatwe do not still have material weaknesses in these areas.

 

**Changesin Internal Controls Over Financial Reporting**

 

During the third quarter of fiscal 2005, in connectionwith our efforts to remediate the deficiencies and weaknesses previouslydisclosed relating to account reconciliation and revenue recognition, we madethe following changes to our internal control over financial reporting thatmaterially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting:

 

•                  required,on a quarterly basis, completion of a general inquiry form by accountants ineach of our operating areas related to accounts and accounting controls withintheir particular operation;

•                  establisheda formal evaluation and implementation process regarding changes in accountingrules;

•                  formalizedthe accounting guidelines and review process for recognition of revenue oncertain customer contracts; and

•                  madevarious minor adjustments to our internal control processes as a result of ourdetailed documentation and evaluation process in preparation for compliancewith Section 404 of the Sarbanes Oxley Act of 2002.

 

As our control changes have not been fully tested andwe cannot conclude that we have eliminated our control weaknesses, in preparingour financial statements for the quarter ended April 30, 2005, we performedadditional procedures to ensure that those financial statements are fairlystated in all material respects in conformity with generally acceptedaccounting principles.

 

**Section404**

 

Section 404 of the Sarbanes-Oxley Act of 2002 requiresthat we document and test the internal controls over

 

18

----

 

financialreporting and to assert in our Annual Report on Form 10-K for the fiscal yearended July 31, 2005, whether the internal controls over financial reporting atJuly 31, 2005 are effective.  Anymaterial weakness in internal controls over financial reporting existing atthat date will preclude us from making a positive assertion.  We are currently undergoing a comprehensiveeffort to comply with Section 404 of the Sarbanes-Oxley Act.

 

In response to the requirements of the Sarbanes-OxleyAct and our previously reported material weaknesses in certain areas, we areformalizing 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.

 

19

----

 

# **PARTII**.  OTHER INFORMATION

 

## **Item6**.       Exhibits

 

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

 
| **Exhibit  No.** | ** ** | **Description**                                                                                       |
|------------------|------------|-------------------------------------------------------------------------------------------------------|
| *23.1            | —     | Consent of Independent Registered  Public Accounting Firm                                             |
| *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.  |

 

----

*** filed herewith**

 

20

----

 

## **Signatures**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized, on the 17th day of June 2005.

 
|   | **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) |

 

21

----