**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**Form 10-Q**
|                                                                                                                                                                                           | **(Mark One)** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------|
| **x         ****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)****OF THE SECURITIES EXCHANGE ACT OF 1934**                                 |
|                                                                                                                                                                                      |
| **For the quarterly period ended October 31, 2006**                                                                                                                                       |
| ** **                                                                                                                                                                                |
| **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 asspecified in its charter)

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

 

**(832) 351-8300**

(Registrant’s telephone number,including area code)

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes  x No  o

Indicate by check mark whether the registrant is a largeaccelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer  x |   | Accelerated  filer  o |   | Non-accelerated  filer  o |   |
|---------------------------------|--------|----------------------------|--------|--------------------------------|--------|

 

Indicate by check mark whether the registrant is a shellcompany (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  x

The number of shares of the Company’s common stock, $.01par value, outstanding at November 30, 2006 was 36,199,968.

 

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**TABLE OF CONTENTS**

**FORM 10-Q**
| **PART I.**                                                                                                                       | **FINANCIAL INFORMATION**                                                                   | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|------------|------------|
| ** **                                                                                                                        | ** **                                                                                  |       |
| Item 1.                                                                                                                           | Financial Statements                                                                        |       |       |
| Consolidated Statements of  Operations and Comprehensive Income for the Three Months Ended October 31,  2006 and 2005 (Unaudited) |                                                                                        |       |
| Consolidated Balance Sheets  as of October 31, 2006 and July 31, 2005 (Unaudited)                                                 |                                                                                        |       |
| Consolidated Statements of  Cash Flows for the Three Months Ended October 31, 2006 and 2005 (Unaudited)                           |                                                                                        |       |
| Notes to Consolidated  Financial Statements (Unaudited)                                                                           |                                                                                        |       |
| Item 2.                                                                                                                           | Management’s Discussion and  Analysis of Financial Condition and Results of Operations |       |       |
| Item 3.                                                                                                                           | Quantitative and Qualitative  Disclosures About Market Risk                                 |       |       |
| Item 4.                                                                                                                           | Controls and Procedures                                                                     |       |       |
|                                                                                                                              |                                                                                        |       |       |
| **PART II. OTHER INFORMATION**                                                                                                    |                                                                                        |       |
|                                                                                                                              |                                                                                        |       |
| Item 6.                                                                                                                           | Exhibits                                                                                    |       |       |
| SIGNATURES                                                                                                                        |                                                                                        |       |

 

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**PART I.  FINANCIAL INFORMATION**

 

**Item 1.    Financial Statements**

 

**VERITAS DGC INC. AND SUBSIDIARIES**

** **

**CONSOLIDATED STATEMENTS OFOPERATIONS AND COMPREHENSIVE INCOME**

**(**Unaudited)

** **
| ** **                                                                        | ** ** | **Three Months Ended October 31,**                | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2006**                                                              | ** ** | **2005** | ** ** |
| ** **                                                                        | ** ** | **(In thousands, except per share amounts)** | ** ** |
|                                                                              |       |                                                                  |       |   |   |
| Revenue                                                                           |       | $                                                                     | 230,831    |   | $ | 168,678 |   |
| Cost  of services                                                                 |       | 165,792                                                               |       | 136,666 |   |
| Research  and development                                                         |       | 5,404                                                                 |       | 4,902 |   |
| Merger  and related costs                                                         |       | 10,259                                                                |       | — |   |
| General  and administrative                                                       |       | 11,432                                                                |       | 8,855 |   |
| Operating  income                                                                 |       | 37,944                                                                |       | 18,255 |   |
| Interest  expense                                                                 |       | 2,188                                                                 |       | 1,476 |   |
| Interest  income                                                                  |       | (4,983                                                                | )          | (1,901 | ) |
| Gain  on involuntary conversion of assets                                         |       | —                                                                |       | (2,000 | ) |
| Other  (income) expense, net                                                      |       | 29                                                                    |       | (126 | ) |
| Income  before provision for income taxes                                         |       | 40,710                                                                |       | 20,806 |   |
| Provision  for income tax expense                                                 |       | 13,182                                                                |       | 9,019 |   |
| Net  income                                                                       |       | $                                                                     | 27,528     |   | $ | 11,787 |   |
|                                                                              |       |                                                                  |       |   |   |
| **Net  income per share:**                                                        | ** ** | ** **                                                            | ** ** | ** ** | ** ** |
| **Basic:**                                                                        | ** ** | ** **                                                            | ** ** | ** ** | ** ** |
| Weighted average common shares                                                    |       | 35,973                                                                |       | 34,689 |   |
| Net income per common share                                                       |       | $                                                                     | .77        |   | $ | .34 |   |
|                                                                              |       |                                                                  |       |   |   |
| **Diluted:**                                                                      | ** ** | ** **                                                            | ** ** | ** ** | ** ** |
| Weighted average common shares                                                    |       | 40,748                                                                |       | 36,838 |   |
| Net income per common share                                                       |       | $                                                                     | .68        |   | $ | .32 |   |
|                                                                              |       |                                                                  |       |   |   |
| Comprehensive  income:                                                            |       |                                                                  |       |   |   |
| Net  income                                                                       |       | $                                                                     | 27,528     |   | $ | 11,787 |   |
| Other  comprehensive income (net of tax, $0 in all periods, except as specified): |       |                                                                  |       |   |   |
| Minimum pension liability adjustment (net of tax provision of $155)               |       | 363                                                                   |       | — |   |
| Foreign currency translation adjustments                                          |       | 862                                                                   |       | 4,905 |   |
| Total  other comprehensive income                                                 |       | 1,225                                                                 |       | 4,905 |   |
| Comprehensive income                                                              |       | $                                                                     | 28,753     |   | $ | 16,692 |   |

 

See Notes to Consolidated Financial Statements

1

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**VERITAS DGC INC. AND SUBSIDIARIES**

** **

**CONSOLIDATED BALANCE SHEETS**

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

**(Unaudited)**

** **
| ** **                                                                                          | ** ** | **October 31,  2006** | ** ** | **July 31,  2006** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-------------------------|------------|
|                                                                                                |       |                       |       |                    |       |
| ASSETS                                                                                              |       |                       |       |                    |       |
| Current assets:                                                                                     |       |                       |       |                    |       |
| Cash and cash equivalents                                                                           |       | $                          | 353,819    |                    | $          | 401,955 |   |
| Restricted cash investments                                                                         |       | 303                        |       | 302                     |       |
| Accounts receivable (net of  allowance for doubtful accounts: $1,915 in October and $1,895 in July) |       | 238,430                    |       | 215,244                 |       |
| Materials and supplies  inventory                                                                   |       | 7,451                      |       | 6,366                   |       |
| Prepayments and other                                                                               |       | 37,386                     |       | 18,917                  |       |
| Deferred tax asset                                                                                  |       | 8,225                      |       | 8,225                   |       |
| Current assets held for sale                                                                        |       | —                     |       | 5,148                   |       |
| Total current assets                                                                                |       | 645,614                    |       | 656,157                 |       |
|                                                                                                |       |                       |       |                    |       |
| Property and equipment                                                                              |       | 546,225                    |       | 359,683                 |       |
| Less accumulated depreciation                                                                       |       | 404,342                    |       | 249,079                 |       |
| Property and equipment, net                                                                         |       | 141,883                    |       | 110,604                 |       |
|                                                                                                |       |                       |       |                    |       |
| Multi-client data library                                                                           |       | 324,069                    |       | 296,603                 |       |
| Deferred tax asset, net                                                                             |       | 41,392                     |       | 41,511                  |       |
| Other assets                                                                                        |       | 22,656                     |       | 22,699                  |       |
| Noncurrent assets held for sale                                                                     |       | —                     |       | 30,456                  |       |
| Total                                                                                               |       | $                          | 1,175,614  |                    | $          | 1,158,030 |   |
|                                                                                                |       |                       |       |                    |       |
| LIABILITIES AND STOCKHOLDERS'  EQUITY                                                               |       |                       |       |                    |       |
| Current liabilities:                                                                                |       |                       |       |                    |       |
| Notes payable                                                                                       |       | $                          | 155,000    |                    | $          | 155,000 |   |
| Accounts payable, trade                                                                             |       | 95,545                     |       | 107,863                 |       |
| Accrued and deferred income  taxes                                                                  |       | 35,131                     |       | 29,224                  |       |
| Deferred revenue                                                                                    |       | 47,581                     |       | 29,280                  |       |
| Other accrued liabilities                                                                           |       | 58,256                     |       | 70,313                  |       |
| Current liabilities held for  sale                                                                  |       | —                     |       | 21,245                  |       |
| Total current liabilities                                                                           |       | 391,513                    |       | 412,925                 |       |
| Non-current liabilities:                                                                            |       |                       |       |                    |       |
| Other non-current liabilities                                                                       |       | 34,268                     |       | 34,561                  |       |
| Total non-current liabilities                                                                       |       | 34,268                     |       | 34,561                  |       |
| Stockholders' equity:                                                                               |       |                       |       |                    |       |
| Common stock, $.01 par value;  issued: 37,376,318 and 37,220,959 shares, respectively               |       | 374                        |       | 372                     |       |
| Additional paid-in capital                                                                          |       | 503,455                    |       | 492,387                 |       |
| Accumulated earnings                                                                                |       | 255,904                    |       | 228,376                 |       |
| Accumulated other  comprehensive income:                                                            |       |                       |       |                    |       |
| Cumulative foreign currency  translation adjustment                                                 |       | 22,645                     |       | 21,783                  |       |
| Minimum pension liability                                                                           |       | (9,004                     | )          | (9,367                  | )          |
| Treasury stock, at cost;  1,357,643 and 1,349,592 shares, respectively                              |       | (23,541                    | )          | (23,007                 | )          |
| Total stockholders' equity                                                                          |       | 749,833                    |       | 710,544                 |       |
| Total                                                                                               |       | $                          | 1,175,614  |                    | $          | 1,158,030 |   |

 

See Notes to Consolidated Financial Statements

 

2

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###  

**VERITAS DGC INC. ANDSUBSIDIARIES**

** **

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(**Unaudited)

** **
| ** **                                                        | ** ** | **Three Months Ended October 31,** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                        | ** ** | **2006**                                               | ** ** | **2005** | ** ** |
| ** **                                                        | ** ** | **(In thousands)**                                | ** ** |
| Cash flows from operating activities:                             |       |                                                   |       |   |   |
| Net income                                                        |       | $                                                      | 27,528     |   | $ | 11,787 |   |
| Non-cash items included in net income:                            |       |                                                   |       |   |   |
| Depreciation and amortization,  net (other than multi-client)     |       | 14,619                                                 |       | 9,045 |   |
| Amortization of multi-client  data library                        |       | 57,925                                                 |       | 52,840 |   |
| Share based compensation                                          |       | 1,323                                                  |       | 1,447 |   |
| Deferred income taxes                                             |       | 467                                                    |       | 364 |   |
| (Gain) / loss on disposition  of property                         |       | (478                                                   | )          | 43 |   |
| Change in operating assets and  liabilities:                      |       |                                                   |       |   |   |
| Accounts receivable                                               |       | (23,023                                                | )          | (5,336 | ) |
| Materials and supplies  inventory                                 |       | (645                                                   | )          | (1,298 | ) |
| Prepayments and other                                             |       | (13,749                                                | )          | 574 |   |
| Accrued income tax                                                |       | 6,817                                                  |       | 2,933 |   |
| Accounts payable, deferred revenue  and other accrued liabilities |       | (27,808                                                | )          | (44,504 | ) |
| Other                                                             |       | (300                                                   | )          | 1,502 |   |
| Net cash provided by operating  activities                        |       | 42,676                                                 |       | 29,397 |   |
| Cash flows from investing activities:                             |       |                                                   |       |   |   |
| Investment in multi-client  data library, net cash                |       | (80,901                                                | )          | (61,622 | ) |
| Purchase of property and  equipment                               |       | (19,221                                                | )          | (11,451 | ) |
| Proceeds from involuntary  conversion of assets                   |       | —                                                 |       | 13,600 |   |
| Proceeds from sales of  property and equipment                    |       | 1,078                                                  |       | 38 |   |
| Net cash used by investing  activities                            |       | (99,044                                                | )          | (59,435 | ) |
| Cash flows from financing activities:                             |       |                                                   |       |   |   |
| Proceeds from the sale of  common stock                           |       | 2,734                                                  |       | 6,560 |   |
| Excess tax benefit from stock  based compensation                 |       | 5,588                                                  |       | 732 |   |
| Principal payments on capital  lease obligations                  |       | (444                                                   | )          | (370 | ) |
| Net cash provided by financing  activities                        |       | 7,878                                                  |       | 6,922 |   |
| Currency gain on foreign cash                                     |       | 354                                                    |       | 1,694 |   |
| Decrease in cash and cash equivalents                             |       | (48,136                                                | )          | (21,422 | ) |
| Beginning cash and cash equivalents balance                       |       | 401,955                                                |       | 249,393 |   |
| Ending cash and cash equivalents balance                          |       | $                                                      | 353,819    |   | $ | 227,971 |   |

 
| **Schedule of non-cash transactions:**                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Capitalization of depreciation and amortization resulting in an  increase in multi-client data library |       | $          | 3,612      |       | $          | 5,609 |   |
|                                                                                                        |            |            |            |            |            |  |  |

 

See Notes to Consolidated Financial Statements

3

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**VERITAS DGCINC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

(Unaudited)

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

***Basis of presentation***

These consolidatedfinancial statements are unaudited, but in the opinion of management, containall appropriate adjustments, all of which are normally recurring adjustmentsunless otherwise disclosed.  Thesefinancial statements, including selected notes, have been prepared inaccordance with the applicable rules of the Securities and Exchange Commissionand do not include all of the information and disclosures required byaccounting principles generally accepted in the United States of America forcomplete financial statements.  Certainreclassifications have been made to the prior period amounts to conform to thecurrent period classification.  Theseinterim financial statements should be read in conjunction with theconsolidated financial statements presented in the Veritas DGC Inc. AnnualReport on Form 10-K for the year ended July 31, 2006.

***Recent Accounting Pronouncements***

In May 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections—a replacement ofAPB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154 requiresretrospective application to prior periods’ financial statements for changes inaccounting principle, unless it is impracticable to determine either theperiod-specific effects or the cumulative effect of the change. SFAS 154 alsorequires that a change in depreciation, amortization, or depletion method forlong-lived, non-financial assets be accounted for as a change in accountingestimate effected by a change in accounting principle. SFAS 154 is effectivefor accounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005. The implementation of SFAS No. 154 did not have amaterial impact on the company’s financial statements.

In February 2006, theFASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments –an amendment of FASB Statements No. 133 and 150.”  SFAS No. 155 (a) permits fair value remeasurement for any hybridfinancial instrument that contains an embedded derivative that otherwise wouldrequire bifurcation, (b) clarifies that certain instruments are not subject tothe requirements of SFAS 133, (c) establishes a requirement to evaluateinterests in securitized financial assets to identify interests that maycontain an embedded derivative requiring bifurcation, (d) clarifies what may bean embedded derivative for certain concentrations of credit risk and (e) amendsSFAS 140 to eliminate certain prohibitions related to derivatives on aqualifying special-purpose entity.  SFAS155 is effective for us for the fiscal year beginning August 1, 2007.  The implementation of SFAS No. 155 isnot expected to have a material impact on the company’s financial statements.

In July 2006, the FASBissued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty inIncome Taxes — An Interpretation of FASB Statement No. 109.” FIN No. 48clarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with SFAS No. 109, “Accountingfor Income Taxes.” FIN No. 48 prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. The newstandard also provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods and disclosure. The provisions of FINNo. 48 are effective for years beginning after December 15, 2006, which is ourfiscal year beginning August 1, 2007. We are currently evaluating theprovisions of FIN No. 48 to determine the impact on our consolidated financialstatements.

In September 2006,the FASB issued FASB Staff Position No. AUG AIR-1, “Accounting for PlannedMajor Maintenance Activities.” This guidance prohibits the use of theaccrue-in-advance method of accounting for planned major activities because anobligation has not occurred and therefore a liability should not berecognized.  The provisions of thisguidance will be effective for us for the fiscal year beginning August 1,2007.  We are currently evaluating the provisionsof this guidance to determine the impact on our consolidated financialstatements.

4

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In September 2006, the FASB issued SFAS No. 157, FairValue Measurements.  SFAS No. 157 definesfair value, establishes a framework for measuring fair value and expandsdisclosure of fair value measurements. SFAS No. 157 applies under other accountingpronouncements that require or permit fair value measurements, and accordingly,does not require any new fair value measurements. SFAS No. 157 is effective forour financial statements issued related to the fiscal year beginning August 1,2008, and interim periods within that year. We are currently evaluating theeffect, if any, that the adoption of this standard will have on ourconsolidated financial statements.

In September 2006, the FASB issued SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).  SFAS No. 158 requires an employer to:  (a) Recognize in its statement of financialposition an asset for a plan’s overfunded status or a liability for a plan’sunderfunded status; (b) Measure a plan’s assets and its obligations thatdetermine its funded status as of the end of the employer’s fiscal year (withlimited exceptions); (c) Recognize changes in the funded status of a definedbenefit postretirement plan in the year in which the changes occur. Thosechanges will be reported in comprehensive income.  The requirement to recognize the fundedstatus of a benefit plan and the disclosure requirements are effective for usas of the end of the fiscal year ending on July 31, 2007.  The requirement to measure plan assets andbenefit obligations as of the date of our fiscal year-end balance sheet iseffective for us for the fiscal year ending July 31, 2009.  We are currently evaluating the provisions ofthis guidance to determine the impact on our consolidated financialstatements.  Had we adopted SFAS No. 158as of July 31, 2006, the impact would have been an increase to liabilities anda decrease to stockholders’ equity of approximately $10 million.

In September 2006, the SEC issued SEC StaffAccounting Bulletin (“SAB”) No. 108, “Financial Statements — Consideringthe Effects of Prior Year Misstatements When Quantifying Misstatements inCurrent Year Financial Statements.” SAB No. 108 addresses how a registrantshould quantify the effect of an error in the financial statements for purposesof assessing materiality and requires that the effect be computed using boththe current year income statement perspective (“rollover”) and the year endbalance sheet perspective (“iron curtain”) methods for fiscal years endingafter November 15, 2006. If a change in the method of quantifying errorsis required under SAB No. 108, this represents a change in accountingpolicy; therefore, if the use of both methods results in a larger, materialmisstatement than the previously applied method, the financial statements mustbe adjusted. SAB No. 108 allows the cumulative effect of such adjustmentsto be made to opening retained earnings upon adoption. The adoption of SABNo. 108 did not have an effect on our consolidated financial statements.

**2.****              Business combinations**

On September 4, 2006, theCompany and Compagnie Générale de Géophysique (“CGG”), a French sociétéanonyme, entered into an Agreement and Plan of Merger, dated as of September 4,2006 (the “Merger Agreement”), by and among the Company, CGG, VolnayAcquisition Co. I, a Delaware corporation and wholly owned subsidiary of CGG (“MergerSub I”), and Volnay Acquisition Co. II, a Delaware corporation and wholly ownedsubsidiary of CGG (“Merger Sub II”), under which CGG has agreed to acquire allof the issued and outstanding shares of common stock, par value $0.01 pershare, of the Company (“Company Common Stock”). Under the terms of the MergerAgreement, which was approved by the Boards of Directors of both the Companyand CGG, Merger Sub I will merge with and into the Company with the Companycontinuing as the surviving corporation, and immediately thereafter, theCompany will merge with and into Merger Sub II with Merger Sub II continuing asthe surviving corporation as a wholly owned subsidiary of CGG.

Total consideration for theCompany Common Stock is fixed at approximately $1.5 billion in cash andapproximately 47 million American Depository Shares (the “ADSs”) of CGG, witheach ADS representing one-fifth of an ordinary share, nominal value €2.00 pershare, of CGG (each a “CGG Ordinary Share”). Under the terms of the MergerAgreement, stockholders of the Company will have the right to elect to receivecash or ADSs, subject to a proration if either cash or stock is oversubscribed.The per share consideration was initially set at $75.00 in cash or 2.2501 ADSsand is subject to adjustment upwards or downwards so that each share of CompanyCommon Stock receives consideration representing equal value.  Thisadjustment, however, will not increase or decrease the total amount of cash orthe total number of ADSs to be issued in the transaction.  Based on theclosing price of CGG’s ADSs on August 29, 2006, the stockholders of the Companywould receive, in the aggregate, consideration comprised of approximately 51%ADSs and 49% cash.

5

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Consummation of thetransactions contemplated by the Merger Agreement is conditioned upon, amongother things, (1) approval by the stockholders of the Company and CGG, (2) thereceipt of required regulatory approvals as discussed below and (3) theeffectiveness of the registration statement on Form F-4 and the registrationstatement on Form F-6 relating to the ADSs to be issued in the merger.  Inthe event of a termination of the Merger Agreement under certain circumstances,the Company or CGG may be required to pay the other party certain terminationfees as more fully explained in the Merger Agreement filed as Exhibit 2.1 toVeritas DGC Inc.’s Form 8-K dated September 4, 2006.

The merger was subject toreview by the Antitrust Division of the U.S. Department of Justice, whichis referred to as the Antitrust Division, and the Federal Trade Commission,which is referred to as the FTC, under the Hart Scott Rodino (“HSR”) Act. TheAntitrust Division terminated the waiting period imposed by the HSR Act onOctober 25, 2006. CGG and Veritas submitted a notice of the merger to theCommittee on Foreign Investment in the United States (“CFIUS”), in accordancewith the regulations implementing the Exon-Florio Amendment to the DefenseProduction Act of 1950, which is referred to as the Exon-Florio Amendment, andon November 16, 2006, the CFIUS issued a letter stating that had concludedits action, having found no national security issues sufficient to warrantfurther investigation. CGG and Veritas each conduct business in Norway and eachsubmitted filings to the Norwegian antitrust authorities, but these authoritiesare deemed to have authorized the merger by not requesting the submission of afull notification. In addition, CGG and Veritas have each submitted filings tothe Brazilian and United Kingdom antitrust authorities, though the approval ofthese authorities is not required to complete the merger.

The merger may alsobe subject to the regulatory requirements of other municipal, state, federaland foreign governmental agencies and authorities, including those relating tothe offer and sale of securities

Upon closing of thetransaction, several significant items would occur, including, withoutlimitation, the following:

·                  Allof our outstanding stock options would fully vest and restrictions on mostoutstanding restricted shares would vest.

·                  CGGwill assume our convertible debt, which would continue to be fully convertible,and the holders of the debt would have the option of exercising their put rightto CGG.

·                  Anyoutstanding borrowings and letters of credit under the credit facility would bedue immediately upon closing of the transaction.

·                  Asignificant amount of severance compensation may be paid to executives of thecompany, including the named executive officers.

·                  Othermaterial effects of the merger will be more fully discussed in the proxystatement/prospectus on Form F-4 which CGG has filed with the SEC and in theproxy statement/prospectus relating to the proposed transaction, which will besent to each Veritas stockholder in connection with the meeting of Veritasstockholders that we intend to call to vote to adopt the merger agreement.

Due to the pending mergerwith CGG, on September 5, 2006, we announced that we terminated discussionswith a third party relating to the possible sale of the Company’s land seismicacquisition business.  The depreciationexpense of $2.7 million previously not recorded related to these assetsexpected to be sold in fiscal 2006 was recorded in fiscal 2007 as if the assetswere not held for sale at any time.  Forfurther discussion related to the assets and liabilities held for sale, see Note7, Assets held for sale.

For the three monthsended October 31, 2006, we have incurred $10.3 million in certain merger andrelated costs.  We terminated discussionswith a third party relating to the possible sale of our land seismicacquisition business, during the first quarter of fiscal 2007.  The $10.3 million includes fees in connectionwith the termination of those discussions, consisting of amounts paid insettlement of all claims by the third party buyers and professional fees,including accounting and legal fees, and professional fees related to thepending merger with CGG.

6

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###### 3.               **Earnings per common share**

Basic and dilutedearnings per common share are computed as follows:
|                                                                 | ** ** | **Three Months Ended October 31,**                | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2006**                                                              | ** ** | **2005** | ** ** |
| ** **                                                      | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Net income                                                      |       | $                                                                     | 27,528     |   | $ | 11,787 |   |
|                                                            |       |                                                                  |       |   |   |
| **Basic:**                                                      |       |                                                                  |       |   |   |
| Weighted average common shares  (including exchangeable shares) |       | 35,973                                                                |       | 34,689 |   |
| Net income per share                                            |       | $                                                                     | .77        |   | $ | .34 |   |
|                                                            |       |                                                                  |       |   |   |
| **Diluted:**                                                    |       |                                                                  |       |   |   |
| Weighted average common shares  (including exchangeable shares) |       | 35,973                                                                |       | 34,689 |   |
| Shares issuable from assumed  conversion of notes               |       | 4,298                                                                 |       | 1,638 |   |
| Shares issuable from assumed  exercise of options               |       | 389                                                                   |       | 469 |   |
| Shares issuable from the  assumed vesting of restricted stock   |       | 88                                                                    |       | 42 |   |
| Total                                                           |       | 40,748                                                                |       | 36,838 |   |
| Net income per share                                            |       | $                                                                     | .68        |   | $ | .32 |   |

 

The shares issuable fromassumed conversion of notes for the three months ended October 31, 2006 arebased upon a stock price of $72.01, which was the closing price of Veritas DGC’scommon stock at October 31, 2006.  Theshares issuable from assumed conversion of notes for the three months endedOctober 31, 2005 are based upon a stock price of $32.21, which was the closingprice of Veritas DGC’s common stock at October 31, 2005.

The following options topurchase common shares have been excluded from the computation assumingdilution because the exercise prices of the options exceeded the average marketprice for the period of the underlying common shares.
|                      | ** ** | **Three Months Ended October 31,** | ** ** |
|----------------------|------------|--------------------------------------------------------|------------|
| ** **           | ** ** | **2006**                                               | ** ** | **2005** | ** ** |
| Number of options    |       | —                                                 |       | 385,271 |   |
| Exercise price range |       | —                                                 |       | $  33.94 - $  55.13 |   |
| Expiring  through    |       | —                                                 |       | March  2012 |   |

 

**4.**              Gain on involuntaryconversion of assets

In January 2005,our seismic vessel Veritas Viking experienced an engine failure while acquiringdata in the Gulf of Mexico and lost substantial amounts of overboard seismicequipment. This seismic equipment was insured at its replacement cost.   A gain of $2.0 million was recorded in thefirst quarter of fiscal 2006 due to the timing of the insurance settlements.  This $2.0 million gain in the first fiscalquarter of 2006 was included as a change in the amounts receivable in theconsolidated statement of cash flows.

7

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**5.**              Income taxes

A reconciliation betweenthe provision for income taxes and the amount computed by applying the U.S.statutory income tax rate to income before provision for income taxes is asfollows:
|                                                          | ** ** | **For the three months  ending October 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **(amounts in thousands)**                                  | ** ** |
| ** **                                               | ** ** | **2006**                                                              | ** ** | **2005** | ** ** |
|                                                     |       |                                                                  |       |   |   |
| Income tax provision computed at the U.S. statutory rate |       | $                                                                     | 14,249     |   | $ | 7,282 |   |
| Increase (decrease) in taxes resulting from:             |       |                                                                  |       |   |   |
| Non-U.S. activities                                      |       | (993                                                                  | )          | 1,153 |   |
| Foreign tax refund                                       |       | (5,047                                                                | )          | — |   |
| Non-deductible merger and  related costs                 |       | 3,590                                                                 |       | — |   |
| Other                                                    |       | 1,383                                                                 |       | 584 |   |
| Total                                                    |       | $                                                                     | 13,182     |   | $ | 9,019 |   |

 

Theincrease (decrease) in taxes resulting from non-U.S. activities includesnon-U.S. earnings taxed at other than the U.S. statutory rate, non-U.S.withholding taxes, U.S. foreign tax credits, U.S. tax on non-U.S. branchoperations or foreign dividends, foreign tax contingencies and changes invaluation allowances on foreign deferred taxes.

Duringthe first quarter of fiscal 2007, the Company recorded a $5.0 million taxbenefit related to a refund received from a foreign taxing authority with respectto certain prior year tax matters.  Inaddition, the Company incurred $10.3 million of non-deductible merger andrelated costs.

###### **6.     Notespayable and debt structure**

As of October 31, 2006,our notes payable consisted of $155.0 million of Convertible Senior Notes due2024. These notes are classified as a current liability as of October 31, 2006because the conversion feature discussed below results in the notes beingconvertible at the option of the holders.

The Convertible SeniorNotes bear interest at a per annum rate which equals the three-month LIBORrate, adjusted quarterly, minus a spread of 0.75%.  The interest rate of the notes, fromSeptember 15, 2006 through December 14, 2006, is 4.64%, based on a LIBOR rateof 5.39%.  For the first quarter offiscal 2007, the weighted average interest rate on the notes was 4.61%. Thenotes will mature on March 15, 2024 and may not be redeemed by us prior toMarch 20, 2009. Holders of the notes may require us to repurchase some, or all,of the notes on March 15, 2009, 2014 and 2019. They could also requirerepurchase upon a change of control (as defined in the indenture under whichthe Convertible Senior Notes were issued).

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 Senior Notes as current on our balancesheet.  These circumstances include:

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

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

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

4.                                       theoccurrence of specified corporate transactions.

8

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Should any of thesecircumstances occur, the Convertible Senior Notes would be convertible at thethen current stock price times the conversion ratio of 41.6146. This amountwould be payable in cash equal to the principal amount of the notes, the parvalue adjusted for dividends or other equity transactions, and the additionalamount payable in shares of our common stock. Currently, the maximum amount payable by us on conversion is $155million in cash plus approximately 6.5 million shares. This settlement methodis prescribed in the indenture and is not at the discretion of any party.  The shares issuable from such conversion areconsidered in the calculation of diluted earnings per share.

As of the beginning ofthe second fiscal quarter of 2006, the Convertible Senior Notes wereconvertible as the stock price remained greater than 120% of the ConversionPrice for at least 20 trading days in the period of 30 consecutive trading daysending on October 31, 2005.  The notescontinued to be convertible as of October 31, 2006.  Because of the convertibility, the notes havebeen classified as a current liability on our consolidated balance sheet as ofOctober 31, 2006.  The determination ofthe convertibility of the notes occurs quarterly.  Depending upon the common stock price in thefuture, the notes may not be convertible in future quarters and therefore wouldnot be classified as current on our consolidated balance sheet.  Assuming a stock price of $72.01 (which wasthe closing stock price at October 31, 2006), conversion of all the notes wouldresult in our payment of $155 million in cash and 4.3 million shares of commonstock.

In connection with our issuance of the ConvertibleSenior Notes, we entered into a registration rights agreement pursuant to whichwe agreed to register the resale of the notes and underlying common stock bythe holders thereof.  If we failed tokeep the shelf registration statement related to this debt effective or usablein accordance with the registration rights agreement, then we were required topay liquidated damages to all holders of notes and all holders of our commonstock issued upon conversion of the notes. The liquidated damages to be paid were equal to an annual rate of 0.50%of the principal amount.  In November2005, the shelf registration statement became no longer effective and,accordingly, we began accruing liquidated damages at approximately $2,100 perday.  We were not required to registerthe resale of the notes and underlying common stock after March 10, 2006 andtherefore, our liability for the payment of liquidated damages ended on thatdate.

Inaddition to the notes, we also have a five-year $85 million revolving loanagreement with a syndicate of banks.  Thefacility provides for revolving loans and the issuance of letters of credit toVeritas DGC Inc. and certain of its subsidiaries of up to $45 million in theUnited States, $15 million in Canada, $15 million in Singapore and $10 millionin the United Kingdom.  As of October 31,2006, there were no borrowings and $5.9 million of outstanding letters ofcredit, leaving $79.1 million available under the revolving loan facility.

Thefacility is secured by pledges of accounts receivable and the U.S. land datalibrary, which, when added together, have a carrying amount of approximately$268 million as of October 31, 2006.  Thefacility is also secured by certain intercompany notes and stock in certainVeritas subsidiaries.  Veritas andcertain of its subsidiaries have also issued loan guarantees with respect tocertain borrowings. Interest rates on borrowings under the facility areselected by the borrower at the time of any advance and the rates so selectedmay be either at LIBOR plus 1.00% or the Base Rate (defined as the lesser ofthe applicable prime rate or the federal funds rate).  These rates may be adjusted upward dependingupon our leverage ratio (calculated as a ratio of funded debt versus EBITDA forthe previous four quarters) to a maximum of LIBOR plus 1.50% or the base rateplus 0.50%.  The loan agreement andrelated documents contain customary financial covenants and default provisions,including a limit on the amount of cash dividends.  These covenants contain certain financialmeasurements as of quarter ending dates, and, as of  October 31, 2006, we were in compliance withthese covenants.

Wealso have various unsecured lines of credit, with lending institutions thatoperate in geographic areas not covered by the lending institutions in ourcredit facility, totaling $8.5 million that may be used exclusively for theissuance of letters of credit and bank guarantees. As of October 31, 2006, $0.4million in letters of credit were outstanding under these lines.

###### **7.****     Pension plan**

We maintain acontributory defined benefit pension plan (the “Plan”) for eligibleparticipating employees in the United Kingdom. The following is the net periodic benefit cost by component:

9

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|                                                  | ** ** | **Three Months Ended October 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                       | ** ** | **2006**                                               | ** ** | **2005** | ** ** |
| ** **                                       | ** ** | **(In thousands)**                                | ** ** |
| Service cost (benefits earned during the period) |       | $                                                      | 398        |   | $ | 331 |   |
| Interest cost on projected benefit obligation    |       | 630                                                    |       | 480 |   |
| Expected return on plan assets                   |       | (391                                                   | )          | (324 | ) |
| Amortization of transition obligation            |       | 2                                                      |       | 2 |   |
| Amortization of prior service cost               |       | (38                                                    | )          | (36 | ) |
| Amortization of net (gain)/loss                  |       | 327                                                    |       | 261 |   |
| Net periodic benefit costs                       |       | $                                                      | 928        |   | $ | 714 |   |

 

We have madecontributions to this plan based on the schedule of contributions on which theabove service cost was based and expect to complete these contributions,totaling approximately $1.6 million for the year, during fiscal 2007.

**8.****              Assets held for sale**

As ofJuly 31, 2006, it was expected that the land acquisition seismic business wouldbe sold to a third party with an expected closing to occur in the second fiscalquarter of fiscal 2007.  The land seismicacquisition business met the criteria to be considered held for sale and wasappropriately classified as of July 31, 2006 in accordance with FAS 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets.”  Further, approximately $2.7 million ofdepreciation expense was not recorded in fiscal year 2006 to reflect thedepreciation expense from the time the assets met the criteria until the end offiscal year 2006.  The assets held forsale were included in the NASA and EAME segments.  The land seismic acquisition business was notconsidered a discontinued operation due to our continuing involvement in thebusiness because of anticipated ongoing contracts.

InSeptember 2006, these assets were no longer considered held for sale due to thepending merger with CGG.  According toFAS 144, when an asset is no longer considered held for sale, the depreciationexpense previously not recorded should be recognized as if the assets were notheld for sale at any time.  Therefore, werecorded $2.7 million of additional depreciation expense in the first fiscalquarter of 2007.  For further discussionon the pending merger with CGG, see Note 2, Business combinations.

Thegeophysical vessel, Veritas Searcher, and certain related equipment were soldduring the first fiscal quarter for approximately $1 million and a gain ofapproximately $0.5 million.  A newvessel, the Veritas Voyager was placed into service in July 2006 as areplacement to the Searcher.

Theamounts reclassified as held for sale as of July 31, 2006 were as follows:
|                                  | ** ** | **As of July 31, 2006  (amounts in thousands)** | ** ** |
|----------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                       | ** ** | **Land  acquisition**                                                         | ** ** | **Searcher  vessel** | ** ** | **Total** | ** ** |
|                             |       |                                                                          |       |   |   |   |   |
| Materials and inventory          |       | $                                                                             | 440        |   | $ | — |   | $ | 440 |   |
| Prepayments and other            |       | 4,708                                                                         |       | — |   | 4,708 |   |
| Current assets                   |       | 5,148                                                                         |       | — |   | 5,148 |   |
|                             |       |                                                                          |       |   |   |   |   |
| Geophysical vessel               |       | —                                                                        |       | 8,331 |   | 8,331 |   |
| Geophysical equipment            |       | 144,096                                                                       |       | 2,206 |   | 146,302 |   |
| Leasehold improvements and other |       | 23,863                                                                        |       | — |   | 23,863 |   |
| Total                            |       | 167,959                                                                       |       | 10,537 |   | 178,496 |   |
| Accumulated depreciation         |       | (138,003                                                                      | )          | (10,037 | ) | (148,040 | ) |
| Property and equipment, net      |       | 29,956                                                                        |       | 500 |   | 30,456 |   |
|                             |       |                                                                          |       |   |   |   |   |
| Total assets                     |       | $                                                                             | 35,104     |   | 500 |   | $ | 35,604 |   |
|                             |       |                                                                          |       |   |   |   |   |
| Deferred revenue                 |       | $                                                                             | 21,245     |   | — |   | $ | 21,245 |   |
| Total current liabilities        |       | $                                                                             | 21,245     |   | — |   | $ | 21,245 |   |
|                                  |            |                                                                               |            |  |  |  |  |  |  |  |

 

10

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###### **9.****              Segment information**

The company has fourreportable segments: North and South America (NASA); Europe, Africa, MiddleEast and Commonwealth of Independent States (EAME); Asia Pacific (APAC); andVeritas Hampson Russell (VHR).  In NASA,EAME and APAC, we conduct geophysical surveys on both a contract and amulti-client basis. When we conduct surveys on a contract basis, we acquire andprocess data for a single client who pays us to conduct the survey and owns thedata we acquire. When we conduct surveys on a multi-client basis, we acquireand process data for our own account and license that data and associatedproducts to multiple clients.  NASA, EAMEand APAC offer a common suite of these products and services to theircustomers, although each product or service may be adapted to meet the needs ofthe local markets.  VHR licensesgeophysical software and provides geophysical reservoir consulting services. Thissegmentation of our company is representative of the manner in which it isviewed and managed by our senior managers and our Board of Directors.  A reconciliation of the reportable segments’results to those of the total enterprise is given below:
| ** **                                                    | ** ** | **For the Three Months Ended October 31, 2006** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **NASA**                                                                           | ** ** | **EAME** | ** ** | **APAC** | ** ** | **VHR** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                                    | ** ** | **(In thousands)**                                                            | ** ** |
| Revenue                                                       |       | $                                                                                  | 139,294    |   | $ | 54,248 |   | $ | 32,202 |   | $ | 5,087 |   | $ | — |   | $ | 230,831 |   |
| Depreciation and amortization, net  (other than multi-client) |       | 9,450                                                                              |       | 2,291 |   | 1,575 |   | 1,025 |   | 278 |   | 14,619 |   |
| Amortization of multi-client library                          |       | 37,082                                                                             |       | 20,749 |   | 94 |   | — |   | — |   | 57,925 |   |
| Operating income (loss)                                       |       | 41,634                                                                             |       | 10,571 |   | 6,825 |   | 663 |   | (21,749 | ) | 37,944 |   |
| Assets                                                        |       | 556,877                                                                            |       | 197,009 |   | 92,453 |   | 11,457 |   | 317,818 |   | 1,175,614 |   |
|                                                               |            |                                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                                    | ** ** | **For the Three Months Ended October 31, 2005** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **NASA**                                                                           | ** ** | **EAME** | ** ** | **APAC** | ** ** | **VHR** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                                    | ** ** | **(In thousands)**                                                            | ** ** |
| Revenue                                                       |       | $                                                                                  | 102,842    |   | $ | 34,769 |   | $ | 26,783 |   | $ | 4,284 |   | $ | — |   | $ | 168,678 |   |
| Depreciation and amortization, net  (other than multi-client) |       | 4,839                                                                              |       | 1,208 |   | 1,819 |   | 961 |   | 218 |   | 9,045 |   |
| Amortization of multi-client library                          |       | 36,745                                                                             |       | 16,095 |   | — |   | — |   | — |   | 52,840 |   |
| Operating income (loss)                                       |       | 19,035                                                                             |       | 3,528 |   | 5,804 |   | (662 | ) | (9,450 | ) | 18,255 |   |
| Assets                                                        |       | 491,099                                                                            |       | 140,136 |   | 54,077 |   | 14,637 |   | 254,517 |   | 954,466 |   |
|                                                               |            |                                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Corporate operatingincome (loss) includes overhead and certain non-recurring adjustments.   The assets within the Corporate segmentconsist primarily of cash.

###### **10.****       Stock based compensation**

As of August 1, 2005, weadopted the Financial Accounting Standard Board Statement No. 123(R) (SFAS123R) to account for stock based employee compensation.  SFAS 123R requires us to record the cost ofstock options and other equity-based compensation in our income statement basedupon the estimated fair value of those awards. We elected to use the modified prospective method for adoption, whichrequires compensation expense to be recorded for all unvested stock options andother equity-based compensation beginning in the first quarter ofadoption.  Accordingly, prior periodshave not been restated to reflect stock based compensation.  For all unvested options outstanding as ofAugust 1, 2005, the previously measured but unrecognized compensation expense,based on the fair value at the original grant date, will be recognized in thestatement of operations over the remaining vesting period. For equity-basedcompensation granted subsequent to August 1, 2005, compensation expense, basedon the fair value on the date of grant, will be recognized in the statement ofoperations over the vesting period.  Fordeferred share units, it is our policy to determine the fair value of the unitsbased on our common stock price at the date of grant which is then expensedover the applicable service period.

Prior to December 11,2002, we had two employee nonqualified stock option plans under which optionswere granted to officers and select employees. Options generally vested overthree years and were exercisable over a five to ten-year period from the dateof grant. The exercise price for each option was the fair market value of thecommon stock on the grant date. Our Board of Directors authorized 5,954,550shares of common stock to be issued under these option plans.

11

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Prior to December 11,2002, we also maintained a stock option plan for non-employee directors (the “DirectorPlan”) under which options were granted to our non-employee directors. TheDirector Plan provided that every year each eligible director was grantedoptions to purchase 5,000 shares of our common stock which vest over a periodof three years from the date of grant and are exercisable over five to tenyears from the date of grant. The exercise price for each option granted wasthe fair market value at the date of grant. The Board of Directors authorized600,000 shares of common stock to be issued under the Director Plan.

On December 11, 2002, weadopted our current Share Incentive Plan that provides for the issuance todirectors, officers and select employees of: (1) nonqualified options topurchase our common stock, (2) incentive options to purchase our common stock,(3) share appreciation rights, (4) deferred share units, (5) restricted sharesand (6) performance shares. Options issued to employees under the ShareIncentive Plan have exercise prices equal to the fair market value at the dateof grant; have five-year lives and vest over three years. Options issued to continuingnon-employee directors under the Share Incentive Plan have exercise pricesequal to the fair market value at the date of grant, have five-year lives andvest immediately.  As of October 31,2006, 1.3 million shares were reserved for issuance under this plan, with nomore than 0.3 million of those shares issuable in any form other than stockoptions.

Information related tostock based compensation follows:
|                                                                                        | ** ** | **Three Months Ended**            | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                             | ** ** | **October 31, 2006**              | ** ** | **October 31, 2005**   | ** ** |
| ** **                                                                             | ** ** | **(in millions of dollars)** | ** ** |
| Compensation costs recorded for all plans                                              |       | $                                           | 1.3        |                             | $          | 1.5 |   |
| Tax  benefit recognized in income statement for share-based compensation  arrangements |       | 0.4                                         |       | 0.4                              |       |
|                                                                                        |            |                                             |            |                                  |            |  |  |

 

Our policy of meeting therequirements upon exercise of stock options is to issue new shares.

As of October 31, 2006,there was approximately $6.2 million, of total unrecognized compensation costrelated to nonvested share-based compensation arrangements.  That cost is expected to be recognized on astraight line basis over the remaining vesting period, generally 2 years.

Stock options

The fair value of eachoption award granted after August 1, 2005 is estimated on the date of grantusing a lattice-based option valuation model that uses the assumptions noted inthe following table. No assumptions are listed for the three months endedOctober 31, 2006 as no options were granted during this period.  Expected volatilities are based on impliedvolatilities from traded options on our stock and historical volatility of ourstock.  We use historical data to estimate option exercise and employeetermination within the valuation model; separate groups of employees werereviewed and shown to have similar historical exercise behavior and are consideredtogether for valuation purposes.  The expected term of options granted isderived from the output of the option valuation model and represents the periodof time that options granted are expected to be outstanding.  Therisk-free rate for periods within the contractual life of the option is basedon the U.S. Treasury yield curve in effect at the time of grant.
|                          | ** ** | **2006**        | ** ** | **2005** | ** ** |
|--------------------------|------------|-----------------|------------|----------|------------|
| Expected volatility      |       | Not  applicable |       | 50.8     | %          |
| Expected dividends       |       | Not  applicable |       | 0        | %          |
| Expected term (in years) |       | Not  applicable |       | 4.0      |       |
| Risk  free rate          |       | Not applicable  |       | 4.0      | %          |

 

12

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The following tablesprovides additional information related to this stock option plan:
|                                 | ** ** | **For the Three Months Ended October 31, 2006** | ** ** |
|---------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                      | ** ** | **Number of  Shares**                                                         | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** | **Weighted  Average  Contractual  Life  In Years** | ** ** | **Aggregate  Intrinsic  Value (000’s)** | ** ** |
| Beginning balance               |       | 1,178,473                                                                          |       | $ | 19.70 |   |   |   |   |   |   |   |
| Options granted                 |       | —                                                                             |       |   |   |   |   |   |   |   |   |
| Options exercised               |       | 106,956                                                                            |       | 17.82 |   |   |   |   |   |   |   |
| Options forfeited               |       | —                                                                             |       |   |   |   |   |   |   |   |   |
| Total outstanding               |       | 1,071,517                                                                          |       | 19.77 |   |   |   | 2.6 |   | $ | 55,977 |   |
| Options  exercisable and vested |       | 818,384                                                                            |       | 19.35 |   |   |   | 2.4 |   | $ | 43,100 |   |
|                                 |            |                                                                                    |            |  |  |  |  |  |  |  |  |  |  |

 

The total intrinsic valueof options exercised during the three months ended October 31, 2006 and 2005was $4.9 million and $7.6 million, respectively.  Cash received from option exercises under allshare-based payment arrangements for the three months ended October 31, 2006was approximately $2.7 million.  The tax benefit realized for the taxdeductions resulting from option exercises of share-based payment arrangementswas approximately $5.3 million for the three months ended October 31, 2006.

Performance shares

During October 2005,certain participants were awarded rights to receive restricted shares of thecompany in October 2006.  Restrictedshares were earned and granted  inOctober 2006.  The number of shares wasbased upon established performance targets that were assessed at the end offiscal year 2006.  The vesting of theissued restricted shares will be two years after the performance targets wereassessed and therefore the service period is from the date of grant throughJuly 31, 2008.  These shares were valuedinitially at $31.94 per share for a total value of $2.5 million based upon themarket price of the shares at the award date and the expected outcome of theperformance targets. Based on the results for the year ended July 31, 2006 andthat the fiscal 2006 performance targets were exceeded, we accrued additionalshare based compensation related to the performance shares.  During the first fiscal quarter of 2007,70,113 shares of restricted stock were issued related to the performance sharesvalued at approximately $4.6 million.  We recorded $1.3 million and $0.4 million of compensation expenserelated to this plan in the fiscal year ended July 31, 2006 and in the firstfiscal quarter of 2007, respectively.  Weexpect to record an additional $2.6 million over the remaining service period.  As a fixed amount of restricted shares havenow been issued, this compensation plan is no longer recorded as a liability,but is now included as additional paid in capital.

Restricted Stock

For the restrictedshares, the shares generally vest ratably over 3 years, except for thoserelated to the performance shares discussed above.  The status of the restricted stock as of July31, 2006 and the changes during the three months ended October 31, 2006 ispresented below:
|                                | ** ** | **Number of  Shares** | ** ** |
|--------------------------------|------------|----------------------------|------------|
| Nonvested at July 31, 2006     |       | 124,969                    |       |
| Granted                        |       | 70,113                     |       |
| Less: Vested                   |       | 34,782                     |       |
| Less: Forfeited                |       | 1,250                      |       |
| Nonvested  at October 31, 2006 |       | 159,050                    |       |

 

The weighted averagegrant date fair value for the granted restricted stock was $65.00 and $31.94per share for the three months ended October 31, 2006 and 2005,respectively.  All of the restrictedstock granted in the first quarter of fiscal 2007 related to the performanceshares discussed above.  The total fairvalue of shares vested during the three months ended October 31, 2006 and 2005was approximately $2.3 million and $0.2 million, respectively.

13

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Employee Stock PurchasePlan

We also have an employee stock purchase plan. TheBoard of Directors originally authorized 1,000,000 shares available forissuance under this plan. Participation is voluntary and substantially allfull-time employees meeting limited eligibility requirements may participate.Contributions are made through payroll deductions and may not be less than 1%or more than 15% of the participant’s base pay as defined. The participant’soption to purchase common stock is deemed to be granted on the first day andexercised on the last day of the fiscal quarter at a price that is the lower of85% of the market price on the first or last day of the fiscal quarter. Inconnection with the pending merger with CGG, we agreed to limit the number ofshares to be issued after the merger agreement signing on September 4,2006.  In order to comply with the mergeragreement, Veritas discontinued the ESPP on October 31, 2006.  During the quarter ended October 31, 2006,17,807 shares of common stock with a weighted fair value at grant of $12.07 pershare were issued related to the preceding quarter’s grant.  During the quarter ended October 31, 2006,there were 18,026 shares granted and all of these will be issued in the secondquarter of fiscal 2007.  The grant datefair value for these shares was $13.15 per share. During the quarter endedOctober 31, 2005, 24,317 shares of common stock with a weighted fair value atgrant of $22.42 per share were issued related to the preceding fiscal quarter’sgrant.  During the quarter ended October31, 2005, there were 23,144 shares granted and all of these were issued in thesecond quarter of fiscal 2006 with a grant date fair value of $7.52 per share.The fair value for the shares granted was determined using the Black-Scholesoption valuation method with the following assumptions:
|                                          | ** ** | **Assumptions used in valuation model** | ** ** |
|------------------------------------------|------------|-------------------------------------------------------------|------------|
| **For the quarter ended** | ** ** | **Risk free  rate**                                    | ** ** | **Volatility** | ** ** | **Expected  life** | ** ** | **Expected  dividends** | ** ** |
| October 31, 2005                         |       |                                                        | 3.5        |  % |   |   | 47 |  % |   | 90  days |   | — |   |
| October 31, 2006                         |       |                                                        | 4.9        |  % |   |   | 44 |  % |   | 90 days |   | — |   |

 

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## **Item 2.****    Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

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

#### **Overview**

OnSeptember 4, 2006, we entered into a merger agreement with Compagnie Généralede Géophysique, a société anonyme organized under the laws of the Republic ofFrance (“CGG”), whereby CGG agreed to acquire Veritas in a part cash, partstock transaction.  The transaction iscurrently expected to close in early calendar year 2007.  See further discussion on the proposed mergerin Note 2, Business Combinations, of Notes to Consolidated FinancialStatements.

Wesee strengthening conditions in the seismic industry, as it continues to moveout of the weak 1999 - 2003 timeframe to what appears to be a robust future. Wefirst noted a change in our marketplace during the second half of calendar2004, when we began to see global exploration for oil and gas increasingworldwide in key basins of interest and exploration and production companiesactively competing with each other for access to seismic acquisition assets incertain markets, driving prices upward.

Whileseismic has traditionally been used purely as an exploration tool, we are alsoseeing growing interest in new seismic reservoir imaging techniques, such aswide azimuth acquisition, which offers better delineation of complex structuresand may advance the use of seismic in hydrocarbon production.

Webelieve all of these trends are promising for our business, although seismic spendingwill undoubtedly continue to fluctuate.

Ouroverall performance for the three months ended October 31, 2006 is the resultof being well positioned to take advantage of the increased exploration andreservoir delineation spending.  Thispositioning includes having quality multi-client data in areas of currentcustomer interest and areas of emerging potential, data imaging capabilitiesthat enable us to further illuminate the subsurface by producing the highestquality seismic images and field operations that provide technical as well ashealth, safety and environmental excellence.

Dueto our sales and operational efforts and the robust seismic market, we haveseen our backlog increase to $550 million at October 31, 2006 from $456 millionat July 31, 2006 and $459 million at October 31, 2005.  We expect that approximately 90% of thebacklog at October 31, 2006 will be completed during the next twelve months.

The company has fourreportable segments: North and South America (NASA); Europe, Africa, Middle Eastand Commonwealth of Independent States (EAME); Asia Pacific (APAC); and VeritasHampson Russell (VHR).  In NASA, EAME andAPAC, we conduct geophysical surveys on both a contract and a multi-clientbasis. When we conduct surveys on a contract basis, we acquire and process datafor a single client who pays us to conduct the survey and owns the data weacquire. When we conduct surveys on a multi-client basis, we acquire andprocess data for our own account and license that data and associated productsto multiple clients.  NASA, EAME and APACoffer a common suite of these products and services to their customers,although each product or service may be

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adapted to meetthe needs of the local markets.  VHRlicenses geophysical software and provides geophysical reservoir consultingservices.  This segmentation of ourcompany is representative of the manner in which it is viewed and managed byour senior managers and our Board of Directors.

#### **Results of operations**

#### ***Three months endedOctober 31, 2006 compared with three months ended October 31, 2005***

*Revenues*.  Ourrevenues increased by 37% from $168.7 million in the first quarter offiscal 2006 to $230.8 million in the first quarter of fiscal 2007 as discussedfurther below.

Multi-client revenue inthe first quarter of fiscal 2007 of $108.3 million increased by $33.8 million,or 45%, compared to the prior year’s first fiscal quarter.  Land multi-client and marine multi-clientcontributed increases of $17.8 million and $16.0 million, respectively.  The increases in the land multi-clientrevenue came primarily from Canada survey sales.  Marine survey sales continue to remain strongglobally with particularly good results coming from the  Gulf of Mexico and the North Sea.  In addition, we had significant multi-clientsales from Kazakhstan, a new and promising area for Veritas.

Total contract revenueincreased $28.3 million, or 30%, from the prior year’s first fiscal quarterwith strong growth from marine acquisition and imaging work from across allgeographic regions.  Our NASA regioncontinues to see significant growth in revenues from the Gulf of Mexicoarea.  Our land contract business remainsstrong, improving from the first quarter results from the prior year thatincluded a large project in South America.

All of our segmentscontributed to higher revenue, which was driven primarily by increases both inmulti-client and contract work.  NASAgenerated a $36.5 million revenue increase primarily through multi-client landwork in Canada, additional marine acquisition work in the Gulf of Mexico andincreased imaging work. EAME had higher revenue of $19.5 million coming fromall product lines with the most significant increase in its marine multi clientsales.  Asia Pacific continued toexperience increases in its marine contract and imaging work.

Revenue by contract typeis as follows:
|                    | ** ** | **For the Three Months Ended October 31,** | ** ** |
|--------------------|------------|--------------------------------------------------------------------------|------------|
| ** **         | ** ** | ** **                                                               | ** ** | ** ** | ** ** | **Change** | ** ** |
| ** **         | ** ** | **2006**                                                                 | ** ** | **2005** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **         | ** ** | **(Dollars in thousands)**                                     | ** ** |
| Multi-Client:      |       |                                                                     |       |   |   |   |   |   |   |
| Land               |       | $                                                                        | 43,747     |   | $ | 25,899 |   | $ | 17,848 |   | 69 | % |
| Marine             |       | 64,549                                                                   |       | 48,558 |   | 15,991 |   | 33 | % |
| Total Multi-Client |       | 108,296                                                                  |       | 74,457 |   | 33,839 |   | 45 | % |
| Contract:          |       |                                                                     |       |   |   |   |   |   |   |
| Land               |       | 48,817                                                                   |       | 47,647 |   | 1,170 |   | 2 | % |
| Marine             |       | 73,718                                                                   |       | 46,574 |   | 27,144 |   | 58 | % |
| Total Contract     |       | 122,536                                                                  |       | 94,221 |   | 28,314 |   | 30 | % |
| Total Revenue      |       | $                                                                        | 230,831    |   | $ | 168,678 |   | $ | 62,153 |   | 37 | % |

 

Revenue by segment is asfollows:
|               | ** ** | **For the Three Months Ended October 31,** | ** ** |
|---------------|------------|--------------------------------------------------------------------------|------------|
| ** **    | ** ** | ** **                                                               | ** ** | ** ** | ** ** | **Change** | ** ** |
| ** **    | ** ** | **2006**                                                                 | ** ** | **2005** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **    | ** ** | **(Dollars in thousands)**                                     | ** ** |
|          |       |                                                                     |       |   |   |   |   |   |   |
| NASA          |       | $                                                                        | 139,294    |   | $ | 102,842 |   | $ | 36,452 |   | 35 | % |
| EAME          |       | 54,248                                                                   |       | 34,769 |   | 19,479 |   | 56 | % |
| APAC          |       | 32,202                                                                   |       | 26,783 |   | 5,419 |   | 20 | % |
| VHR           |       | 5,087                                                                    |       | 4,284 |   | 803 |   | 19 | % |
| Total Revenue |       | $                                                                        | 230,831    |   | $ | 168,678 |   | $ | 62,153 |   | 37 | % |

 

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*Operating income. *Operating income for thefirst quarter of fiscal 2007 of $37.9 million more than doubled from the $18.3million in the prior year’s first fiscal quarter.  The increase in the operating income wasprimarily due to higher revenue and margins in both multi-client and contractwork.  Margin increases were generated bymarine multi-client sales in the Gulf of Mexico, Canada, North Sea andKazakhstan.

Operating income included$10.3 million of merger and related costs. We terminated discussions with a third party relating to the possiblesale of our land seismic acquisition business, during the first quarter offiscal 2007.  The $10.3 million includesfees in connection with the termination of those discussions, consisting ofamounts paid in settlement of all claims by the third party buyers andprofessional fees, including accounting and legal fees, and professional feesrelated to the pending merger with CGG.

Also included inoperating income in the first quarter of fiscal 2007 was approximately $2.7million of depreciation that related to the land seismic acquisition assetsthat were previously considered held for sale during fiscal 2006.  Another significant item within operatingincome was $1.4 million of professional fees related to obtaining a significantrefund from a foreign taxing authority. The benefit of the refund was recorded as a reduction of income taxexpense, which is discussed below.

General andadministrative expenses increased $2.6 million from the prior year’s firstfiscal quarter primarily due to the professional fees incurred related toobtain the tax refund discussed above and discussed in the income tax sectionbelow.

*Interestexpense*.  Interestexpense increased by $0.7 million from the prior year’s first fiscal quarter asa result of increases in the LIBOR rate applicable to the $155 millionconvertible debt.

*Interestincome*.  Interestincome increased $3.1 million compared to the prior year’s first fiscal quarterdue to a higher cash balance and higher interest rates.

*Involuntaryconversion of assets*. The company recognized a pre-tax insurance gain of $2.0 million in the firstquarter of fiscal 2006 related to insurance settlements for the equipment losson the Veritas Viking experienced in the second quarter of fiscal year 2005.

*Other income (expense), net. *Other income and expense,net consisted of foreign exchange losses of $0.3 million and othermiscellaneous gains of $0.3 million in the first quarter of fiscal 2007.  For the first quarter of fiscal year 2006,other income and expense, net consisted of $0.9 million of foreign exchangelosses and other miscellaneous gains of $1.0 million.

*Income taxes. * Thecompany’s effective tax rate for the quarter ended October 31, 2006 was 32%,which is lower than the 35% U.S. statutory rate and the prior year’s firstquarter tax rate of 43%.  The reductionin the current quarter rate was attributable to non-U.S. activities and a $5.0million tax benefit related to a refund received from a foreign taxingauthority with respect to certain prior year tax matters.  This reduction was partially offset by a $3.6million tax provision related to $10.3 million of non-deductible merger andrelated costs.

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

#### ***Cash flow andliquidity***

Our internal sources ofliquidity are cash on hand and cash flow from operations.  External sources include existing creditfacilities, public financing, equity sales, equipment financing, existingcredit facilities, and trade credit.  Webelieve that our current cash balance and cash flow from operations will beadequate to meet our liquidity needs over the next twelve months.

Net cash provided byoperating activities was $42.7 million for the first three months of fiscal2007, which is an increase from $29.4 million for the first three months offiscal 2006 primarily due to the increase in net income.  Net cash used by investing activitiesincreased to $99.0 million in the first three months of fiscal 2007 from $59.4million in the first three months of fiscal 2006 primarily due to increasedmulti-client library and capital

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expenditures.  Our currently projected cash investments forfiscal 2007 include capital expenditures to replace and upgrade existingequipment of approximately $230 to $250 million and investment in our datalibrary of approximately $270 to $300 million. We expect to fund the remainder of these investments from our currentcash on hand and from internally generated funds.

As of the beginning ofthe second fiscal quarter of fiscal 2006, our convertible senior notes wereconvertible.  See further discussion onthe convertibility of the notes below. The notes continued to be convertible as of October 31, 2006.  As of October 31, 2006, we had an adequateamount of cash to fund the conversion of the notes which would require apayment of the entire principal amount had all of the notes been converted onthat date.

While we believe that wehave adequate sources of funds to meet our liquidity needs even if we wererequired to fund the conversion of the notes, our ability to meet ourobligations depends on our future performance, which is subject to many factorsbeyond our control. Key factors affecting future results include utilizationlevels of acquisition and processing assets and demand for multi-client librarysurveys, all of which are driven by exploration spending and, ultimately, theunderlying commodity prices.

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

As of October 31, 2006,our notes payable consisted of $155.0 million of Convertible Senior Notes due2024. These notes are classified as a current liability as of October 31, 2006because the conversion feature discussed below results in the notes beingconvertible at the option of the holders.

The Convertible SeniorNotes bear interest at a per annum rate which equals the three-month LIBORrate, adjusted quarterly, minus a spread of 0.75%.  The interest rate of the notes, fromSeptember 15, 2006 through December 14, 2006, is 4.64%, based on a LIBOR rateof 5.39%.  For the first quarter offiscal 2007, the weighted average interest rate on the notes was 4.61%. Thenotes will mature on March 15, 2024 and may not be redeemed by us prior toMarch 20, 2009. Holders of the notes may require us to repurchase some, or all,of the notes on March 15, 2009, 2014 and 2019. They could also requirerepurchase upon a change of control (as defined in the indenture under whichthe Convertible Senior Notes were issued).

Under certain circumstances and at the option of theholder, the Convertible Senior Notesare convertible prior to the maturity date into cash and shares of our commonstock.  Certain of these circumstancesmay result in classification 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 conversion ratio; or

4.                                       theoccurrence of specified corporate transactions.

Should any of thesecircumstances occur, the Convertible Senior Notes would be convertible at thethen current stock price times the conversion ratio of 41.6146. This amountwould be payable in cash equal to the principal amount of the notes, the parvalue adjusted for dividends or other equity transactions, and the additionalamount payable in shares of our common stock. Currently, the maximum amount payable by us on conversion is $155million in cash plus approximately 6.5 million shares. This settlement methodis prescribed in the indenture and is not at the discretion of any party.  The shares issuable from such conversion areconsidered in the calculation of diluted earnings per share.

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As of the beginning ofthe second fiscal quarter of 2006, the Convertible Senior Notes were convertibleas the stock price remained greater than 120% of the Conversion Price for atleast 20 trading days in the period of 30 consecutive trading days ending onOctober 31, 2005.  The notes continued tobe convertible as of October 31, 2006. Because of the convertibility, the notes have been classified as acurrent liability on our consolidated balance sheet as of October 31,2006.  The determination of theconvertibility of the notes occurs quarterly. Depending upon the common stock price in the future, the notes may notbe convertible in future quarters and therefore would not be classified ascurrent on our consolidated balance sheet. Assuming a stock price of $72.01 (which was the closing stock price atOctober 31, 2006), conversion of all the notes would result in our payment of$155 million in cash and 4.3 million shares of common stock.

In connection with our issuance of the ConvertibleSenior Notes, we entered into a registration rights agreement pursuant to whichwe agreed to register the resale of the notes and underlying common stock bythe holders thereof.  If we failed tokeep the shelf registration statement related to this debt effective or usablein accordance with the registration rights agreement, then we were required topay liquidated damages to all holders of notes and all holders of our commonstock issued upon conversion of the notes. The liquidated damages to be paid were equal to an annual rate of 0.50%of the principal amount.  In November2005, the shelf registration statement became no longer effective and,accordingly, we began accruing liquidated damages at approximately $2,100 perday.  We were not required to registerthe resale of the notes and underlying common stock after March 10, 2006 andtherefore, our liability for the payment of liquidated damages ended on thatdate.

Inaddition to the notes, we also have a five-year $85 million revolving loanagreement with a syndicate of banks.  Thefacility provides for revolving loans and the issuance of letters of credit toVeritas DGC Inc. and certain of its subsidiaries of up to $45 million in theUnited States, $15 million in Canada, $15 million in Singapore and $10 millionin the United Kingdom.  As of October 31,2006, there were no borrowings and $5.9 million of outstanding letters ofcredit, leaving $79.1 million available under the revolving loan facility.

Thefacility is secured by pledges of accounts receivable and the U.S. land datalibrary, which, when added together, have a carrying amount of approximately$268 million as of October 31, 2006.  The facility is also secured by certainintercompany notes and stock in certain Veritas subsidiaries.  Veritas and certain of its subsidiaries havealso issued loan guarantees with respect to certain borrowings. Interest rateson borrowings under the facility are selected by the borrower at the time ofany advance and the rates so selected may be either at LIBOR plus 1.00% or theBase Rate (defined as the lesser of the applicable prime rate or the federalfunds rate).  These rates may be adjustedupward depending upon our leverage ratio (calculated as a ratio of funded debtversus EBITDA for the previous four quarters) to a maximum of LIBOR plus 1.50%or the base rate plus 0.50%.  The loanagreement and related documents contain customary financial covenants anddefault provisions, including a limit on the amount of cash dividends.  These covenants contain certain financialmeasurements as of quarter ending dates, and, as of  October 31, 2006, we were in compliance withthese covenants.

Wealso have various unsecured lines of credit, with lending institutions thatoperate in geographic areas not covered by the lending institutions in ourcredit facility, totaling $8.5 million that may be used exclusively for theissuance of letters of credit and bank guarantees. As of October 31, 2006, $0.4million in letters of credit were outstanding under these lines.

***RecentAccounting Pronouncements***

In May 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections—a replacement ofAPB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154 requiresretrospective application to prior periods’ financial statements for changes inaccounting principle, unless it is impracticable to determine either theperiod-specific effects or the cumulative effect of the change. SFAS 154 alsorequires that a change in depreciation, amortization, or depletion method forlong-lived, non-financial assets be accounted for as a change in accountingestimate effected by a change in accounting principle. SFAS 154 is effectivefor accounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005. The implementation of SFAS No. 154 did not have amaterial impact on the company’s financial statements.

In February 2006, theFASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments –an amendment of FASB Statements No. 133 and 150.”  SFAS No. 155 (a) permits fair value remeasurement for any hybridfinancial instrument that contains an embedded derivative that otherwise wouldrequire bifurcation, (b)

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clarifies that certain instruments are not subject to the requirements ofSFAS 133, (c) establishes a requirement to evaluate interests in securitizedfinancial assets to identify interests that may contain an embedded derivativerequiring bifurcation, (d) clarifies what may be an embedded derivative forcertain concentrations of credit risk and (e) amends SFAS 140 to eliminatecertain prohibitions related to derivatives on a qualifying special-purposeentity.  SFAS 155 is effective for us forthe fiscal year beginning August 1, 2007. The implementation of SFAS No. 155 is not expected to have amaterial impact on the company’s financial statements.

In July 2006, the FASBissued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty inIncome Taxes — An Interpretation of FASB Statement No. 109.” FIN No. 48clarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with SFAS No. 109, “Accountingfor Income Taxes.” FIN No. 48 prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. The newstandard also provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods and disclosure. The provisions of FINNo. 48 are effective for years beginning after December 15, 2006, which is ourfiscal year beginning August 1, 2007.  Weare currently evaluating the provisions of FIN No. 48 to determine the impacton our consolidated financial statements.

In September 2006,the FASB issued FASB Staff Position No. AUG AIR-1, “Accounting for PlannedMajor Maintenance Activities.” This guidance prohibits the use of theaccrue-in-advance method of accounting for planned major activities because anobligation has not occurred and therefore a liability should not berecognized.  The provisions of thisguidance will be effective for us for the fiscal year beginning August 1,2007.  We are currently evaluating theprovisions of this guidance to determine the impact on our consolidatedfinancial statements.

In September 2006, the FASB issued SFAS No. 157, FairValue Measurements.  SFAS No. 157 definesfair value, establishes a framework for measuring fair value and expandsdisclosure of fair value measurements. SFAS No. 157 applies under otheraccounting pronouncements that require or permit fair value measurements, andaccordingly, does not require any new fair value measurements. SFAS No. 157 iseffective for our financial statements issued related to the fiscal yearbeginning August 1, 2008, and interim periods within that year. We arecurrently evaluating the effect, if any, that the adoption of this standardwill have on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).  SFAS No. 158 requires an employer to:  (a) Recognize in its statement of financialposition an asset for a plan’s overfunded status or a liability for a plan’sunderfunded status; (b) Measure a plan’s assets and its obligations thatdetermine its funded status as of the end of the employer’s fiscal year (withlimited exceptions); (c) Recognize changes in the funded status of a definedbenefit postretirement plan in the year in which the changes occur. Thosechanges will be reported in comprehensive income.  The requirement to recognize the fundedstatus of a benefit plan and the disclosure requirements are effective for usas of the end of the fiscal year ending on July 31, 2007.  The requirement to measure plan assets andbenefit obligations as of the date of our fiscal year-end balance sheet iseffective for us for the fiscal year ending July 31, 2009.  We are currently evaluating the provisions ofthis guidance to determine the impact on our consolidated financial statements.  Had we adopted SFAS No. 158 as of July 31,2006, the impact would have been an increase to liabilities and a decrease tostockholders’ equity of approximately $10 million.

In September 2006, the SEC issued SEC StaffAccounting Bulletin (“SAB”) No. 108, “Financial Statements — Consideringthe Effects of Prior Year Misstatements When Quantifying Misstatements inCurrent Year Financial Statements.” SAB No. 108 addresses how a registrantshould quantify the effect of an error in the financial statements for purposesof assessing materiality and requires that the effect be computed using boththe current year income statement perspective (“rollover”) and the year endbalance sheet perspective (“iron curtain”) methods for fiscal years endingafter November 15, 2006. If a change in the method of quantifying errorsis required under SAB No. 108, this represents a change in accountingpolicy; therefore, if the use of both methods results in a larger, materialmisstatement than the previously applied method, the financial statements mustbe adjusted. SAB No. 108 allows the cumulative effect of such adjustmentsto be made to opening retained earnings upon adoption. The adoption of SABNo. 108 did not have an effect on our consolidated financial statements.

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#### ***Critical accountingpolicies***

While all of ouraccounting policies are important in assuring that we adhere to currentaccounting standards, certain policies are particularly important due to theirimpact on our financial statements.  Ourcritical accounting policies are described in detail in Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations -Significant Accounting Policies included in our Annual Report on Form 10-K forthe fiscal year ended July 31, 2006, which description is incorporated hereinby reference.

## **Item 3.****    Quantitative and QualitativeDisclosures Regarding Market Risk**

Asof October 31, 2006, we had $155.0 million Convertible Senior Notes bearinginterest at LIBOR less 0.75% with a fair value of $465 million, based upon thebid price of 300.29 on October 31, 2006. These notes are not hedged and represent our total exposure to interestrate risk. Each 100 basis point increase in the LIBOR rate will increase ourinterest expense by $1.6 million per year.

## **Item 4.****    Controls and Procedures**

**Evaluation of Disclosure Controls and Procedures**

 We carriedout an evaluation, under the supervision of and with the participation of ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as to the effectiveness, design and operation of our disclosure controls andprocedures (as defined in Rule 13a-15(e) under the Securities and Exchange Actof 1934) as of October 31, 2006. Our Chief Executive Officer and ChiefFinancial Officer concluded that the design and operation of our disclosurecontrols and procedures were effective as of October 31, 2006.

**Changesin Internal Control over Financial Reporting**

During the first quarterof fiscal 2007, we did not make any change to our internal control overfinancial reporting that materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

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# **PARTII.  OTHER INFORMATION**

## **Item 6.****    Exhibits**

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

 

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***  filed herewith**

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## **SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized, on the 6th day of December 2006.
|        | **VERITAS DGC INC.** |
|--------|----------------------|
|   |                 |   |
|   | By:                  | /s/ Mark E. Baldwin |
|   |                 | Mark E. Baldwin |
|   |                 | Executive Vice  President, Chief Financial Officer and Treasurer  (Principal Financial Officer) |
|   |                 |   |
|   |                 |   |
|   |                 | /s/ Dennis S. Baldwin |
|   |                 | Dennis S.  Baldwin |
|   |                 | Vice President,  Corporate Controller 

(Chief  Accounting Officer) |

 

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