**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**Form 10-Q**

 
| **(Mark One)** | ** ** | ** **                                                                                                                                                                |       |       |
|----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| **ý**     | ** ** | ** **                                                                                                                                                                |       |       |
|           |       | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)**                                                                                                                      |       |       |
| ** **     | ** ** | **OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                | ** ** | ** ** |
|           |       |                                                                                                                                                                      |       |       |
| ** **     | ** ** | **For the quarterly period ended October 31, 2005**                                                                                                                       |       |       |
|           |       |                                                                                                                                                                      |       |       |
| ** **     | ** ** | **OR**                                                                                                                                                                    |       |       |
|           |       |                                                                                                                                                                      |       |       |
| **o**          | ** ** | ** **                                                                                                                                                                | ** ** | ** ** |
|           |       | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)**                                                                                                                     |       |       |
| ** **     | ** ** | **OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                |       |       |
|           |       |                                                                                                                                                                      |       |       |
| ** **     | ** ** | **For the transition period from            to           ** | ** ** | ** ** |
|           |       |                                                                                                                                                                      |       |       |
| ** **     | ** ** | **Commission file number 1-7427**                                                                                                                                         |       |       |

 

**Veritas DGC Inc.**

(Exact name of registrant as specified in its charter)

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

 

**(832) 351-8300**

(Registrant’s telephone number, including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes ý No o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act). Yes ý  No o

 

Indicateby check mark whether the registrant is a shell company (as defined in rule12b-2 of the Exchange Act).  Yes o  No ý

 

Thenumber of shares of the Company’s common stock, $.01 par value, outstanding atNovember 30, 2005 was 34,933,314 (including 93,432 Veritas Energy Services Inc.exchangeable shares which are identical to the company’s common stock in allmaterial respects).

 

 

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**TABLE OF CONTENTS**

 

**FORM 10-Q**

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

 

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# **PART I. FINANCIAL INFORMATION**

# ** **

## **Item1.**             Financial Statements

 

**VERITAS DGC INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS AND**

**COMPREHENSIVE INCOME**

**(Unaudited)**

 
| ** **                                                      | ** ** | **Three Months Ended October 31,**            | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                      | ** ** | **2005**                                      | ** ** | **2004** | ** ** |
| ** **                                                      | ** ** | **(In thousands, except per share  amounts)** | ** ** |
|                                                            |       |                                          |       |   |   |
| Revenue                                                         |       | $                                             | 168,678    |   | $ | 129,581 |   |
| Cost of services                                                |       | 136,666                                       |       | 116,002 |   |
| Research and development                                        |       | 4,902                                         |       | 4,094 |   |
| General and administrative                                      |       | 8,855                                         |       | 6,359 |   |
| Operating income                                                |       | 18,255                                        |       | 3,126 |   |
| Interest expense                                                |       | 1,476                                         |       | 757 |   |
| Interest income                                                 |       | (1,901                                        | )          | (819 | ) |
| Gain on involuntary conversion  of assets                       |       | (2,000                                        | )          | — |   |
| Other (income) expense, net                                     |       | (126                                          | )          | 241 |   |
| Income before provision for income taxes                        |       | 20,806                                        |       | 2,947 |   |
| Provision for income tax  expense                               |       | 9,019                                         |       | 1,969 |   |
| Net income                                                      |       | $                                             | 11,787     |   | $ | 978 |   |
|                                                            |       |                                          |       |   |   |
| Net income per share:                                           |       |                                          |       |   |   |
| Basic:                                                          |       |                                          |       |   |   |
| Net income per common share                                     |       | $                                             | .34        |   | $ | .03 |   |
| Weighted average common shares  (including exchangeable shares) |       | 34,689                                        |       | 33,752 |   |
|                                                            |       |                                          |       |   |   |
| Diluted:                                                        |       |                                          |       |   |   |
| Net income per common share                                     |       | $                                             | .32        |   | $ | .03 |   |
| Weighted average common shares  (including exchangeable shares) |       | 36,838                                        |       | 34,895 |   |
|                                                            |       |                                          |       |   |   |
| Comprehensive income:                                           |       |                                          |       |   |   |
| Net income                                                      |       | $                                             | 11,787     |   | $ | 978 |   |
| Other comprehensive income (net  of tax, $0 in all periods):    |       |                                          |       |   |   |
| Foreign currency translation adjustments                        |       | 4,905                                         |       | 7,285 |   |
| Unrealized gain on investments available for sale               |       | —                                        |       | 84 |   |
| Total other comprehensive  income                               |       | 4,905                                         |       | 7,369 |   |
| Comprehensive income                                            |       | $                                             | 16,692     |   | $ | 8,347 |   |

 

See Notes to Consolidated Financial Statements

 

1

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**VERITAS DGC INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(Dollars inthousands, except par value)**

 
| ** **                                                                                                                                                  | ** ** | **October 31,****2005** | ** ** | **July 31,****2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------|------------|
| ** **                                                                                                                                                  | ** ** | **(Unaudited)**         | ** ** | ** **           | ** ** |
| ASSETS                                                                                                                                                      |       |                    |       |                 |       |
| Current assets:                                                                                                                                             |       |                    |       |                 |       |
| Cash and cash equivalents                                                                                                                                   |       | $                       | 227,971    |                 | $          | 249,393 |   |
| Restricted cash investments                                                                                                                                 |       | 239                     |       | 237                  |       |
| Accounts and notes receivable (net of allowance of $814 at October and  $1,322 at July)                                                                     |       | 158,947                 |       | 165,989              |       |
| Materials and supplies inventory                                                                                                                            |       | 6,679                   |       | 5,381                |       |
| Prepayments and other                                                                                                                                       |       | 18,152                  |       | 18,900               |       |
| Deferred tax asset and tax receivables                                                                                                                      |       | 10,766                  |       | 12,486               |       |
| Total current assets                                                                                                                                        |       | 422,754                 |       | 452,386              |       |
|                                                                                                                                                        |       |                    |       |                 |       |
| Property and equipment                                                                                                                                      |       | 505,333                 |       | 495,090              |       |
| Less accumulated depreciation                                                                                                                               |       | 376,519                 |       | 367,173              |       |
| Property and equipment, net                                                                                                                                 |       | 128,814                 |       | 127,917              |       |
|                                                                                                                                                        |       |                    |       |                 |       |
| Multi-client data library                                                                                                                                   |       | 333,250                 |       | 316,793              |       |
| Deferred tax asset, net                                                                                                                                     |       | 45,599                  |       | 45,963               |       |
| Other assets                                                                                                                                                |       | 24,049                  |       | 23,539               |       |
| Total                                                                                                                                                       |       | $                       | 954,466    |                 | $          | 966,598 |   |
|                                                                                                                                                        |       |                    |       |                 |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                                  |       |                    |       |                 |       |
| Current liabilities:                                                                                                                                        |       |                    |       |                 |       |
| Notes payable                                                                                                                                               |       | $                       | 155,000    |                 | $          | — |   |
| Accounts payable, trade                                                                                                                                     |       | 71,968                  |       | 75,810               |       |
| Accrued and deferred income taxes                                                                                                                           |       | 11,347                  |       | 9,402                |       |
| Deferred revenue                                                                                                                                            |       | 23,164                  |       | 42,043               |       |
| Other accrued liabilities                                                                                                                                   |       | 46,853                  |       | 65,193               |       |
| Total current liabilities                                                                                                                                   |       | 308,332                 |       | 192,448              |       |
| Non-current liabilities:                                                                                                                                    |       |                    |       |                 |       |
| Long-term debt                                                                                                                                              |       | —                  |       | 155,000              |       |
| Other non-current liabilities                                                                                                                               |       | 38,304                  |       | 36,602               |       |
| Total non-current liabilities                                                                                                                               |       | 38,304                  |       | 191,602              |       |
| Stockholders’ equity:                                                                                                                                  |       |                    |       |                 |       |
| Common stock, $.01 par value; issued: 36,109,846 and 35,580,032 shares,  respectively (excluding Exchangeable Shares of 141,193 and 155,370,  respectively) |       | 361                     |       | 355                  |       |
| Additional paid-in capital                                                                                                                                  |       | 460,548                 |       | 451,704              |       |
| Accumulated earnings                                                                                                                                        |       | 157,932                 |       | 146,145              |       |
| Accumulated other comprehensive income:                                                                                                                     |       |                    |       |                 |       |
| Cumulative foreign currency translation adjustment                                                                                                          |       | 19,150                  |       | 14,245               |       |
| Unrealized gain on investments-available for sale                                                                                                           |       | —                  |       | 197                  |       |
| Minimum pension liability                                                                                                                                   |       | (8,410                  | )          | (8,410               | )          |
| Treasury stock, at cost; 1,322,002 and 1,320,106 shares, respectively                                                                                       |       | (21,751                 | )          | (21,688              | )          |
| Total stockholders’ equity                                                                                                                             |       | 607,830                 |       | 582,548              |       |
| Total                                                                                                                                                       |       | $                       | 954,466    |                 | $          | 966,598 |   |

 

See Notes to Consolidated Financial Statements

 

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**VERITAS DGC INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                                             | ** ** | **Three Months Ended October 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                             | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| ** **                                                                                             | ** ** | **(In thousands)**                 | ** ** |
| Cash flows from operating  activities:                                                                 |       |                               |       |   |   |
| Net income                                                                                             |       | $                                  | 11,787     |   | $ | 978 |   |
| Non-cash items included in net  income:                                                                |       |                               |       |   |   |
| Depreciation and amortization, net (other than multi-client)                                           |       | 9,045                              |       | 9,764 |   |
| Amortization of multi-client library                                                                   |       | 52,840                             |       | 36,272 |   |
| Stock based compensation                                                                               |       | 1,447                              |       | 83 |   |
| Deferred taxes                                                                                         |       | 364                                |       | (340 | ) |
| Change in operating assets/liabilities:                                                                |       |                               |       |   |   |
| Accounts and notes receivable                                                                          |       | (5,336                             | )          | 5,845 |   |
| Materials and supplies inventory                                                                       |       | (1,298                             | )          | (226 | ) |
| Prepayments and other                                                                                  |       | 574                                |       | 1,686 |   |
| Current income tax                                                                                     |       | 2,933                              |       | 5,745 |   |
| Accounts payable, deferred revenue and other accrued liabilities                                       |       | (44,504                            | )          | (4,475 | ) |
| Other                                                                                                  |       | 1,177                              |       | 3,260 |   |
| Net cash provided by operating activities                                                              |       | 29,029                             |       | 58,592 |   |
|                                                                                                   |       |                               |       |   |   |
| Cash flows from investing  activities:                                                                 |       |                               |       |   |   |
| Increase in restricted cash                                                                            |       | (2                                 | )          | (116 | ) |
| Investment in multi-client data library, net cash                                                      |       | (61,622                            | )          | (35,625 | ) |
| Purchase of property and equipment                                                                     |       | (11,451                            | )          | (7,294 | ) |
| Proceeds from involuntary conversion of assets                                                         |       | 13,600                             |       |   |   |
| Sale of property and equipment                                                                         |       | 38                                 |       | 282 |   |
| Net cash used by investing activities                                                                  |       | (59,437                            | )          | (42,753 | ) |
|                                                                                                   |       |                               |       |   |   |
| Cash flows from financing  activities:                                                                 |       |                               |       |   |   |
| Excess tax benefit from stock based compensation                                                       |       | 732                                |       | — |   |
| Net proceeds from sale of common stock                                                                 |       | 6,560                              |       | 1,893 |   |
| Net cash provided by financing activities                                                              |       | 7,292                              |       | 1,893 |   |
| Currency gain on foreign cash                                                                          |       | 1,694                              |       | 528 |   |
| Increase (decrease) in cash  and cash equivalents                                                      |       | (21,422                            | )          | 18,260 |   |
| Beginning cash and cash  equivalents balance                                                           |       | 249,393                            |       | 116,299 |   |
| Ending cash and cash  equivalents balance                                                              |       | $                                  | 227,971    |   | $ | 134,559 |   |
|                                                                                                   |       |                               |       |   |   |
| **Schedule of  non-cash transactions:**                                                                |       |                               |       |   |   |
| Capitalization of depreciation and amortization resulting in an  increase in multi-client data library |       | $                                  | 5,609      |   | $ | 2,913 |   |

 

See Notes to Consolidated Financial Statements

 

3

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**VERITAS DGC INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

###### **1.**         Summaryof significant accounting policies

 

***Basis ofpresentation***

 

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.  Certain reclassifications have been made to theprior period amounts to conform to the current period classification.  These interim financial statementsshould be read in conjunction with the consolidated financial statementspresented in the Veritas DGC Inc. Annual Report on Form 10-K for the year endedJuly 31, 2005.

 

***Recent AccountingPronouncements***

*** ***

In December 2004,the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position(“FSP”) No. 109-1, “Application of FASB Statement No. 109, Accountingfor Income Taxes, to the Tax Deduction on Qualified Production Activities Providedby the American Jobs Creation Act of 2004,” which provides guidance on therecently enacted American Jobs Creation Act of 2004 (the “Act”). The Actprovides a U.S. tax deduction for income from qualified domestic productionactivities. FSP 109-1 provides for the treatment of the deduction as a specialdeduction as described in SFAS No. 109. We are currently evaluating theimpact on Veritas of this special deduction but do not believe it will have amaterial impact to the consolidated financial statements.

 

In December 2004,the FASB issued FASB Staff Position No. 109-2, “Accounting and DisclosureGuidance for the Foreign Repatriation Provision within the American JobsCreation Act of 2004,” which provides guidance under SFAS No. 109 with respectto recording the potential impact of the repatriation provisions of the Act ona company’s income tax expense and deferred tax liability. FSP 109-2 statesthat a company is allowed time beyond the financial reporting period ofenactment to evaluate the effect of the Act on its plan for reinvestment orrepatriation of foreign earnings for purposes of applying SFAS No. 109.The company has not yet decided on whether, and to what extent, we might electto repatriate foreign earnings under the provisions in the Act. Any suchrepatriation under the Act must occur by July 31, 2006. Accordingly,Veritas’ consolidated financial statements do not reflect a provision for taxesrelated to this election.

 

In December 2004,the FASB issued Statement of Financial Accounting Standards (“SFAS”)No. 153,**“Exchanges ofNonmonetary Assets — an amendment of APB Opinion No. 29,” to address themeasurement of exchanges of nonmonetary assets.  SFAS No. 153eliminates the exception from fair value measurement for nonmonetary exchangesof similar productive assets and replaces it with a general exception forexchanges of nonmonetary assets that do not have commercial substance.  Anonmonetary exchange has commercial substance if the future cash flows of theentity are expected to change significantly as a result of the exchange.  This statement was adopted by the companybeginning August 1, 2005.  The adoption of this statement had no impact onthe company’s financial statements and is not expected to have a materialimpact on future financial statements.

 

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 is not expected tohave a material impact on the Company’s financial statements.

 

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###### **2.**         Earningsper common share

 

Basic and diluted earnings per common share arecomputed as follows:

 
| ** **                                                     | ** ** | **Three Months Ended October 31,**            | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                     | ** ** | **2005**                                      | ** ** | **2004** | ** ** |
| ** **                                                     | ** ** | **(In thousands, except per share  amounts)** | ** ** |
| Net income                                                     |       | $                                             | 11,787     |   | $ | 978 |   |
|                                                           |       |                                          |       |   |   |
| **Basic:**                                                     |       |                                          |       |   |   |
| Weighted average common shares (including exchangeable shares) |       | 34,689                                        |       | 33,752 |   |
| Net income per share                                           |       | $                                             | .34        |   | $ | .03 |   |
|                                                           |       |                                          |       |   |   |
| **Diluted:**                                                   |       |                                          |       |   |   |
| Weighted average common shares (including exchangeable shares) |       | 34,689                                        |       | 33,752 |   |
| Shares issuable from assumed conversion of notes               |       | 1,638                                         |       | — |   |
| Shares issuable from assumed exercise of options               |       | 469                                           |       | 1,090 |   |
| Shares issuable from the assumed vesting of restricted stock   |       | 42                                            |       | 53 |   |
| Total                                                          |       | 36,838                                        |       | 34,895 |   |
| Net income per share                                           |       | $                                             | .32        |   | $ | .03 |   |

 

The shares issuable from assumed conversion of notesis based upon a stock price of $32.21, which was the closing price of VeritasDGC’s common stock at October 31, 2005. The Convertible Senior Notes were not convertible as of October 31, 2004and the shares issuable from such conversion, while considered, are notincluded in the income per share calculation for the fiscal quarter endingOctober 31, 2004 as they are anti-dilutive (see Note 4 for a description of ourConvertible Senior Notes).

 

The following options to purchase common shares havebeen excluded from the computation assuming dilution because the exerciseprices of the options exceeded the average market price of the underlyingcommon shares.

 
| ** **           | ** ** | **Three Months Ended October 31,** | ** ** |
|----------------------|------------|------------------------------------|------------|
| ** **           | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| Number of options    |       | 385,271                            |       | 761,908 |   |
| Exercise price range |       | $ 33.94  - $ 55.13       |       | $ 22.84  - $ 55.13 |   |
| Expiring through     |       | March  2012                        |       | March  2012 |   |

 

###### **3.**                            Gainon involuntary conversion of assets

 

In January 2005, ourseismic 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. As aresult, insurance settlements for reimbursement of certain costs and to acquirereplacement equipment in excess of the book value of the equipment lost lessour deductible were recorded as a gain of $9.9 million during the fourthquarter of fiscal year 2005.  Anadditional $2.0 million gain was recorded in the first quarter of fiscal 2006due to the timing of the insurance settlements, which are substantiallycomplete. This $2.0 million gain in the first fiscal quarter is included as achange in accounts receivable in the consolidated statement of cash flows.

 

###### **4.**         Notespayable and debt structure

 

As of October 31, 2005, our notes payable outstandingconsisted of $155.0 million of Convertible Senior Notes due 2024. These notesare classified as current as of October 31, 2005 as the conversion featurediscussed below results in the notes being callable at the option of theholders.

 

The Convertible Senior Notes bear interest at a perannum rate which equals the three-month LIBOR rate, adjusted quarterly, minus aspread of 0.75%.  The interest rate ofthe notes, from September 15, 2005 through

 

5

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December 14, 2005,is 3.12%, based on a LIBOR rate of 3.87%. For the first quarter of fiscal 2006, the weighted average interest rateon the notes was 2.74%. The notes will mature on March 15, 2024 and may not beredeemed by us prior to March 20, 2009. Holders of the notes may require us torepurchase some, or all, of the notes on March 15, 2009, 2014 and 2019. Theycould also require repurchase upon a change of control (as defined in theindenture under which the Convertible Senior Notes were issued).

 

Undercertain circumstances and at the option of the holder, the Convertible Senior Notes are convertible prior to thematurity date into cash and shares of our common stock.  Certain of these circumstances may result inclassification of the ConvertibleSenior 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 the fiscalquarter preceding the quarter in which the conversion occurs;

 

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

 

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

 

4.                                       theoccurrence of specified corporate transactions.

 

Should any of these circumstances occur, theConvertible Senior Notes would be convertible at the then current stock pricetimes the conversion ratio of 41.6146. This amount would be payable in cashequal to the principal amount of the notes, the par value adjusted fordividends or other equity transactions, and the additional amount payable inshares of our common stock.  Currently,the maximum amount payable by us on conversion is $155 million in cash plusapproximately 6.5 million shares. For clarity, conversion at a $40 stock pricewould result in our payment of $155 million in cash and 2.575 million shares ofcommon stock.  This settlement method isprescribed in the indenture and is not 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 of the second fiscal quarter of2006, the Convertible Senior Notes became convertible as the stock priceremained greater than 120% of the Conversion Price for at least 20 trading daysin the period of 30 consecutive trading days ending on October 31, 2005.  Because of the convertibility, the notes havebeen classified as a current liability on our consolidated balance sheet as ofOctober 31, 2005.  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 $32.21 (which was theclosing stock price at October 31, 2005), conversion of all the notes wouldresult in our payment of $155 million in cash and 1.638 million shares ofcommon stock.

 

If we fail to keep the shelf registration statementrelated to this debt effective or usable in accordance with the registrationrights agreement, then we may be required to pay liquidated damages to allholders of notes and all holders of our common stock issued upon conversion ofthe notes.  The liquidated damages to bepaid are equal to an annual rate of 0.50% of the principal amount.  In November 2005, the shelf registrationstatement became no longer effective and, accordingly, we began accruingliquidated damages at approximately $2,100 per day.  In the process of making this registrationeffective, on November 4, 2005, we filed a post-effective amendment to theregistration statement; however, until the registration statement is declaredeffective, liquidated damages will be paid each quarter to the record holders.

 

In addition to the notes, we have a Credit Facilityconsisting primarily of a revolving loan facility permitting borrowings of upto $55.0 million, including a facility for swing line loans of up to $10.0million, the issuance of letters of credit in an aggregate amount of up to$48.0 million.  Loans made under therevolving loan facility, including swing-line loans, bear interest at avariable rate determined on the date of borrowing that is related to variousbase rates and margins depending upon our leverage ratio and the location ofthe borrowing. The revolving loan facility expires in February 2006. The CreditFacility prohibits us from, among other things, paying cash dividends. As ofOctober 31, 2005, there were no borrowings and $9.5 million in letters ofcredit outstanding

 

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under therevolving loan facility, leaving $45.5 million available.

 

We also have various unsecured lines of credit, withlending institutions that operate in geographic areas not covered by the lendinginstitutions in our Credit Facility, totaling $8.5 million that may be usedexclusively for the issuance of letters of credit and bank guarantees. As ofOctober 31, 2005, $1.4 million in letters of credit were outstanding underthese lines.

 

Borrowings under the Credit Facility are secured byassets, including accounts receivable, equipment, vehicles, multi-client datalibrary, intellectual property, and stock of certain material subsidiaries,owned by us and certain of our subsidiaries. At October 31, 2005, the carryingvalue of the secured assets, including intercompany receivables, which areeliminated in consolidation, was $1.1 billion. The Credit Facility and relateddocuments contain a number of covenants, including financial covenants relatingto interest coverage, leverage and net worth. These covenants relate tomeasurements as of quarter ending dates, and, as of our last fiscal quarterended October 31, 2005, we were in compliance with these covenants.

 

###### **5.**         Pension plan

###### ** **

We maintain a contributory defined benefit pensionplan (the “Plan”) for eligible participating employees in the UnitedKingdom.  The following is the netperiodic benefit cost by component:

 
| ** **                                        | ** ** | **Three Months Ended October 31,** | ** ** |
|---------------------------------------------------|------------|------------------------------------|------------|
| ** **                                        | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| ** **                                        | ** ** | **(In thousands)**                 | ** ** |
| Service cost (benefits earned  during the period) |       | $                                  | 331        |   | $ | 149 |   |
| Interest cost on projected  benefit obligation    |       | 480                                |       | 303 |   |
| Expected return on plan assets                    |       | (324                               | )          | (216 | ) |
| Amortization of transition  obligation            |       | 2                                  |       | 2 |   |
| Amortization of prior service  cost               |       | (36                                | )          | (36 | ) |
| Amortization of net  (gain)/loss                  |       | 261                                |       | 76 |   |
| Net periodic benefit costs                        |       | $                                  | 714        |   | $ | 278 |   |

 

We have made contributions to this plan based on theschedule of contributions on which the above service cost was based and expectto complete these contributions, totaling approximately $1.3 million for theyear, during fiscal 2006.

 

7

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###### **6.**         Segmentinformation

###### ** **

We have organized the company into four reportablesegments: North and South America (NASA); Europe, Africa, the Middle East andCommonwealth 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 adapted to meet the needs of the localmarkets.  VHR licenses geophysicalsoftware and provides geophysical reservoir consulting services.  The results of VHR’s operations werepreviously included in those of the NASA region; however, beginning in fiscal2006, senior management began to review the results of VHR separately.  This segmentation of our company isrepresentative of the manner in which it is viewed and managed by our seniormanagers and our Board of Directors.  Theinformation related to the three months ended October 31, 2004 has beenrestated to reflect the new segment structure. A reconciliation of the reportable segments’ results to those of thetotal enterprise is given below:

 
| ** **              | ** ** | **For the Three Months Ended  October 31, 2005** | ** ** |
|-------------------------|------------|--------------------------------------------------|------------|
| ** **              | ** ** | **NASA**                                         | ** ** | **EAME** | ** ** | **APAC** | ** ** | **VHR** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **              | ** ** | **(In thousands)**                               | ** ** |
| Revenue                 |       | $                                                | 102,842    |   | $ | 34,769 |   | $ | 26,783 |   | $ | 4,284 |   | $ | — |   | $ | 168,678 |   |
| 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 |   |
|                         |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **              | ** ** | **For the Three Months Ended  October 31, 2004** | ** ** |
|-------------------------|------------|--------------------------------------------------|------------|
| ** **              | ** ** | **NASA**                                         | ** ** | **EAME** | ** ** | **APAC** | ** ** | **VHR** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **              | ** ** | **(In thousands)**                               | ** ** |
| Revenue                 |       | $                                                | 76,693     |   | $ | 31,774 |   | $ | 18,056 |   | $ | 3,058 |   | $ | — |   | $ | 129,581 |   |
| Operating income (loss) |       | 9,033                                            |       | 3,098 |   | (1,135 | ) | (1,402 | ) | (6,468 | ) | 3,126 |   |
| Assets                  |       | 467,109                                          |       | 113,827 |   | 38,368 |   | 15,329 |   | 150,836 |   | 785,469 |   |
|                         |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

###### **7.**         Stockbased compensation

###### ** **

As of August 1, 2005, we adopted the FinancialAccounting Standard Board Statement No. 123(R) (SFAS 123R) to account for stockbased employee compensation.  SFAS 123Rrequires us to record the cost of stock options and other equity-basedcompensation in our income statement based upon the estimated fair value ofthose awards.  We elected to use themodified prospective method for adoption, which requires compensation expenseto be recorded for all unvested stock options and other equity-based compensationbeginning in the first quarter of adoption. Accordingly, prior periods have not been restated to reflect stock basedcompensation.  For all unvested optionsoutstanding as of August 1, 2005, the previously measured but unrecognizedcompensation expense, based on the fair value at the original grant date, willbe recognized in the statement of operations over the remaining vesting period.For equity-based compensation granted subsequent to August 1, 2005,compensation expense, based on the fair value on the date of grant, will berecognized in the statement of operations over the vesting period.

 

Prior to December 11, 2002, we had two employeenonqualified stock option plans under which options were granted to officersand select employees. Options generally vested over three years and were exercisableover a five to ten-year period from the date of grant. The exercise price foreach option was the fair market value of the common stock on the grant date.Our Board of Directors authorized 5,954,550 shares of common stock to be issuedunder these option plans.

 

Prior to December 11, 2002, we also maintained a stockoption plan for non-employee directors (the “Director Plan”) under whichoptions were granted to our non-employee directors. The Director Plan provided

 

8

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that every yeareach eligible director was granted options to purchase 5,000 shares of ourcommon stock which vest over a period of three years from the date of grant andare exercisable over five to ten years from the date of grant. The exerciseprice for each option granted was the fair market value at the date of grant.The Board of Directors authorized 600,000 shares of common stock to be issuedunder the Director Plan.

 

On December 11, 2002, we adopted our current ShareIncentive Plan that provides for the issuance to directors, officers and selectemployees of: (1) nonqualified options to purchase our common stock, (2)incentive options to purchase our common stock, (3) share appreciation rights,(4) deferred share units, (5) restricted shares and (6) performance shares.Options issued to employees under the Share Incentive Plan have exercise pricesequal to the fair market value at the date of grant; have five-year lives andvest over three years. Options issued to continuing non-employee directorsunder the Share Incentive Plan have exercise prices equal to the fair marketvalue at the date of grant, have five-year lives and vest immediately.  As of October 31, 2005, 1.3 million shareswere reserved for issuance under this plan, with no more than 0.3 million ofthose shares issuable in any form other than stock options.

 

The compensation cost that has been charged againstincome for all plans for the three months ended October 31, 2005 was $1.5million.  The total income tax benefit recognized in the income statementfor share-based compensation arrangements for the three months ended October31, 2005 was approximately $0.4 million. During the three months ended October 31, 2005, the impact to net incomeof adopting SFAS 123R was approximately $1.1 million, and approximately $0.03to basic and diluted earnings per share. SFAS 123R requires tax benefits relating to excess stock basedcompensation deductions to be prospectively presented in our statement of cashflows as financing cash inflows. Accordingly, for the quarter ended October 31, 2005, we reportedapproximately $0.7 million of excess tax benefits from stock based compensationas cash provided by financing activities on our statement of cash flows.

 

Our policy of meeting the requirements upon exerciseof stock options is to issue new shares.

 

As of October 31, 2005, there was approximately $9.4million of total unrecognized compensation cost related to nonvestedshare-based compensation arrangements. That cost is expected to be recognized on a straight line basis over thevesting period, generally 3 years.

 

Stock options

 

The fair value of each option award granted afterAugust 1, 2005 is estimated on the date of grant using a lattice-based optionvaluation model that uses the assumptions noted in the following table.Expected volatilities are based on implied volatilities from traded options onour stock and historical volatility of our stock.  We use historical datato estimate option exercise and employee termination within the valuationmodel; separate groups of employees were reviewed and shown to have similarhistorical exercise behavior and are considered together for valuationpurposes.  The expected term of options granted is derived from the outputof the option valuation model and represents the period of time that optionsgranted are expected to be outstanding.  The risk-free rate for periodswithin the contractual life of the option is based on the U.S. Treasury yieldcurve in effect at the time of grant.

 

| ** **               | ** ** | **Three Months Ended October 31,  2005** | ** ** |
|--------------------------|------------|------------------------------------------|------------|
| Expected volatility      |       | 50.8                                     | %          |   |
| Expected dividends       |       | 0                                        | %          |   |
| Expected term (in years) |       | 4.0                                      |       |   |
| Risk free rate           |       | 4.0                                      | %          |   |

 

9

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The following table provides additional informationrelated to this stock option plan:

 
| *** ***                   | *** *** | **For the Three Months Ended October 31, 2005** | ** ** |
|--------------------------------|--------------|-------------------------------------------------|------------|
| ** **                     | ** **   | **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              |         | 2,422,790                                       |       | $ | 17.52 |   |   |   |   |   |   |   |
| Options granted                |         | 209,750                                         |       | 31.94 |   | $ | 13.29 |   |   | 5 |   |   |   |
| Options exercised              |         | (395,708                                        | )          | 14.18 |   |   |   |   |   |   |   |   |
| Options forfeited              |         | (4,908                                          | )          | 14.16 |   |   |   |   |   |   |   |   |
| Total outstanding              |         | 2,231,924                                       |       | 19.50 |   |   |   |   | 3 |   | $ | 28,372 |   |
| Options exercisable and vested |         | 1,584,324                                       |       | 20.54 |   |   |   |   | 3 |   | $ | 18,495 |   |
|                                |              |                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The total intrinsic value of options exercised duringthe three months ended October 31, 2005 and 2004 was $7.6 million and $1.5million, respectively.  Cash receivedfrom option exercises under all share-based payment arrangements for the threemonths ended October 31, 2005 was approximately $6.6 million.  The taxbenefit realized for the tax deductions resulting from option exercises ofshare-based payment arrangements was approximately $1.0 million for the threemonths ended October 31, 2005.

 

Performance shares

 

During October 2005, certain participants were awardedrights to receive restricted shares of the company in October 2006.  Restricted shares will be granted, if earned,in October 2006.  The number of shares isbased upon established performance targets that will be assessed at the end ofthe fiscal year.  The vesting of theissued restricted shares will be two years after the performance targets areassessed 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.  One month ofexpense has been recognized during the quarter ended October 31, 2005.  The compensation expense related to this planmay fluctuate based upon the expected outcome of the performance targets.

 

Restricted Stock

 

For the restricted shares, the shares generally vestratably over 3 years.  The status of therestricted stock as of July 31, 2005 and the changes during the three monthsended October 31, 2005 is presented below:

 
| ** **                    | ** ** | **Number of****Shares** | ** ** |
|-------------------------------|------------|-------------------------|------------|
| Nonvested at July 31, 2005    |       | 54,134                  |       |
| Granted                       |       | 97,500                  |       |
| Vested                        |       | 7,167                   |       |
| Forfeited                     |       | 1,888                   |       |
| Nonvested at October 31, 2005 |       | 142,579                 |       |

 

The weighted average grant date fair value for thegranted restricted stock was $31.94 per share for the three months endedOctober 31, 2005.  The total fair valueof shares vested during the three months ended October 31, 2005 and 2004 wasapproximately $0.2 million.

 

Employee Stock Purchase Plan

 

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

 

10

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may not be lessthan 1% or more than 15% of the participant’s base pay as defined. Theparticipant’s option to purchase common stock is deemed to be granted on thefirst day and exercised on the last day of the fiscal quarter at a price thatis the lower of 85% of the market price on the first or last day of the fiscalquarter. During the quarter ended October 31, 2005, 24,317 shares of commonstock with a weighted fair value at grant of $22.42 per share were issuedrelated to the preceding quarter’s grant. During the quarter ended October 31, 2005, there were 23,144 sharesgranted and all of these will be issued in the second quarter.  The grant date fair value for these was $7.52per share. The fair value for those granted in the first quarter weredetermined using the Black-Scholes option valuation method assuming: noexpected dividends, a risk-free interest rate of 3.5%, expected life of 90 daysand volatility of 47%.

 

Prior to August 1, 2005

 

Prior to August 1, 2005, we accounted for equity-basedcompensation using the intrinsic method prescribed in Accounting PrinciplesBoard Opinion No. 25.  As required bySFAS 123R, we have disclosed below the effect on net income and earnings pershare of equity-based employee compensation, including stock options, thatwould have been recorded using the fair value based method for the fiscalquarter ended October 31, 2004.

 
| ** **                                                                                                                                 | ** ** | **Three Months Ended  October 31, 2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| Net income (loss) as reported                                                                                                              |       |                                     | $          |  978 |   |   |
| Add: Compensation expense, net of related tax effects                                                                                      |       |                                     | 83         |   |   |
| Less: Total stock based employee compensation expense determined under  fair value based method for all awards, net of related tax effects |       |                                     | (679       | ) |   |
| Pro forma net income (loss)                                                                                                                |       |                                     | $          | 382 |   |   |
|                                                                                                                                       |       |                                     |       |   |   |
| Earnings (loss) per share – Basic and Diluted                                                                                         |       |                                     |       |   |   |
| As reported                                                                                                                                |       |                                     | $          | .03 |   |   |
| Pro-forma                                                                                                                                  |       |                                     | .01        |   |   |

 

The weighted average fair values of options grantedduring fiscal year 2005 were determined using the Black-Scholes optionvaluation method assuming no expected dividends. Other assumptions used are asfollows:

 

| ** **              | ** ** | **For the Three Months Ended  October 31, 2004** | ** ** |
|-------------------------|------------|--------------------------------------------------|------------|
| Risk-free interest rate |       | 3.7                                              | %          |   |
| Expected volatility     |       | 46.8                                             | %          |   |
| Expected life in years  |       | 4.0                                              |       |   |

 

11

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

 

*This report on Form 10-Q and thedocuments incorporated by reference contain forward-looking statements, withinthe meaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934. These statements include statementsincorporated by reference to other documents we file with the SEC.Forward-looking statements include, among other things, business strategy andexpectations concerning industry conditions, market position, futureoperations, margins, profitability, liquidity and capital resources.Forward-looking statements generally can be identified by the use ofterminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate”or “believe” or similar expressions or the negatives thereof. Theseexpectations are based on management’s assumptions and current beliefs based oncurrently available information. Although we believe that the expectations reflected in such statementsare reasonable, we can give no assurance that such expectation will be correct.You are cautioned not to place undue reliance on these*forward*-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**

#### ** **

We believe that, overall,global exploration for oil and gas is increasing in all areas.  While seismic has traditionally been usedpurely as an exploration tool, we are seeing increasing interest in new seismicreservoir imaging techniques, such as multi- or wide-azimuth acquisition, whichoffer better delineation of complex structures and may advance the use ofseismic in hydrocarbon production.  Webelieve all of this is promising for our business, although seismic spendingwill undoubtedly continue to fluctuate.

 

Our overall performanceduring the first quarter of fiscal 2006 is the result of being well positionedto take advantage of the increased exploration spending.  This positioning includes having qualitymulti-client data in areas of current customer interest, data processingabilities that enable us to produce the highest quality seismic images, andfield operations that are capable of providing technical as well as health,safety and environmental excellence.

 

Due to our selling andoperational efforts and the robust seismic market, we have seen our backlogincrease to $459 million at October 31, 2005 from $302 million at July 31, 2005and $252 million at October 31, 2004.  Weexpect that approximately $294 million of the backlog at October 31, 2005 willbe completed during the next twelve months.

 

We have organized the company into four reportablesegments: North and South America (NASA); Europe, Africa, the Middle East andCommonwealth 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-client basis.When we conduct surveys on a contract basis, we acquire and process data for asingle client who pays us to conduct the survey and owns the data we acquire.When we conduct surveys on a multi-client basis, we acquire and process datafor our own account and license that data and associated products to multipleclients.  NASA, EAME and APAC offer acommon suite of these products and services to their customers, although eachproduct or service may be adapted to meet the needs of the local markets.  VHR licenses geophysical software andprovides geophysical reservoir consulting services.  The results of VHR’s operations werepreviously included in those of the NASA region; however, beginning in fiscal2006, senior management began to review the results of VHR separately.  This segmentation of our company isrepresentative of the manner in which it is viewed and managed by our seniormanagers and our Board of Directors.  Theinformation related to the three months ended October 31, 2004 has beenrestated to reflect the new segment structure.

 

12

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#### **Resultsof operations**

#### ** **

#### ***Three months ended October 31, 2005 compared withthree months ended October 31, 2004***

#### ** **

*Revenue*.  Ourrevenue increased by 30% from $129.6 million in the first quarter of fiscal2005 to $168.7 million in the first quarter of fiscal 2006.

 

Multi-client revenue forthe first quarter of fiscal 2006 of $74.5 million increased by $29.4 million,or 65%, compared to the prior year’s first fiscal quarter. Land multi-clientand marine multi-client contributed increases of $15.1 million and $14.3million, respectively.  These increasescame primarily from surveys in process in the Gulf of Mexico, Canada and theNorth Sea.

 

Total contract revenueincreased by $9.7 million, or 11%, from the prior year’s first fiscal quarter.Marine revenue improved significantly in the APAC region, while in the NASA andEAME regions we chose to allocate our vessels to multi-client library projectsresulting in higher marine multi-client revenue.

 

NASA and APAC contributedthe largest revenue increases on a segment basis.  Growth in NASA resulted from multi-clientactivity in the Gulf of Mexico and Canada. APAC benefited from increases in the marine contract business.

 

Revenue by contract type is as follows:

 
| ** **         | ** ** | **For the Three Months Ended  October 31,** | ** ** |
|--------------------|------------|---------------------------------------------|------------|
| ** **         | ** ** | ** **                                  | ** ** | ** ** | ** ** | **Change** | ** ** |
| ** **         | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **         | ** ** | **(Dollars in thousands)**                  | ** ** |
| Multi-Client:      |       |                                        |       |   |   |   |   |   |   |
| Land               |       | $                                           | 25,899     |   | $ | 10,816 |   | $ | 15,083 |   | 140 | % |
| Marine             |       | 48,558                                      |       | 34,281 |   | 14,277 |   | 42 | % |
| Total Multi-Client |       | 74,457                                      |       | 45,097 |   | 29,360 |   | 65 | % |
| Contract:          |       |                                        |       |   |   |   |   |   |   |
| Land               |       | 47,647                                      |       | 36,497 |   | 11,150 |   | 31 | % |
| Marine             |       | 46,574                                      |       | 47,987 |   | (1,413 | ) | (3 | )% |
| Total Contract     |       | 94,221                                      |       | 84,484 |   | 9,737 |   | 11 | % |
| Total Revenue      |       | $                                           | 168,678    |   | $ | 129,581 |   | $ | 39,097 |   | 30 | % |

 

Revenue by segment is as follows:

 
| ** **    | ** ** | **For the Three Months Ended  October 31,** | ** ** |
|---------------|------------|---------------------------------------------|------------|
| ** **    | ** ** | ** **                                  | ** ** | ** ** | ** ** | **Change** | ** ** |
| ** **    | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **    | ** ** | **(Dollars in thousands)**                  | ** ** |
|          |       |                                        |       |   |   |   |   |   |   |
| NASA          |       | $                                           | 102,842    |   | $ | 76,693 |   | $ | 26,149 |   | 34 | % |
| EAME          |       | 34,769                                      |       | 31,774 |   | 2,995 |   | 9 | % |
| APAC          |       | 26,783                                      |       | 18,056 |   | 8,727 |   | 48 | % |
| VHR           |       | 4,284                                       |       | 3,058 |   | 1,226 |   | 40 | % |
| Total Revenue |       | $                                           | 168,678    |   | $ | 129,581 |   | $ | 39,097 |   | 30 | % |

 

*Operatingincome. *Operating income increased $15.1 million comparedto the prior year’s first fiscal quarter due to increased revenue and marginsin both multi-client and contract work. This performance was driven byfavorable pricing, project mix and increased efficiency.  Margin increases were generated by marinemulti-client sales in the Gulf of Mexico and marine contract work primarily inthe APAC region.

 

General and administrative expenses increased $2.5million from the prior year’s first fiscal quarter primarily due to share-basedemployee compensation expense of approximately $1.0 million resulting from theadoption of SFAS 123R and higher professional fees.

 

13

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*Interest expense*.  Interest expense increased $0.7 million inthe first quarter of fiscal 2005 to $1.5 million. This increase is due to theincrease in the LIBOR rate when compared to prior year’s first quarter.

 

*Interest income*.  Interest income increased $1.1 million compared to the prior year firstquarter primarily due to a highercash balance and higher interest rates.

 

*Other income (expense), net. *Other income and expense,net consists of foreign exchange losses of $0.9 million and other miscellaneousgains of 1.0 million in the first quarter of fiscal 2006.  For first quarter of fiscal 2005, otherincome and expense, net consists of $0.3 million of foreign exchange losses andother miscellaneous gains of $0.1 million.

 

*Gain on involuntary conversion ofassets*.  The companyrecognized a pre-tax insurance gain of $2.0 million in the first quarter offiscal 2006 related to insurance settlements for the equipment loss on the VeritasViking experienced in the second quarter of fiscal year 2005.

 

#### ***Income taxes.***  The company’s effective taxrate for the quarter ended October 31, 2005 was 43%, which is higher than the35% U.S. statutory rate.  Substantiallyall of this higher tax rate was attributable to non-U.S. activities.  The prior year’s first quarter tax rate of67% is higher than the current quarter tax rate due to the company’s inabilityto record in the prior year the benefit of certain deferred tax assets.  However, during the fourth fiscal quarter of2005, we concluded that valuation allowances recorded against deferred taxassets in certain jurisdictions were no longer necessary, resulting in a nettax benefit.

#### ** **

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

#### ** **

Our internal sources of liquidity are cash and cashequivalents on hand and cash flow from operations.  External sources include public financing,equity sales, equipment financing, our Credit Facility, and trade credit.  We believe that our current cash balance andcash flow from operations are adequate to meet our liquidity needs for the nexttwelve months and expect to increase our cash balance during fiscal 2006.

 

Net cash provided by operating activities decreasedfrom $58.6 million in the first quarter of fiscal 2005 to $29.0 million in thefirst quarter of fiscal 2006 and net cash used by investing activitiesincreased from $42.8 million in the first quarter of fiscal 2005 to $59.4million in the first quarter of fiscal 2006. Our currently projected cash investments for fiscal 2006 include capitalexpenditures to replace and upgrade existing equipment of approximately $60 to$65 million and investment in our data library of approximately $140 to $160million.  We expect to fund the remainderof these investments from our current cash on hand and from internallygenerated funds.

 

As of the beginning ofthe second fiscal quarter, the Convertible Senior Notes became convertible asthe stock price remained greater than 120% of the Conversion Price for at least20 trading days in the period of 30 consecutive trading days ending on October31, 2005 which is the last day of our first fiscal quarter.  As such, the debt is classified as current asof the end of the first fiscal quarter. However, we do not expect any of the debt to be converted during fiscal2006.  As of October 31, 2005, we had anadequate amount of cash to fund the conversion of the notes which would requirea payment of the entire principal amount had all of the notes been converted onthat date.

 

While we believe that we have adequate sources offunds to meet our liquidity needs even if we were required to fund theconversion of the notes, our ability to meet our obligations depends on ourfuture performance, which is subject to many factors beyond our control. Keyfactors affecting future results include utilization levels of acquisition andprocessing assets and demand for multi-client library surveys, all of which aredriven by exploration spending and, ultimately, the underlying commodityprices.

 

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

#### ** **

As of October 31, 2005, our notes payable outstandingconsisted of $155.0 million of Convertible Senior Notes due 2024.  These notes are classified as current as ofOctober 31, 2005 as the conversion feature discussed below results in the notesbeing callable at the option of the holders.

 

14

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The Convertible Senior Notes bear interest at a perannum rate which equals the three-month LIBOR rate, adjusted quarterly, minus aspread of 0.75%.  The interest rate ofthe notes, from September 15, 2005 through December 14, 2005, is 3.12%, basedon a LIBOR rate of 3.87%.  For the firstquarter of fiscal 2006, the weighted average interest rate on the notes was2.74%. The notes will mature on March 15, 2024 and may not be redeemed by usprior to March 20, 2009. Holders of the notes may require us to repurchasesome, or all, of the notes on March 15, 2009, 2014 and 2019. They could alsorequire repurchase upon a change of control (as defined in the indenture underwhich the Convertible Senior Notes were issued).

 

Undercertain circumstances and at the option of the holder, the Convertible Senior Notes are convertible prior to thematurity date into cash and shares of our common stock.  Certain of these circumstances may result inclassification of the ConvertibleSenior Notes as current on our balance sheet. These circumstances include:

 

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

 

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

 

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

 

4.             theoccurrence of specified corporate transactions.

 

Should any of these circumstances occur, theConvertible Senior Notes would be convertible at the then current stock pricetimes the conversion ratio of 41.6146. This amount would be payable in cash equalto the principal amount of the notes, the par value adjusted for dividends orother equity transactions, and the additional amount payable in shares of ourcommon stock.  Currently, the maximumamount payable by us on conversion is $155 million in cash plus approximately6.5 million shares. For clarity, conversion at a $40 stock price would resultin our payment of $155 million in cash and 2.575 million shares of commonstock.  This settlement method isprescribed 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 of the second fiscal quarter of2006, the Convertible Senior Notes became convertible as the stock price remainedgreater than 120% of the Conversion Price for at least 20 trading days in theperiod of 30 consecutive trading days ending on October 31, 2005.  Because of the convertibility, the notes havebeen classified as a current liability on our consolidated balance sheet as ofOctober 31, 2005.  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 $32.21 (which wasthe closing stock price at October 31, 2005), conversion of all the notes wouldresult in our payment of $155 million in cash and 1.638 million shares ofcommon stock.

 

If we fail to keep the shelf registration statementrelated to this debt effective or usable in accordance with the registrationrights agreement, then we may be required to pay liquidated damages to allholders of notes and all holders of our common stock issued upon conversion ofthe notes.  The liquidated damages to bepaid are equal to an annual rate of 0.50% of the principal amount.  In November 2005, the shelf registrationstatement became no longer effective and, accordingly, we began accruing liquidateddamages at approximately $2,100 per day. In the process of making this registration effective, on November 4,2005, we filed a post-effective amendment to the registration statement;however, until the registration statement is declared effective, liquidateddamages will be paid each quarter to the record holders.

 

In addition to the notes, we have a Credit Facilityconsisting primarily of a revolving loan facility permitting borrowings of upto $55.0 million, including a facility for swing line loans of up to $10.0million, the issuance of letters of credit in an aggregate amount of up to$48.0 million.  Loans made under therevolving loan facility, including swing-line loans, bear interest at avariable rate determined on the date of borrowing that is related to variousbase rates and margins depending upon our leverage ratio and the location ofthe borrowing. The

 

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revolving loanfacility expires in February 2006. The Credit Facility prohibits us from, amongother things, paying cash dividends. As of October 31, 2005, there were noborrowings and $9.5 million in letters of credit outstanding under therevolving loan facility, leaving $45.5 million available.

 

We also have various unsecured lines of credit, withlending institutions that operate in geographic areas not covered by thelending institutions in our Credit Facility, totaling $8.5 million that may beused exclusively for the issuance of letters of credit and bank guarantees. Asof October 31, 2005, $1.4 million in letters of credit were outstanding underthese lines.

 

Borrowings under the Credit Facility are secured byassets, including accounts receivable, equipment, vehicles, multi-client datalibrary, intellectual property, and stock of certain material subsidiaries,owned by us and certain of our subsidiaries. At October 31, 2005, the carryingvalue of the secured assets, including intercompany receivables, which areeliminated in consolidation, was $1.1 billion. The Credit Facility and relateddocuments contain a number of covenants, including financial covenants relatingto interest coverage, leverage and net worth. These covenants relate tomeasurements as of quarter ending dates, and, as of our last fiscal quarter,ended October 31, 2005, we were in compliance with these covenants.

 

***Recent AccountingPronouncements***

*** ***

In December 2004,the FASB issued FASB Staff Position No. 109-1, “Application of FASBStatement No. 109, Accounting for Income Taxes, to the Tax Deduction onQualified Production Activities Provided by the American Jobs Creation Act of2004,” which provides guidance on the recently enacted American Jobs CreationAct of 2004 (the “Act”). The Act provides a tax deduction for income fromqualified domestic production activities. FSP 109-1 provides for the treatmentof the deduction as a special deduction as described in SFAS No. 109. Weare currently evaluating the impact on Veritas of this special deduction but donot believe it will have a material impact to the consolidated financialstatements.

 

In December 2004, the FASB issued FASB StaffPosition No. 109-2, “Accounting and Disclosure Guidance for the ForeignRepatriation Provision within the American Jobs Creation Act of 2004,” whichprovides guidance under SFAS No. 109 with respect to recording thepotential impact of the repatriation provisions of the Act on a company’sincome tax expense and deferred tax liability. FSP 109-2 states that a companyis allowed time beyond the financial reporting period of enactment to evaluatethe effect of the Act on its plan for reinvestment or repatriation of foreignearnings for purposes of applying SFAS No. 109. The company has not yetdecided on whether, and to what extent, we might elect to repatriate foreignearnings under the provisions in the Act. Any such repatriation under the Actmust occur by July 31, 2006. Accordingly, Veritas’ consolidated financialstatements do not reflect a provision for taxes related to this election.

 

In December 2004,the FASB issued SFAS No. 153,**“Exchangesof Nonmonetary Assets — an amendment of APB Opinion No. 29,” to addressthe measurement of exchanges of nonmonetary assets.  SFAS No. 153eliminates the exception from fair value measurement for nonmonetary exchangesof similar productive assets and replaces it with a general exception forexchanges of nonmonetary assets that do not have commercial substance.  Anonmonetary exchange has commercial substance if the future cash flows of theentity are expected to change significantly as a result of the exchange.  This statement was adopted by the companybeginning August 1, 2005.  The adoption of this statement had no impact onthe company’s financial statements and is not expected to have a materialimpact on future financial statements.

 

In May 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections—a replacement of APB Opinion No. 20 and FASBStatement No. 3.” SFAS No. 154 requires retrospective application to priorperiods’ financial statements for changes in accounting principle, unless it isimpracticable to determine either the period-specific effects or the cumulativeeffect of the change. SFAS 154 also requires that a change in depreciation,amortization, or depletion method for long-lived, non-financial assets beaccounted for as a change in accounting estimate effected by a change inaccounting principle. SFAS 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 15, 2005.The implementation of SFAS No. 154 is not expected to have a material impact onthe Company’s financial statements.

 

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

#### ** **

As of August 1, 2005, we adopted the FinancialAccounting Standard Board Statement No. 123(R) (SFAS 123R) to account for stockbased employee compensation.  SFAS 123Rrequires us to record the cost of stock options and other equity-basedcompensation in our income statement based upon the estimated fair value ofthose awards.  We elected to use themodified prospective method for adoption, which requires compensation expenseto be recorded for all unvested stock options and other equity-basedcompensation beginning in the first quarter of adoption.  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. Determining the fair value of stock based awards at the grant daterequires judgment, including estimating the expected term of stock options, theexpected volatility of our stock and the amount of stock options to beforfeited.  If actual results differsignificantly from these estimates, stock based compensation expense and theresults of operations could be materially impacted.

 

While all of our accounting policies are important inassuring that we adhere to current accounting standards, certain policies areparticularly important due to their impact on our financial statements.  In addition to the accounting policy relatedto stock based compensation discussed above, the remaining critical accountingpolicies are described in detail in Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations - SignificantAccounting Policies included in our Annual Report on Form 10-K for the fiscalyear ended July 31, 2005, which description is incorporated herein byreference.

 

## **Item3.**             Quantitative and Qualitative Disclosures About MarketRisk

## ** **

As of October 31, 2005, wehad $155.0 million Convertible Senior Notes bearing interest at LIBOR less0.75% with a fair value of $229 million, based upon the bid price of 147.63 onOctober 31, 2005. These notes are not hedged and represent our total exposureto interest rate risk. Each 100 basis point increase in the LIBOR rate willincrease our interest expense by $1.6 million per year.

 

## **Item4.**             Controls and Procedures

## ** **

**Evaluationof Disclosure Controls and Procedures**

 

We carried out anevaluation, under the supervision of and with the participation of ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as to the effectiveness, design and operation of our disclosure controls andprocedures (as defined in Rule 13a-15(e) under the Securities and Exchange Actof 1934) as of October 31, 2005. The evaluation considered the proceduresdesigned to ensure that information required to be disclosed by us in reportsthat we file or submit under the Securities and Exchange Act of 1934 isrecorded, processed, summarized and reported in the time periods specified inthe rules and forms of the Securities and Exchange Commission and communicatedto our management as appropriate to allow timely decisions regarding requireddisclosure. Our Chief Executive Officer and Chief Financial Officer concludedthat the design and operation of our disclosure controls and procedures wereeffective as of October 31, 2005.

 

**Changes in Internal Control over FinancialReporting**

 

During the first quarter of fiscal 2006, we did notmake any change to our internal control over financial reporting thatmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

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# **PART II.  OTHERINFORMATION**

 

## **Item 6.**             Exhibits

 
| **Exhibit****No.** | ** ** | **Description**                                                                                                                                                                                               |
|--------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.34              | —     | Letter  Agreement dated October 24, 2005 between Veritas DGC Inc. and Stephen J.  Ludlow (Exhibit 10.3 to Veritas DGC Inc.’s Form 8-K dated October 28, 2005 is  incorporated herein by reference.)      |
| 10.35              | —     | Employment  agreement between Veritas DGC Inc. and Dennis S. Baldwin dated November 7,  2005. (Exhibit 10.1 to Veritas DGC Inc.’s Form 8-K dated November 7, 2005 is  incorporated herein by reference.) |
| *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 SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized, on the 9th day ofDecember 2005.

 
|   | **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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