**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

----

 

**Form 10-Q**

 

| **(Mark One)**                                             |       |
|------------------------------------------------------------|------------|
| **ý**                                                 | ** ** |
| **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d)** |
| **OF THE SECURITIES EXCHANGE ACT  OF 1934**                |

 

**For the quarterly period ended April 30,2006**

 

**OR**

 

| **o**                                                       | ** ** |
|-------------------------------------------------------------|------------|
| **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d)** |
| **OF THE SECURITIES EXCHANGE ACT  OF 1934**                 |

 

**For the transition period from             to             **

 

**Commission file number 1-7427**

 

**Veritas DGC Inc.**

(Exact name of registrant as specified in itscharter)

 

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

 

**(832) 351-8300**

(Registrant’s telephone number, including areacode)

 

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

 

Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý                     Accelerated filer o            Non-accelerated filer o

 

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

 

The number of shares of the company’scommon stock, $.01 par value, outstanding at May 31, 2006 was 35,819,834.

 

 

----

 

**TABLE OF CONTENTS**

 

**FORM 10-Q**

 
| **PART I. FINANCIAL  INFORMATION**                                                                                           | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                        | ** ** |
| ITEM 1. FINANCIAL STATEMENTS                                                                                                 |       |
| Consolidated  Statements of Operations and Comprehensive Income for the Three and Nine  Months Ended April 30, 2006 and 2005 |       |
| Consolidated  Balance Sheets as of April 30, 2006 and July 31, 2005                                                     |       |
| Consolidated Statements of Cash Flows for the Nine Months Ended April 30,  2006 and 2005                                     |       |
| Notes to Consolidated Financial Statements                                                                                        |       |
| ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS                          |       |
| ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES  REGARDING MARKET RISK                                                      |       |
| ITEM 4. CONTROLS AND PROCEDURES                                                                                              |       |
| ** **                                                                                                                        | ** ** |
| **PART II. OTHER  INFORMATION**                                                                                              | ** ** |
| ** **                                                                                                                        | ** ** |
| ITEM 6. EXHIBITS                                                                                                             |       |
| SIGNATURES                                                                                                                        |       |

 

----

# ** **

# **PART I. FINANCIALINFORMATION**

# ** **

## **Item 1.**                                       Financial Statements

## ** **

**VERITAS DGC INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**AND COMPREHENSIVE INCOME**

**(Unaudited)**

** **
| ** **                                                      | ** ** | **Three  Months Ended   April 30,**       | ** ** | **Nine  Months Ended  April 30,** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                      | ** ** | **2006**                                       | ** ** | **2005**                               | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                            |       | **(In thousands, except per share  amounts )** |       |
|                                                            |       |                                           |       |                                   |       |   |   |   |   |
| Revenue                                                         |       | $                                              | 236,219    |                                   | $          | 175,510 |   | $ | 643,757 |   | $ | 497,319 |   |
| Cost  of services                                               |       | 171,022                                        |       | 132,957                                |       | 475,611 |   | 393,898 |   |
| Research  and development                                       |       | 5,504                                          |       | 4,676                                  |       | 16,221 |   | 13,790 |   |
| General  and administrative                                     |       | 11,082                                         |       | 8,632                                  |       | 31,481 |   | 23,597 |   |
| Operating  income                                               |       | 48,611                                         |       | 29,245                                 |       | 120,444 |   | 66,034 |   |
| Interest  expense                                               |       | 2,002                                          |       | 1,140                                  |       | 5,128 |   | 2,803 |   |
| Interest  income                                                |       | (3,302                                         | )          | (1,553                                 | )          | (7,629 | ) | (3,080 | ) |
| Gain  on involuntary conversion of assets                       |       | —                                         |       | —                                 |       | (2,000 | ) | — |   |
| Other  expense (income), net                                    |       | 711                                            |       | (901                                   | )          | 66 |   | (963 | ) |
| Income  before provision for income taxes                       |       | 49,200                                         |       | 30,559                                 |       | 124,879 |   | 67,274 |   |
| Provision  for income taxes                                     |       | 16,324                                         |       | 12,152                                 |       | 49,135 |   | 30,521 |   |
| Net  income                                                     |       | $                                              | 32,876     |                                   | $          | 18,407 |   | $ | 75,744 |   | $ | 36,753 |   |
|                                                            |       |                                           |       |                                   |       |   |   |   |   |
|                                                            |       |                                           |       |                                   |       |   |   |   |   |
| Net  income per share:                                          |       |                                           |       |                                   |       |   |   |   |   |
| Basic:                                                          |       |                                           |       |                                   |       |   |   |   |   |
| Net  income per common share                                    |       | $                                              | .92        |                                   | $          | .54 |   | $ | 2.16 |   | $ | 1.09 |   |
| Weighted  average common shares (including exchangeable shares) |       | 35,555                                         |       | 33,792                                 |       | 35,091 |   | 33,775 |   |
|                                                            |       |                                           |       |                                   |       |   |   |   |   |
| Diluted:                                                        |       |                                           |       |                                   |       |   |   |   |   |
| Net  income per common share                                    |       | $                                              | .84        |                                   | $          | .52 |   | $ | 1.95 |   | $ | 1.05 |   |
| Weighted  average common shares (including exchangeable shares) |       | 39,194                                         |       | 35,131                                 |       | 38,833 |   | 34,970 |   |
|                                                            |       |                                           |       |                                   |       |   |   |   |   |
| Comprehensive  income:                                          |       |                                           |       |                                   |       |   |   |   |   |
| Net  income                                                     |       | $                                              | 32,876     |                                   | $          | 18,407 |   | $ | 75,744 |   | $ | 36,753 |   |
| Other  comprehensive income (net of tax, $0 in all periods):    |       |                                           |       |                                   |       |   |   |   |   |
| Foreign  currency translation adjustments                       |       | 1,740                                          |       | (889                                   | )          | 8,373 |   | 5,699 |   |
| Unrealized  loss on investments available for sale              |       | —                                         |       | (342                                   | )          | — |   | (116 | ) |
| Total  other comprehensive income (loss)                        |       | 1,740                                          |       | (1,231                                 | )          | 8,373 |   | 5,583 |   |
| Comprehensive  income                                           |       | $                                              | 34,616     |                                   | $          | 17,176 |   | $ | 84,117 |   | $ | 42,336 |   |

 

See Notes to Consolidated Financial Statements

 

1

----

 

**VERITAS DGC INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

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

(Unaudited)

 
| ** **                                                                                                                                                        | ** ** | **April 30,****2006** | ** ** | **July 31,****2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|---------------------------|------------|
|                                                                                                                                                              |       | **(Unaudited)**            | ** ** |                      |       |
| ASSETS                                                                                                                                                            |       |                       | ** ** |                      |       |
| Current  assets:                                                                                                                                                  |       |                       |       |                      |       |
| Cash  and cash equivalents                                                                                                                                        |       | $                          | 378,228    |                      | $          | 249,393 |   |
| Restricted  cash investments                                                                                                                                      |       | 696                        |       | 237                       |       |
| Accounts  receivable (net of allowance of $910 at April and $1,322 at July)                                                                                  |       | 203,821                    |       | 165,989                   |       |
| Materials  and supplies inventory                                                                                                                                 |       | 7,330                      |       | 5,381                     |       |
| Prepayments  and other                                                                                                                                            |       | 23,740                     |       | 18,900                    |       |
| Deferred  tax asset and tax receivables                                                                                                                           |       | 10,766                     |       | 12,486                    |       |
| Total  current assets                                                                                                                                             |       | 624,581                    |       | 452,386                   |       |
|                                                                                                                                                              |       |                       |       |                      |       |
| Property  and equipment                                                                                                                                           |       | 539,792                    |       | 495,090                   |       |
| Less  accumulated depreciation                                                                                                                                    |       | 401,412                    |       | 367,173                   |       |
| Property  and equipment, net                                                                                                                                      |       | 138,380                    |       | 127,917                   |       |
|                                                                                                                                                              |       |                       |       |                      |       |
| Multi-client  data library                                                                                                                                        |       | 272,183                    |       | 316,793                   |       |
| Deferred  tax asset, net                                                                                                                                          |       | 42,658                     |       | 45,963                    |       |
| Other  assets                                                                                                                                                     |       | 23,818                     |       | 23,539                    |       |
| Total                                                                                                                                                             |       | $                          | 1,101,620  |                      | $          | 966,598 |   |
|                                                                                                                                                              |       |                       |       |                      |       |
| LIABILITIES AND STOCKHOLDERS’  EQUITY                                                                                                                        |       |                       |       |                      |       |
| Current  liabilities:                                                                                                                                             |       |                       |       |                      |       |
| Notes  payable                                                                                                                                                    |       | $                          | 155,000    |                      | $          | — |   |
| Accounts  payable, trade                                                                                                                                          |       | 76,455                     |       | 75,810                    |       |
| Accrued  and deferred income taxes                                                                                                                                |       | 17,644                     |       | 9,402                     |       |
| Deferred  revenue                                                                                                                                                 |       | 46,500                     |       | 42,043                    |       |
| Other  accrued liabilities                                                                                                                                        |       | 62,985                     |       | 65,193                    |       |
| Total  current liabilities                                                                                                                                        |       | 358,584                    |       | 192,448                   |       |
| Non-current liabilities:                                                                                                                                          |       |                       |       |                      |       |
| Long-term  debt                                                                                                                                                   |       | —                     |       | 155,000                   |       |
| Other  non-current liabilities                                                                                                                                    |       | 41,750                     |       | 36,602                    |       |
| Total  non-current liabilities                                                                                                                                    |       | 41,750                     |       | 191,602                   |       |
|                                                                                                                                                              |       |                       |       |                      |       |
| Commitments and contingent  liabilities (Note 5)                                                                                                                  |       |                       |       |                      |       |
|                                                                                                                                                              |       |                       |       |                      |       |
| Stockholders’  equity:                                                                                                                                       |       |                       |       |                      |       |
| Common  stock, $.01 par value; issued: 36,908,931 shares and 35,580,032 shares,  respectively (excluding Exchangeable Shares of 88,866 and 155,370, respectively) |       | 369                        |       | 355                       |       |
| Additional  paid-in capital                                                                                                                                       |       | 486,736                    |       | 451,704                   |       |
| Accumulated  earnings                                                                                                                                             |       | 221,889                    |       | 146,145                   |       |
| Accumulated  other comprehensive income:                                                                                                                          |       |                       |       |                      |       |
| Cumulative  foreign currency translation adjustment                                                                                                               |       | 22,618                     |       | 14,245                    |       |
| Unrealized  gain on investments available for sale                                                                                                                |       | —                     |       | 197                       |       |
| Minimum  pension liability                                                                                                                                        |       | (8,388                     | )          | (8,410                    | )          |
| Treasury  stock, at cost: 1,326,645 shares and 1,320,106 shares, respectively                                                                                     |       | (21,938                    | )          | (21,688                   | )          |
| Total  stockholders’ equity                                                                                                                                  |       | 701,286                    |       | 582,548                   |       |
| Total                                                                                                                                                             |       | $                          | 1,101,620  |                      | $          | 966,598 |   |

 

See Notes to Consolidated Financial Statements

 

2

----

 

**VERITAS DGC INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(Unaudited)**

 
| ** **                                                         | ** ** | **Nine  Months Ended April 30,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                         | ** ** | **2006**                              | ** ** | **2005** | ** ** |
|                                                               |       | **(In thousands )**                   |       |
| Cash  flows from operating activities:                             |       |                                  |       |   |   |
| Net  income                                                        |       | $                                     | 75,744     |   | $ | 36,753 |   |
| Non-cash  items included in net income:                            |       |                                  |       |   |   |
| Depreciation  and amortization, net (other than multi-client)      |       | 35,264                                |       | 33,164 |   |
| Amortization  of multi-client data library                         |       | 157,642                               |       | 103,559 |   |
| Stock  based compensation                                          |       | 4,728                                 |       | 263 |   |
| Deferred  taxes                                                    |       | 4,822                                 |       | (372 | ) |
| Change  in operating assets and liabilities:                       |       |                                  |       |   |   |
| Accounts  receivable                                               |       | (51,022                               | )          | 26,870 |   |
| Materials  and supplies inventory                                  |       | (1,945                                | )          | (696 | ) |
| Prepayments  and other                                             |       | (5,002                                | )          | 4,013 |   |
| Current  income tax                                                |       | 14,195                                |       | 19,632 |   |
| Accounts  payable, deferred revenue, and other accrued liabilities |       | (2,125                                | )          | 6,637 |   |
| Other                                                              |       | 2,394                                 |       | 9,987 |   |
| Net  cash provided by operating activities                         |       | 234,695                               |       | 239,810 |   |
|                                                               |       |                                  |       |   |   |
| Cash  flows from investing activities:                             |       |                                  |       |   |   |
| Investment  in multi-client data library, net cash                 |       | (101,426                              | )          | (77,558 | ) |
| Purchase  of property and equipment                                |       | (47,523                               | )          | (43,533 | ) |
| Proceeds  from involuntary conversion of assets                    |       | 15,520                                |       | — |   |
| Sale  of property and equipment                                    |       | 222                                   |       | 1,240 |   |
| Increase  in restricted cash                                       |       | (457                                  | )          | (125 | ) |
| Net  cash used by investing activities                             |       | (133,664                              | )          | (119,976 | ) |
|                                                               |       |                                  |       |   |   |
| Cash  flows from financing activities:                             |       |                                  |       |   |   |
| Excess  tax benefit from stock based compensation                  |       | 2,427                                 |       | — |   |
| Principal  payments on capital lease obligations                   |       | (1,536                                | )          | — |   |
| Net  proceeds from sale of common stock                            |       | 23,392                                |       | 1,918 |   |
| Net  cash provided by financing activities                         |       | 24,283                                |       | 1,918 |   |
| Currency  gain on foreign cash                                     |       | 3,521                                 |       | 402 |   |
| Increase  in cash and cash equivalents                             |       | 128,835                               |       | 122,154 |   |
| Beginning  cash and cash equivalents balance                       |       | 249,393                               |       | 116,299 |   |
| Ending  cash and cash equivalents balance                          |       | $                                     | 378,228    |   | $ | 238,453 |   |

 
| **Schedule of non-cash transactions:**                                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Capitalization  of depreciation and amortization resulting in an increase in multi-client  data library |       | $          | 9,098      |       | $          | 7,015 |   |
| Capital  lease obligations incurred for the purchase of property and equipment                          |       | $          | 3,742      |       | $          | — |   |

 

See Notes to Consolidated Financial Statements

 

3

----

 

**VERITAS DGC INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

(Unaudited)

 

###### **1.**                   Summary ofsignificant 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. These financial statements, including selectednotes, have been prepared in accordance with the applicable rules of theSecurities and Exchange Commission and do not include all of the informationand disclosures required by accounting principles generally accepted in theUnited States of America for complete financial statements. Certainreclassifications have been made to the prior period amounts to conform tothe current period classification. These interim financial statements should beread in conjunction with the consolidated financial statements presented in theVeritas DGC Inc. Annual Report on Form 10-K for the year ended July 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, Accounting forIncome 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 production activitiesbeginning in our fiscal year ending July 31, 2006. FSP 109-1 provides forthe treatment of the deduction as a special deduction as described in SFAS No. 109.Accordingly, we will record the amount of any special deductions in the yearsthey are taken.

 

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 withrespect to recording the potential impact of the repatriation provisions of theAct on a company’s income tax expense and deferred tax liability. FSP 109-2states that 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 is completing its evaluation on whether, and to what extent, wemight elect to repatriate foreign earnings under the provisions in the Act. Anysuch repatriation 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 of Nonmonetary Assets — anamendment of APB Opinion No. 29,” to address the measurement of exchangesof nonmonetary assets. SFAS No. 153 eliminates the exception from fairvalue measurement for nonmonetary exchanges of similar productive assets andreplaces it with a general exception for exchanges of nonmonetary assets thatdo not have commercial substance. A nonmonetary exchange has commercialsubstance if the future cash flows of the entity are expected to changesignificantly as a result of the exchange. This statement was adopted by thecompany beginning August 1, 2005. The adoption of this statement had noimpact on the company’s financial statements and is not expected to have amaterial impact on future financial statements.

 

In May 2005, theFASB issued SFAS No. 154, “Accounting Changes and Error Corrections—areplacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154requires retrospective application to prior periods’ financial statements forchanges in accounting principle, unless it is impracticable to determine eitherthe period-specific effects or the cumulative effect of the change. SFAS 154also requires that a change in depreciation, amortization, or depletion methodfor long-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 notexpected to have a material impact on the company’s financial statements.

 

4

----

 

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

 

###### **2.**                                      Earnings percommon share

###### ** **

Basic and dilutedearnings per common share are computed as follows:

 
| ** **                                                      | ** ** | **Three  Months Ended****April 30,**     | ** ** | **Nine  Months Ended****April 30,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                      | ** ** | **2006**                                      | ** ** | **2005**                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                      | ** ** | **(In thousands, except per share  amounts)** | ** ** |
|                                                            |       |                                          |       |                                     |       |   |   |   |   |
| Net  income                                                     |       | $                                             | 32,876     |                                     | $          | 18,407 |   | $ | 75,744 |   | $ | 36,753 |   |
|                                                            |       |                                          |       |                                     |       |   |   |   |   |
| **Basic:**                                                      |       |                                          |       |                                     |       |   |   |   |   |
| Weighted  average common shares (including exchangeable shares) |       | 35,555                                        |       | 33,792                                   |       | 35,091 |   | 33,775 |   |
| Income  per share                                               |       | $                                             | .92        |                                     | $          | .54 |   | $ | 2.16 |   | $ | 1.09 |   |
|                                                            |       |                                          |       |                                     |       |   |   |   |   |
| **Diluted:**                                                    |       |                                          |       |                                     |       |   |   |   |   |
| Weighted  average common shares (including exchangeable shares) |       | 35,555                                        |       | 33,792                                   |       | 35,091 |   | 33,775 |   |
| Shares  issuable from assumed conversion of notes               |       | 3,216                                         |       | —                                   |       | 3,216 |   | — |   |
| Shares  issuable from assumed exercise of options               |       | 341                                           |       | 1,295                                    |       | 454 |   | 1,149 |   |
| Shares  issuable from assumed vesting of restricted stock       |       | 82                                            |       | 44                                       |       | 72 |   | 46 |   |
| Total                                                           |       | 39,194                                        |       | 35,131                                   |       | 38,833 |   | 34,970 |   |
| Income  per share                                               |       | $                                             | .84        |                                     | $          | .52 |   | $ | 1.95 |   | $ | 1.05 |   |

 

The shares issuable fromassumed conversion of notes for both the three and nine months ended April 30,2006 are based upon a stock price of $47.92, which was the closing price ofVeritas DGC’s common stock at April 28, 2006, the last business day of thequarter.

 

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

 
| ** **           | ** ** | **Three  Months Ended****April 30,** | ** ** | **Nine  Months Ended****April 30,** | ** ** |
|----------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **           | ** ** | **2006**                                  | ** ** | **2005**                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| Number of options    |       | 6,541                                     |       | 397,130                                  |       | 15,407 |   | 729,496 |   |
| Exercise price range |       | $45.31-55.13                              |       | $27.81-55.13                             |       | $38.13-55.13 |   | $24.44-55.13 |   |
| Expiring through     |       | May 2008                             |       | March 2012                          |       | May 2008 |   | March 2012 |   |

 

5

----

 

###### **3.**                   Gain oninvoluntary 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. An additional $2.0 million gain was recorded inthe first quarter of fiscal 2006 due to the timing of the insurancesettlements, which are substantially complete.

 

###### **4.**                   Notes payableand debt structure

###### ** **

As of April 30,2006, our notes payable consisted of $155.0 million of Convertible Senior Notesdue 2024. These notes are classified as a current liability as of April 30,2006 because the conversion feature discussed below results in the notes beingconvertible at the option of the holders.

 

The Convertible SeniorNotes bear interest at a per annum rate which equals the three-month LIBORrate, adjusted quarterly, minus a spread of 0.75%. The interest rate of thenotes, from March 15, 2006 through June 14, 2006, is 4.16%, based ona LIBOR rate of 4.91%. For the third quarter of fiscal 2006, the weightedaverage interest rate on the notes was 3.96%. The notes will mature on March 15,2024 and may not be redeemed by us prior to March 20, 2009. Holdersof the notes may require us to repurchase some, or all, of the notes on March 15,2009, 2014 and 2019. They could also require repurchase upon a change ofcontrol (as defined in the indenture under which the Convertible Senior Noteswere issued).

 

Under certaincircumstances and at the option of the holder, the Convertible Senior Notes areconvertible prior to the maturity date into cash and shares of our common stock.Certain of these circumstances may result in classification of theConvertible Senior Notes as current on our balance sheet. These circumstancesinclude:

 

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

 

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

 

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

 

4.                                       theoccurrence of specified corporate transactions.

 

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

 

As of the beginning ofthe second quarter of fiscal 2006, the Convertible Senior Notes wereconvertible as the stock price remained greater than 120% of the ConversionPrice for at least 20 trading days in the period of 30 consecutive trading daysending on October 31, 2005. The notes continued to be convertible as of April 30,2006. Because of the convertibility, the notes have been classified as acurrent liability on our consolidated balance sheet as of April 30, 2006. Thedetermination of the convertibility of the notes occurs quarterly. Dependingupon the common stock price in the future, the notes may not beconvertible in future quarters and therefore would not be classified as currenton our consolidated balance sheet. Assuming a stock price of $47.92 (which wasthe closing stock price on the last business day of the quarter ended April 30,2006), conversion of all the notes would result in

 

6

----

 

our payment of $155million in cash and 3.2 million shares of common stock.

 

In connection with ourissuance of the Convertible Senior Notes, we entered into a registration rightsagreement pursuant to which we agreed to register the resale of the notes andunderlying common stock by the holders thereof. Under the terms of thatregistration rights agreement, we were required to file a shelf registrationstatement for the notes and underlying common stock within an agreed amount oftime and thereafter to keep it current or useable for two-year period ending inMarch 2006. If we failed to file or keep the shelf registration statementrelated to this debt effective or usable in accordance with the registrationrights agreement, then, subject to certain exceptions, we were required to payliquidated damages to all holders of notes and all holders of our common stockissued upon conversion of the notes. The liquidated damages to be paid wereequal to an annual rate of 0.50% of the principal amount. In November 2005,the shelf registration statement became no longer effective and, accordingly,we began accruing and paying liquidated damages at approximately $2,100 per day.For the nine months ended April 30, 2006, we have recorded and paid approximately$310,000 of expense related to these liquidated damages. We are not required toregister the resale of the notes and underlying common stock after March 10,2006 and therefore, our liability for the payment of liquidated damages endedon that date.

 

In addition to the notes,we also have a five-year $85 million revolving loan agreement with a syndicateof banks. We entered into this facility in February 2006. The facilityprovides for revolving loans and the issuance of letters of credit to VeritasDGC Inc. and certain of its subsidiaries of up to $45 million in the UnitedStates, $15 million in Canada, $15 million in Singapore and $10 million in theUnited Kingdom. As of April 30, 2006, there were no borrowings and $19.6million of outstanding letters of credit, leaving $65.4 million available underthe revolving loan facility. This new credit facility replaced our previouscredit facility that consisted primarily of a revolving loan facility.

 

The facility is securedby pledges of accounts receivable and the U.S. land data library, which, whenadded together, have a carrying amount of approximately $230 million as of April 30,2006. The facility is also secured by certain intercompany notes and stock incertain Veritas subsidiaries. Veritas and certain of its subsidiaries have alsoissued loan guarantees with respect to certain borrowings. Interest rates onborrowings under the facility are selected by the borrower at the time of anyadvance and the rates so selected may be either at LIBOR plus 1.00% or theBase Rate (defined as the lesser of the applicable prime rate or the federalfunds rate). These rates may be adjusted upward depending upon ourleverage ratio (calculated as a ratio of funded debt versus EBITDA for theprevious four quarters) to a maximum of LIBOR plus 1.50% or the base rate plus0.50%. The loan agreement and related documents contain customary financialcovenants and default provisions. These covenants contain certain financial measurementsas of quarter ending dates, and, as of our last fiscal quarter ended April 30,2006, we were in compliance with these covenants.

 

We also have variousunsecured lines of credit, with lending institutions that operate in geographicareas not covered by the lending institutions in our credit facility, totaling$8.5 million that may be used exclusively for the issuance of letters ofcredit and bank guarantees. As of April 30, 2006, $1.6 million in lettersof credit were outstanding under these lines.

 

7

----

 

###### **5.**                   Commitments andcontingencies

###### ** **

In March 2006, we enteredinto an agreement to charter a seismic vessel which is to be newly constructed.The time charter is for a period of 8 years fixed, with options of up to 10more years. When delivered in February 2007, the vessel will be theseventh seismic vessel in our fleet. In addition to the charter, we arecommitted to invest approximately $62 million to equip the vessel for seismicoperations. Of this expected total, approximately $6 million is expected to bespent during the fiscal year ending July 31, 2006 with the remainderexpected to be spent during the fiscal year ending July 31, 2007. We havealso entered into a commitment to purchase approximately $26 million ofrecording equipment to upgrade a vessel in our existing fleet. Substantiallyall of this amount will be spent during the fiscal year ending July 31,2007.

 

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

###### ** **

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

 

 
| ** **                                        | ** ** | **Three  Months Ended****April 30,** | ** ** | **Nine  Months Ended****April 30,** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                        | ** ** | **2006**                                  | ** ** | **2005**                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                              |       | **(In thousands )**                       |       |
|                                              |       |                                      |       |                                     |       |   |   |   |   |
| Service  cost (benefits earned during the period) |       | $                                         | 324        |                                     | $          | 155 |   | $ | 978 |   | $ | 459 |   |
| Interest  cost on projected benefit obligation    |       | 470                                       |       | 316                                      |       | 1,418 |   | 935 |   |
| Expected  return on plan assets                   |       | (317                                      | )          | (225                                     | )          | (957 | ) | (666 | ) |
| Amortization  of prior service cost               |       | (35                                       | )          | (38                                      | )          | (106 | ) | (112 | ) |
| Amortization  of net gain                         |       | 256                                       |       | 79                                       |       | 772 |   | 235 |   |
| Amortization  of transition obligation            |       | 2                                         |       | 2                                        |       | 6 |   | 6 |   |
| Net  periodic benefit costs                       |       | $                                         | 700        |                                     | $          | 289 |   | $ | 2,111 |   | $ | 857 |   |
|                                                   |            |                                           |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

We have madecontributions to this plan based on the schedule of contributions on whichthe above service cost is based and expect to complete these contributions,totaling approximately $1.3 million for the year, during fiscal 2006.

 

###### **7.**                   Segmentinformation

###### ** **

We have organized thecompany into four reportable segments: North and South America (NASA); Europe,Africa, Middle East and Commonwealth of Independent States (EAME); Asia Pacific(APAC); and Veritas Hampson-Russell (VHR). In NASA, EAME and APAC, we conductgeophysical surveys on both a contract and a multi-client basis. When weconduct surveys on a contract basis, we acquire and process data for a singleclient who pays us to conduct the survey and owns the data we acquire. When weconduct surveys on a multi-client basis, we acquire and process data for ourown account and license that data and associated products to multiple clients. NASA,EAME and APAC offer a common suite of these products and services to theircustomers, although each product or service may be adapted to meet theneeds of the local markets. VHR licenses geophysical software and providesgeophysical 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. Thissegmentation of our company is representative of the manner in which it isviewed and managed by our senior managers and our Board of Directors. Theinformation related to the three and nine months ended April 30, 2005 hasbeen restated to reflect the new segment structure. A reconciliation of thereportable segments’ results to those of the total enterprise is given below:

 

8

----

 
| ** **                                                   | ** ** | **For the Three Months Ended April 30, 2006** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **NASA**                                                                         | ** ** | **EAME** | ** ** | **APAC** | ** ** | **VHR** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                                   | ** ** | **(In thousands)**                                                          | ** ** |
| Revenue                                                      |       | $                                                                                | 172,557    |   | $ | 31,246 |   | $ | 27,366 |   | $ | 5,050 |   | $ | — |   | $ | 236,219 |   |
| Depreciation  and amortization, net(other than multi-client) |       | 9,274                                                                            |       | 1,187 |   | 432 |   | 1,015 |   | 258 |   | 12,166 |   |
| Amortization  of multi-client library                        |       | 43,611                                                                           |       | 5,669 |   | — |   | — |   | — |   | 49,280 |   |
| Operating  income (loss)                                     |       | 51,719                                                                           |       | 3,989 |   | 3,989 |   | 1 |   | (11,087 | ) | 48,611 |   |
| Assets                                                       |       | 544,871                                                                          |       | 161,655 |   | 79,936 |   | 15,215 |   | 299,943 |   | 1,101,620 |   |
|                                                              |            |                                                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                                   | ** ** | **For the Three Months Ended April 30, 2005** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **NASA**                                                                         | ** ** | **EAME** | ** ** | **APAC** | ** ** | **VHR** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                                   | ** ** | **(In thousands  )**                                                        | ** ** |
| Revenue                                                      |       | $                                                                                | 111,007    |   | $ | 30,636 |   | $ | 29,396 |   | $ | 4,471 |   | $ | — |   | $ | 175,510 |   |
| Depreciation  and amortization, net(other than multi-client) |       | 7,151                                                                            |       | 1,422 |   | 1,198 |   | 945 |   | 253 |   | 10,969 |   |
| Amortization  of multi-client library                        |       | 12,875                                                                           |       | 5,568 |   | 713 |   | — |   | — |   | 19,156 |   |
| Operating  income (loss)                                     |       | 26,489                                                                           |       | 7,498 |   | 4,336 |   | (854 | ) | (8,224 | ) | 29,245 |   |
| Assets                                                       |       | 457,425                                                                          |       | 103,251 |   | 51,508 |   | 14,705 |   | 212,053 |   | 838,942 |   |
|                                                              |            |                                                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                                   | ** ** | **For the Nine Months Ended April 30, 2006** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **NASA**                                                                        | ** ** | **EAME** | ** ** | **APAC** | ** ** | **VHR** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                                   | ** ** | **(In thousands  )**                                                       | ** ** |
| Revenue                                                      |       | $                                                                               | 445,541    |   | $ | 99,705 |   | $ | 83,882 |   | $ | 14,629 |   | $ | — |   | $ | 643,757 |   |
| Depreciation  and amortization, net(other than multi-client) |       | 23,614                                                                          |       | 4,660 |   | 3,321 |   | 2,969 |   | 700 |   | 35,264 |   |
| Amortization  of multi-client library                        |       | 132,282                                                                         |       | 25,360 |   | — |   | — |   | — |   | 157,642 |   |
| Operating  income (loss)                                     |       | 123,923                                                                         |       | 14,198 |   | 15,231 |   | (1,427 | ) | (31,481 | ) | 120,444 |   |
| Assets                                                       |       | 544,871                                                                         |       | 161,655 |   | 79,936 |   | 15,215 |   | 299,943 |   | 1,101,620 |   |
|                                                              |            |                                                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                                   | ** ** | **For the Nine Months Ended April 30, 2005** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **NASA**                                                                        | ** ** | **EAME** | ** ** | **APAC** | ** ** | **VHR** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                                   | ** ** | **(In thousands  )**                                                       | ** ** |
| Revenue                                                      |       | $                                                                               | 318,527    |   | $ | 95,486 |   | $ | 71,497 |   | $ | 11,809 |   | $ | — |   | $ | 497,319 |   |
| Depreciation  and amortization, net(other than multi-client) |       | 22,192                                                                          |       | 3,932 |   | 3,368 |   | 2,846 |   | 826 |   | 33,164 |   |
| Amortization  of multi-client library                        |       | 70,531                                                                          |       | 29,734 |   | 3,294 |   | — |   | — |   | 103,559 |   |
| Operating  income (loss)                                     |       | 73,025                                                                          |       | 14,998 |   | 5,452 |   | (4,334 | ) | (23,107 | ) | 66,034 |   |
| Assets                                                       |       | 457,425                                                                         |       | 103,251 |   | 51,508 |   | 14,705 |   | 212,053 |   | 838,942 |   |
|                                                              |            |                                                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

###### **8.**                   Stock basedcompensation

###### ** **

As of August 1,2005, we adopted the Financial Accounting Standard Board Statement No. 123(R)(SFAS 123R) to account for stock based 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 the modified prospective method for adoption,which requires compensation expense to be recorded for all unvested stockoptions and other equity-based compensation beginning in the first quarter ofadoption. Accordingly, prior periods have not been restated to reflect stockbased compensation. For all unvested options outstanding as of August 1, 2005,the previously measured but unrecognized compensation expense, based on thefair value at the original grant date, will be recognized in the statement ofoperations over the remaining

 

9

----

 

vesting period. Forequity-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. For deferredshare units, it is our policy to determine the fair value of the units based onour common stock price at the date of grant which is then expensed over theapplicable service period.

 

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

 

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

 

On December 11, 2002,we adopted our current Share Incentive Plan that provides for the issuance todirectors, officers and select employees of: (1) nonqualified options topurchase our common stock, (2) incentive options to purchase our commonstock, (3) share appreciation rights, (4) deferred share units, (5) restrictedshares and (6) performance shares. Options issued to employees under theShare Incentive Plan have exercise prices equal to the fair market value at thedate of grant; have five-year lives and vest over three years. Options issuedto continuing non-employee directors under the Share Incentive Plan haveexercise prices equal to the fair market value at the date of grant, havefive-year lives and vest immediately. In lieu of options, non-employeedirectors have been granted the right to receive one deferred share unit (DSU)for each option which would otherwise have been granted. These DSU’s are vestedimmediately and automatically convert to one share of our common stock when theservice as a director terminates. As of April 30, 2006, 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.

 

Information related tostock based compensation follows:

 
| ** **                                                                             | ** ** | **Three  Months Ended  April 30, 2006**         | ** ** | **Nine  Months Ended  April 30, 2006** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                             | ** ** | **(in millions of dollars, expect  per share data)** | ** ** |
| Compensation  costs recorded for all plans                                             |       | $                                                    | 1.6        |                                        | $          | 4.7 |   |
| Tax  benefit recognized in income statement for share-based compensation  arrangements |       | 0.5                                                  |       | 1.4                                         |       |
| Impact  of adopting SFAS 123R to:                                                      |       |                                                 |       |                                        |       |
| Net  income                                                                            |       | 1.1                                                  |       | 3.3                                         |       |
| Basic  earnings per share                                                              |       | 0.03                                                 |       | 0.09                                        |       |
| Diluted  earnings per share                                                            |       | 0.03                                                 |       | 0.08                                        |       |
|                                                                                        |            |                                                      |            |                                             |            |  |  |

 

SFAS 123R requires taxbenefits relating to excess stock based compensation deductions to be prospectivelypresented in our statement of cash flows as financing cash inflows. Accordingly,for the nine months ended April 30, 2006, we reported approximately $2.4million of excess tax benefits from stock based compensation as cash providedby financing activities on our statement of cash flows.

 

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

 

As of April 30,2006, there was approximately $8.8 million of total unrecognized compensationcost related to nonvested share-based compensation arrangements. That cost isexpected to be recognized on a straight line basis over the weighted averageremaining period which is approximately 2 years.

 

10

----

 

Stock options

 

The fair value of eachoption award granted after August 1, 2005 is estimated on the date ofgrant using a lattice-based option valuation model that uses the assumptionsnoted in the following table. Expected volatilities are based on impliedvolatilities from traded options on our stock and historical volatility of ourstock. We use historical data to estimate option exercise and employeetermination within the valuation model; separate groups of employees werereviewed and shown to have similar historical exercise behavior and areconsidered together for valuation purposes. The expected term of optionsgranted is derived from the output of the option valuation model and representsthe period of time that options granted are expected to be outstanding. Therisk-free rate for periods within the contractual life of the option is basedon the U.S. Treasury yield curve at the time of grant.

 
| ** **               | ** ** | **Nine  Months Ended  April 30, 2006** | ** ** |
|--------------------------|------------|---------------------------------------------|------------|
| Expected volatility      |       | 50.8                                        | %          |
| Expected dividends       |       | 0                                           | %          |
| Expected term (in years) |       | 4.0                                         |       |
| Risk free rate           |       | 4.0                                         | %          |

 

The following tableprovides additional information related to this stock option plan:

 
| ** **                      | ** ** | **For the Nine Months Ended April 30,  2006** | ** ** |
|---------------------------------|------------|----------------------------------------------------|------------|
| ** **                      | ** ** | **Number of****Shares**                            | ** ** | **Weighted****Average  Exercise  Price** | ** ** | **Weighted****Average  Grant Date  Fair Value** | ** ** | **Weighted****Average  Contractual  Life  In Years** | ** ** | **Aggregate****Intrinsic  Value (000’s)** | ** ** |
| Beginning  balance              |       | 2,422,790                                          |       | $ | 17.52 |   |   |   |   |   |   |   |
| Options  granted                |       | 209,750                                            |       | 31.94 |   | $ | 13.29 |   | 4.5 |   |   |   |
| Options  exercised              |       | (1,208,362                                         | )          | 17.57 |   |   |   |   |   |   |   |
| Options  forfeited              |       | (39,605                                            | )          | 23.27 |   |   |   |   |   |   |   |
| Total  outstanding              |       | 1,384,573                                          |       | 19.56 |   |   |   | 3.0 |   | $ | 39,263 |   |
| Options  exercisable and vested |       | 1,055,273                                          |       | 18.47 |   |   |   | 2.8 |   | $ | 31,080 |   |
|                                 |            |                                                    |            |  |  |  |  |  |  |  |  |  |  |  |

 

The total intrinsic valueof options exercised during the nine months ended April 30, 2006 and 2005was $25.8 million and $1.5 million, respectively. The intrinsic value is theamount by which the fair value of the underlying stock exceeds the exerciseprice of an option. Cash received under all share-based payment arrangementsfor the nine months ended April 30, 2006 was approximately $23.4 million. Thetax benefit realized for the tax deductions resulting from option exercises ofshare-based payment arrangements was approximately $3.6 million for the ninemonths ended April 30, 2006.

 

Performance shares

 

During October 2005,certain participants were awarded rights to receive restricted shares of thecompany in October 2006. Restricted shares will be granted, if earned, in October 2006.The number of shares is based upon established performance targets that will beassessed at the end of the fiscal year. The vesting of the issued restrictedshares will be two years after the performance targets are assessed andtherefore the service period is from the date of grant through July 31,2008. These shares were valued initially at $31.94 per share for a total valueof $2.5 million based upon the market price of the shares at the award date andthe expected outcome of the performance targets. Based on the results for the ninemonths ended April 30, 2006 and the increased probability that the fiscal2006 performance targets will be exceeded, we accrued additional stock basedcompensation related to the performance shares. The shares are currently valuedat $4.9 million, which will be recorded as compensation expense over theremaining service period. The compensation expense related to this plan may continueto fluctuate based upon the expected outcome of the performance targets.

 

11

----

 

Restricted Stock

 

Restricted shares awardedgenerally vest ratably over 3 years. The status of the restricted stock as of July 31,2005 and the changes during the fiscal year through April 30, 2006 arepresented below:

 
| ** **                                             | ** ** | **Number of****Shares** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|
| Nonvested  at July 31, 2005                       |       | 54,134                  |       |
|                                                   |       |                    |       |
| Activity  for the quarter ended October 31, 2005: |       |                    |       |
| Granted                                                |       | 97,500                  |       |
| Less:  Vested                                          |       | 7,167                   |       |
| Less:  Forfeited                                       |       | 1,888                   |       |
| Nonvested  at October 31, 2005                    |       | 142,579                 |       |
|                                                   |       |                    |       |
| Activity  for the quarter ended January 31, 2006: |       |                    |       |
| Granted                                                |       | 3,100                   |       |
| Less:  Vested                                          |       | 14,540                  |       |
| Less:  Forfeited                                       |       | —                  |       |
| Nonvested  at January 31, 2006                    |       | 131,139                 |       |
|                                                   |       |                    |       |
| Activity  for the quarter ended April 30, 2006:   |       |                    |       |
| Granted                                                |       | 2,000                   |       |
| Less:  Vested                                          |       | 3,033                   |       |
| Less:  Forfeited                                       |       | 4,388                   |       |
| Nonvested  at April 30, 2006                      |       | 125,718                 |       |

 

The weighted averagegrant date fair value for the granted restricted stock was $43.26 and $32.11per share for the three and nine months ended April 30, 2006, respectively.The total fair value of shares vested during the three and nine months ended April 30,2006 and 2005 was as follows (in thousands of dollars):

 
| ** **                  | ** ** | **Three  Months Ended****April 30,** | ** ** | **Nine  Months Ended****April 30,** | ** ** |
|-----------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                  | ** ** | **2005**                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
|                        |       |                                      |       |                                     |       |   |   |   |   |
| Fair value of shares vested |       | $                                         | 132        |                                     | $          | 74 |   | $ | 955 |   | $ | 565 |   |
|                             |            |                                           |            |                                          |            |  |  |  |  |  |  |  |  |

 

Employee StockPurchase Plan

 

We also have an employee stockpurchase plan which was approved by our stockholders. Originally 1,000,000shares were authorized for issuance under this plan. Participation is voluntaryand substantially all full-time employees meeting limited eligibilityrequirements may participate. Contributions are made through payrolldeductions and may not be less than 1% or more than 15% of the participant’sbase pay as defined. The participant’s option to purchase common stock isdeemed to be granted on the first day and exercised on the last day of thefiscal quarter at a price that is the lower of 85% of the market price on thefirst or last day of the fiscal quarter. Information related to the sharesgranted during the first and second quarters of fiscal 2006 is below. The fairvalue was determined using the Black-Scholes option valuation method using theassumptions shown below.

 
| ** **                | ** ** | ** **          | ** ** | ** **                    | ** ** | ** **                 | ** ** | **Assumptions used in valuation  model** | ** ** |
|---------------------------|------------|---------------------|------------|-------------------------------|------------|----------------------------|------------|------------------------------------------|------------|
| **For the quarter ended** | ** ** | **Shares  granted** | ** ** | **Quarter when to be issued** | ** ** | **Grant date  fair value** | ** ** | **Risk free  rate**                      | ** ** | **Volatility** | ** ** | **Expected  life** | ** ** | **Expected dividends** | ** ** |
| October 31, 2005     |       | 23,144              |       | Second                        |       | $                          | 7.52       |                                     | 3.5        | % | 47 | % | 90 days |   | — |   |
| January 31, 2006     |       | 21,878              |       | Third                         |       | $                          | 7.50       |                                     | 3.9        | % | 40 | % | 90 days |   | — |   |
| April 30, 2006       |       | 19,543              |       | Fourth                        |       | $                          | 10.67      |                                     | 4.7        | % | 39 | % | 90 days |   | — |   |
|                           |            |                     |            |                               |            |                            |            |                                          |            |  |  |  |  |  |  |  |  |  |

 

12

----

 

Prior to August 1,2005

 

Prior to August 1,2005, we accounted for equity-based compensation using the intrinsic methodprescribed in Accounting Principles Board 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 three and ninemonths ended April 30, 2005.

 
| ** **                                                                                                                                  | ** ** | **Three Months  Ended  April 30, 2005** | ** ** | **Nine  Months Ended  April 30,****2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------|------------|
|                                                                                                                                        |       |                                         |       |                                           |       |
| Net  income as reported                                                                                                                     |       | $                                            | 18,407     |                                           | $          | 36,753 |   |
| Add:  Compensation expense, net of related tax effects                                                                                      |       | 84                                           |       | 263                                            |       |
| Less:  Total stock-based employee compensation expense determined under fair value  based method for all awards, net of related tax effects |       | (648                                         | )          | (2,002                                         | )          |
| Pro  forma net income                                                                                                                       |       | $                                            | 17,843     |                                           | $          | 35,014 |   |
|                                                                                                                                        |       |                                         |       |                                           |       |
| Earnings  per share:                                                                                                                        |       |                                         |       |                                           |       |
| Basic:                                                                                                                                      |       |                                         |       |                                           |       |
| As  reported                                                                                                                                |       | $                                            | .54        |                                           | $          | 1.09 |   |
| Pro-forma                                                                                                                                   |       | .53                                          |       | 1.04                                           |       |
|                                                                                                                                        |       |                                         |       |                                           |       |
| Diluted:                                                                                                                                    |       |                                         |       |                                           |       |
| As  reported                                                                                                                                |       | $                                            | .52        |                                           | $          | 1.05 |   |
| Pro-forma                                                                                                                                   |       | .51                                          |       | 1.00                                           |       |

 

The weighted average fairvalues of options granted during fiscal 2005 were determined using theBlack-Scholes option valuation method assuming no expected dividends. Otherassumptions used are as follows:

 
| ** **               | ** ** | **For the  Three and Nine Months Ended April 30, 2005** | ** ** |
|--------------------------|------------|--------------------------------------------------------------|------------|
| Risk-free  interest rate |       | 3.7                                                          | %          |
| Expected  volatility     |       | 46.8                                                         | %          |
| Expected  life in years  |       | 4.0                                                          |       |

 

###### **9.**                   ExchangeableShares

###### ** **

Two shares of specialvoting stock of Veritas DGC Inc. are authorized and outstanding, each as a series ofcommon shares. One special voting share was issued in connection with thecombination of Digicon Inc. (Veritas DGC Inc.’s former name) and Veritas EnergyServices Inc. in August of 1996. The other special voting share was issuedin connection with the combination of Veritas DGC Inc., Veritas Energy Servicesand Enertec Resources Inc. in September 1999.

 

These special votingshares possess a number of votes equal to the number of outstanding VeritasEnergy Services exchangeable shares and Veritas Energy Services Class Aexchangeable shares, Series 1 that are not owned by Veritas DGC Inc. orany of its subsidiaries. Such exchangeable shares were issued to the formerstockholders of Veritas Energy Services and Enertec Resources in businesscombinations with Veritas DGC Inc. In any matter submitted to Veritas DGC Inc.stockholders for a vote, each holder of a Veritas Energy Services exchangeableshare has the right to instruct a trustee as to the manner of voting for one ofthe votes comprising the Veritas Energy Services special voting share for eachVeritas Energy Services exchangeable share owned by the holder. Likewise, eachholder of a Veritas Energy Services class A exchangeable share, series 1has the right to instruct a trustee as to the manner of voting for one of thevotes comprising the Enertec special voting share for each Veritas Energy

 

13

----

 

Services Class Aexchangeable shares, Series 1 owned by the holder. The Veritas EnergyServices exchangeable shares and the Veritas Energy Services Class Aexchangeable shares, Series 1 are convertible on a one-for-one basis intoshares of the common stock and, when coupled with the voting rights afforded bythe special voting shares, have rights virtually identical to Veritas DGC Inc.common stock. As a result, we treat the exchangeable shares as shares of ourcommon stock for all purposes, including the calculation of earnings per shareinformation.

 

In January 2006, itwas announced that Veritas Energy Services has accelerated the automaticredemption date of its exchangeable shares and its class A exchangeableshares, series 1 to May 16, 2006, and that Veritas DGC has exercisedits right to redeem both classes of Veritas Energy Services exchangeableshares. On May 16, 2006, the closing date, each exchangeable share of bothclasses then outstanding was exchanged for one share of Veritas DGC commonstock. Following the redemption on May 16, Veritas DGC owned all of theissued and outstanding shares of Veritas Energy Services. Therefore, after May 16,2006, we now have only one class of stock outstanding.

 

###### **10.**            Subsequent Events

###### ** **

Selling of land seismicacquisition business

 

We announced on June 1,2006 that we entered into a letter of intent with Matco Capital Ltd. to sellour land seismic acquisition business for an undisclosed consideration.

 

In fiscal year 2005 theland seismic acquisition business of Veritas generated approximately US $140million of revenue, or approximately 22 percent of the consolidated revenue ofVeritas. The closing is expected to occur in the summer of 2006 and iscontingent upon reaching a definitive agreement as well as receipt ofregulatory and other approvals.

 

Texas franchise tax

 

On May 18, 2006, anew tax reform measure was signed into law that substantially revises theTexas state franchise tax. We believe this new legislation is an income tax tobe accounted for in accordance with FASB Statement No. 109, Accounting forIncome Taxes. We are currently evaluating the impact this will have on ourfinancial statements.

 

14

----

 

## **Item 2.**                                   Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

## ** **

*This report on Form 10-Q and thedocuments incorporated by reference contain forward-looking statements, withinthe meaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934. These statements include statementsincorporated by reference to other documents we file with the SEC.Forward-looking statements include, among other things, business strategy andexpectations concerning industry conditions, market position, futureoperations, margins, profitability, liquidity and capital resources. Forward-lookingstatements generally can be identified by the use of terminology such as “may,”“will,” “expect,” “intend,” “estimate,” “anticipate” or “believe” or similarexpressions or the negatives thereof. These expectations are based onmanagement’s assumptions and current beliefs based on currently availableinformation. Although we believe that the expectations reflected in suchstatements are reasonable, we can give no assurance that such expectation willbe correct. You are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date of this report onForm 10-Q. Our operations are subject to a number of uncertainties, risks andother influences, many of which are outside our control, and any one of which,or a combination of which, could cause our actual results of operations todiffer materially from the forward-looking statements. Important factors thatcould cause actual results to differ materially from our expectations aredisclosed in “Risk Factors” and elsewhere in our Annual Report on Form 10-K.*

 

#### **Overview**

#### ** **

We believe that globalexploration for oil and gas is increasing worldwide in key basins of interest.While seismic has traditionally been used purely as an exploration tool, we arealso seeing growing interest in new seismic reservoir imaging techniques, suchas wide azimuth acquisition, which offers better delineation of complexstructures and may advance the use of seismic in hydrocarbon production. Webelieve all of this is promising for our business, although seismic spendingwill undoubtedly continue to fluctuate.

 

Our overall performance forthe nine months ended April 30, 2006 is the result of being well positioned totake advantage of the increased exploration and reservoir delineation spending.This positioning includes having quality multi-client data in areas of currentcustomer interest, data processing abilities that enable us to produce thehighest quality seismic images, and field operations that are capable ofproviding technical as well as health, safety and environmental excellence.

 

The particularly strongperformance of our land multi-client and contract business in North Americaprovides a solid indicator of our customers’ renewed interest and increasedexploration activity in the mature Canadian and US markets.

 

Due to our sales andoperational efforts and the robust seismic market, our backlog was $460million on April 30, 2006, compared to $474 million at January 31, 2006 and$234 million at April 30, 2005. Weexpect that approximately 90% of our April 30, 2006 backlog will be completedduring the next twelve months.

 

We have organized the company into four reportablesegments: North and South America (NASA); Europe, Africa, Middle East andCommonwealth of Independent States (EAME); Asia Pacific (APAC); and VeritasHampson-Russell (VHR). In NASA, EAME and APAC, we conduct geophysical surveyson both a contract and a multi-client basis. When we conduct surveys on acontract basis, we acquire and process data for a single client who pays us toconduct the survey and owns the data we acquire. When we conduct surveys on amulti-client basis, we acquire and process data for our own account and licensethat data and associated products to 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 geophysical software and provides geophysical reservoirconsulting services. The results of VHR’s operations were previously includedin those of the NASA region; however, beginning in fiscal 2006, seniormanagement began to review the results of VHR separately. This segmentation ofour company is representative of the manner in which it is viewed and managedby our senior managers and our Board of Directors. The information related tothe three and nine months ended April 30, 2005 has been restated to reflect thenew segment structure.

 

15

----

 

#### **Results of operations**

#### ** **

#### ***Three months ended April 30, 2006compared with three months ended April 30, 2005***

#### ** **

*Revenue*. Our revenue increased by 35% from$175.5 million in the third quarter of fiscal 2005 to $236.2 million in thethird quarter of fiscal 2006.

 

Multi-client revenue in the third quarter of fiscal2006 of $88.8 million increased $41.2 million, or 86%, compared to the prioryear’s third fiscal quarter. Increased revenues were driven by continuedstrengthening of interest in the Gulf of Mexico and especially strong marinedata library sales in Brazil.

 

Contract revenue in the third quarter of fiscal 2006increased $19.5 million, or 15%, from the prior year’s third fiscal quarter.While market conditions continue to improve and strengthen our businessworldwide, we saw much of the increase in this fiscal quarter from landacquisition work in Canada and Alaska as well as increased processing revenueacross all geographic divisions. The marine acquisition revenue remained strongconsidering the prior year third quarter had a significant wide azimuth projectin the Gulf of Mexico.

 

The NASA segment was the primary contributor to thehigher revenue. This increase was driven by increased marine multi-clientlibrary data sales related to the Brazil and the Gulf of Mexico areas. Theincrease also came from land acquisition work in Canada and Alaska. The revenuein the Asia Pacific segment decreased from the prior year third quarterprimarily due to maintenance work and vessel downtime during the currentquarter.

 

Revenues by contract type were as follows:

 
| ** **         | ** ** | **Three Months Ended April 30,** | ** ** |
|--------------------|------------|----------------------------------|------------|
| ** **         | ** ** | ** **                       | ** ** | ** ** | ** ** | **Change** | ** ** |
| ** **         | ** ** | **2006**                         | ** ** | **2005** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **         | ** ** | **(Dollars in thousands)**       | ** ** |
| Multi-Client:      |       |                             |       |   |   |   |   |   |   |
| Land               |       | $                                | 12,713     |   | $ | 10,291 |   | $ | 2,422 |   | 24 | % |
| Marine             |       | 76,132                           |       | 37,359 |   | 38,773 |   | 104 | % |
| Total Multi-Client |       | 88,845                           |       | 47,650 |   | 41,195 |   | 86 | % |
| Contract:          |       |                             |       |   |   |   |   |   |   |
| Land               |       | 75,167                           |       | 56,981 |   | 18,186 |   | 32 | % |
| Marine             |       | 72,207                           |       | 70,879 |   | 1,328 |   | 2 | % |
| Total Contract     |       | 147,374                          |       | 127,860 |   | 19,514 |   | 15 | % |
| Total Revenue      |       | $                                | 236,219    |   | $ | 175,510 |   | $ | 60,709 |   | 35 | % |

 

Revenues from our operating segments were as follows:

 
| ** **    | ** ** | **For the Three Months Ended  April 30,** | ** ** |
|---------------|------------|-------------------------------------------|------------|
| ** **    | ** ** | ** **                                | ** ** | ** ** | ** ** | **Change** | ** ** |
| ** **    | ** ** | **2006**                                  | ** ** | **2005** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **    | ** ** | **(Dollars in thousands)**                | ** ** |
|          |       |                                      |       |   |   |   |   |   |   |
| NASA          |       | $                                         | 172,557    |   | $ | 111,007 |   | $ | 61,550 |   | 55 | % |
| EAME          |       | 31,246                                    |       | 30,636 |   | 610 |   | 2 | % |
| APAC          |       | 27,366                                    |       | 29,396 |   | (2,030 | ) | (7 | )% |
| VHR           |       | 5,050                                     |       | 4,471 |   | 579 |   | 13 | % |
| Total Revenue |       | $                                         | 236,219    |   | $ | 175,510 |   | $ | 60,709 |   | 35 | % |

 

*Operating income.*Operatingincome increased $19.4****million, or66%, compared to the prior year’s third fiscal quarter primarily due toimproved revenue and pricing in both our multi-client and contract business.The strongest areas were in land acquisition and processing work. Operatingmargin as a percent of revenue increased from 17% in the prior year’s thirdfiscal quarter to 21% in the current year’s third fiscal quarter.

 

General and administrative expenses increased $2.5million from the prior year’s third fiscal quarter primarily due to share-basedemployee compensation expense resulting from the adoption of new accountingrules, severance

 

16

----

 

costs and increasedprovision for performance-based incentive compensation.

 

*Interest expense.*Interestexpense increased by $0.9 million from the prior year’s third fiscal quarter asa result of increases in the interest rate on the $155.0 million convertibledebt.

 

*Interest income*.Interest income increased approximately $1.7 million compared to the prioryear’s third fiscal quarter due to higher interest rates and a higher cashbalance.

 

*Other income (expense), net.*Otherincome and expense, net primarily consists of foreign exchange losses of $0.7million in the third quarter of fiscal 2006. For third quarter of fiscal 2005,other income and expense, net consists of $0.3 million of foreign exchangegains and other miscellaneous gains of $0.6 million.

 

*Income taxes.*The company’seffective tax rate for the quarter ended April 30, 2006 was 33.2%, which isslightly lower than the 35% U.S. statutory rate. The current quarter tax rateis lower than the prior year’s third quarter rate of 39.8% primarily because offavorable adjustments recorded in the current quarter relating to the filing ofcertain prior year tax returns.

 

#### ***Nine months ended April 30, 2006compared with nine months ended April 30, 2005***

#### ** **

*Revenue*. Our revenue increased by 29% from$497.3 million in the first nine months of fiscal 2005 to $643.8 million in thefirst nine months of fiscal 2006.

 

Multi-client revenue in the first nine months offiscal 2006 of $286.4 million increased $106.0 million, or 59%, compared to theprior fiscal year’s first nine months. Both land and marine revenue improvedprimarily as a result of strong sales of land surveys in Canada and marine datalibrary sales in Brazil and the Gulf of Mexico.

 

Contract revenue in the first nine months of fiscal2006 of $357.4 million increased $40.5 million, or 13%, compared to the priorfiscal year’s first nine months. Both land and marine revenue improvedprimarily due to increased activity in Canada and the Asia Pacific region.Processing work also had improvements in revenue across all geographicsegments. Revenue increases were partially offset by a revenue decrease inmarine acquisition in NASA due to a significant wide azimuth project in theGulf of Mexico in the third quarter of fiscal 2005 and the allocation ofvessels to multi-client library projects during fiscal 2006.

 

Our NASA and APAC regions contributed the largestrevenue increases on a segment basis. Growth in NASA was due to increasedmulti-client activity in Canada, Brazil and the Gulf of Mexico. For the firstnine months in fiscal 2006, APAC has benefited from higher activity in themarine contract business.

 

Revenues by contract type were as follows:

 
| ** **         | ** ** | **Nine Months Ended April 30,** | ** ** |
|--------------------|------------|---------------------------------|------------|
| ** **         | ** ** | ** **                      | ** ** | ** ** | ** ** | **Change** | ** ** |
| ** **         | ** ** | **2006**                        | ** ** | **2005** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **         | ** ** | **(Dollars in thousands)**      | ** ** |
| Multi-Client:      |       |                            |       |   |   |   |   |   |   |
| Land               |       | $                               | 85,693     |   | $ | 36,303 |   | $ | 49,390 |   | 136 | % |
| Marine             |       | 200,691                         |       | 144,110 |   | 56,581 |   | 39 | % |
| Total Multi-Client |       | 286,384                         |       | 180,413 |   | 105,971 |   | 59 | % |
| Contract:          |       |                            |       |   |   |   |   |   |   |
| Land               |       | 156,359                         |       | 133,965 |   | 22,394 |   | 17 | % |
| Marine             |       | 201,014                         |       | 182,941 |   | 18,073 |   | 10 | % |
| Total Contract     |       | 357,373                         |       | 316,906 |   | 40,467 |   | 13 | % |
| Total Revenue      |       | $                               | 643,757    |   | $ | 497,319 |   | $ | 146,438 |   | 29 | % |

 

17

----

 

Revenues from our operating segments were as follows:

 
| ** **    | ** ** | **For the Nine Months Ended April  30,** | ** ** |
|---------------|------------|------------------------------------------|------------|
| ** **    | ** ** | ** **                               | ** ** | ** ** | ** ** | **Change** | ** ** |
| ** **    | ** ** | **2006**                                 | ** ** | **2005** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **    | ** ** | **(Dollars in thousands)**               | ** ** |
|          |       |                                     |       |   |   |   |   |   |   |
| NASA          |       | $                                        | 445,541    |   | $ | 318,527 |   | $ | 127,014 |   | 40 | % |
| EAME          |       | 99,705                                   |       | 95,486 |   | 4,219 |   | 4 | % |
| APAC          |       | 83,882                                   |       | 71,497 |   | 12,385 |   | 17 | % |
| VHR           |       | 14,629                                   |       | 11,809 |   | 2,820 |   | 24 | % |
| Total Revenue |       | $                                        | 643,757    |   | $ | 497,319 |   | $ | 146,438 |   | 29 | % |

 

*Operating income.*Operatingincome increased $54.4 million, or 82%, from the first nine months of fiscal2005 to $120.4 million in the first nine months of fiscal 2006. This increasewas primarily due to improvements in both revenue and margins across ourmulti-client and contract business. Margin increases were primarily due to themulti-client sales in NASA in Canada, Brazil and the Gulf of Mexico as well asan increase in marine contract work in the APAC region and land contract workprimarily in Canada.

 

General and administrative expenses increased $7.9million from the prior fiscal year’s first nine months due to share-basedemployee compensation expense of approximately $2.5 million resulting from theadoption of SFAS 123R as well as severance costs, higher professional fees andincreased provision for performance-based incentive compensation.

 

*Interest expense*.Interest expense increased by $2.3 million from the prior fiscal year’s firstnine months as a result of the increase in the LIBOR applicable to the $155million convertible debt.

 

*Interest income*.Interest income increased $4.5 millioncompared to the prior year’s first nine months primarily due to a higher interest rates and a higher cashbalance.

 

*Gain on involuntary conversion ofassets*. The company recognized a pre-tax insurance gain of$2.0 million in the first quarter of fiscal 2006 related to insurancesettlements for the equipment loss on the Veritas Viking experienced in thesecond quarter of fiscal year 2005.

 

*Other income (expense), net.*Otherincome and expense, net consists of foreign exchange losses of $1.0 million andother miscellaneous gains of $1.0 million for the nine months ended April 30,2006. For the nine months ended April 30, 2005, other income and expense, netconsisted of other miscellaneous gains of $0.9 million.

 

*Income taxes.*The company’seffective tax rate for the nine months ended April 30, 2006 was 39.3%, which ishigher than the 35% U.S. statutory rate. Substantially all of this higher taxrate was attributable to non-U.S. activities. The effective tax rate for theprior year’s first nine months of 45.4% was higher than the current year taxrate due to the company’s inability to record in the prior year the benefit ofcertain deferred tax assets, and favorable adjustments recorded in the currentquarter relating to the filing of certain prior year tax returns. However,during the fourth fiscal quarter of 2005, we concluded that valuationallowances recorded against deferred tax assets in certain jurisdictions wereno longer necessary, resulting in a net tax benefit in fiscal 2005.

 

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

#### ** **

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

#### ** **

Our internal sources of liquidity are cash on hand andcash flow from operations. External sources include our existing creditfacilities, public financing, equity sales, equipment financing, and tradecredit. We believe that our current cash balance and cash flow from operationswill be adequate to meet our liquidity needs over the next twelve months. Weexpect to continue to increase our cash balance during the remainder of fiscal2006.

 

18

----

 

Net cash provided by operating activities was $235million for the first nine months of fiscal 2006, which is a slight decreasecompared to the first nine months of fiscal 2005 due to the changes in workingcapital items. Net cash used by investing activities increased to $134 millionin the first nine months of fiscal 2006 from $120 million in the first ninemonths of fiscal 2005 primarily due to increased multi-client libraryexpenditures. Our currently projected cash investments for fiscal 2006 includecapital expenditures to replace and upgrade existing equipment of approximately$70 to $75 million and investment in our data library of approximately $170 to$180 million. We expect to fund the remainder of these investments from ourcurrent cash on hand and from internally generated funds.

 

As of the beginning of the second quarter offiscal  2006, the Convertible SeniorNotes were convertible as the stock price remained greater than 120% of theConversion Price for at least 20 trading days in the period of 30 consecutivetrading days ending on October 31, 2005. The notes continued to be convertibleas of April 30, 2006. However, we do not expect any of the debt to be convertedduring fiscal 2006. As of April 30, 2006, we had an adequate amount of cash tofund the conversion of the notes which would require a payment of the entireprincipal amount had all of the notes been converted on that 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 our customers’ exploration spending and, ultimately, the underlyingcommodity prices.

 

In March 2006, we entered into an agreement withanother company to charter a seismic vessel which is to be newlyconstructed.  The time charter is for a period of 8 years fixed, withoptions of up to 10 more years.  When delivered in February 2007, thevessel will be the seventh seismic vessel in our fleet. In addition to thecharter, we are committed to invest approximately $62 million to equip thevessel for seismic operations.  Of this expected total, approximately $6million is expected to be spent during the fiscal year ending July 31,2006 and the remainder is expected to be spent during the fiscal year endingJuly 31, 2007.

 

We have also entered into a commitment to purchaseapproximately $26 million of recording equipment to upgrade a vessel in ourexisting fleet. Substantially all of this amount will be spent during thefiscal year ending July 31, 2007.

 

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

#### ** **

As of April 30, 2006, our notes payable consisted of$155.0 million of Convertible Senior Notes due 2024. These notes are classifiedas a current liability as of April 30, 2006 because the conversion featurediscussed below results in the notes being convertible 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 of the notes, from March 15, 2006 throughJune 14, 2006, is 4.16%, based on a LIBOR rate of 4.91%. For the third quarterof fiscal 2006, the weighted average interest rate on the notes was 3.96%. Thenotes will mature on March 15, 2024 and may not be redeemed by us prior toMarch 20, 2009. Holders of the notes may require us to repurchase some, or all,of the notes on March 15, 2009, 2014 and 2019. They could also requirerepurchase upon a change of control (as defined in the indenture under whichthe Convertible Senior Notes were issued).

 

Under certain circumstances andat the option of the holder, the Convertible Senior Notes are convertible prior to the maturity date into cash andshares of our common stock. Certain 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;

 

19

----

 

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

 

4.                                       theoccurrence of specified corporate transactions.

 

Should any of 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 onconversion is $155 million in cash plus approximately 6.5 million shares. Thissettlement method is prescribed in the indenture and is not at the discretionof any party. The shares issuable from such conversion are considered in thecalculation of diluted earnings per share.

 

As of the beginning of the second fiscal quarter of2006, the Convertible Senior Notes were 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. The notescontinued to be convertible as of April 30, 2006. Because of theconvertibility, the notes have been classified as a current liability on ourconsolidated balance sheet as of April 30, 2006. The determination of theconvertibility of the notes occurs quarterly. Depending upon the common stockprice in the future, the notes may not be convertible in future quarters andtherefore would not be classified as current on our consolidated balance sheet.Assuming a stock price of $47.92 (which was the closing stock price on the lastbusiness day of the quarter ended April 30, 2006), conversion of all the noteswould result in our payment of $155 million in cash and 3.2 million shares ofcommon stock.

 

In connection withour issuance of the Convertible Senior Notes, we entered into a registrationrights agreement pursuant to which we agreed to register the resale of thenotes and underlying common stock by the holders thereof. Under the terms ofthat registration rights agreement, we were required to file a shelfregistration statement for the notes and underlying common stock within anagreed amount of time and thereafter to keep it current or useable for two-yearperiod ending in March 2006. If we failed to file or keep the shelfregistration statement related to this debt effective or usable in accordancewith the registration rights agreement, then, subject to certain exceptions, wewere required to pay liquidated damages to all holders of notes and all holdersof our common stock issued upon conversion of the notes. The liquidated damagesto be paid were equal to an annual rate of 0.50% of the principal amount. InNovember 2005, the shelf registration statement became no longer effective and,accordingly, we began accruing and paying liquidated damages at approximately$2,100 per day. For the nine months ended April 30, 2006, we have recorded andpaid approximately $310,000 of expense related to these liquidated damages. Weare not required to register the resale of the notes and underlying commonstock after March 10, 2006 and therefore, our liability for the payment ofliquidated damages ended on that date.

 

In addition to the notes, we also have a five-year $85million revolving loan agreement with a syndicate of banks. We entered intothis facility in February 2006. The facility provides for revolving loans andthe issuance of letters of credit to Veritas DGC Inc. and certain of itssubsidiaries of up to $45 million in the United States, $15 million in Canada,$15 million in Singapore and $10 million in the United Kingdom. As of April 30,2006, there were no borrowings and $19.6 million of outstanding letters ofcredit, leaving $65.4 million available under the revolving loan facility. Thisnew credit facility replaced our previous credit facility that consistedprimarily of a revolving loan facility.

 

The facility is secured by pledges of accountsreceivable and the U.S. land data library, which, when added together, have acarrying amount of approximately $230 million as of April 30, 2006. Thefacility is also secured by certain intercompany notes and stock in certainVeritas subsidiaries. Veritas and certain of its subsidiaries have also issuedloan guarantees with respect to certain borrowings. Interest rates onborrowings under the facility are selected by the borrower at the time of anyadvance and the rates so selected may be either at LIBOR plus 1.00% or the BaseRate (defined as the lesser of the applicable prime rate or the federal fundsrate). These rates may be adjusted upward depending upon our leverage ratio(calculated as a ratio of funded debt versus EBITDA for the previous fourquarters) to a maximum of LIBOR plus 1.50% or the base rate plus 0.50%. Theloan agreement and related documents contain customary financial covenants anddefault provisions. These covenants contain certain financial

 

20

----

 

measurementsas of quarter ending dates, and, as of our last fiscal quarter ended April 30,2006, we were in compliance with these covenants.

 

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 April 30, 2006, $1.6 million in letters of credit were outstanding underthese lines.

 

***Recent Accounting Pronouncements***

*** ***

In December 2004, the FASB issued FASB StaffPosition No. 109-1, “Application of FASB Statement No. 109,Accounting for Income Taxes, to the Tax Deduction on Qualified ProductionActivities Provided by the American Jobs Creation Act of 2004,” which providesguidance on the recently enacted American Jobs Creation Act of 2004 (the“Act”). The Act provides a tax deduction for income from qualified domesticproduction activities. FSP 109-1 provides for the treatment of the deduction asa special deduction as described in SFAS No. 109. Accordingly, we willrecord the amount of any special deductions in the years they are taken.

 

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 SFASNo. 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. Thisstatement was adopted by the company beginning August 1, 2005.  Theadoption of this statement had no impact on the company’s financial statementsand is not expected to have a material impact 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.

 

In February 2006, the FASB issued SFAS No. 155,“Accounting for Certain Hybrid Financial Instruments – an amendment of FASBStatements No. 133 and 150.”  SFAS No.155 (a) permits fair valueremeasurement for any hybrid financial instrument that contains an embeddedderivative that otherwise would require bifurcation, (b) clarifies that certaininstruments are not subject to the requirements of SFAS 133, (c) establishes arequirement to evaluate interests in securitized financial assets to identifyinterests that may contain an embedded derivative requiring bifurcation, (d)clarifies what may be an embedded derivative for certain concentrations ofcredit risk and (e) amends SFAS 140 to eliminate certain prohibitions relatedto derivatives on a qualifying special-purpose entity. SFAS 155 is effectivefor us for the fiscal year beginning August 1, 2007. The implementationof SFAS No. 155 is not expected to have a material impact on the company’sfinancial statements.

 

21

----

 

#### ***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 123R requires us to record the cost of stockoptions and other equity-based compensation in our income statement based uponthe estimated fair value of those awards. We elected to use the modifiedprospective method for adoption, which requires compensation expense to berecorded for all unvested stock options and other equity-based compensationbeginning in the first quarter of adoption. 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. Determiningthe fair value of stock based awards at the grant date requires judgment,including estimating the expected term of stock options, the expectedvolatility of our stock and the amount of stock options to be forfeited. Ifactual results differ significantly from these estimates, stock basedcompensation expense and the results of operations could be materiallyimpacted.

 

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. Inaddition to the accounting policy related to stock based compensation discussedabove, the remaining critical accounting policies are described in detail inItem 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations - Significant Accounting Policies included in our Annual Reporton Form 10-K for the fiscal year ended July 31, 2005, which description isincorporated herein by reference.

 

## **Item 3.**                                   Quantitative and Qualitative DisclosuresRegarding Market Risk

## ** **

As of April 30, 2006, we had$155.0 million in Convertible Senior Notes bearing interest at LIBOR less 0.75%with a fair value of $323 million, based upon the bid price of 208.64 on April30, 2006. These notes are not hedged and represent our total exposure tointerest rate risk. Each 100 basis point increase in the LIBOR rate willincrease our interest expense by $1.6 million per year.

 

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

## ** **

**Evaluation of Disclosure Controls andProcedures**

 

We carried out an evaluation, under the supervision ofand with the participation of our management, including our Chief ExecutiveOfficer and Chief Financial Officer, as to the effectiveness, design andoperation of our disclosure controls and procedures (as defined in Rule13a-15(e) under the Securities and Exchange Act of 1934) as of April 30, 2006.The evaluation considered the procedures designed to ensure that informationrequired to be disclosed by us in reports that we file or submit under theSecurities and Exchange Act of 1934 is recorded, processed, summarized andreported in the time periods specified in the rules and forms of the Securitiesand Exchange Commission and communicated to our management as appropriate toallow timely decisions regarding required disclosure. Our Chief ExecutiveOfficer and Chief Financial Officer concluded that the design and operation ofour disclosure controls and procedures were effective as of April 30, 2006.

 

**Changesin Internal Control over Financial Reporting**

 

During the third 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.

 

22

----

 

# **PART II. OTHERINFORMATION**

 

## **Item 6.**                                   Exhibits

## ** **

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

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

 

----

*** filed herewith**

**** furnished herewith**

 

23

----

 

## **Signatures**

## ** **

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized, on the 6th day of June 2006.

 
|   | **VERITAS  DGC INC.** |
|--------|-----------------------|
|   |
|   | By:                   |   /s/  MARK E. BALDWIN |
|   |                  | Mark E. Baldwin |
|   |                  | Executive Vice  President, Chief Financial Officer and Treasurer  (Principal Financial Officer) |
|   |                  |   |
|   |                  |   |
|   |                  |   /s/  DENNIS S. BALDWIN |
|   |                  | Dennis S. Baldwin |
|   |                  | Vice President,  Corporate Controller  (Chief Accounting Officer) |
|        |                       |  |  |

 

24

----