<PAGE>   1
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   ----------

                                    FORM 10-K
(Mark One)
 X   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE 
---  ACT OF 1934

                     FOR THE FISCAL YEAR ENDED JULY 31, 1998

                                       OR

     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES 
---  EXCHANGE ACT OF 1934


               FOR THE TRANSITION PERIOD FROM ________ TO ________

                          COMMISSION FILE NUMBER 1-7427

                                VERITAS DGC INC.
             (Exact name of registrant as specified in its charter)

         DELAWARE                                       76-0343152
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

    3701 KIRBY DRIVE, SUITE #112
           HOUSTON, TEXAS                                  77098
(Address of principal executive offices)                (Zip Code)
                                 (713) 512-8300
              (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

    Title of each class                Name of each exchange on which registered
    -------------------                -----------------------------------------
Common Stock, $.01 Par Value                     New York Stock Exchange
Preferred Stock Purchase Rights                  New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES  X  NO
                                       ---    ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant was $______________________ as of September 30,
1998.

The number of shares of the Company's common stock, $.01 par value, (the "Common
Stock"), outstanding at September 30, 1998 was 22,785,516 (including 1,506,863
Veritas Energy Services Inc. exchangeable shares which are identical to the
Common Stock in all material respects).

The registrant's proxy statement to be filed in connection with the registrant's
1998 Annual Meeting of Stockholders is incorporated by reference into Part III
of this report.


<PAGE>   2



                                TABLE OF CONTENTS

                                    FORM 10-K

<TABLE>
<CAPTION>

   Item                                                                              Page Number
   ----                                                                              -----------
<S>      <C>                         <C>                                             <C>
                                    PART I

1        Business
           General                                                                       1
           Industry Overview                                                             1
           Services and Markets                                                          2
           Technology and Capital Expenditures                                           6
           Competition and Other Business Conditions                                     7
           Backlog                                                                       7
           Significant Customers                                                         7
           Employees                                                                     7
2        Properties                                                                      8
3        Legal Proceedings                                                               8
4        Submission of Matters to a Vote of Security Holders                             8

                                    PART II

5        Market for Registrant's Common Equity and Related Stockholder Matters           9
6        Selected Consolidated Financial Data                                           10
7        Management's Discussion and Analysis of Financial Condition and
            Results of Operations                                                       11
8        Consolidated Financial Statements and Supplementary Data                       15
9        Changes in and Disagreements with Accountants on Accounting
             and Financial Disclosure                                                   44

                                    PART III

10       Directors and Executive Officers of the Registrant                             44
11       Executive Compensation                                                         44
12       Security Ownership of Certain Beneficial Owners and Management                 44
13       Certain Relationships and Related Transactions                                 44

                                    PART IV

14       Exhibits, Financial Statement Schedules and Reports on Form 8-K                44

         Signatures                                                                     48
</TABLE>


<PAGE>   3

Unless the context otherwise requires, the number of shares, per share prices,
weighted average number of shares outstanding and per share amounts in this
report have been adjusted to reflect the August 30, 1996 business combination
(the "Combination") with Veritas Energy Services Inc. ("VES"). Unless the
context otherwise requires, all references to the "Company" are to Veritas DGC
Inc. and its subsidiaries and give effect to the consummation of the
Combination. Prior to the consummation of the Combination, the Company's name
was Digicon Inc. ("Digicon"). This report on Form 10-K contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those anticipated in the forward-looking statements
as a result of certain factors including those set forth under Item 1.
"Business" and Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."


                                     PART I

ITEM 1.   BUSINESS

GENERAL

The Company is a leading provider of seismic data acquisition, seismic data
processing, multi-client data sales and exploration and development information
services to the petroleum industry in selected markets worldwide. Oil and gas
companies utilize seismic data for the determination of suitable locations for
drilling exploratory wells and, increasingly, in reservoir management for the
development and production of oil and gas reserves. The Company acquires seismic
data in land, marsh, swamp and tidal ("transition zone") and marine environments
and processes data acquired by its own crews and crews of other operators. The
Company acquires seismic data both on an exclusive contractual basis for its
customers and on its own behalf for licensing to multiple customers on a
non-exclusive basis.

To increase its presence in the market for onshore geophysical services, in
August 1996 the Company completed the Combination with VES, a leading land
seismic contractor. Prior to the Combination, Digicon and VES had complementary
operations with no significant geographic overlap.

Prior to the Combination, the Company had initiated a comprehensive program
designed to refocus each of the Company's geographic and operational lines of
business. The Company's actions included: (i) selling its seismic equipment
manufacturing operations; (ii) selling its joint venture interests in the former
Soviet Union; (iii) deploying its land and transition zone crews and its marine
crews into markets where the Company's presence would be significant; (iv)
expanding its accumulation and sales of multi-client data to capitalize on the
historically higher margins associated with non-exclusive data; (v) emphasizing
research and development on its proprietary software in order to capitalize on
its reputation for seismic data processing innovation; and (vi) streamlining its
cost structure through personnel reduction, office consolidations, vessel
deactivations and the outsourcing of certain development and manufacturing
functions.

Beginning in fiscal 1997, the Company embarked upon an extensive capital
expenditure program designed to increase its efficiency and expand its
operations to improve the competitive position of its principal services and to
enable the Company to capitalize on high-growth/high-margin opportunities in
selected markets.

INDUSTRY OVERVIEW

Geophysical services enable oil and gas companies to determine whether
subsurface conditions are likely to be favorable for finding new oil and gas
accumulations and assist in determining the size and structure of previously
identified fields. These services consist of the acquisition and processing of
three dimensional ("3D") and two dimensional ("2D") seismic and other
geophysical data, which is used to produce computer-generated graphic images of
the subsurface strata. The resulting images are then analyzed and interpreted by
customers' geophysicists and are used by oil and gas companies in 


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<PAGE>   4

acquisition of new leases, selection of drilling locations on exploratory
prospects and reservoir development and management.

Geophysical data is acquired by land, transition zone and marine crews. In data
acquisition, a source of acoustical energy is employed at or below the earth's
surface and an acoustical wave is produced through the discharge of compressed
air, the detonation of small explosive charges, or other energy generating
techniques. As the acoustical wave travels through the earth, portions are
reflected by variations in the underlying rock layers, and the reflected energy
is captured by sensors situated at intervals along specified paths from the
point of acoustical impulse. The resulting signals are then converted to digital
data and transmitted to a recording unit. This data is then input into a
specialized data processing system that enhances the recorded signal by reducing
noise and distortion and improving resolution and arranges the input data to
produce, with the aid of plotting devices, an image of the subsurface strata. By
interpreting seismic data, oil and gas companies create detailed stratigraphic
maps of prospective areas and producing oil and gas reservoirs.

Three-dimensional surveys involve the acquisition of a very dense grid of
seismic data over a precisely defined area. This heavy concentration of data
requires extensive computer processing, involving the use of sophisticated
proprietary techniques, to produce an accurate image of the subsurface. Computer
analysis of the 3D survey data allows geophysicists to better examine and
interpret important subsurface features.

Over the last several years, worldwide demand for 3D surveys by major oil and
gas companies and independent producers has increased. The greater precision and
improved subsurface resolution obtainable from 3D seismic data have assisted
them in finding new fields and more accurately delineating existing fields, as
well as enhancing existing reservoir management and production monitoring
techniques. Enhanced subsurface resolution obtainable from 3D studies has been a
key factor in improving drilling success ratios and lowering finding and field
extension costs. This improved technology, coupled with advances in drilling and
completion techniques, is enhancing the industry's ability to find and develop
oil and gas reserves.

The industry is experiencing growing demand for 3D multi-client data surveys.
Increased leasing activity and the high costs of drilling exploration and
development wells have created significant demand for large-scale surveys
employing sophisticated data processing techniques. The relatively expensive
cost of acquiring and processing this data has prompted many oil and gas
companies to participate in multi-client data surveys to reduce their
geophysical expenses.

SERVICES AND MARKETS

The Company acquires seismic data in land, transition zone and marine
environments and processes data acquired from its own crews as well as data
acquired by other geophysical crews. The Company currently operates 13 land
crews, 3 transition zone crews and 9 marine crews in selected markets worldwide.
The Company also operates 20 seismic data processing facilities, located in
major oil and gas centers around the world. When performing geophysical services
under contract for oil and gas companies, the Company may be employed to acquire
and/or process geophysical data. Under these arrangements, the Company's entire
work-product belongs to the contracting party. The Company also acquires and
processes geophysical data for its own account, preserving its work-product in a
data library for later licensing on a non-exclusive basis. When acquiring data
for its library, the Company seeks pre-funding commitments for a large portion
of the cost of such surveys from multiple clients.



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The following tables set forth the Company's revenues by service group and
geographical area:

<TABLE>
<CAPTION>
  REVENUES BY SERVICE GROUP(1)                    Years Ended July 31,
                                           ----------------------------------
                                             1998         1997         1996
                                           --------     --------     --------
                                                 (In thousands of dollars)
  <S>                                           <C>          <C>          <C>
  Land and transition zone acquisition     $229,754     $175,837     $117,667
  Marine acquisition                         85,852       64,429       54,360
  Data processing                            91,999       74,107       55,566
  Data library sales                        121,354       48,342       23,003
                                           --------     --------     --------
                 Total                     $528,959     $362,715     $250,596
                                           ========     ========     ========
  </TABLE>

<TABLE>
<CAPTION>
  REVENUES BY GEOGRAPHICAL AREA               Years Ended July 31,
                                     ----------------------------------
                                       1998         1997          1996
                                     --------     --------     --------
                                           (In thousands of dollars)
  <S>                               <C>           <C>          <C>     
  United States(2)                   $281,223     $184,013     $ 98,875
  Canada                               47,059       52,141       47,423
  Latin America                        93,494       51,157       36,346
  Europe                               51,089       42,798       37,394
  Middle East                          13,632        2,403
  Asia Pacific                         42,462       30,203       30,558
                                     --------     --------     --------
            Total                    $528,959     $362,715     $250,596
                                     ========     ========     ========
</TABLE>

(1) Revenues from data acquisition and data processing services are recognized
    based on contractual rates set forth in the related contract if the contract
    provides a separate rate for each service provided. If the contract only
    provides a rate for the overall service, revenues are recognized based on
    the percentage of each service group's cost to total cost.

(2) Includes export sales of $458, $4,115 and $4,774 in fiscal 1998, 1997 and
    1996, respectively.

In fiscal 1998, 1997 and 1996, 47%, 50% and 62%, respectively, of the Company's
revenues were attributable to international operations and export sales. See
Note 16 of Notes to Consolidated Financial Statements for additional
geographical information.

Geophysical services are marketed from the Company's corporate offices and from
its regional administrative centers by personnel whose duties also typically
include technical, supervisory or executive responsibilities. Contracts are
obtained either through competitive bidding in response to invitations for bids,
by direct negotiation with the prospective customer or through the initiation by
the Company of surveys for its data library, which surveys are then offered for
license on a non-exclusive basis.

Contracts for exclusive data acquisition involve payments on either a turnkey
method, time basis or on a combination of both methods. Under the turnkey
method, payments for services are based upon the amount of data collected or
processed, and the Company bears substantially all of the risk of business
interruption caused by inclement weather and other hazards. When operating on a
time basis, payments are based on agreed rates per unit of time, which may be
expressed in periods ranging from days to months, and certain risks of business
interruption (except for interruptions caused by failure of the Company's
equipment) are borne by the customer. When a combination of both turnkey and
time methods is used, the risk of business interruption is shared by the Company
and the customer. In each case, progress payments are usually required unless it
is expected that the job can be accomplished in a brief period. In recent years,
the Company's contracts for data acquisition have been predominately on a
turnkey or combination of turnkey/time basis. Substantially all exclusive data
processing work is done on a turnkey basis.

LAND AND TRANSITION ZONE ACQUISITION

The Company's land and transition zone acquisition services are performed with
seismic equipment using the latest technology. The equipment is capable of
collecting both 2D and 3D data, has a combined recording capacity of
approximately 31,000 channels and can be configured to operate up to 22 crews. A
majority of the Company's land and transition zone acquisition services involve
3D surveys. The 


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<PAGE>   6

Company is currently operating a total of 16 crews: eight in the United States,
two in Canada, two in Argentina, two in Bolivia, one in Oman and one in
Madagascar.

Each crew consists of: a surveying unit which lays out the lines to be recorded
and marks the site for shot-hole placement or equipment location; an explosive
or mechanical vibrating unit; and a recording unit that lays out the geophones
and recording instruments, directs shooting operations and records the
acoustical signal reflected from subsurface strata. On a typical land seismic
survey, the seismic crew is supported by several drill crews, which are
typically furnished by third parties under short-term contracts. Drill crews
operate in advance of the seismic crew and bore shallow holes for explosive
charges which, when detonated by the seismic crew, produce the necessary
acoustical impulse. In locations where the use of explosives is precluded due to
population density, technical requirements or ecological factors, a mechanical
vibrating unit or compressed air is substituted for explosives as the acoustical
source.

The Company uses helicopters to aid its crews in seismic data acquisition in
situations where such use will reduce overall costs and improve productivity. In
a helicopter supported project, seismic lines are cut approximately two meters
wide, compared to five meters wide when trucks are used to move cables,
geophones and personnel. The use of helicopters, which is often required in
areas with rugged terrain and in agricultural areas, results in better access
and reduced surface damage. In such a project, each seismic crew is typically
supported by one or two helicopters specifically suited to seismic acquisition
requirements.

MARINE ACQUISITION

Marine acquisition services are carried out by the Company's crews operating
from chartered vessels (except the Acadian Searcher which was purchased in
December 1997) which have been modified or equipped to the Company's
specifications. All of the vessels operated by the Company are equipped to
perform both 2D and 3D seismic surveys. During the last several years, a
majority of the marine seismic data acquisition services performed by the
Company involved 3D surveys. The following table sets forth certain information
concerning the geophysical vessels currently operated by the Company:

<TABLE>
<CAPTION>
                         YEAR
                        ENTERED
      VESSEL            SERVICE         LOCATION           LENGTH        BEAM
  -------------------   -------    ------------------     --------     -------
  <S>                   <C>        <C>                    <C>          <C>
  Acadian Searcher        1983     Offshore Australia     217 feet     44 feet
  Ross Seal               1987     Offshore Cambodia      176 feet     38 feet
  Polar Search            1992     Gulf of Mexico         300 feet     51 feet
  Pearl Chouest           1995     Gulf of Mexico         210 feet     40 feet
  Cape Romano             1996     Gulf of Mexico         155 feet     36 feet
  Polar Princess          1996     Gulf of Mexico         250 feet     46 feet
  Professor Kurentsov     1997     Offshore Canada        225 feet     41 feet
  Seabulk Veritas         1997     Gulf of Mexico         194 feet     40 feet
  Veritas Viking          1998     North Sea              305 feet     72 feet
</TABLE>

The Polar Search, Polar Princess and Professor Kurentsov are chartered from a
ship operator for initial terms which expire in January 2000, February 2000 and
August 2001, respectively. The Veritas Viking is chartered from a ship owner on
an initial term which expires in June 2006. The Company's other vessels, are
operated under short-term charter arrangements expiring at various times through
1999. These charters contain certain options for the Company to extend terms at
rates closely approximating the expiring terms and rates. Decisions on whether
to extend the expiring vessel charters or enter into charters with other vessel
owners will be made prior to each charter expiration date.

Each vessel generally has an equipment complement consisting of seismic
recording instrumentation, digital seismic streamer cable, cable location and
seismic data location systems, multiple navigation systems, a source control
system which controls the synchronization of the energy source and a firing
system which generates the acoustical impulses. The streamer cable contains
hydrophones that receive the 


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<PAGE>   7

acoustical impulses reflected by variations in the subsurface strata. Data
acquired by each channel in the digital cable is partially processed before it
is transmitted to recording instruments for storage on magnetic media, thus
reducing subsequent processing time and the effective acquisition costs to the
customer.

At present, three of the Company's vessels are equipped with multiple streamers
and multiple energy sources, which acquire more lines of data with each pass,
reducing completion time and the effective acquisition cost. A three vessel,
multi-boat crew obtains similar benefits by recording the signals generated from
two source arrays on the master vessel with cables towed by each of the master
and two slave vessels. The Veritas Viking, the Company's largest vessel, was
added in fiscal 1998 and is capable of deploying more than 12 seismic streamer
cables. The Company has signed an eight-year charter for another large vessel to
join its fleet, which will be a sister ship to the Veritas Viking and is
expected to begin service in May 1999.

Each marine seismic crew consists of approximately 20 persons, excluding the
ship's captain and ship personnel. Seismic personnel live aboard the ship during
their tours of duty, which are staggered to permit continuous operations. During
seismic operations, the Company's personnel direct the positioning of the vessel
using sophisticated navigational equipment, deploy and retrieve the seismic
streamer cable and energy-source array, and operate all other systems relating
to data collection activities. The Company's personnel do not, however, have
ultimate responsibility for the vessel, which is operated by the captain and
personnel who are employees of the vessel owner.

DATA PROCESSING

The Company currently operates 20 seismic data processing centers capable of
processing 2D, 3D and four dimensional ("4D") data. A majority of the Company's
data processing services are performed on 3D seismic data. At each of the
centers, data received from the field, both from the Company and other
geophysical crews, is processed to produce an image of the earth's subsurface
using proprietary computer software and techniques developed by the Company. The
Company also reprocesses older seismic data using new techniques designed to
enhance the quality of the data. The Company's data processing centers have
opened at various times from 1966 through 1998 and are located in Houston (two
locations), Irving, Austin and Midland, Texas; Denver, Colorado; Oklahoma City,
Oklahoma; Santa Cruz, Bolivia; Singapore; Crawley, England; Calgary, Alberta,
Canada; Brisbane and Perth, Australia; Jakarta, Indonesia; Kuala Lumpur,
Malaysia; Buenos Aires and Neuquen, Argentina; Caracas, Venezuela; Quito,
Ecuador; and Abu Dhabi, U.A.E.

The Company's centers operate high capacity, advanced technology data processing
systems based on NEC, SUN SGI and HP computer systems with high-speed networks.
These systems utilize the Company's proprietary SEISMIC data processing
software. The marine and land data acquisition crews have software identical to
that utilized in the processing centers, allowing for ease in the movement of
data from the field to the data processing centers. The Company operates both
land and marine data processing centers and tailors the equipment and software
deployed in an area to meet the local market demands.

To improve its speed and capacity in processing large 3D and 4D surveys, the
Company installed a NEC supercomputer in its Houston processing center in early
fiscal 1997. The success of this first system led to the installation of a
second in the Crawley center in August 1997 and a third in Singapore in July
1998. These supercomputer installations act as global resources for all of the
Company's data processing operations.

DATA LIBRARY SALES

The Company often acquires and processes data for its own account. The Company
seeks pre-funding commitments from multiple customers for a large portion of the
cost of these surveys thereby lowering investment risk. In recent periods, the
Company has generally received commitments in excess of 70%, 


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<PAGE>   8
however future market conditions may impact these commitment levels. Once
acquired and processed, these surveys are then licensed for use to other
customers on a non-exclusive basis. Factors considered in determining whether to
undertake such surveys include the availability of initial participants to
underwrite a percentage of the costs, the location to be surveyed, the
probability and timing of future lease, concession and development activity in
the area and the availability, quality and price of competing data.

The relatively expensive cost of acquiring and processing seismic data has
prompted many oil and gas companies to participate in multi-client surveys to
reduce their geophysical expenses. In response to this increased demand, the
Company is adding to its data library, primarily in the Gulf of Mexico, the
North Atlantic Margin and Asia Pacific. While historically the Company's
multi-client data library has been offshore, the Company began adding onshore
surveys in Mississippi, Wyoming and Texas in fiscal 1997. As of July 31, 1998,
the Company's multi-client data library included approximately 1.8 million line
kilometers of survey data.

TECHNOLOGY AND CAPITAL EXPENDITURES

The geophysical industry is highly technical, and the requirements for the
acquisition and processing of seismic data have evolved continuously during the
past 50 years. Accordingly, it is of significance to the Company that its
technological capabilities are comparable or superior to those of its
competitors, whether through continuing research and development, strategic
alliances with equipment manufacturers or by acquiring technology under license
from others. The Company has introduced several technological innovations in its
geophysical service business that have become industry standard practice in both
acquisition and processing.

Currently, the Company employs approximately 59 persons in its research and
development activities, substantially all of whom are scientists, engineers or
programmers. During fiscal 1998, 1997 and 1996, research and development
expenditures were $6.2 million, $3.7 million, and $3.2 million, respectively.

The Company rarely applies for patents on internally developed technology. This
policy is based upon the belief that most proprietary technology, even where
regarded as patentable, can be more effectively protected by maintaining
confidentiality than through disclosure and a patent enforcement program.
Certain of the equipment, processes and techniques used by the Company are
subject to the patent rights of others, and the Company holds non-exclusive
licenses with respect to a number of such patents. While the Company regards as
beneficial its access to others' technology through licensing, the Company
believes that substantially all presently licensed technology could be replaced
without significant disruption to the business should the need arise.

The capital expenditure program for fiscal 1999 requires expenditures of
approximately $95.2 million, and another $8.2 million is budgeted for research
and development activities. The level of future capital expenditures will depend
on the availability of funding and market requirements as dictated by oil and
gas company activity levels.

The following table sets forth a summary of the Company's capital expenditures:

<TABLE>
<CAPTION>
                                                Years Ended July 31,
                                         -------------------------------
                                          1998        1997         1996
                                         -------     -------     -------
                                            (In thousands of dollars)
<S>                                      <C>         <C>         <C>    
Land and transition zone acquisition     $29,207     $38,024     $15,020
Marine acquisition                        43,599      34,482       7,757
Data processing                           24,701      19,743       8,394
Other                                      2,042       3,801       1,689
                                         -------     -------     -------
Total                                    $99,549     $96,050     $32,860
                                         =======     =======     =======
</TABLE>


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<PAGE>   9

COMPETITION AND OTHER BUSINESS CONDITIONS

The acquisition and processing of seismic data for the oil and gas exploration
industry has historically been highly competitive worldwide. As a result of
changing technology and increased capital requirements, the seismic industry has
consolidated substantially since the late 1980's. The largest competitors
remaining in the market are Western Geophysical (a division of Baker Hughes
Inc.), Geco-Prakla (a division of Schlumberger), Compagnie Generale Geophysique
and Petroleum Geo-Services ASA. Management believes the Company is the fifth
largest geophysical services company based on revenues. Competition for
available seismic surveys is based on several competitive factors, including
price, crew experience, equipment availability, technological expertise and
reputation for quality and dependability.

The Company's data acquisition activities often are conducted under extreme
weather and other hazardous conditions. Accordingly, these operations are
subject to risks of injury to personnel and loss of equipment. The Company
carries insurance against the destruction of, or damage to, its chartered
vessels, geophysical equipment and property and injury to persons that may
result from its operations and considers the amounts of such insurance to be
adequate. The Company may not be able to obtain insurance against certain risks
or for equipment located from time to time in certain areas of the world. The
Company obtains insurance against war, expropriation, confiscation and
nationalization when such insurance is available and when management considers
it advisable to do so. Such coverage is not always available and, when
available, is subject to unilateral cancellation by the insuring companies on
short notice. The Company also carries insurance against pollution hazards.

Fixed costs, including costs associated with vessel charters and operating
leases, labor costs, depreciation, and interest expense, account for a
substantial percentage of the Company's costs and expenses. As a result,
downtime or low productivity resulting from reduced demand, equipment failures,
weather interruptions or otherwise, can result in significant operating losses.

BACKLOG

At July 31, 1998, the Company's backlog of commitments for services was $299.8
million, compared with $257.3 million at July 31, 1997. It is anticipated that a
majority of the July 31, 1998 backlog will be completed in the next 12 months.
This backlog consists of written orders or commitments believed to be firm.
Contracts for services are occasionally varied or modified by mutual consent and
in certain instances are cancelable by the customer on short notice without
penalty. As a result of these factors, the Company's backlog as of any
particular date may not be indicative of the Company's actual operating results
for any succeeding fiscal period.

SIGNIFICANT CUSTOMERS

Historically, the Company's principal customers have been international oil and
gas companies, foreign national oil companies and independent oil and gas
companies. No single customer accounted for 10% or more of total revenues during
the years ended July 31, 1998, 1997 and 1996.

EMPLOYEES

At July 31, 1998, the Company had approximately 4,000 full-time employees. With
the exception of 351 unionized employees working at the Singapore data
processing center or on Argentina land crews, none of its employees are subject
to collective bargaining agreements. The Company considers the relations with
its employees to be good.


                                       7
<PAGE>   10

ITEM 2.   PROPERTIES

The Company's headquarters in Houston are located in a 12-story office building
and occupy approximately 106,000 square feet of leased premises. Approximately
38% of this space is devoted to data processing operations, and the balance
houses executive, accounting, research and development and geophysical operating
personnel. The Company leases additional space aggregating approximately 445,000
square feet which is used primarily for seismic data processing operations,
exploration and development information services, geophysical operating
personnel and warehousing in Austin, Galveston, Houston, Irving and Midland,
Texas; Denver, Colorado; New Iberia, Louisiana; Oklahoma City, Oklahoma; Buenos
Aires and Neuquen, Argentina; Brisbane and Perth, Australia; Santa Cruz,
Bolivia; Calgary, Alberta, Canada; Quito, Ecuador; Crawley, England; Kuala
Lumpur, Malaysia; Muscat, Oman; Singapore; Caracas, Venezuela; and Abu Dhabi,
U.A.E. These facilities are conventional office space, except for any
modifications in wiring, air conditioning and lighting necessary to accommodate
computer equipment. Leases covering the Company's facilities expire at varying
times from 1998 through 2013. The Company owns property in Jackson, Mississippi,
comprising 37,551 square feet of office and workshop facilities and in Calgary,
Alberta, Canada comprising 15,000 square feet of office space and maintenance
facilities. Additionally, the Company owns approximately two acres in Calgary,
Alberta, Canada used for equipment storage.


ITEM 3.   LEGAL PROCEEDINGS

As of September 30, 1998, the Company was not a party to, nor was its property
the subject of any material pending legal proceedings, as defined by relevant
rules and regulations of the Securities and Exchange Commission.


ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year ended July 31, 1998.


                                       8
<PAGE>   11
                                     PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock commenced trading on the New York Stock Exchange
under the symbol "VTS" on September 3, 1996. Prior to that time, the common
stock traded on the American Stock Exchange under the symbol "DGC". The
following table sets forth the reported high and low sales prices for the common
stock on the New York Stock Exchange and the American Stock Exchange, as
appropriate, for the periods shown.

<TABLE>
<CAPTION>
                         Period                High           Low
                       -----------          ---------     ---------
          <S>          <C>                  <C>           <C>
          1998         1st Quarter          $ 50 1/8      $ 25
                       2nd Quarter            47 5/16       26 1/2
                       3rd Quarter            54 1/2        36
                       4th Quarter            60 7/8        30 7/16

          1997         1st Quarter          $ 21 1/2      $ 11 1/2
                       2nd Quarter            25 1/4        16 1/2
                       3rd Quarter            21 1/4        15 1/2
                       4th Quarter            26 5/8        18 1/8
</TABLE>

On September 30, 1998, the last reported sale price of the Company's common
stock on the New York Stock Exchange was $16 11/16 per share. On September 30,
1998, the approximate number of holders of record of common stock was 131.

Historically, the Company has not paid any dividends on its common stock and has
no present plans to pay any dividends. The payment of any future dividends on
common stock would depend, among other things, upon the current and retained
earnings and financial condition of the Company and upon a determination by its
board of directors that the payment of dividends would be desirable. In
addition, the Company's senior notes due October 2003 limit the payment of
dividends. (See Note 4 of Notes to Consolidated Financial Statements.)



                                       9
<PAGE>   12

ITEM 6.   SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected consolidated financial data as of and
for each of the five years in the period ended July 31, 1998, which has been
restated for the Combination (see Note 2 of Notes to Consolidated Financial
Statements) which was accounted for as a pooling of interests. In addition,
earnings per share for the years ended July 31, 1995 and 1994 have been adjusted
to reflect a one-for-three reverse stock split effected in January 1995.

As a result of the differing year ends of Digicon and VES, results of operations
for dissimilar year ends have been combined. Digicon's results of operations for
fiscal years ended July 31, 1994 and 1995 have been combined with VES' results
of operations for fiscal years ended October 31, 1994 and 1995, respectively. To
conform year ends, Digicon's results of operations for the year ended July 31,
1996 have been combined with VES' results of operations for the twelve months
ended July 31, 1996. Accordingly, VES' operating results for the period August
1, 1995 through October 31, 1995 are included in the years ended July 31, 1995
and 1996. An adjustment in an amount equal to the results of operations for the
three-month period is included in the consolidated statements of changes in
stockholders' equity. VES' revenues, net income and earnings per share and
earnings per share assuming dilution were $22,150,000, $936,000 and $.05,
respectively, for the period August 1, 1995 through October 31, 1995.

<TABLE>
<CAPTION>
                                                                          Years Ended July 31,
                                             ---------------------------------------------------------------------------
                                                1998             1997           1996            1995            1994
                                             -----------     -----------     -----------     -----------     -----------
                                                              (In thousands, except per share amounts)
<S>                                          <C>             <C>             <C>             <C>             <C>        
STATEMENT OF OPERATIONS DATA:
   Revenues                                  $   528,959     $   362,715     $   250,596     $   215,630     $   178,392
   Net income (loss)                              66,958          25,125           1,281           5,594         (10,354)
   Earnings (loss) per common share                 2.96            1.33             .07             .31            (.66)
   Earnings (loss) per common share -               
     assuming dilution                              2.87            1.30             .07             .31            (.66)
</TABLE>

<TABLE>
<CAPTION>
                                                                                As of July 31,
                                             ----------------------------------------------------------------------------
                                                1998             1997            1996            1995            1994
                                             -----------     -----------      -----------     -----------     -----------  
                                                                          (In thousands of dollars)
<S>                                          <C>             <C>             <C>              <C>             <C>   
BALANCE SHEET DATA:
   Total assets                              $   478,490     $   385,089     $   198,592      $  184,340     $  171,814
   Long-term debt (including current       
     maturities)                                  75,561          75,971          41,090          36,788         31,104
</TABLE>


                                       10
<PAGE>   13



ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

FISCAL 1998 COMPARED WITH FISCAL 1997

Revenues. Revenues increased 46% from $362.7 million to $529.0 million during
the current year. Although all service groups improved, multi-client data
library sales showed the largest increase at 151%, from $48.4 million to $121.3
million. Over the past two years, as oil and gas companies have moved toward
multi-client surveys to reduce finding costs, the Company has significantly
increased its data library. Sales were mainly from marine surveys in the
deepwater Gulf of Mexico and North Atlantic Margin.

Land and transition zone acquisition revenues increased 31% from $175.8 million
to $229.8 million as a result of additional recording capacity, including the
purchase of equipment to configure up to two crews in Oman and the addition of
one crew in Latin America, and operating efficiencies from upgraded and
standardized equipment. Warmer than usual winter conditions, an extended spring
breakup period and a decrease in deep gas seismic activity in Canada had a
negative impact on revenues.

Marine acquisition revenues increased 33% from $64.4 million to $85.9 million
even though five vessels were in drydock approximately one month each for
regularly scheduled maintenance at various times during the year. The increase
was primarily due to additional streamer capacity and an increase in demand for
multi-client surveys, particularly in the Gulf of Mexico. In addition, the
Company chartered a new vessel beginning June 1998 that set Company production
records.

Data processing revenues increased 24% from $74.1 million to $92.0 million as a
result of increases in market activity, volume of data acquired in 3D surveys
and demand for computer intensive processes such as prestack time and depth
migration. The Company has substantially upgraded its processing centers,
including the addition of a second NEC supercomputer in Crawley, England and
several multi-noded workstations, to meet this increased demand.

Operating Expenses. Costs of services increased 28% from $271.7 million to
$346.9 million, but as a percent of revenues decreased from 75% to 66%. The
improvement in operating margins is mainly attributable to significant sales and
performance of multi-client data surveys that generally have higher margins.
Data processing operating margins also showed improvement due to more efficient
equipment. Land and transition zone margins remained consistent.

Depreciation and Amortization. Depreciation and amortization expense increased
38% from $40.6 million to $56.1 million due to the large increase in capital
expenditures over the past two years.

Selling, General and Administrative. Selling, general and administrative
expenses increased 65% from $11.4 million to $18.8 million resulting primarily
from the addition of staff to support the Company's expanded operations and
costs incurred in implementing new administrative and accounting systems and a
more aggressive marketing strategy.

Interest Expense. Interest expense includes an $800,000 reduction in the current
year for interest capitalized on the build out of the Company's newly chartered
vessel.

Other Income (Expense). Other income (expense) increased from a loss of $630,000
to income of $338,000 primarily from interest income earned on higher average
cash balances. This increase was offset by net foreign currency losses resulting
from fluctuations in foreign money markets.

Income Taxes. Provision for income taxes increased from $6.1 million to $34.2
million as a result of the Company's increased profitability. The effective tax
rate increased from 20% to 34% due to the write-off of certain of the Company's
investments in the prior year.

                                       11
<PAGE>   14


FISCAL 1997 COMPARED WITH FISCAL 1996

Revenues. For fiscal 1997, total revenues increased 45% from $250.6 million to
$362.7 million. Land and transition zone acquisition revenues increased 49% from
$117.6 million to $175.8 million as a result of higher demand, additional
capacity of 9,000 channels and operating efficiencies from upgraded and
standardized equipment. Demand improved significantly in Canada and remained
high during the spring break-up period. Contracts in the Company's other markets
had longer terms, larger channel requirements, better prices and improved
weather protection clauses.

Marine acquisition revenues increased 19% from $54.4 million to $64.4 million
primarily due to increased utilization of the Company's vessels, higher
productivity from the upgrade to Syntron equipment, the addition of the Polar
Princess in the first quarter and another short-term chartered vessel in the
fourth quarter.

Data processing operations increased 33% from $55.6 million to $74.1 million due
to increases in capacity, productivity and volumes of data available for
processing. The Company substantially upgraded its processing centers, installed
a NEC supercomputer in Houston and opened new centers in Abu Dhabi, Australia,
Ecuador and Oklahoma.

Multi-client data sales increased 110% from $23.0 million to $48.4 million due
to expanding customer interest in the Gulf of Mexico, especially deepwater and
sub-salt areas, and North Sea multi-client data surveys.

Operating Expenses. Costs of services increased 37% from $198.7 million to
$271.7 million, but as a percent of revenues decreased from 79% to 75%. The
improvement in operating margins is attributable to higher prices due to
increased market demand, better equipment utilization and higher productivity
for all service groups as discussed above.

Depreciation and Amortization. Depreciation and amortization expense increased
51% from $26.9 million to $40.6 million due to the extensive 1997 capital
expenditure program.

Selling, General and Administrative. Selling, general and administrative
expenses increased 57% from $7.3 million to $11.4 million, resulting primarily
from costs incurred in implementing new administrative and accounting systems,
pursuing a more aggressive marketing strategy and from incentive compensation as
a result of the Company's improved performance.

Interest. Interest expense increased 37% from $5.5 million to $7.5 million due
to increased debt levels required to finance the Company's 1997 capital
expenditure program. The Company issued $75 million of senior notes during the
year.

Merger Related Costs. Merger related costs consist primarily of one month of
investment banking and professional fees and expenses incurred in connection
with the Combination.

Income Taxes. Provision for income taxes increased from $2.0 million to $6.1
million as a result of the Company's increased profitability. However, the
effective tax rate was reduced in the current year by the write-off of certain
of the Company's investments.

Equity in (earnings) loss. Equity in (earnings) loss is related to the
Indonesian joint venture. An increase in marine acquisition surveys and the sale
of multi-client data library account for the increased profitability of the
joint venture in the current year.

LIQUIDITY AND CAPITAL RESOURCES

SOURCES AND USES

The Company's internal sources of liquidity are cash, short-term investments and
cash flow from operations. External sources include the unutilized portion of a
revolving credit facility, public financing, equipment financing and trade
credit.

                                       12
<PAGE>   15

In October 1996, the Company completed a $75.0 million public offering of Senior
Notes due in October 2003 (the "Senior Notes"). The net proceeds from the Senior
Notes were used to retire outstanding indebtedness of the Company and fund a
portion of the Company's capital expenditures in fiscal 1997. The indenture
relating to the Senior Notes (the "Indenture") contains certain covenants,
including covenants that limit the Company's ability to, among other things,
incur additional debt, pay dividends, and complete mergers, acquisitions and
sales of assets. The Company is in compliance with all covenants of the
agreement at July 31, 1998. Upon a change in control of the Company (as defined
in the Indenture), holders of the Senior Notes have the right to require the
Company to purchase all or a portion of such holder's Senior Note at a price
equal to 101% of the aggregate principal amount. Interest is payable
semi-annually.

In July 1998, the Company obtained a new revolving credit facility due July 2001
from commercial lenders that provides advances up to $50.0 million. Advances are
limited by an unsecured borrowing base and bear interest, at the Company's
election, at LIBOR or prime rate plus a margin based on certain ratios
maintained by the Company. Currently, the borrowing base exceeds the maximum
commitment. Covenants in the agreement limit, among other things, the Company's
right to take certain actions, including creating indebtedness. In addition, the
agreement requires the Company to maintain certain financial ratios. The Company
is in compliance with all covenants of the agreement and there were no
outstanding advances as of July 31, 1998.

The Company requires significant amounts of working capital to support its
operations and to fund capital spending and research and development programs.
The Company's foreign operations require greater amounts of working capital than
similar domestic activities, as the average collection period for foreign
receivables is generally longer than for comparable domestic accounts. In
addition, receivables denominated in foreign currencies are subject to
fluctuations in foreign money markets. Approximately 47% of revenues for the
year ended July 31, 1998 were attributable to the Company's foreign operations.
The Company has also increased its participation in multi-client data surveys
and has significantly expanded its multi-client data library. Because of the
lead-time between survey execution and sale, partially funded multi-client data
surveys generally require greater amounts of working capital than contract work.
Depending on the timing of future sales of the data and the collection of the
proceeds from such sales, the Company's liquidity will be affected; however, the
Company believes that these non-exclusive surveys have good long-term sales,
earnings and cash flow potential.

The Company's capital budget for fiscal 1999 is $95.2 million which includes
expenditures of $30.0 million to maintain or replace the Company's current
operating equipment and $65.2 million to expand capacity, including the
outfitting of a new marine seismic vessel. Research and development costs are
estimated at $8.2 million in fiscal 1999.

The Company will require substantial cash flow to continue operations on a
satisfactory basis, complete its capital expenditure and research and
development programs and meet its principal and interest obligations with
respect to outstanding indebtedness. The Company anticipates that cash and
short-term investments, cash flow from operations, the unutilized portion of the
revolving credit facility and borrowings permitted under the Indenture and
revolving credit facility will provide sufficient liquidity to fund these
requirements through fiscal 1999. However, the Company's ability to meet its
obligations depends on its future performance, which, in turn, is subject to
general economic conditions, business and other factors beyond the Company's
control. For example, due to the continuing low price levels of crude oil,
exploration and production expenditures may experience some contraction during
1999, which may affect exploration budgets allocated to seismic expenditures. If
the Company is unable to generate sufficient cash flow from operations or
otherwise to comply with the terms of the revolving credit facility or the
Indenture, it may be required to refinance all or a portion of its existing debt
or obtain additional financing. There can be no assurance that the Company would
be able to obtain such refinancing or financing, or that any refinancing or
financing would result in a level of net proceeds required.

                                       13
<PAGE>   16


OTHER

The Company has prepared a formal plan to address Year 2000 issues as they
relate to the Company's business and its operations. In accordance with that
plan, the Company has evaluated all internal hardware and software used in its
operations, including those used to support the Company's activities, such as
seismic data acquisition and processing equipment and accounting and payroll
systems. In the ordinary course of business, the Company has replaced a
significant amount of its hardware and software with Year 2000 compliant
systems. A replacement schedule has been prepared for its remaining
non-compliant systems and an ongoing monitoring program and contingency
procedures in the event of unanticipated non-compliance problems have been
established. The Company has also identified all external relationships, mainly
suppliers and customers, and mailed each entity an internally prepared
questionnaire regarding Year 2000 issues. Approximately 95% of the
questionnaires have been returned and indicate a state of readiness. The
remaining 5% do not pertain to critical systems. The Company estimates that it
will complete its plan, including remedial actions, by June 30, 1999 and is not
aware of any material contingencies or costs that will be incurred.

Since the Company's quasi-reorganization with respect to Digicon on July 31,
1991, the tax benefits of net operating loss carryforwards existing at the date
of the quasi-reorganization have been recognized through a direct addition to
paid-in capital, when realization is more likely than not. Additionally, the
utilization of the net operating loss carryforwards existing at the date of the
quasi-reorganization is subject to certain limitations. During the year ended
July 31, 1998 the Company recognized $1.6 million related to these benefits, due
to the increased profitability of the Company during the current fiscal year and
anticipated profitability in the next fiscal year. See Note 6 of Notes to
Consolidated Financial Statements.

The Company maintains operations in Europe, which are predominately conducted
from its U.K. offices. Although the U.K. has not currently elected to convert to
the new "euro" currency, the Company does have transactions with companies in
countries that will adopt the new currency. The Company has made a preliminary
assessment and does not anticipate any material effect to the financial
statements as a result of the new currency.

See Note 1 of Notes to Consolidated Financial Statements regarding new
accounting pronouncements not yet adopted.


                                       14
<PAGE>   17



ITEM 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders of
Veritas DGC Inc.


In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Veritas DGC Inc. and its subsidiaries at July 31, 1998 and 1997 and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.





PRICEWATERHOUSECOOPERS LLP

Houston, Texas
October 1, 1998


                                       15
<PAGE>   18

                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders of
Veritas DGC Inc.



We have audited the consolidated statements of income, cash flows and changes in
stockholders' equity of Veritas DGC Inc. and subsidiaries for the year ended
July 31, 1996. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
consolidated financial statements based on our audit. The consolidated financial
statements give retroactive effect to the merger of Digicon Inc. and Veritas
Energy Services Inc., which has been accounted for as a pooling of interests as
described in Note 2 to the consolidated financial statements. We did not audit
the consolidated statements of income, cash flows and changes in stockholders'
equity of Veritas Energy Services Inc. for the year ended October 31, 1995 or
for the twelve months ended July 31, 1996, which statements reflect total
revenues of $109,996,000 for the year ended October 31, 1995 and $118,591,000
for the twelve months ended July 31, 1996. Those statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar
as it relates to the amounts included for Veritas Energy Services Inc. for 1995
and 1996, is based solely on the report of such other auditors.

We conducted our audit in accordance with generally accepted auditing standards.
These standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the report of the other auditors provide a
reasonable basis for our opinion.

In our opinion, based on our audit and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the results of operations of Veritas DGC Inc. and
subsidiaries and its cash flows for the year ended July 31, 1996 in conformity
with generally accepted accounting principles.



DELOITTE & TOUCHE LLP

Houston, Texas
October 10, 1996


                                       16
<PAGE>   19


                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders of
Veritas Energy Services Inc.


We have audited the consolidated statements of income, retained earnings and
changes in financial position of Veritas Energy Services Inc. for the nine
months ended July 31, 1996 and for the year ended October 31, 1995 (not
presented separately herein). These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all
material respects, the results of operations of the Company and the changes in
its financial position for the nine months ended July 31, 1996 and for the year
ended October 31, 1995 in accordance with Canadian generally accepted accounting
principles.



PRICE WATERHOUSE
Chartered Accountants

Calgary, Alberta
September 20, 1996


                                       17
<PAGE>   20



                        VERITAS DGC INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                   For the Years Ended July 31,
                                                             ---------------------------------------
                                                                1998           1997           1996
                                                             ---------      ---------      ---------
<S>                                                          <C>            <C>            <C>      
REVENUES                                                     $ 528,959      $ 362,715      $ 250,596

COSTS AND EXPENSES:
    Cost of services                                           346,896        271,656        198,711
    Write-off/write-down for impairment of assets                                              3,628
    Depreciation and amortization                               56,121         40,631         26,921
    Selling, general and administrative                         18,758         11,408          7,255
    Other (income) expense:
        Interest                                                 7,318          7,484          5,466
        Merger related costs                                                      597          3,666
        Other                                                     (338)           630            546
                                                             ---------      ---------      ---------
                  Total costs and expenses                     428,755        332,406        246,193
                                                             ---------      ---------      ---------

Income before provision for income taxes and equity in         100,204         30,309          4,403
     (earnings) loss of 50% or less-owned companies and               
     joint ventures
Provision for income taxes                                      34,218          6,062          2,009
Equity in (earnings) loss of 50% or less-owned companies          
     and joint ventures                                           (972)          (878)         1,113
                                                             ---------      ---------      ---------
NET INCOME                                                   $  66,958      $  25,125      $   1,281
                                                             =========      =========      =========


PER SHARE:
    Earnings per common share                                $    2.96      $    1.33      $     .07
                                                             =========      =========      =========
    Weighted average common shares                              22,594         18,898         17,882
                                                             =========      =========      =========

    Earnings per common share - assuming dilution            $    2.87      $    1.30      $     .07
                                                             =========      =========      =========
    Weighted average common shares - assuming dilution          23,315         19,364         18,095
                                                             =========      =========      =========
</TABLE>

                 See Notes to Consolidated Financial Statements


                                       18
<PAGE>   21


                        VERITAS DGC INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                   (In thousands of dollars, except par value)

<TABLE>
<CAPTION>
                                                                                           July 31,
                                                                                   ------------------------
                                                                                     1998           1997
                                                                                   ---------      ---------
<S>                                                                                <C>            <C>      
                                     ASSETS
Current assets:
     Cash and cash equivalents                                                     $  40,089      $  71,177
     Restricted cash investments                                                         186            550
     Accounts and notes receivable (net of allowance for doubtful accounts:          
        1998, $1,248; 1997, $646)                                                    151,820        120,946
     Materials and supplies inventory                                                  4,106          2,333
     Prepayments and other                                                            16,290         10,429
                                                                                   ---------      ---------
           Total current assets                                                      212,491        205,435

Property and equipment:
     Seismic equipment                                                               206,449        156,264
     Data processing equipment                                                        72,925         54,516
     Seismic ship                                                                      7,534
     Leasehold improvements and other                                                 39,116         29,978
                                                                                   ---------      ---------
           Total                                                                     326,024        240,758
        Less accumulated depreciation                                                151,104        108,004
                                                                                   ---------      ---------
           Property and equipment - net                                              174,920        132,754

Multi-client data library                                                             51,143         20,904
Investment in and advances to joint ventures                                           2,943          2,908
Goodwill (net of accumulated amortization: 1998, $3,233; 1997, $2,725)                 2,655          3,163
Deferred tax asset                                                                    19,157         10,213
Other assets                                                                          15,181          9,712
                                                                                   ---------      ---------
           Total                                                                   $ 478,490      $ 385,089
                                                                                   =========      =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Current maturities of long-term debt                                          $     289      $     383
     Accounts payable - trade                                                         42,493         39,007
     Accrued interest                                                                  2,234          2,188
     Other accrued liabilities                                                        50,753         38,669
     Income taxes payable                                                             10,682          3,486
                                                                                   ---------      ---------
           Total current liabilities                                                 106,451         83,733

Non-current liabilities:
     Long-term debt - less current maturities                                         75,272         75,588
     Other non-current liabilities                                                     5,071          4,467
                                                                                   ---------      ---------
           Total non-current liabilities                                              80,343         80,055

Commitments and contingent liabilities (See Note 8)

Stockholders' equity:
     Preferred stock, $.01 par value; authorized:1,000,000 shares; none issued
     Common stock, $.01 par value; authorized: 40,000,000 shares; issued:                
        21,278,653 and 19,982,040 shares (excluding 1,505,915 and 2,367,071
        Exchangeable Shares, respectively) at July 31, 1998 and 1997,
        respectively                                                                     213            200
     Additional paid-in capital                                                      202,512        194,764
     Accumulated earnings (from August 1, 1991 with respect to Digicon Inc.)          94,358         27,400
     Cumulative foreign currency translation adjustment                               (3,660)        (1,063)
     Less: Treasury stock, at cost; 50,000 shares at July 31, 1998                    (1,727)
                                                                                   ---------      ---------
        Total stockholders' equity                                                   291,696        221,301
                                                                                   ---------      ---------
           Total                                                                   $ 478,490      $ 385,089
                                                                                   =========      =========
</TABLE>

                 See Notes to Consolidated Financial Statements


                                       19
<PAGE>   22

                        VERITAS DGC INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (In thousands of dollars)

<TABLE>
<CAPTION>
                                                                                   For the Years Ended July 31,
                                                                           ------------------------------------------
                                                                                1998           1997           1996
                                                                             ---------      ---------      ---------
<S>                                                                          <C>            <C>            <C>      
OPERATING ACTIVITIES:
     Net income                                                              $  66,958      $  25,125      $   1,281
     Non-cash items included in net income:
        Write-off/write-down for impairment of assets                                                          3,628
        Depreciation and amortization                                           56,121         40,631         26,921
        Amortization of deferred gain on sale/leaseback                                                         (103)
        Loss on disposition of property and equipment                            1,549          1,151            875
        Equity in (earnings) loss of 50% or less-owned companies and            
           joint ventures                                                         (972)          (878)         1,113
        Write-down of multi-client data library to market                          689          2,604          1,774
        Deferred taxes                                                          (7,314)          (924)
        Other                                                                                                     61
     Change in operating assets/liabilities:
        Accounts and notes receivable                                          (30,874)       (55,499)        (9,466)
        Materials and supplies inventory                                        (1,773)          (674)          (241)
        Prepayments and other                                                   (5,861)        (2,230)        (1,807)
        Multi-client data library                                              (30,928)         2,120            574
        Other                                                                   (5,598)        (4,282)           851
        Accounts payable - trade                                                 1,043         11,003            952
        Accrued interest                                                            46          1,875            (96)
        Other accrued liabilities                                               12,084         18,764            796
        Income taxes payable                                                     7,196          1,672           (227)
        Other non-current liabilities                                              604          2,952         (1,541)
     Adjustment to conform fiscal year of Veritas Energy Services Inc.                                        (5,268)
                                                                             ---------      ---------      ---------
           Total cash provided by operating activities                          62,970         43,410         20,077

FINANCING ACTIVITIES:
     Payments of secured term loans                                                           (10,854)
     Payments of long-term debt                                                   (410)       (24,976)       (11,437)
     Borrowings from long-term debt                                                               781          1,500
     Net payments  under credit agreements                                                    (11,458)        (2,665)
     Borrowings from senior notes                                                              75,000
     Debt issue costs                                                                          (2,765)
     Net proceeds from sale of common stock                                      6,131         80,515          4,470
     (Purchase) sale of treasury stock                                          (1,727)                        3,972
                                                                             ---------      ---------      ---------
           Total cash provided (used) by financing activities                    3,994        106,243         (4,160)

INVESTING ACTIVITIES:
     (Increase) decrease in restricted cash investments                            364           (223)           343
     (Increase) decrease in investment in and advances to joint ventures           937           (567)        (2,372)
     Purchase of property and equipment                                        (97,106)       (89,112)       (14,459)
     Sale of property and equipment                                                221          1,037            668
                                                                             ---------      ---------      ---------
           Total cash used by investing activities                             (95,584)       (88,865)       (15,820)
     Currency (gain) loss on foreign cash                                       (2,468)           317           (107)
                                                                             ---------      ---------      ---------
     Change in cash and cash equivalents                                       (31,088)        61,105            (10)
     Beginning cash and cash equivalents balance                                71,177         10,072         10,082
                                                                             ---------      ---------      ---------
     Ending cash and cash equivalents balance                                $  40,089      $  71,177      $  10,072
                                                                             =========      =========      =========
</TABLE>

                 See Notes to Consolidated Financial Statements


                                       20
<PAGE>   23

                        VERITAS DGC INC. AND SUBSIDIARIES

        SUPPLEMENTARY SCHEDULES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (In thousands of dollars)

<TABLE>
<CAPTION>
                                                                                     For the Years Ended July 31,
                                                                                  ---------------------------------
                                                                                   1998         1997         1996
                                                                                  -------      -------      -------
<S>                                                                                <C>           <C>          <C>  
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: 
    Increase in property and equipment for:
        Accounts and notes receivable - deferred credits utilized                 $            $            $   866
        Execution of equipment purchase obligations                                              6,388       16,963
        Accounts payable - trade                                                    2,443          550          572
    Utilization of net operating losses existing prior to the
       quasi-reorganization resulting in an increase (decrease) in:
        Deferred tax asset valuation allowance                                     (1,630)      (9,867)
        Additional paid-in capital                                                  1,630        9,867

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
    Cash paid for:
        Interest -
           Senior notes                                                             6,513        3,496
           Equipment purchase obligations                                             113          673        1,878
           Secured term loans                                                                      274          506
           Credit agreements                                                           53          403        1,843
           Other                                                                      603          656        1,286
        Income taxes                                                               33,369        1,891        5,086
</TABLE>


                 See Notes to Consolidated Financial Statements


                                       21
<PAGE>   24


                        VERITAS DGC INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
                            (In thousands of dollars)

<TABLE>
<CAPTION>
                                                                                                   Accumulated      
                                                              Treasury Stock,                       Earnings        Cumulative    
                                   Common Stock Issued           At Cost                         (from August 1,      Foreign     
                                  ----------------------  ----------------------     Additional     1991 with        Currency    
                                                   Par                                Paid-In        respect        Translation   
                                       Shares     Value      Shares       Amount      Capital    to Digicon Inc.)    Adjustment   
                                  -------------- -------  -----------   ---------   -----------  -----------------  -------------
<S>                               <C>            <C>      <C>           <C>         <C>          <C>                <C>       
BALANCE, JULY 31, 1995                11,134,939 $   111     (858,497)  $  (4,772)  $   100,797  $           1,930  $         (66)
Treasury stock issued for cash,
   net of issue costs                                         858,497       4,772          (800)
Common stock issued for cash            
   upon exercise of warrants              29,433                                            530
Common stock issued for cash
   under employee stock option
   plan                                  181,497       2                                  2,448
Common stock certificates
   cancelled                             (11,517)
Registration and filing costs                                                               (30)
Exchangeable stock issued for
   cash under employee stock
   purchase plan -Veritas Energy
   Services Inc.                                                                             12
Exchangeable stock issued for
   cash under employee stock
   option plan -Veritas Energy
   Services Inc.                                                                          1,512
Cumulative foreign currency
   translation adjustment                                                                                                    (868)
Net income                                                                                                   1,281
Adjustment to conform fiscal
   year of Veritas Energy
   Services Inc.                                                                                              (936)
                                  -------------- -------  -----------   ---------   -----------  -----------------  -------------
BALANCE, JULY 31, 1996                11,334,352     113                                104,469              2,275           (934)
Common stock issued for
   exchangeable stock                  4,645,968      47                                    (47)
Common stock issued for cash
   upon exercise of warrants             191,333       2                                  1,029
Common stock issued for cash
   under employee stock option
   plan                                  360,387       3                                  3,121
Common stock issued for cash,
   net of issue costs                  3,450,000      35                                 76,416
Registration and filing costs                                                               (91)
Utilization of net operating
   loss carryforwards existing
   prior to quasi-reorganization                                                          9,867
Cumulative foreign currency
   translation adjustment                                                                                                    (129)
Net income                                                                                                  25,125
                                  -------------- -------  -----------   ---------   -----------  -----------------  -------------
BALANCE, JULY 31, 1997                19,982,040     200                                194,764             27,400         (1,063)
Common stock issued for
   exchangeable stock                    871,818       9                                     (9)
Common stock issued for cash
   upon exercise of warrants              42,000                                            189
Common stock issued for cash
   under employee stock option
   plan                                  326,731       3                                  3,925
Common stock issued for services
   under restricted stock
   agreements                              3,333                                            169
Common stock issued for cash
   under employee stock purchase
   plan                                   52,731       1                                  1,864 
Common stock reacquired for
   cash, including fees                                       (50,000)     (1,727)
Registration and filing costs                                                               (20)
Utilization of net operating
   loss carryforwards existing
   prior to quasi-reorganization                                                           1,630
Cumulative foreign currency
   transaction adjustment                                                                                                  (2,597)
Net income                                                                                                  66,958
                                  -------------- -------  -----------   ---------  ------------  -----------------  -------------
BALANCE, JULY 31, 1998                21,278,653 $   213      (50,000)  $  (1,727) $    202,512  $          94,358  $      (3,660)
                                  ============== =======  ===========   =========  ============  =================  =============
</TABLE>

                 See Notes to Consolidated Financial Statements


                                       22
<PAGE>   25
                        VERITAS DGC INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996

1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION

Veritas DGC Inc. (the "Company") provides seismic data acquisition, data
processing, multi-client data sales and exploration and development information
services to the petroleum industry in selected markets worldwide. The
accompanying consolidated financial statements include the accounts of Veritas
DGC Inc., formerly Digicon Inc. ("Digicon"), and all majority-owned domestic and
foreign subsidiaries. Investments in 50% or less-owned companies and joint
ventures are accounted for on the equity method. All material intercompany
balances and transactions have been eliminated. All financial information for
all periods presented prior to the merger on August 30, 1996 between Digicon and
Veritas Energy Services Inc. ("VES") includes the results of VES. (See Note 2.)
The merger has been accounted for as a pooling of interests. Digicon effected a
quasi-reorganization adjustment as of July 31, 1991 in which its accumulated
deficit at July 31, 1991 of $139,751,000 was offset against additional paid-in
capital.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

RECLASSIFICATION OF PRIOR YEAR BALANCES

Certain prior year balances have been reclassified for consistent presentation.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments include cash and short-term investments,
restricted cash investments, accounts and notes receivable, accounts payable and
debt. The fair market value of the $75.0 million senior notes included in
long-term debt and $2.2 million of related accrued interest is $78.5 million
based on the present value of total payments due at the high yield corporate
bond rate at July 31, 1998. The carrying value is a reasonable estimate of fair
value for all other instruments.

NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." This statement requires disclosure in both annual and interim reporting
of the reporting period's comprehensive income (changes in equity from non-owner
sources), net of the related tax effect, on the face of the consolidated
statement of income, consolidated statement of changes in stockholders' equity
or in a separate statement of comprehensive income and the accumulated balance
of other comprehensive income (comprehensive income excluding net income) as a
separate component in the stockholders' equity section of the consolidated
balance sheet. Classifications included in the accumulated balance are disclosed
on the face of the consolidated balance sheet or statement of changes in
stockholders' equity or in notes to the consolidated financial statements. The
Company's sources of comprehensive income include net income and cumulative
foreign currency translation adjustments. The Company will be required to
implement this statement in fiscal year 1999. Management has not completed its
assessment of how it will present the required information.


                                       23
<PAGE>   26

                        VERITAS DGC INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996

In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which will supersede SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." It will require the
Company to disclose certain financial information in both annual and interim
reporting about "operating segments" which are components of a company that are
evaluated regularly by management in deciding how to allocate its resources and
in assessing its performance. It also requires disclosure about the countries
from which the Company derives its revenues and in which it employs its
long-lived assets. Major customers will continue to be disclosed. The Company
will be required to implement this statement in fiscal year 1999. Management has
not completed its assessment of how the adoption of this statement will affect
its existing segment disclosures.

In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which will supersede the disclosure
requirements of SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." This statement
addresses disclosures only and will require the Company to provide a
reconciliation of the beginning and ending balances of the benefit obligation
and the fair value of plan assets in addition to disclosures already presented.
The Company will be required to implement this statement in fiscal year 1999.

TRANSLATION OF FOREIGN CURRENCIES

The Company has determined that the United States ("U.S.") dollar is its primary
functional currency and, accordingly, most foreign entities translate property
and equipment (and related depreciation) and inventories into U.S. dollars at
the exchange rate in effect at the time of their acquisition while other assets
and liabilities are translated at year-end rates. Operating results (other than
depreciation) are translated at the average rates of exchange prevailing during
the year. The remaining foreign entities use the Canadian dollar as their
functional currency and translate all assets and liabilities at year-end
exchange rates and operating results at average exchange rates prevailing during
the year. Adjustments resulting from the translation of assets and liabilities
are recorded in the cumulative foreign currency translation adjustment account
in stockholders' equity. Remeasurement gains and losses are included in the
determination of net income and are reflected in other costs and expenses. (See
Note 13.)


CASH EQUIVALENTS

For purposes of the Consolidated Statements of Cash Flows, the Company has
defined "cash equivalents" as items readily convertible into known amounts of
cash with original maturities of three months or less.

RESTRICTED CASH INVESTMENTS

Restricted cash investments in the amounts of $186,000 and $550,000 at July 31,
1998 and 1997, respectively, were pledged as collateral on certain bank
guarantees related to contracts entered into in the normal course of business.


ACCOUNTS RECEIVABLE

Included in accounts and notes receivable at July 31, 1998 and 1997 are unbilled
amounts of approximately $43,058,000 and $17,308,000, respectively. Such amounts
are either not billable to the customer at July 31 in accordance with the
provisions of the contract and generally will be billed in one to four months or
are currently billable and will be invoiced in the next monthly statement cycle.

                                       24
<PAGE>   27
                        VERITAS DGC INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996

INVENTORIES

Inventories of materials and supplies are stated at the lower of average cost or
market.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Depreciation is computed using the
straight-line method based on estimated useful lives as follows:

<TABLE>
<CAPTION>
                                           Estimated Useful
                                                 Life
                                           ----------------
<S>                                        <C>
    Seismic equipment                             3-5
    Data processing equipment                       3
    Seismic ship                                    5
    Leasehold improvements and other             3-10
</TABLE>

Expenditures for routine repairs and maintenance are charged to expense as
incurred; expenditures for additions and improvements, including capitalized
interest, are capitalized and depreciated over the estimated useful life of the
related asset. The net gain or loss on property and equipment disposed of is
included in other costs and expenses. (See Note 13.)

In fiscal 1996, the Company recognized impairment of assets in the amount of
$3,628,000 or $.20 per common share and per common share - assuming dilution.
(See Note 12.)

MULTI-CLIENT DATA LIBRARY

The Company collects and processes certain seismic data for its own account to
which it retains all ownership rights and which it resells to clients on a
non-transferable, non-exclusive basis. The Company may obtain precommitted sales
contracts to help fund the cash requirements of these surveys which generally
last from five to seven months. The Company capitalizes associated costs using
an estimated sales method. Under that method the amount capitalized equals
actual costs incurred less costs attributed to the precommitted sales contracts
based on the percentage of total estimated costs to total estimated sales
multiplied by actual sales. The capitalized cost of multi-client data library is
likewise charged to operations in the period subsequent sales occur based on the
percentage of total estimated costs to total estimated sales multiplied by
actual sales. Beginning in fiscal 1997, the Company changed the estimated life
of its multi-client data library so that any costs remaining 24 months after
completion of a survey are charged to operations over a period not to exceed 24
months. The Company periodically reviews the carrying value of the multi-client
data library to assess whether there has been a permanent impairment of value
and records losses when the total estimated costs exceed total estimated sales
or when it is determined that estimated sales would not be sufficient to cover
the carrying value of the asset.

GOODWILL

The Company records the purchase price of businesses or joint venture interests
in excess of the fair value of net assets acquired as goodwill which is
amortized using the straight-line method over a period of 10 to 20 years which
approximates the period benefits are expected to be derived. The Company
periodically reviews the carrying value of goodwill in relation to the current
and expected operating results of the businesses or joint ventures in order to
assess whether there has been a permanent impairment of such amounts.


                                       25
<PAGE>   28
                        VERITAS DGC INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996

MOBILIZATION COST

Transportation and make-ready expenses of seismic operations incurred prior to
commencement of business in an area, that would not have been incurred
otherwise, are deferred and amortized over the lesser of the term of the related
contract or backlog of contracts in that area or one year. Amounts applicable to
operations for the Company's own account are included in the cost of the
multi-client data library. Unamortized mobilization costs are shown as other
assets and totaled $818,000 at July 31, 1998. There were no unamortized
mobilization costs at July 31, 1997.

LEASES

Operating leases include those for office space, specialized seismic equipment
rented for short periods of time, and the Company's seismic ships which
generally are chartered on a short-term basis.

REVENUES

Revenues from data acquisition and data processing services are recognized on
the percentage-of-completion method measured by the amount of data collected or
processed to the total amount of data to be collected or processed or by time
incurred to total time expected to be incurred. Sales from the licensing of
multi-client data surveys are recognized upon delivery of such data based upon
agreed rates set forth in the contract.

RESEARCH AND DEVELOPMENT

Research and development costs are charged to expense when incurred. Research
and development costs for the years ended July 31, 1998, 1997 and 1996 were
$6,196,000, $3,725,000 and $3,193,000, respectively.

STOCK-BASED COMPENSATION

The Company maintains stock-based compensation plans that are accounted for
using the intrinsic value based method allowed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. Under that method, compensation expense is recorded in the
accompanying consolidated financial statements when the quoted market price of
stock at the grant date or other measurement date exceeds the amount an employee
must pay to acquire the stock. As required by SFAS No. 123, "Accounting for
Stock-Based Compensation," the effect on net income and earnings per share of
compensation expense that would have been recorded using the fair value based
method is reported through disclosure. (See Note 9.)


EARNINGS PER SHARE

All per share amounts contained herein have been restated in accordance with
SFAS No. 128, "Earnings per Share," which became effective for interim and
annual reporting periods ending after December 15, 1997. This statement requires
the computation of earnings per share based upon weighted average common shares
outstanding and earnings per share - assuming dilution based upon weighted
average common shares outstanding and additional common shares, utilizing the
treasury stock method and average market prices, that would have been
outstanding if dilutive potential common shares had been issued. (See Note 14.)


                                       26
<PAGE>   29
                        VERITAS DGC INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996

2.      BUSINESS COMBINATION

Veritas DGC Inc. was formerly named Digicon Inc. ("Digicon"). On August 30,
1996, Digicon and Veritas Energy Services Inc. ("VES"), a Canadian company,
consummated a business combination (the "Combination"). VES became a wholly
owned subsidiary of Digicon and Digicon changed its name to Veritas DGC Inc.
(the "Company"). As a result of the Combination, each share of VES no par value
common shares outstanding was converted into the right to receive VES no par
value exchangeable stock (the "Exchangeable Stock") at an exchange ratio of 0.8
of a share of Exchangeable Stock per VES common share. All of the holders of VES
common shares, except for those shareholders who perfected and properly
exercised their right to dissent from the Combination and received fair value of
their shares in cash, became holders of Exchangeable Stock and accordingly,
7,023,701 shares of Exchangeable Stock were issued. The aggregate stated capital
of the Exchangeable Stock is equal to the aggregate stated capital immediately
prior to the Combination of the VES common shares that were exchanged or
approximately $30.0 million. The Exchangeable Stock is convertible, at the
discretion of the stockholder, on a one-for-one basis into shares of the
Company's $0.01 par value common stock and their holders have rights identical
to the holders of the Company's common stock. Options to purchase shares of VES
common stock ("VES Option") were converted into options to purchase shares of
the Company's common stock at an exchange ratio of 0.8 of an option in the
Company's common stock per VES Option. (See Note 9.) The VES articles of
amalgamation were amended to reduce the number of authorized VES common shares
to one which is held by the Company.

The Combination has been accounted for as a pooling of interests and,
accordingly, the accompanying consolidated financial statements have been
prepared on a basis that includes the accounts of Digicon and VES. Information
concerning common stock and per share data has been restated on an equivalent
share basis. As a result of the differing year ends of Digicon and VES, results
of operations for dissimilar year ends have been combined. Digicon's results of
operations for the year ended July 31, 1995 have been combined with VES' results
of operations for the year ended October 31, 1995. To conform year ends,
Digicon's results of operations for the year ended July 31, 1996 have been
combined with VES' results of operations for the twelve months ended July 31,
1996 and, accordingly, VES' operating results for the period August 1,1995
through October 31, 1995 are included in the years ended July 31, 1995 and July
31, 1996. An adjustment in an amount equal to the results of operations for this
three-month period is included in the consolidated statements of changes in
stockholders' equity. VES' revenues, net income, and earnings per share and
earnings per share - assuming dilution were $22,150,000, $936,000 and $0.05,
respectively, for the period August 1, 1995 through October 31, 1995.


                                       27
<PAGE>   30
                        VERITAS DGC INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996

Presented below is the effect of the pooling of interests on previously reported
results of operations for the year ended July 31, 1996. Amounts related to VES
have been converted into the Company's reporting currency, U.S. dollars, using
weighted average exchange rates prevailing during the period and reflect
adjustments for differences between U.S. and Canadian generally accepted
accounting principles ("GAAP") and reclassifications to conform financial
statement presentation. Canadian to U.S. GAAP adjustments include adjustments to
(i) write off foreign exchange losses on borrowings which are deferred and
amortized over the period of the debt, decreasing net income by approximately
$173,000 and (ii) reverse the effect of a prior period adjustment, increasing
net income by approximately $102,000. Reclassification of $28,842,000 has been
made to net amounts billed to customers for reimbursable costs against VES'
revenues.

<TABLE>
<CAPTION>
                                            For the Year Ended July 31, 1996
                                            --------------------------------
                                             Revenues           Net Income
                                            ----------         -------------
                                              (In thousands of dollars)
<S>                                          <C>               <C>      
            Digicon                          $ 160,847         $     385
            VES                                118,591               967
            Reclassifications                  (28,842)
            Adjustments                                              (71)
                                             ---------         ---------
                     Total                   $ 250,596         $   1,281
                                             =========         =========
</TABLE>

The Company's earnings per share and earnings per share - assuming dilution as
previously reported was $0.03 and its earnings per share and earnings per share
-assuming dilution as restated is $0.07.

There were no material adjustments to the net assets of VES as a result of
adopting the same accounting principles as the Company.

During the year ended July 31, 1997 and 1996, the Company incurred and expensed
$597,000 and $3,666,000, respectively, of costs associated with the Combination.
These costs consist primarily of professional fees and include $150,000 payable
to a stockholder who was the former Chairman of the Board of Directors for
consulting services rendered in conjunction with the Combination.


3.     INVESTMENT IN INDONESIAN JOINT VENTURE

Summarized financial information for the Company's 80% owned Indonesian joint
venture (P.T. Digicon Mega Pratama) which is accounted for under the equity
method due to provisions in the joint venture agreement that give minority
shareholders the right to exercise control is as follows:

<TABLE>
<CAPTION>
                                                                              July 31,
                                                                     -------------------------
                                                                       1998             1997
                                                                     --------         --------
                                                                     (In thousands of dollars)
<S>                                                                  <C>              <C>     
         Current assets                                              $  2,740         $  3,697
         Property and equipment, net                                      613               60
         Multi-client data library                                                         228
                                                                     --------         --------
                  Total assets                                       $  3,353         $  3,985
                                                                     ========         ========
                                                                     
         Current liabilities                                         $    410         $  1,077 
         Advances from affiliates                                      13,847           14,784

         Stockholders' deficit:
             Common stock                                               2,576            2,576
             Accumulated deficit                                      (13,480)         (14,452)
                                                                     --------         --------
                  Total stockholders' deficit                         (10,904)         (11,876)
                                                                     --------         --------
                  Total liabilities and stockholders' deficit        $  3,353         $  3,985
                                                                     ========         ========
</TABLE>

                                       28
<PAGE>   31
                        VERITAS DGC INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                      For the Years Ended July 31,
                                                                ---------------------------------------
                                                                 1998            1997             1996
                                                                -------         -------         -------
                                                                        (In thousands of dollars)
<S>                                                             <C>             <C>             <C>    
         Revenues                                               $ 3,346         $ 7,240         $ 2,927
         Cost and expenses:
             Cost of services                                     2,378           6,424           3,429
             Depreciation and amortization                          316
             Other                                                 (320)            (62)            (15)
                                                                -------         -------         -------
                  Total                                           2,374           6,362           3,414
                                                                -------         -------         -------
         Income (loss) before provision for income taxes            972             878            (487)
         Provision for income taxes                                                                 166
                                                                -------         -------         -------
         Net income (loss)                                      $   972         $   878         $  (653)
                                                                =======         =======         =======
</TABLE>

4.     LONG-TERM DEBT

The Company's long-term debt is as follows:

<TABLE>
<CAPTION>
                                                                                     July 31,
                                                                            -------------------------
                                                                             1998             1997
                                                                            -------        ----------
                                                                            (In thousands of dollars)
<S>                                                                         <C>            <C>
         Senior notes due October 2003, at 9 3/4%                           $75,000        $75,000
         Equipment purchase obligations maturing
             through September 2000, at a                                   
             weighted average rate of 9.29% at July 31, 1998                    561            971
                                                                            -------        -------
                  Total                                                      75,561         75,971
         Less current maturities                                                289            383
                                                                            -------        -------
                  Due after one year                                        $75,272        $75,588
                                                                            =======        =======
</TABLE>

The senior notes are due in October 2003 with interest payable semi-annually at
9 3/4%. The senior notes are unsecured and are effectively subordinated to
secured debt of the Company with respect to the assets securing such debt and to
all debt of its subsidiaries whether secured or unsecured. The indenture
relating to the senior notes contains certain covenants which limit the
Company's ability to, among other things, incur additional debt, pay dividends
and complete mergers, acquisitions and sales of assets. Upon a change in control
of the Company, as defined in the indenture, the holders of the senior notes
have the right to require the Company to purchase all or a portion of such
holder's senior note at a price equal to 101% of the aggregate principal amount.
The Company has the right to redeem the senior notes, in whole or part, on or
after October 15, 2000. Under certain conditions, the Company may redeem up to
$20.0 million in aggregate principal amount of the senior notes prior to October
15, 1999.

The Company maintained a revolving credit agreement which matured in July 1998
with a commercial bank that provided advances up to $25.0 million of which $20.0
million were secured by substantially all of the receivables of the Company.
Advances bore interest, at the Company's election, at LIBOR plus two percent or
prime rate and were defined by a borrowing formula. In July 1998, the Company
obtained a new revolving credit agreement due July 2001 with commercial lenders
to provide advances up to $50.0 million. Advances are limited by an unsecured
borrowing base and bear interest, at the Company's election, at LIBOR or prime
rate (8.5% at July 31, 1998) plus a margin based on certain ratios maintained by
the Company. Covenants in the agreement limit, among other things, the Company's
right to take certain actions, including creating indebtedness. In addition, the
agreement requires the Company to maintain certain financial ratios. No advances
were outstanding at July 31, 1998 and 1997 under the credit agreements.

                                       29
<PAGE>   32
                        VERITAS DGC INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996

The Company's equipment purchase obligations represent installment loans and
capitalized lease obligations primarily related to computer and seismic
equipment.

Annual maturities of long-term debt for the next five years are as follows:

<TABLE>
<CAPTION>
                                 Annual
                Fiscal Year    Maturities
                -----------   -------------
                              (In thousands
                               of dollars)
                 <S>           <C>
                   1999        $   289
                   2000            240
                   2001             32
                   2004         75,000
                               =======
                  Total        $75,561
                               =======
</TABLE>

During the year ended July 31, 1998, the Company incurred interest costs of
$8,118,000. The Company capitalized $800,000 of this amount as a cost of
leasehold improvements to a chartered vessel. No interest was capitalized during
the years ended July 31, 1997 and 1996.


5.    OTHER ACCRUED LIABILITIES

Other accrued liabilities included $12,216,000 and $8,313,000 of accrued payroll
and benefits and $19,196,000 and $14,263,000 of deferred revenues at July 31,
1998 and 1997, respectively.


6.    INCOME TAXES

Pretax income was taxed under the following jurisdictions:

<TABLE>
<CAPTION>
                                                For the Years Ended July 31,
                                              ----------------------------------------
                                                1998            1997            1996
                                              --------        --------        --------
                                                     (In thousands of dollars)
          <S>                                  <C>             <C>             <C>     
          U.S.                                $ 90,690        $ 21,098        $  9,457
          Foreign                                9,514           9,211          (5,054)
                                              --------        --------        --------
                  Total                       $100,204        $ 30,309        $  4,403
                                              ========        ========        ========
</TABLE>

The provision for income taxes consists of the following:

<TABLE>
<CAPTION>

                                                   For the Years Ended July 31,
                                            ------------------------------------------
                                              1998             1997             1996
                                            --------         --------         --------
                                                     (In thousands of dollars)
           <S>                              <C>              <C>              <C>    
           Current - U.S.                   $ 36,616         $  3,352         $    192
           Deferred - U.S.                    (5,469)          (2,940)             395
           Current - Foreign                   4,952            3,634            2,555
           Deferred - Foreign                 (1,881)           2,016           (1,133)
                                            --------         --------         --------
                  Total                     $ 34,218         $  6,062         $  2,009
                                            ========         ========         ========
</TABLE>


                                       30
<PAGE>   33

                        VERITAS DGC INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996

A reconciliation of income tax expense computed at the U.S. statutory rate to
the provision reported in the consolidated statements of income is as follows:

<TABLE>
<CAPTION>
                                                                        For the Years Ended July 31,
                                                                 ------------------------------------------
                                                                   1998             1997             1996
                                                                 --------         --------         --------
                                                                          (In thousands of dollars)
<S>                                                              <C>              <C>              <C>     
     Income tax at the statutory rate                            $ 35,071         $ 10,608         $  1,541
                                                                                                     
     Increase (reduction) in taxes resulting from:
       Foreign earnings taxed at other than the U.S.               
         statutory  rate                                           (1,349)           1,806             (131) 
       Write-off of investment                                                      (6,300)          (4,734)
       Contingency                                                  1,036            2,327
       Foreign losses with no tax recovery                                                            4,985
       Foreign tax credit                                          (3,465)
       U.S. tax on Subpart F income and dividends                   1,685
       Employee Nonqualified Stock Option Plan deduction           (1,375)
       U.S. tax on branch operations                                2,567              501
       Prior year tax return to tax provision reconciliation       (1,708)          (3,826)
       Other                                                        1,756              946              348
                                                                 --------         --------         --------
              Total                                              $ 34,218         $  6,062         $  2,009
                                                                 ========         ========         ========
</TABLE>

Deferred taxes result from the effect of transactions that are recognized in
different periods for financial and tax reporting purposes. The primary
components of the Company's deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                                                                             July 31,
                                                                                    -------------------------
                                                                                      1998             1997
                                                                                    --------         --------
                                                                                    (In thousands of dollars)
<S>                                                                                 <C>              <C>     
     Deferred tax assets:
          Difference between book and tax basis of property and equipment           $  4,067         $  1,713
          Difference between book and tax basis of multi-client data library          20,402           13,871
          Net operating loss carryforwards                                            36,111           37,539
          Tax credit carryforwards                                                       334            1,629
          Other                                                                         (693)            (630)
                                                                                    --------         --------
              Total                                                                   60,221           54,122
     Deferred tax liabilities                                                           (259)          (1,425)
                                                                                    --------         --------
     Net deferred tax asset                                                           59,962           52,697
     Valuation allowance                                                             (40,805)         (42,484)
                                                                                    --------         --------
     Net deferred tax asset                                                         $ 19,157         $ 10,213
                                                                                    ========         ========
</TABLE>

A valuation allowance is established when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The valuation
allowance is then adjusted when the realization of deferred tax assets becomes
more likely than not. Adjustments are also made to recognize the expiration of
net operating loss and investment tax credit carryforwards, with equal and
offsetting adjustments to the related deferred tax asset. Should the Company's
income projections result in the conclusion that realization of additional
deferred tax assets is more likely than not, further adjustments to the
valuation allowance are made. Since the Company's quasi-reorganization with
respect to Digicon on July 31, 1991 the tax benefits of net operating loss
carryforwards existing at the date of the quasi-reorganization have been
recognized through a direct addition to paid-in capital, when realization is
more likely than not. The net reduction of approximately $1,679,000 in the
valuation allowance during the current period resulted primarily from
recognition of the expected utilization of net operating loss carryforwards
generated prior to the quasi-reorganization and the expiration of investment tax
credits.

As of July 31, 1998, the Company has U.S. net operating loss carryforwards of
approximately $77,964,000 and investment tax credit carryforwards of
approximately $334,000. Approximately 


                                       31
<PAGE>   34

                        VERITAS DGC INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996

$53,421,000 of net operating loss carryforwards and all of the investment tax
credit carryforwards existed prior to the quasi-reorganization. The following
schedule sets forth the expiration dates of the U.S. net operating loss and
investment tax credit carryforwards:

<TABLE>
<CAPTION>
                                U.S. Net          Investment
             Fiscal Year      Operating Loss      Tax Credit
             -----------    ----------------      ----------
                              (In thousands of dollars)
                <S>         <C>                   <C>    
                1999        $ 2,209               $   315
                2000          9,406                    19
                2001         30,032
                2003          4,222
                2004          6,355
                2005          1,198
                2006          1,347
                2007          2,505
                2009          7,994
                2010          2,710
                2011          9,986
                            -------               -------
                   Total    $77,964               $   334
                            =======               =======
</TABLE>

Internal Revenue Service regulations restrict the utilization of U.S. net
operating loss carryforwards and other tax benefits (such as investment tax
credits) for any company in which an "ownership change" (as defined in Section
382 of the Internal Revenue Code) has occurred. The Company has performed the
required testing and has concluded that two "ownership changes" have occurred.
The first occurred in connection with the issuance of common stock through a
public offering made by the Company on January 6, 1992. The utilization of U.S.
net operating loss carryforwards existing at the date of the first "ownership
change" is limited to approximately $4,041,000 per year. The second "ownership
change" occurred on August 30, 1996 as a result of the stock acquisition of
Veritas Energy Services Inc. The utilization of U.S. net operating losses
incurred between the first and second ownership changes is limited to
approximately $8,875,000 per year, which includes the limitation of
approximately $4,041,000 from the first ownership change. The second limitation
also applies to the limitation from the first ownership change that accumulated
during the periods between the first and second ownership changes. During the
years ended July 31, 1998 and 1997, the Company utilized approximately
$8,875,000 and $10,983,000 of limitation carryover, respectively. As of July 31,
1998, approximately $11,492,000 of unused limitation carryover remained.

Foreign operations had net operating loss carryforwards of approximately
$25,187,000 at July 31, 1998, of which approximately $14,385,000 existed prior
to the quasi-reorganization. Approximately $16,677,000 of the total foreign net
operating loss carryforwards are related to United Kingdom operations, have an
indefinite carryforward period, and are available to offset future profits in
the Company's current trade or business. Approximately $13,312,000 of the United
Kingdom net operating loss carryforwards existed prior to the
quasi-reorganization. Approximately $4,186,000 of the total foreign net
operating loss carryforwards are related to Oman operations, were generated
after the quasi-reorganization and have a carryforward period of five years.

The Company considers the undistributed earnings of its foreign subsidiaries to
be permanently reinvested. The Company has not provided deferred U.S. income tax
on those earnings, as it is not practicable to estimate the amount of additional
tax that might be payable should these earnings be remitted or deemed remitted
as dividends or if the Company should sell its stock in the subsidiaries.

                                       32
<PAGE>   35
                        VERITAS DGC INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996

7.    DEFERRED CREDITS

In August 1992, the Company entered into agreements with a customer pursuant to
which the Company received certain seismic equipment with a fair value of
approximately $1,792,000 and was obligated to allow $7,800,000 in discounts at
specified rates on future seismic services performed by the Company for such
customer. The Company recorded deferred revenue equal to the fair value of
seismic equipment at the time the equipment was received. The deferred revenue
is amortized as an adjustment to revenues at a rate determined by the ratio of
revenues generated by the customer during a reporting period to total revenues
estimated to be generated by the customer under the agreements. Revenues are
recognized net of discounts allowed as the customer purchases seismic services
eligible for the discounts. At July 31, 1998, there was no remaining
unrecognized deferred revenue and remaining discounts in the amount of
$1,847,000 were available to such customer.

The Company also has $585,000 and $5,022,000 at July 31, 1998 and 1997,
respectively, included in accounts payable-trade relating to deferred credits
earned by certain customers in conjunction with their original participation in
certain of the Company's multi-client data surveys. These credits may be applied
by the customers against future invoiced amounts.


8.    COMMITMENTS AND CONTINGENT LIABILITIES

Total rentals of vessels, equipment and office facilities charged to operations
amounted to $57,476,000, $37,332,000 and $28,210,000 for the years ended July
31, 1998, 1997 and 1996, respectively.

Minimum rentals payable under operating leases, principally for office space and
vessel charters with remaining noncancellable terms of at least one year are as
follows:

<TABLE>
<CAPTION>
                            Fiscal Year     Minimum Rentals
                            -----------  -------------------------
                                         (In thousands of dollars)
                            <S>              <C>    
                                 1999        $37,636
                                 2000         25,214
                                 2001         13,081
                                 2002         10,066
                                 2003          9,988
                                 2004-2013    27,544
</TABLE>

In connection with the Company's 1999 capital expenditure program, the Company
has commitments of approximately $3,000,000 outstanding at July 31, 1998.

On November 25, 1997, the Company entered into a 96-month charter agreement for
a vessel which is being constructed by a shipbuilder for the owner. The charter
is noncancellable unless the owner exercises its right to cancel the
shipbuilding contract due to late delivery (in excess of 180 days of the
scheduled delivery time of May 1999).

The Company has an employment agreement with a former employee, who was also a
director, that contains a non-compete clause for a period of three years ending
December 31, 1998 during which time the former employee will receive payments of
$12,709 per month plus certain employee benefits.

During 1993 the Company purchased occurrence-based workers compensation
insurance. The policies for the years ended August 31, 1998 and 1997 were issued
under a guaranteed cost program and, accordingly, there were no deductibles. The
policy for the year ended August 31, 1996 provided for a maximum deductible of
$1,000,000. Management has evaluated the adequacy of the accrual for the
liability for incurred but unreported workers compensation claims and has
determined that the ultimate 

                                       33
<PAGE>   36
                        VERITAS DGC INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996

resolution of any such claims would not have a material adverse impact on the
financial position of the Company. The Company has letters of credit in the
amount of $4,150,000 at July 31,1998 that will expire upon the completion of
certain events relating to specific contracts.


9.     EMPLOYEE BENEFITS

The Company maintains a 401(k) plan in which employees of the Company's
majority-owned domestic subsidiaries and certain foreign subsidiaries are
eligible to participate. However, employees of foreign subsidiaries who are
covered under a foreign deferred compensation plan are not eligible. Employees
are permitted to make contributions of up to 10% of their salary to a maximum of
$9,500 per year. Generally, the Company will contribute an amount equal to
one-half of the employee's contribution of up to $8,000 or 8% of the employee's
salary (whichever is less); however, if consolidated pre-tax income for any
fiscal year is less than the amount required to be contributed by the Company,
the Company may elect to reduce its contribution, but in no event may it reduce
the total contribution to less than 25% of the employee contribution. The
Company may make additional contributions from its current or cumulative net
profits in an amount to be determined by the Board of Directors. The Company's
matching contributions to the 401(k) plan were $679,000 in 1998, $426,000 in
1997, and $314,000 in 1996.

The Company has an employee nonqualified stock option plan under which options
are granted to officers and key employees. Options generally vest over a period
of time and are exercisable over a ten-year period but may not be exercised
earlier than six months after the grant date. The exercise price for each option
shall not be less than the lesser of (i) the fair market value of the common
stock on the grant date or (ii) the average fair market value of the common
stock during the 30 trading days ending on the trading day next preceding the
grant date. The Company has authorized 1,158,333 shares of common stock to be
issued under the plan.

The Company also has a stock option plan for non-employee directors (the
"Director Plan") under which options are granted to non-employee directors of
the Company. The Director Plan provides that every other year each eligible
director shall be granted options to purchase 10,000 shares of the Company's
common stock. Options vest ratably over four years on the anniversary of the
grant date and are exercisable over ten years. The exercise price for each
option granted is fair market value, as defined. The Company has authorized
600,000 shares of common stock to be issued under the Director Plan.



                                       34
<PAGE>   37
                        VERITAS DGC INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996

At the date of Combination (see Note 2), options to purchase VES Common Stock
("VES Option") were converted into options to purchase shares of the Company's
common stock at an exchange ratio of 0.8 of an option in the Company's common
stock per VES Option. All options are immediately exercisable and expire at
varying times through November 2005.

<TABLE>
<CAPTION>
                                                                    For the Year Ended July 31, 1998
                                                     --------------------------------------------------------------
                                                                                        Weighted         Weighted
                                                                       Weighted       Average Grant       Average
                                                      Number of        Average          Date Fair       Contractual
                                                       Shares       Exercise Price        Value            Life
                                                     ----------     --------------    -------------     -----------
<S>                                                  <C>            <C>               <C>               <C>
    Beginning balance                                1,276,364      $    15.18
    Options granted                                    133,426      $    30.95
    Options exercised                                 (326,733)     $    11.94
    Options forfeited                                  (60,518)     $    19.78
                                                     ---------      
    Ending balance                                   1,022,539      $    18.00
                                                     =========      
    Options exercisable                                366,482      $    12.38
                                                     =========      

    Options granted by range of exercise price:
      Exercise price less than market price              5,954      $    38.30        $    39.56
      Exercise price equal to market price             125,444      $    30.32        $    30.32
      Exercise price more than market price              2,028      $    48.31        $    47.57
                                                     ---------      
                                                       133,426
                                                     =========      

    Ending balance by range of exercise price:
      $ 5.25 - $ 7.28                                  196,201      $     6.45                              6.5
      $13.50 - $20.25                                  735,618      $    18.93                              8.6
      $20.38 - $28.75                                   33,205      $    25.55                              9.0
      $36.06 - $52.81                                   57,154      $    41.17                              9.3
      $55.13 - $56.50                                      361      $    55.95                              9.8
                                                     ---------      
      Ending balance                                 1,022,539
                                                     =========      

    Options exercisable by range of exercise
    price:
      $ 5.25 - $ 7.28                                  196,201      $     6.45
      $13.50 - $20.25                                  151,436      $    17.14
      $20.38 - $28.75                                    6,280      $    25.90
      $36.06 - $52.81                                   12,475      $    40.89
      $55.13 - $56.50                                       90      $    55.95
                                                     ---------      
      Options exercisable                              366,482
                                                     =========      
</TABLE>

                                       35
<PAGE>   38
                        VERITAS DGC INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                              For the Year Ended July 31, 1997
                       ----------------------------------------------
                                                          Weighted
                                         Weighted       Average Grant
                       Number of         Average         Date Fair
                         Shares       Exercise Price       Value
                       ---------      --------------    -------------
<S>                      <C>          <C>               <C>
Beginning balance        837,840      $    8.30
Options granted          837,241      $   19.38         $   19.38
Options exercised       (360,385)     $    8.82
Options forfeited        (38,332)     $   16.30
                       ---------
Ending balance         1,276,364      $   15.18
                       =========  
Options exercisable      467,536      $    7.93
                       =========
</TABLE>

<TABLE>
<CAPTION>
                               For the Year Ended July 31, 1996
                        -------------------------------------------
                                                        Weighted 
                                       Weighted       Average Grant
                        Number of      Average          Date Fair
                         Shares     Exercise Price        Value
                        ---------   --------------    -------------
<S>                      <C>          <C>             <C>
Beginning balance        877,263      $   10.98
Options granted          400,160      $    6.25         $   6.25
Options exercised       (388,171)     $   12.35
Options forfeited        (51,412)     $    7.49
                        --------
Ending balance           837,840      $    8.30
                        ======== 
Options exercisable      667,340      $    9.08
                        ======== 
</TABLE>

The weighted average fair values of options granted are determined using the
Black-Scholes option valuation method assuming no expected dividends. Other
assumptions used are as follows:

<TABLE>
<CAPTION>
                                       For the Years Ended July 31,
                             ---------------------------------------------------
                                 1998               1997               1996
                             -------------      -------------      -------------
<S>                              <C>                <C>                <C> 
Risk-free interest rate          6.1%               6.6%               5.9%
Expected volatility             49.6%              50.2%              48.8%
Expected life                   10.0 years         10.0 years          8.7 years
</TABLE>

In conjunction with certain employment agreements, the Company issued 13,025 and
10,000 shares of restricted stock with weighted average grant date fair values
of $33.66 and $20.25 per share, respectively, during the years ended July 31,
1998 and 1997, respectively, to certain individuals in exchange for services
rendered over a three-year period.

On November 1, 1997, the Company initiated a compensatory employee stock
purchase plan for up to 500,000 shares of common stock. Participation is
voluntary and substantially all full-time employees meeting limited eligibility
requirements may participate. Contributions are made through payroll deductions
and may not be less than 1% or more than 15% of the participant's base pay as
defined. The participant's option to purchase common stock is deemed to be
granted on the first day and exercised on the last day of the fiscal quarter at
a price which is the lower of 85% of the market price on the first or last day
of the fiscal quarter. During the year ended July 31, 1998, 52,731 shares of
common stock were issued with a weighted average grant date fair value of $35.37
per share.

                                       36
<PAGE>   39
                        VERITAS DGC INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996

On June 9, 1998, the Company initiated a restricted stock plan for up to 50,000
shares. The eligibility of an employee and the terms and amount of the grant are
determined by the Board of Directors' Compensation Committee. During the year
ended July 31, 1998, 4,400 shares of restricted stock were issued at a weighted
average grant date fair value of $43.09 per share which will vest over a
three-year period.

Compensation expense relating to the stock-based compensation plans described
above was $506,000 and $23,000 for the years ended July 31, 1998 and 1997,
respectively. No compensation expense was recognized for the year ended July 31,
1996. The effect on net income and earnings per share that would have been
recorded using the fair value based method is as follows:

<TABLE>
<CAPTION>
                                                                    For the Years Ended July 31,
                                                                -----------------------------------
                                                                  1998          1997        1996
                                                                ---------     -------     ---------
                                                              (In thousands, except per share amounts)
<S>                                                             <C>           <C>         <C>      
     Net income reported                                        $  66,958     $25,125     $   1,281
                                                                =========     =======     =========
     Pro forma net income                                          64,498     $24,138     $     692
                                                                =========     =======     =========

     Earnings per common share reported                         $    2.96     $  1.33     $    0.07
                                                                =========     =======     =========
     Pro forma earnings per common share                        $    2.85     $  1.28     $    0.04
                                                                =========     =======     =========

     Earnings per common share - assuming dilution reported     $    2.87     $  1.30     $    0.07
                                                                =========     =======     =========
     Proforma earnings per common share - assuming dilution     $    2.77     $  1.25     $    0.04
                                                                =========     =======     =========
</TABLE>

The effect on net income and earnings per share may not be representative of the
effects on future net income and earnings per share because some options vest
over several years and additional awards may be granted.

The Company maintains a contributory defined benefit pension plan (the "Pension
Plan") for eligible participating employees in the United Kingdom offices.
Monthly contributions by employees are equal to 4% of their salaries with the
Company providing an additional contribution in an actuarially determined amount
necessary to fund future benefits to be provided under the Pension Plan.
Benefits provided are based upon 1/60 of the employee's final pensionable salary
(as defined) for each complete year of service up to 2/3 of the employee's final
pensionable salary and increase annually at 5%. The Pension Plan also provides
for 50% of such actual or expected benefits to be paid to a surviving spouse
upon the death of a participant. Pension Plan assets consist mainly of
investments in marketable securities which are held and managed by an
independent trustee. The net periodic pension costs are as follows:

<TABLE>
<CAPTION>
                                                    For the Years Ended July 31,
                                                    ----------------------------
                                                    1998       1997       1996
                                                    -----      -----      -----
                                                     (In thousands of dollars)
<S>                                                 <C>        <C>        <C>  
Service costs (benefits earned during the period)   $ 457      $ 238      $ 224
Interest costs on projected benefit obligation        441        384        292
Return on assets                                     (695)      (392)      (312)
Net amortization and deferral                         224          5          5
                                                    -----      -----      -----
Net periodic pension costs                          $ 427      $ 235      $ 209
                                                    =====      =====      =====
</TABLE>

                                       37
<PAGE>   40
                        VERITAS DGC INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996

The funded status of the Pension Plan is as follows:

<TABLE>
<CAPTION>
                                                                       July 31,
                                                                 --------------------
                                                                  1998         1997
                                                                 -------      -------
                                                               (In thousands of dollars)
<S>                                                              <C>          <C>    
Plan assets at fair value                                        $ 6,443      $ 5,277

Projected benefit obligation:
  Actuarial present value of accumulated vested benefit       
    obligations                                                    7,400        4,726
  Effect of future salary increases                                1,492          753
                                                                 -------      -------
      Total projected benefit obligation                           8,892        5,479
                                                                 -------      -------
Projected benefit obligation in excess of plan assets             (2,449)        (202)
Unrecognized prior service cost                                                    49
Unrecognized net loss                                              2,243
                                                                 -------      -------
Pension liability                                                $  (206)     $  (153)
                                                                 =======      =======
</TABLE>

The weighted average assumptions used to determine the projected benefit
obligation and the expected long-term rate of return on assets are as follows:

<TABLE>
<CAPTION>
                                                             For the Years Ended July 31,
                                                             ----------------------------
                                                                1998     1997     1996
                                                                ----     ----     ----
<S>                                                             <C>      <C>      <C> 
Discount rate                                                   6.5%     8.0%     8.5%
Rates of increase in compensation levels                        4.5%     6.0%     6.5%
Expected long-term rate of return on assets                     7.0%     8.5%     9.0%
</TABLE>

10.  COMMON AND PREFERRED STOCK

The board of directors, without any action by the stockholders, may issue up to
one million shares of authorized preferred stock, par value, $.01, in one or
more series and determine the voting rights, preferences as to dividends and in
liquidation and the conversion and other rights of such stock. There are no
shares of preferred stock outstanding as of July 31, 1998.

On May 27, 1997, the board of directors of the Company declared a distribution
of one right for each outstanding share of common stock or Exchangeable Stock
(see Note 2) to shareholders of record at the close of business on June 12, 1997
and designated 400,000 shares of the authorized preferred stock as a class to be
distributed under a shareholder rights agreement. Upon the occurrence of certain
events enumerated by the shareholder rights agreement, each right entitles the
registered holder to purchase a fraction of a share of the Company's authorized
preferred stock or the common stock of an acquiring company. The rights, among
other things, will cause substantial dilution to a person or group that attempts
to acquire the Company. The rights expire on May 15, 2007 but may be redeemed
earlier.

In July 1998, the Board of Directors approved a stock repurchase program under
which the Company is authorized to buy up to 1,000,000 shares of its outstanding
common stock in open market transactions. At July 31, 1998, the Company had
repurchased 50,000 shares at $34.50 per share.


11.    WARRANTS

In conjunction with the cancellation of a previous issue of common and preferred
stock and certain other liabilities, the Company authorized 454,545 warrants
which may be exercised for 454,545 shares of common stock. The warrants were
issued for a term of five years beginning July 5, 1991 at an exercise price of
$18.00 per share. The warrants could only be exercised for cash. Warrants for
29,433 shares were exercised on July 5, 1996 and the remaining warrants expired.

                                       38
<PAGE>   41
                        VERITAS DGC INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996

In conjunction with a previously outstanding secured term loan, the Company
issued 113,333 warrants exercisable at a price of $6.00 per share. The warrants
were exercised in December 1996.

In conjunction with previously outstanding short-term related party loans, the
Company issued warrants to purchase 120,000 common shares for cash at a price of
$4.50 per share to the lenders. As of July 31, 1998, all warrants have been
exercised.


12.    WRITE-OFF/WRITE-DOWN OF ASSETS

In connection with the Combination, management committed the Company to a plan
to upgrade its seismic data processing hardware. Certain equipment was scheduled
to be replaced by October 1996. During July 1996, the Company recognized
impairment of $3,628,000 relating to the abandonment of the equipment to be
replaced.


13.    OTHER COSTS AND EXPENSES

Other costs and expenses consist of the following:

<TABLE>
<CAPTION>
                                                                        For the Years Ended July 31,
                                                                  ---------------------------------------
                                                                    1998           1997             1996
                                                                  -------         -------         -------
                                                                         (In thousands of dollars)
         <S>                                                      <C>             <C>             <C>
         Net foreign currency exchange (gains) losses             $ 2,333         $    46         $  (156)
         Net loss on disposition of property and equipment          1,549           1,151             875
         Interest income                                           (4,220)           (552)           (547)
         Other                                                                        (15)            374
                                                                  -------         -------         -------
                  Total                                           $  (338)        $   630         $   546
                                                                  =======         =======         =======
</TABLE>


14.     EARNINGS PER COMMON SHARE

Earnings per common share and earnings per common share - assuming dilution are
computed as follows:

<TABLE>
<CAPTION>
                                                                          For the Years Ended July 31,
                                                                     -------------------------------------
                                                                       1998            1997           1996
                                                                     -------        -------        -------
                                                                    (In thousands, except per share amounts)
<S>                                                                  <C>            <C>            <C>    
         Net income                                                  $66,958        $25,125        $ 1,281
                                                                     =======        =======        =======
         Weighted average common shares                               22,594         18,898         17,882
                                                                     =======        =======        =======
         Earnings per common share                                   $  2.96        $  1.33        $  0.07
                                                                     =======        =======        =======

          Weighted average common shares - assuming dilution:
                  Weighted average common shares                      22,594         18,898         17,882
                  Shares issuable from assumed conversion of:
                      Options                                            721            432             86
                      Warrants                                                           34            127
                                                                     -------        -------        -------
                              Total                                   23,315         19,364         18,095
                                                                     =======        =======        =======
         Earnings per common share - assuming dilution               $  2.87        $  1.30        $  0.07
                                                                     =======        =======        =======
</TABLE>

Exchangeable Stock issued in the business combination between Digicon, and VES
is included in both computations. (See Note 2.) Options to purchase 22,810
common shares at exercise prices ranging from $42 to $56 1/2 expiring through
July 2008 and 241,489 common shares at exercise prices ranging from 127/8 to 13
1/2 expiring through November 2002 have been excluded from the computation
assuming 


                                       39
<PAGE>   42
                        VERITAS DGC INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996

dilution for the years ended July 31, 1998, and 1996, respectively,
because the options' exercise prices exceeded the average market price of the
underlying common shares. There were no anti-dilutive options for the year ended
July 31, 1997.

15.     RELATED PARTY TRANSACTIONS

The Company is party to transactions with P.T. Digicon Mega Pratama ("P.T.
Digicon"), an 80% owned joint venture (see Note 3), in the normal course of
business. During the years ended July 31, 1998, 1997 and 1996, the Company
charged P.T. Digicon $368,000, $1,429,000 and $1,207,000, respectively, relating
to allocations of corporate administrative expenses and actual expenses incurred
by P.T. Digicon for salary cost, insurance and equipment charges. Advances from
the Company to P.T. Digicon of $13,847,000 and $14,784,000 at July 31, 1998 and
1997, respectively, have no formal repayment terms and do not bear interest.

16.     GEOGRAPHICAL INFORMATION

Substantially all of the Company's operations consist of geophysical services.
The following tables provide relevant information for the years ended July 31,
1998, 1997 and 1996, grouped by major geographic areas.
Intersegment sales between geographic areas are valued at current market prices.

<TABLE>
<CAPTION>
                                                                    For the Year Ended July 31, 1998
                                        ------------------------------------------------------------------------------------
                                                           Revenues                       
                                        ----------------------------------------------          Operating
                                        Unaffiliated     Intersegment                            Profit         Identifiable
                                         Customers           Sales             Total             (Loss)            Assets
                                        ------------     ------------        ---------         ----------       ------------
                                                                    (In thousands of dollars)
<S>                                     <C>                <C>               <C>                <C>              <C>      
Geographic areas:
     Europe                             $  51,089          $   6,819         $  57,908          $  18,945        $  56,699
     Middle East                           13,632                               13,632             (3,762)          12,243
     Asia Pacific                          42,462                               42,462              7,746           39,328
     Latin America                         93,494                               93,494              6,302           45,068
     Canada                                47,059                112            47,171              1,616           23,581
     Eliminations                                                (70)              (70)
                                        ---------          ---------         ---------          ---------        ---------
             Totals                       247,736              6,861           254,597             30,847          176,919
     United States                        281,223*                 4           281,227*            95,095          239,317
     Eliminations                                             (6,865)           (6,865)
                                        ---------          ---------         ---------          ---------        ---------
             Totals                       528,959                              528,959            125,942          416,236
Corporate expenses                                                                                (18,758)
Interest                                                                                           (7,318)
Other                                                                                                 338
Income taxes                                                                                      (34,218)
Investments in 50% or less-owned                                                                      
   companies and joint ventures                                                                       972            2,943
Corporate assets                                                                                                    59,311
                                        ---------          ---------         ---------          ---------        ---------
       Totals                           $ 528,959          $                 $ 528,959          $  66,958        $ 478,490
                                        =========          =========         =========          =========        =========
</TABLE>

----------------------
* Includes export sales of $458.

There was no single client that accounted for 10% or more of total revenues
during the year ended July 31, 1998. During 1998, depreciation and amortization
expense was $4,062,000 for Europe; $4,415,000 for Middle East; $5,064,000 for
Asia Pacific; $5,478,000 for Latin America; $8,541,000 for Canada and
$28,561,000 for the United States. Capital expenditures were $34,942,000 for
Europe; $3,122,000 for Middle East; $15,071,000 for Asia Pacific; $7,057,000 for
Latin America; $5,494,000 for Canada and $33,863,000 for the United States.


                                       40
<PAGE>   43
                        VERITAS DGC INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                              For the Year Ended July 31, 1997
                                      ----------------------------------------------------------------------------------
                                                          Revenues                            
                                      ------------------------------------------------         Operating
                                       Unaffiliated       Intersegment                           Profit         Identifiable
                                        Customers            Sales             Total             (Loss)            Assets
                                       ------------       ------------       ---------        -----------       ------------
                                                                      (In thousands of dollars)
<S>                                     <C>                <C>               <C>                <C>              <C>      
Geographic areas:
     Europe                             $  42,798          $   9,982         $  52,780          $  14,756        $  31,880
     Middle East                            2,403                                2,403               (603)          12,607
     Asia Pacific                          30,203                               30,203              2,661           30,538
     Latin America                         51,157                               51,157              1,884           29,052
     Canada                                52,141              2,698            54,839              2,763           31,924
     Eliminations                                             (2,705)           (2,705)
                                        ---------          ---------         ---------          ---------        ---------
             Totals                       178,702              9,975           188,677             21,461          136,001
     United States                        184,013*               169           184,182*            28,967          166,696
     Eliminations                                            (10,144)          (10,144)
                                        ---------          ---------         ---------          ---------        ---------
             Totals                       362,715                              362,715             50,428          302,697
Corporate expenses                                                                                (11,408)
Interest                                                                                           (7,484)
Merger related costs                                                                                 (597)
Other                                                                                                (630)
Income taxes                                                                                       (6,062)
Investments in 50% or less-owned
   companies and joint ventures                                                                       878            2,908
Corporate assets                                                                                                    79,484
                                        ---------          ---------         ---------          ---------        ---------
       Totals                           $ 362,715          $                 $ 362,715          $  25,125        $ 385,089
                                        =========          =========         =========          =========        =========
</TABLE>

-------------------
* Includes export sales of $4,115.

There was no single client that accounted for 10% or more of total revenues
during the year ended July 31, 1997. During 1997, depreciation and amortization
expense was $2,818,000 for Europe; $939,000 for Middle East; $2,996,000 for Asia
Pacific; $4,550,000 for Latin America; $8,961,000 for Canada and $20,367,000 for
the United States. Capital expenditures were $4,783,000 for Europe; $11,136,000
for Middle East; $6,845,000 for Asia Pacific; $4,883,000 for Latin America;
$6,560,000 for Canada and $61,843,000 for the United States.


                                       41
<PAGE>   44
                        VERITAS DGC INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                For the Year Ended July 31, 1996
                                      -------------------------------------------------------------------------------------
                                                         Revenues                            
                                      -----------------------------------------------         Operating
                                       Unaffiliated       Intersegment                          Profit         Identifiable
                                        Customers            Sales             Total            (Loss)            Assets
                                      -------------       ------------       ---------         ---------       ------------
                                                                   (In thousands of dollars)
<S>                                   <C>                  <C>               <C>               <C>               <C>
Geographic areas:
     Europe                             $  37,394          $   1,532         $  38,926         $   8,065         $  35,463
     Asia Pacific                          30,558                               30,558             1,745            23,590
     Latin America                         36,346                 92            36,438            (1,289)           29,758
     Canada                                47,423                 87            47,510             4,079            30,666
                                        ---------          ---------         ---------         ---------         ---------
             Totals                       151,721              1,711           153,432            12,600           119,477
     United States                         98,875*                61            98,936*            8,736            77,561
     Eliminations                                             (1,772)           (1,772)
                                        ---------          ---------         ---------         ---------         ---------
             Totals                       250,596                              250,596            21,336           197,038
Corporate expenses                                                                                (7,255)
Interest                                                                                          (5,466)
Merger related costs                                                                              (3,666)
Other                                                                                               (546)
Income taxes                                                                                      (2,009)
Investments in 50% or less-owned
   companies and joint ventures                                                                   (1,113)            1,463
Corporate assets                                                                                                        91
                                        ---------          ---------         ---------         ---------         ---------
       Totals                           $ 250,596          $                 $ 250,596         $   1,281         $ 198,592
                                        =========          =========         =========         =========         =========
</TABLE>

--------------------------
* Includes export sales of $4,774.

There was no single client that accounted for 10% or more of total revenues
during the year ended July 31, 1996. During 1996, operating profit (loss)
included write-off/write-down for impairment of assets of $2,091,000 for Europe;
$1,127,000 for Asia Pacific and $410,000 for the United States. Depreciation and
amortization expense was $5,182,000 for Europe; $1,707,000 for Asia Pacific;
$4,655,000 for Latin America; $7,689,000 for Canada and $7,688,000 for the
United States. Capital expenditures were $4,088,000 for Europe; $6,795,000 for
Asia Pacific; $4,734,000 for Latin America; $3,657,000 for Canada and
$13,586,000 for the United States.


                                       42
<PAGE>   45
                        VERITAS DGC INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996

17.    SELECTED UNAUDITED QUARTERLY FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                             For the Year Ended July 31, 1998
                                                                 --------------------------------------------------------------
                                                                 1st Quarter      2nd Quarter      3rd Quarter      4th Quarter
                                                                 -----------      -----------      -----------      -----------
                                                                      (In thousands of dollars, except per share amounts)
<S>                                                                 <C>             <C>             <C>             <C>     
         Revenues                                                   $142,186        $123,569        $122,810        $140,394
         Gross profit                                                 48,933          42,765          47,429          42,936
         Net income                                                   21,319          17,677          16,062          11,900
         Earnings per common share*                                      .95             .79             .71             .52
         Earnings per common share - assuming dilution*                  .94             .76             .69             .51
</TABLE>

<TABLE>
<CAPTION>
                                                                             For the Year Ended July 31, 1997
                                                                 --------------------------------------------------------------
                                                                 1st Quarter      2nd Quarter      3rd Quarter      4th Quarter
                                                                 -----------      -----------      -----------      -----------
                                                                        (In thousands of dollars, except per share amounts)
<S>                                                                 <C>             <C>             <C>             <C>     
         Revenues                                                   $ 76,405        $ 90,691        $ 86,843        $108,776
         Gross profit                                                 18,085          22,709          23,499          26,766
         Merger related costs                                            597
         Net income                                                    5,168           6,507           6,086           7,364
         Earnings per common share*                                      .28             .35             .32             .37
         Earnings per common share - assuming dilution*                  .27             .34             .32             .37
</TABLE>

*  Quarterly per share amounts may not total to annual per share amounts because
   weighted average common shares for the quarter may vary from weighted average
   common shares for the year.



                                       43
<PAGE>   46

ITEM 9.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
FINANCIAL DISCLOSURE

Previously reported in Form 10-K for the fiscal year ended July 31, 1997.

                                    PART III

ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this item is incorporated by reference to the material
appearing under the headings "Election of Directors - Nominees" and "Other
Information - Executive Officer Tenure and Identification" in the Proxy
Statement for the 1998 Annual Meeting of Stockholders.

ITEM 11.     EXECUTIVE COMPENSATION

Information required by this item is incorporated by reference to the material
appearing under the heading "Other Information - Executive Compensation" in the
Proxy Statement for the 1998 Annual Meeting of Stockholders.

ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required by this item is incorporated by reference to the material
appearing under the headings "Election of Directors" and "Other Information -
Certain Stockholders" in the Proxy Statement for the 1998 Annual Meeting of
Stockholders.

ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by this item is incorporated by reference to the material
appearing under the heading "Other Information - Certain Transactions" in the
Proxy Statement for the 1998 Annual Meeting of Stockholders.

                                     PART IV

ITEM 14.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

                        CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                        Page Number
                                                                                        -----------
<S>                                                                                          <C>
Reports of Independent Accountants                                                           15
Consolidated Statements of Income for the Three Years Ended July 31, 1998                    18
Consolidated Balance Sheets as of  July 31, 1998 and 1997                                    19
Consolidated Statements of Cash Flows for the Three Years Ended July 31, 1998                20
Consolidated Statements of Changes in Stockholders' Equity for the Three Years               
     Ended  July 31, 1998                                                                    22
Notes to Consolidated Financial Statements                                                   23
</TABLE>

                   CONSOLIDATED FINANCIAL STATEMENT SCHEDULES

All other financial statement schedules are omitted for the reason that they are
not required or are not applicable, or the required information is shown in the
consolidated financial statements or the notes thereto.

Individual financial statements of 50% or less-owned companies and joint
ventures accounted for by the equity method have been omitted because such 50%
or less-owned companies and joint ventures, considered in the aggregate as a
single subsidiary, would not constitute a significant subsidiary.


                                       44
<PAGE>   47

             FORM 8-K REPORTS DURING THE QUARTER ENDED JULY 31, 1998

No Form 8-K reports were filed during the quarter ended July 31, 1998.

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
      Exhibit
      -------
      <S>         <C>
           2)     Combination Agreement dated as of May 10, 1996, between
                  Digicon Inc. and Veritas Energy Services Inc. (Exhibit 2.1 of
                  Digicon Inc.'s Current Report on Form 8-K dated May 10, 1996
                  is incorporated herein by reference.)

         3-A)     Restated Certificate of Incorporation with amendments of
                  Digicon Inc. dated August 30, 1996. (Exhibit 3.1 to Veritas
                  DGC Inc.'s Current Report on Form 8-K dated September 16, 1996
                  is incorporated herein by reference.)

         3-B)     Certificate  of  Ownership  and Merger of New Digicon  Inc.  
                  and Digicon Inc. (Exhibit 3-B to Digicon Inc.'s Registration
                  Statement No. 33-43873 dated November 12, 1991 is incorporated
                  herein by reference.)

         3-C)     By-laws of New Digicon Inc.  dated June 24, 1991.  (Exhibit  
                  3-C to Digicon Inc.'s Registration Statement No. 33-43873
                  dated November 12, 1991 is incorporated herein by reference).

         4-A)     Specimen certificate for Senior Notes. (Included as part of
                  Section 2.2 of Exhibit 4-B to Veritas DGC Inc.'s Registration
                  Statement No. 333-12481 dated September 20, 1996 is
                  incorporated herein by reference.)

         4-B)     Form of Trust Indenture relating to the 9 3/4% Senior Notes
                  due 2003 of Veritas DGC Inc. between Veritas DGC Inc. and
                  Fleet National Bank, as trustee. (Exhibit 4-B to Veritas DGC
                  Inc.'s Registration Statement No. 333-12481 dated September
                  20, 1996 is incorporated herein by reference.)

         4-C)     Specimen Veritas DGC Inc. Common Stock certificate. (Exhibit
                  4-C to Veritas DGC Inc.'s Form 10-K for the year ended July
                  31, 1996 is incorporated herein by reference.)

         4-D)     Rights Agreement between Veritas DGC Inc. and ChaseMellon
                  Shareholder Services, L.L.C. dated as of May 15, 1997.
                  (Exhibit 4.1 of Veritas DGC Inc.'s Current Report on Form 8-K
                  filed May 27, 1997 is incorporated herein by reference.)

         4-E)     Form S-8  Restricted  Stock Grant  Agreement.  (Exhibit  4.8 
                  to Veritas DGC Inc.'s Registration Statement No. 333-48953
                  dated March 31, 1998 is incorporated herein by reference.)

         4-F)     Restricted Stock Plan.  (Exhibit 4.1 of Veritas DGC Inc.'s  
                  Registration Statement No. 333-57603 dated June 24, 1998 is
                  incorporated herein by reference.)

         4-G)     Key Contributor Incentive Plan for Fiscal Year 1998 as Amended
                  and Restated September 29, 1998. (Exhibit 4.7 to Veritas DGC
                  Inc.'s Registration Statement No. 333-65081 dated September
                  30, 1998 is incorporated herein by reference.)

           9)     Voting and Exchange Trust Agreement dated August 30, 1996
                  among Digicon Inc., Veritas Energy Services Inc. and the R-M
                  Trust Company. (Exhibit 9.1 of Veritas DGC Inc.'s Current
                  Report on Form 8-K dated September 16, 1996 is incorporated
                  herein by reference.)

        10-A)     Support Agreement dated August 30, 1996 between Digicon Inc.
                  and Veritas Energy Services Inc. (Exhibit 10.1 of Veritas DGC
                  Inc.'s Current Report on Form 8-K dated August 30, 1996 is
                  incorporated herein by reference.)
</TABLE>

                                       45
<PAGE>   48
<TABLE>
      <S>         <C>
        10-B)     Amended and Restated 1992  Non-Employee  Director Stock Option
                  Plan. (Exhibit 4.2 to Veritas DGC Inc.'s Registration
                  Statement No. 333-41829 dated December 10, 1997 is
                  incorporated herein by reference.)

        10-C)     Second  Amended and Restated  1992  Employee  Nonqualified
                  Stock Option Plan. (Exhibit 4.1 to Veritas DGC Inc.'s
                  Registration Statement No. 333-41829 dated December 10, 1997
                  is incorporated herein by reference.)

        10-D)     1997 Employee  Stock  Purchase Plan.  (Exhibit 4.1 to Veritas 
                  DGC Inc.'s Registration Statement No. 333-38377 dated October
                  21, 1997 is incorporated herein by reference.)

        10-E)     Restricted Stock Agreement dated April 1, 1997 between Veritas
                  DGC Inc. and Anthony Tripodo. (Exhibit 10-O to Veritas DGC
                  Inc.'s Form 10-K for the year ended July 31, 1997 is
                  incorporated herein by reference.)

        10-F)     Employment Agreement executed by David B. Robson. (Exhibit
                  10-L to Veritas Inc.'s Form 10-K for the year ended July 31,
                  1997 is incorporated herein by reference.)

        10-G)     Employment Agreement executed by Stephen J. Ludlow. (Exhibit
                  10-B to Veritas DGC Inc.'s Form 10-Q for the quarter ended
                  April 30, 1997 is incorporated herein by reference.)

        10-H)     Employment Agreement executed by Lawrence C. Fichtner.
                  (Exhibit 10-M to Veritas DGC Inc.'s Form 10-K for the year
                  ended July 31, 1997 is incorporated herein by reference.)

        10-I)     Employment Agreement executed by Anthony Tripodo. (Exhibit
                  10-I to Veritas DGC Inc.'s Form 10-Q for the quarter ended
                  April 30, 1997 is incorporated herein by reference.)

        10-J)     Employment Agreement executed by Rene M.J. VandenBrand.
                  (Exhibit 10-N to Veritas DGC Inc.'s Form 10-K for the year
                  ended July 31, 1997 is incorporated herein by reference.)

       *10-K)     Credit Agreement dated July 27, 1998 among Veritas DGC Inc.,
                  as borrower, and Bank One, Texas, N.A., as issuing bank, as a
                  bank and as agent for the banks, and the banks named therein.

        10-L)     Credit Agreement dated July 18, 1996 among Digicon Inc. and
                  Digicon Geophysical Corp., Digicon/GFS Inc., Digicon
                  Geophysical Limited and Digicon Exploration, Ltd., as
                  Borrowers, each of the banks named therein, and Wells Fargo
                  Bank (Texas), National Association, as issuing bank, as a bank
                  and as agent for the banks. (Exhibit 10-G of Veritas DGC
                  Inc.'s Amendment No. 1 to Registration Statement No.
                  333-12481, dated October 2, 1996 is incorporated herein by
                  reference.)

        10-M)     Letter dated September 27, 1996 from Wells Fargo Bank (Texas),
                  National Association, agreeing to amend the Credit Agreement
                  dated July 18, 1996. (Exhibit 10-H of Veritas DGC Inc.'s
                  Amendment No. 1 to Registration Statement No. 333-12481, dated
                  October 2, 1996 is incorporated herein by reference.)

        10-N)     Letter dated May 28, 1997 from Wells Fargo Bank (Texas),
                  National Association, agreeing to amend the Credit Agreement
                  dated July 18, 1996. (Exhibit 10-J to Veritas DGC Inc.'s Form
                  10-Q for the quarter ended April 30, 1997 is incorporated
                  herein by reference.)

          16)     Letter regarding change in certifying accountants. (Exhibit
                  16.1 of Veritas DGC Inc.'s Current Report on Form 8-K as
                  amended by Form 8-K/A dated November 27, 1996 and December 4,
                  1996, respectively, is incorporated herein by reference.)
</TABLE>

                                       46
<PAGE>   49
<TABLE>
      <S>         <C>
         *21)     Subsidiaries of the Registrant.

       *23-A)     Consent of  PricewaterhouseCoopers LLP.

       *23-B)     Consent of PricewaterhouseCoopers, Chartered Accountants.

       *23-C)     Consent of Deloitte & Touche LLP.

       *27-A)     Financial Data Schedule for the year ended July 31, 1998 filed electronically herewith.
       
       *27-B)     Financial Data Schedule for the year ended July 31, 1997 filed electronically herewith.

       *27-C)     Financial Data Schedule for the year ended July 31, 1996 filed electronically herewith.
</TABLE>







   * Filed herewith

                                       47
<PAGE>   50

                                   SIGNATURES

Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned; thereunto duly authorized, on the 2nd day of October,
1998.

                             VERITAS DGC INC.

                             By:     /s/  DAVID B. ROBSON
                                ------------------------------------------------
                                     David B. Robson
                                     (Chairman of the Board and Chief Executive 
                                      Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons on behalf of the Registrant in the indicated capacities have
signed this report below on the 2nd day of October, 1998.

<TABLE>
<CAPTION>
                        Signature                                                     Title
                        ---------                                                     -----
       <S>                                                          <C>
                 /s/ DAVID B. ROBSON                                 Chairman of the Board and Chief Executive
       ---------------------------------------------                            Officer, Director
                     David B. Robson

                /s/ STEPHEN J. LUDLOW                                 President and Chief Operating Officer,
       ---------------------------------------------                               Director
                    Stephen J. Ludlow

               /s/ LAWRENCE C. FICHTNER                                Executive Vice President - Corporate
       ---------------------------------------------                        Communications, Director
                   Lawrence C. Fichtner

                 /s/ ANTHONY TRIPODO                               Executive Vice President, Chief Financial and
       ---------------------------------------------                     Accounting Officer and Treasurer
                     Anthony Tripodo

                /s/ CLAYTON P. CORMIER                                              Director
       ---------------------------------------------
                    Clayton P. Cormier

                  /s/ RALPH M. EESON                                                Director
       ---------------------------------------------
                      Ralph M. Eeson

                  /s/ JAMES R. GIBBS                                                Director
       ---------------------------------------------
                      James R. Gibbs

                                                                                    Director
       ---------------------------------------------
                    Steven J. Gilbert

                                                                                    Director
       ---------------------------------------------
                    Brian F. MacNeill

                                                                                    Director
       ---------------------------------------------
                   Douglas B. Thompson

                                                                                    Director
       ---------------------------------------------
                      Jack C. Threet
</TABLE>


                                       48