**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**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, 2006**                                                                                                                      |
| ** **     |       | ** **                                                                                                                                                       |
| ** **     |       | **OR**                                                                                                                                                           |
| ** **     | ** ** | ** **                                                                                                                                                       |
| **o**          |       | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)**                                                                                                            |
| ** **     |       | **OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                       |
| ** **     |       | ** **                                                                                                                                                       |
| ** **     | ** ** | **For the transition period from             to           ** |
| ** **     | ** ** | ** **                                                                                                                                                       |
| ** **     |       | **Commission file number 1-7427**                                                                                                                                |

 

**Veritas DGC Inc.**

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

 

**(832) 351-8300**

(Registrant’s telephone number,including area code)

Securities registered pursuantto 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 ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.

Yes x  No o

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act.

Yes o  No x

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes x  No o

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form10-K.  o

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

Large accelerated filer x    Acceleratedfiler o                              Non-acceleratedfiler o

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theSecurities Exchange Act of 1934). Yes o  No x

The aggregate marketvalue of the registrant’s voting stock held by non-affiliates of the registrantwas $1,589 million as of January 31, 2006.

The number ofshares of the Company’s common stock, $.01 par value, outstanding at August 31,2006 was 36,058,583.

**DOCUMENTS INCORPORATED BY REFERENCE**

Portions of theregistrant’s definitive proxy statement to be filed in connection with theregistrant’s 2006 Annual Meeting of Stockholders are incorporated by referenceinto Part III of this annual report.

 

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**TABLE OFCONTENTS**

**FORM 10-K**
| PART I                                                                                                                      |   |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|--------|
| ITEM 1. Business                                                                                                            |   |   |
| ITEM 1A. Risk Factors                                                                                                       |   |   |
| ITEM 1B.  Unresolved Staff Comments                                                                                         |   |   |
| ITEM 2. Properties                                                                                                          |   |   |
| ITEM 3. Legal Proceedings                                                                                                   |   |   |
| ITEM 4.  Submission of Matters to a Vote of Security Holders                                                                |   |   |
| PART II                                                                                                                     |   |   |
| ITEM 5. Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities |   |   |
| ITEM 6. Selected Consolidated Financial Data                                                                                |   |   |
| ITEM 7. Management’s Discussion and Analysis of  Financial Condition and Results of Operations                         |   |   |
| ITEM 7A. Quantitative and Qualitative Disclosures  Regarding Market Risk                                                    |   |   |
| ITEM 8.  Consolidated Financial Statements and Supplementary Data                                                           |   |   |
| ITEM 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                               |   |   |
| ITEM 9A. Controls  and Procedures                                                                                           |   |   |
| ITEM 9B. Other  Information                                                                                                 |   |   |
| PART III                                                                                                                    |   |   |
| ITEM 10.  Directors and Executive Officers of the Registrant                                                                |   |   |
| ITEM 11. Executive  Compensation                                                                                            |   |   |
| ITEM 12.  Security Ownership of Certain Beneficial Owners and Management and Related  Stockholder Matters                   |   |   |
| ITEM 13.  Certain Relationships and Related Transactions                                                                    |   |   |
| ITEM 14.  Principal Accountant Fees and Services                                                                            |   |   |
| PART IV                                                                                                                     |   |   |
| ITEM 15.  Exhibits and Financial Statement Schedules                                                                        |   |   |
| SIGNATURES                                                                                                                  |   |   |

 

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*This annual report on Form 10-K contains forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934. Forward-looking statements include,among other things, business strategy and expectations concerning industryconditions, market position, future operations, margins, profitability,liquidity and capital resources. Forward-looking statements generally can beidentified by the use of terminology such as “may,” “will,” “expect,” “intend,”“estimate,” “anticipate” or “believe” or similar expressions or the negativesthereof. These expectations are based on management’s assumptions and currentbeliefs based on currently available information. Although we believe that theexpectations reflected in such statements are reasonable, we can give noassurance that such expectations will be correct. You are cautioned not toplace undue reliance on these forward-looking statements, which speak only asof the date of this annual report on Form 10-K. Our operations are subject to anumber of uncertainties, risks and other influences, many of which are outsideour control, and any one of which, or a combination of which, could cause ouractual results of operations to differ materially from the forward-lookingstatements. Important factors that could cause actual results to differmaterially from our expectations are disclosed in Item 1. “Business” and Item7. “Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Risk Factors” and elsewhere in this annual report on Form 10-K.*

# **PART I**

## **ITEM1. Business**

### **MergerAgreement**

On September 4, 2006, weentered into a merger agreement with Compagnie Générale de Géophysique, asociété anonyme organized under the laws of the Republic of France (“CGG”),whereby CGG agreed to acquire Veritas in a part cash, part stocktransaction.  The transaction iscurrently expected to close around the end of calendar year 2006.  See further discussion on the proposed mergerin Note 15, Subsequent Events, of Notes to Consolidated Financial Statements.

### **General**

Veritas is a leadingprovider of integrated geophysical information and services to the petroleumindustry worldwide. Our customers include major, national and independent oiland gas companies that utilize geophysical technologies to:

·           identify new subsurface areas favorable for theproduction of hydrocarbons;

·           determine the size, structure and stratigraphy ofpreviously identified oil and gas fields; and

·    optimizedevelopment and production of hydrocarbon reserves.

We acquire, process,interpret and market geophysical information that provides 2D and 3D images ofthe subsurface. We also produce 4D surveys, which record fluid movement in thereservoir by repeating specific 3D surveys over time. Additionally, we usegeophysical data for reservoir characterization to enable our customers tomaximize their recovery of oil and natural gas.

### **Servicesand Markets**

We conduct geophysicalsurveys on both a contract and a multi-client basis. When we conduct surveys ona contract basis, we acquire and process data for a single client who pays usto conduct the survey and owns the data we acquire. When we conduct surveys ona multi-client basis, we acquire and process data for our own account and licensethat data and associated products to multiple clients.**The high cost of acquiring and processinggeophysical data on an exclusive basis has prompted many oil and gas companiesto license surveys on a multi-client basis. In response to this demand, we havebuilt a large library of surveys consisting of approximately 200,000 linekilometers of 2D data and 210,000 square kilometers of 3D data. Our marine datalibrary includes surveys in the Gulf of Mexico, the North Sea, Southeast Asia,West Africa, North Africa, Canada and Brazil. Our land data library includessurveys in Texas, Mississippi, Oklahoma, Wyoming and Utah in the United Statesas well as Alberta and British Columbia in Canada. The portion of our revenuegenerated from the sale of multi-client data licenses is influenced by a numberof factors, including government licensing of exploration and production rightsand as a result, will fluctuate from year to year.

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The following tablesdescribe our revenue by contract type and geographic area based on the locationof the product or service provided:
|                                             | ** ** | **Years Ended July 31,** | ** ** |
|---------------------------------------------|------------|-----------------------------------------|------------|
| **Revenue by Contract Type** | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                  | ** ** | **(In thousands)**                 | ** ** |
| Contract work                               |       | $                                       | 470,132    |   | $ | 389,046 |   | $ | 289,404 |   |
| Licensing of multi-client data              |       | 352,056                                 |       | 244,980 |   | 275,065 |   |
| Total                                       |       | $                                       | 822,188    |   | $ | 634,026 |   | $ | 564,469 |   |

 
|                                               | ** ** | **Years Ended July 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------|------------|
| **Revenue by Geographic Area** | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                    | ** ** | **(In thousands)**                 | ** ** |
| United States                                 |       | $                                       | 343,299    |   | $ | 287,993 |   | $ | 245,144 |   |
| Canada                                        |       | 141,667                                 |       | 92,639 |   | 88,283 |   |
| Latin America                                 |       | 67,401                                  |       | 17,178 |   | 57,210 |   |
| Europe                                        |       | 93,589                                  |       | 71,852 |   | 79,182 |   |
| Middle East/Africa                            |       | 60,771                                  |       | 62,515 |   | 32,513 |   |
| Asia Pacific                                  |       | 115,461                                 |       | 101,849 |   | 62,137 |   |
| Total                                         |       | $                                       | 822,188    |   | $ | 634,026 |   | $ | 564,469 |   |

 

In fiscal 2006, 2005 and2004, 58%, 55% and 57%, respectively, of our revenue was attributable tonon-U.S. operations and export sales. (See Note 13 of Notes to ConsolidatedFinancial Statements for additional geographic and segment information.)

### **PrincipalOperating Assets**

We acquire, process,interpret and sell geophysical information utilizing a wide array of assets asfollows:

***Land Acquisition***

Our land acquisitionactivities are performed with technologically advanced geophysical equipment.As of July 31, 2006, our land survey equipment had a combined recordingcapacity of approximately 52,000 channels. We typically deploy equipment inNorth and South America and Oman by crews of varying size. Our crew countvaries widely as land acquisition is a seasonal activity in many markets,primarily due to weather.

Our land operationsinclude surveying crews, which lay out the lines to be recorded and mark thesites for shot-hole placement or equipment location, and recording crews, whichuse explosive or mechanical vibrating units to produce acoustic impulses and userecording units to synchronize the shooting and capture of the seismic signalsvia geophones. On a land survey where explosives are used, the recording crewis supported by several drill crews, which are typically furnished by thirdparties under short-term contracts. Drill crews operate in advance of therecording crew and bore shallow holes for explosive charges which, whendetonated by the recording crew, produce the necessary acoustic impulse.

***Marine Acquisition***

Our marine acquisitioncrews operate from chartered vessels that have been modified or equipped to ourspecifications. All of the vessels we utilize are equipped to perform both 2Dand 3D geophysical surveys. During the last several years, the majority of themarine geophysical data acquisition services we performed involved 3D surveys.The following table contains certain information concerning the geophysicalvessels we operated as of July 31, 2006.
| Vessel            | ** ** | **Year  Entered  Service** | ** ** | **Length** | ** ** | **Beam** | ** ** | **Charter Expiration** | ** ** |
|-------------------|------------|----------------------------|------------|------------|------------|----------|------------|------------------------|------------|
| Pacific Sword     |       | 1999                       |       | 189 feet   |       | 40 feet  |       | October 2006           | (1)        |
| Seisquest         |       | 2001                       |       | 300 feet   |       | 60 feet  |       | May 2007               | (1)        |
| Veritas Viking    |       | 1998                       |       | 305 feet   |       | 72 feet  |       | May 2011               |       |
| Veritas Viking II |       | 1999                       |       | 305 feet   |       | 72 feet  |       | May 2007               |       |
| Veritas Vantage   |       | 2002                       |       | 305 feet   |       | 72 feet  |       | April 2010             |       |
| Veritas Voyager   |       | 2006                       |       | 220 feet   |       | 52 feet  |       | July 2011              | (1)        |
| Veritas Searcher  |       | 1982                       |       | 217 feet   |       | 44 feet  |       | Owned                  | (1)        |

 

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(1) See the followingdiscussions related to various changes in the status of the charters and thevessels subsequent to July 31, 2006.

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The Veritas Searcher wassold in August 2006.  During July 2006,we chartered the Veritas Voyager to replace the Veritas Searcher.  As of July 31, 2006, the Veritas Searcher wasclassified in the balance sheet as an asset held for sale.

Each vessel is equippedwith geophysical recording instrumentation, digital geophysical streamer cable,cable location and geophysical data location systems, multiple navigationsystems, and a source control system that controls the synchronization of theenergy source and a firing system that generates the acoustic impulses.Streamer cables contain hydrophones that receive the acoustic impulsesreflected by variations in the subsurface strata.

At present, five of ourvessels are equipped with multiple streamers and multiple energy sources. Thesevessels acquire more lines of data with each pass, which reduces completiontime and the acquisition cost. The Veritas Viking, Veritas Viking II and theVeritas Vantage are each capable of deploying 12 streamers simultaneously,although each is currently equipped to tow eight. The Veritas Viking, VeritasViking II, Veritas Vantage and Veritas Voyager are equipped with solidstreamers that offer numerous advantages over fluid-filled streamers. The solidstreamers allow these vessels to work in rougher seas and record more desirablefrequencies with less noise and less downtime than is possible withfluid-filled streamers.

In March 2006, we enteredinto an agreement with a third party ship owner to charter a vessel currentlyknown as the Veritas Vision, which is currently being converted for seismicoperations.  The term of the charter is for a period of eight years fixed,with options of up to 10 more years.  When delivered in the first calendarquarter of 2007, the Veritas Vision will be the seventh seismic vessel in ourfleet.

In September 2006, weentered into an agreement to charter a seismic vessel, currently known as theViking Poseidon, which is currently expected to be in service commencing in thesecond calendar quarter of 2007.  Thisvessel will serve as a replacement for the Seisquest vessel, which is under acharter that expires in May of 2007.

Subsequent to July 31,2006, we renewed our charter agreement to extend the charter expiration relatedto the Pacific Sword from October 2006 to October 2009.

***Data Processing and Interpretation***

Weoperate several data processing centers capable of processing 2D and 3D data.Most of our data processing services are performed on 3D seismic data. Thecenters process data received from the field, both from our own crews and fromother geophysical companies, to produce an image of the earth’s subsurfaceusing proprietary computer software and techniques. We also reprocess oldergeophysical data using new techniques designed to enhance the quality of thedata. Our first data processing center opened in 1966, and we now have centersin all of our geographic locations.

Our processing centersoperate high capacity, advanced technology data processing systems onhigh-speed cluster CPUs. These systems run our proprietary data processingsoftware. The marine and land data acquisition crews have software compatiblewith that utilized in the processing centers, allowing for ease in the movementof data from the field to the data processing centers. Our centers cangenerally process both land and marine data and we tailor the equipment andsoftware deployed in an area to meet the local market demands.

We operate visualizationcenters in Houston, Calgary, Perth, and Crawley. These four centers allow teamsof our customers’ geoscientists and engineers to view and interpret largevolumes of complex 3D data. The visualization centers have imaging tools usedfor advanced interpretive techniques that enhance the understanding of regionalas well as detailed reservoir geology. These visualization centers allow us tooffer our expertise combined with the type of collaborative geophysical modelbuilding that is enabling oil companies to explore areas of complex geologysuch as the large sub-salt plays in the deepwater Gulf of Mexico.

We have groups ofscientists available to perform advanced geophysical and geologicalinterpretation on a contract basis. These experts work around the world, usingthird party and our proprietary software to create subsurface models for ourclients and advise our clients on how best to exploit their reservoirs. Theirwork is related to exploration as well as production activities. Additionally,we license our proprietary Hampson-Russell software to companies desiring to dotheir own geophysical interpretation.

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### **Technologyand Capital Expenditures**

The geophysical industryis highly technical, and the requirements for the acquisition and processing ofgeophysical data have evolved continuously during the past 50 years.Accordingly, it is critical that our technological capabilities are comparableor superior to those of our competitors. We maintain our technologicalcapabilities through continuing research and development, strategic allianceswith equipment manufacturers, and by acquiring technology from others.

Our research anddevelopment staff includes scientists, engineers or programmers. Our researchand development efforts focus on new acquisition technologies and processes andon our core processing and imaging software. During fiscal 2006, 2005 and 2004,research and development expenditures were $22.9 million, $18.9 million and$15.5 million, respectively.

During fiscal 2006, 2005,and 2004, capital expenditures for equipment were $67.9 million, $62.4 millionand $30.5 million, respectively. We expect to increase substantially ourinvestment in capital equipment during fiscal 2007 to approximately $200 to$240 million. Our 2007 capital budget includes amounts for replacement andupgrading of our existing equipment and amounts for equipping a new vessel thatis expected to be in place during the first calendar quarter of 2007.

During fiscal 2006, 2005and 2004, our cash multi-client investment, net of capitalized depreciation,was $165.6 million, $148.4 million and $126.3 million, respectively. For fiscal2007, we are planning to substantially increase our cash investment inmulti-client data to approximately $250 to $300 million.

### **Competition**

The acquisition andprocessing of geophysical data for the oil and gas industry has historicallybeen highly competitive worldwide. Success in marketing geophysical services isbased on several factors, including price, crew experience, equipmentavailability, technological expertise, reputation for quality anddependability, safety record and, in the case of multi-client surveys,availability of surveys in the area of current customer interest.

Our largest globalcompetitors are Western-Geco (a division of Schlumberger), CGG and PetroleumGeo-Services ASA. Additionally, there are a large number of seismic companies,mostly small and local, in the land acquisition and land data processing areaswhere financial and technical barriers to entry are minimal. In themulti-client library business, we compete with the full-service seismiccompanies mentioned above, as well as with specialty library companies such asTGS Nopec Geophysical Company ASA and Seitel Inc.  On September 5, 2006, we announced that weentered into a merger agreement with CGG whereby CGG will acquire Veritas in apart cash, part stock transaction.  Seefurther discussion on the proposed merger in Note 15, Subsequent Events, ofNotes to Consolidated Financial Statements.

We compete to a lesserdegree with large, state-affiliated companies, such as BGP of China. Thesecompanies are large providers of seismic services in their home countries andhave recently been expanding their operations to include other parts of theworld. They are particularly aggressive in price sensitive markets, such asthose involving large tenders to national oil companies, where low price is ofparamount importance.

Due to the constantlychanging configurations of seismic crews and the immense numbers of channels inthe market, it is impossible to discuss the global competition in landacquisition in any quantitative fashion. Tracking our competition is morefeasible in the marine acquisition market. According to a September 15, 2005report by Enskilda Securities, a third party industry analyst, there are atotal of 60 towed-streamer vessels working in the world, including 44 3Dvessels and 16 2D vessels. In fiscal 2005 and 2006, there were temporary andlocal shortages of vessels of specific capability, which allowed us to increaseseismic acquisition margins in certain regions.

### **Backlog**

At July 31, 2006, ourbacklog of commitments for future revenue was $456.4 million, compared with$301.8 million at July 31, 2005.  Weexpect that approximately 90% of our July 31, 2006 backlog will be completedduring the next twelve months. This backlog consists of written orders or firmcommitments. Contracts for services are subject to modification by mutualconsent and in certain instances are cancelable by the customer on short noticewithout penalty. As a result of these factors, our backlog as of any particulardate may not be indicative of our actual operating results for any succeedingperiod.

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### **SignificantCustomers**

Our customers includeinternational oil and gas companies, national oil companies and independent oiland gas companies. In fiscal 2006, no customer accounted for 10% or more of ourtotal revenue. A single, large multi-national oil company represented 12% ofour revenue in fiscal 2005.  In fiscal2004, no customer accounted for 10% or more of our total revenue.

### **Employees**

During fiscal 2006, weemployed an average of approximately 2,800 people on a full-time basis. Ournumber of employees varies greatly due to activity changes in our landacquisition business and during fiscal 2006 ranged from a low of approximately2,400 to a high of approximately 4,300. This variation typically occurs on aseasonal basis, with higher employee counts and higher revenue occurring duringour second and third fiscal quarters, coinciding with the winter seismicacquisition seasons in Alaska and Canada. However, performance of large landsurveys in South America or other locales can cause a marked shift from thispattern. A total of 31 employees in Singapore are subject to collectivebargaining agreements. We consider our relations with our employees to be good.

### **OurSEC Reporting**

We electronically filecertain documents with the SEC. We file annual reports on Form 10-K; quarterlyreports on Form 10-Q; current reports on Form 8-K (as appropriate) and proxystatements; along with any related amendments and supplements thereto. Fromtime-to-time, we may also file registration statements pertaining to equity ordebt offerings. You may read and copy any materials we file with the SEC at theSEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, DC20549. You may obtain information regarding the Public Reference Room bycalling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internetwebsite at www.sec.gov that contains reports, proxy and information statements,and other information regarding issuers that file with the SEC.

We provide electronicaccess to our periodic and current reports on our internet website, www.veritasdgc.com.These reports are available on our website as soon as reasonably practicableafter we electronically file such materials with the SEC. You may also contactour investor relations department at 832-351-8821 for paper copies of thesereports free of charge.

## **ITEM1A. Risk Factors**

***Our recently announced mergeragreement with CGG may cause uncertainties among our customers.***

***Some customers may be hesitant to contract for our servicesin light of uncertainties about our ability to perform due to our recentlyannounced plan to merge with CGG or may prefer not to do business with usfollowing the completion of the merger. If we are unable to reassure our customers to continue utilizing ourservices, our financial results may be adversely affected.***

***In the event our recently announcedplan to merge with CGG is not consummated, our ability to carry on our businessat current levels may be affected.***

***Closing of our current agreement to merge with CGG iscontingent upon a number of items, including, among other things, approval ofthe merger by an affirmative vote of a majority of our shareholders andapproval of the issuance of CGG shares in the merger by the affirmative vote oftwo-thirds of CGG’s shareholders, as well as the receipt of necessaryregulatory approvals from several agencies in several countries.  There can be no assurance that all suchapprovals will be obtained, and, in the event any approval required under themerger agreement as a condition to closing is not obtained, the merger may notbe consummated.  If the merger is notconsummated, we may have difficulty retaining and recruiting employees in vitalareas and we may have difficulty retaining current customers or attracting newcustomers.***

***In the event our recently announcedplan to merge with CGG is not consummated, the price of our stock may beaffected.***

Our closing stock pricewas $57.27 on July 31, 2006 and closed at $70.07 on September 5, 2006, afterannouncement of the merger. The increase in the stock price is primarily due tothe premium to be paid related to the merger. In the event our previously announced merger with CGG is not consummated,the price of our common shares may be adversely affected because

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the stockholderswill not receive the premium contemplated by the merger agreement.

**As a provider of geophysical technologies, our business issubstantially dependent on the level of exploration expenditures by oil and gascompanies.**

Exploration expendituresby oil and gas companies are affected by several factors, including actual andforecasted petroleum commodity prices and such companies’ own short term andstrategic plans. These expenditures may also be affected by worldwide economicconditions. Should there be a sustained period of substantially reducedexploration expenditures by oil and gas companies, the demand for geophysicalservices likely will drop and have an adverse effect on our results ofoperations and cash flow during the affected period. In recent years, many ofour customers had been using a substantial portion of their discretionary cashto pay down debt, buy back their stock, drill low-risk prospects and maximize productionfrom existing fields rather than exploring for new prospects. While we believethis trend has ended, due to recent commodity price increases and currentsupply and demand forecasts, there can be no guarantee that oil and gascompanies will engage in substantial or prolonged exploration programsinvolving seismic spending. While petroleum commodity prices are currently highfrom a historical perspective, history has shown these prices to be veryvolatile.

**Weak demand or technological obsolescence could impair the value of ourmulti-client data library.**

We have investedsignificant amounts in acquiring and processing multi-client data and expect tocontinue to do so for the foreseeable future. There is no assurance that wewill recover all the costs of such surveys. Technological, regulatory or otherindustry or general economic developments could render all or portions of ourmulti-client data library obsolete or reduce its value. For example, in fiscal2003 and fiscal 2002 we incurred $4.9 million and $55.3 million, respectively,in impairment charges related to slow moving surveys in our multi-clientlibrary. These surveys were found to be impaired for various reasons, includingslow acreage turnover in the case of U.S. land surveys, a border dispute in thecase of a Shetland-Faroes survey and excessive acquisition cost in the case ofa Gulf of Mexico survey. Additionally, our individual surveys have a book lifeof five years, so particular surveys may be subject to significant amortizationeven though sales of licenses associated with that survey are weak ornon-existent, thus reducing our profits.

**Weare dependent on achieving and maintaining technological advances, whichcreates risks regarding technological obsolescence, requirements for substantialfuture capital expenditures, the unavailability of necessary technology and thefailure of new technologies.**

The development ofgeophysical data acquisition and processing equipment has been characterized byrapid technological advancements in recent years. We expect this trend tocontinue. We will be required to invest substantial capital in the future tomaintain our technology. Furthermore, manufacturers of geophysical equipmentmay develop new systems that render our equipment, even if recently acquired,obsolete or less desirable, requiring significant additional capitalexpenditures. Because some of our competitors are themselves leading designersand manufacturers of seismic equipment, we may not have access to theirtechnology. Even if critical new and advanced equipment is available to us, wemay not have funds available or be able to obtain necessary financing onacceptable terms to acquire it. Further, any investment we may make in aperceived technological advance may not be effective, economically successfulor otherwise accepted in the market.

**We face intense competition in our industry, which couldadversely affect our results.**

Competition amonggeophysical service providers historically has been, and we expect willcontinue to be, intense. Competitive factors in recent years have includedprice, crew experience, equipment availability, technological expertise andreputation for quality, safety and dependability. Some of our competitorsoperate substantially more data acquisition crews and have significantlygreater financial and other resources than we do. These larger andbetter-financed operators could enjoy an advantage over us in a competitiveenvironment for contract awards and data sales and in the development of newtechnologies. Other competitors operate with extremely low overhead and competevigorously on price in certain markets where that is the determining factor inawarding work. These low-cost competitors can have a competitive advantage overus in these markets.

**Highfixed costs could result in operating losses.**

Our business has highfixed costs. As a result, downtime or low productivity due to reduced demand,weather interruptions, equipment failures or other causes can result insignificant operating losses. Low utilization rates may hamper our ability torecover the cost of necessary capital investments.

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**Our revenue is subject to fluctuations that are beyond our control,which could adversely affect our results of operations in any financial period.**

Our operating resultsvary in material respects from quarter to quarter and will most likely continueto do so in the future. Factors that cause variations include the timing of thereceipt and commencement of contracts for data acquisition, customers’budgetary cycles, the timing of offshore lease sales and the effect of suchtiming on the demand for geophysical activities, seasonal factors and thetiming of sales of licenses to geophysical data in our multi-client datalibrary, which may be significant to us and which are not typically made in alinear or consistent pattern. Combined with our high fixed costs, these revenuefluctuations could produce unexpected adverse results of operations in anyfiscal period.

**We may be unable to attract and retain key employees, which could adverselyaffect our business.**

Our success depends uponattracting and retaining highly skilled professionals and technical personnel.A number of our employees are highly skilled scientists and highly trainedtechnicians, and our failure to continue to attract and retain such individualscould adversely affect our ability to compete in the geophysical servicesindustry. We may confront significant and potentially adverse competition forkey personnel, particularly during periods of increased demand for geophysicalservices and possible uncertainties caused by our recently announced plan tomerge with CGG. In addition, our success will depend to a significant extentupon the abilities and efforts of members of our senior management, the loss ofwhom could adversely affect our business.

***We face risks associated with our foreign revenuegenerating activities.***

Substantialportions of our revenue are derived from foreign activities. During the fiscalyears ended July 31, 2006 and 2005, approximately 57% and 53% of our revenue,respectively, was attributable to activities outside the United States. Duringthe fiscal years ended July 31, 2006 and 2005, we recognized revenue fromcustomers residing in the following foreign countries that represented morethan 1% of our consolidated revenue on a gross basis for that fiscal year:
|                       | ** ** | **July 31,**      | ** ** |
|-----------------------|------------|------------------------|------------|
| ** **            | ** ** | **2006**               | ** ** | **2005** | ** ** |
| **Country of origin** | ** ** | **(In millions)** | ** ** |
| Australia             |       | $                      | 71.8       |   | $ | 38.7 |   |
| Brazil                |       | 42.2                   |       | 6.4 |   |
| Cameroon              |       | 10.3                   |       | 0.5 |   |
| Canada                |       | 140.0                  |       | 90.7 |   |
| India                 |       | 10.1                   |       | 12.1 |   |
| Indonesia             |       | 11.4                   |       | 1.8 |   |
| Malaysia              |       | 6.4                    |       | 19.2 |   |
| Nigeria               |       | 0.6                    |       | 12.0 |   |
| Norway                |       | 29.3                   |       | 21.5 |   |
| Oman                  |       | 14.8                   |       | 22.3 |   |
| Peru                  |       | 17.0                   |       | 4.3 |   |
| South Africa          |       | 0.8                    |       | 6.9 |   |
| Trinidad and  Tobago  |       | 14.9                   |       | — |   |
| United Kingdom        |       | 47.7                   |       | 43.1 |   |
|                       |            |                        |            |  |  |  |  |

 

Foreign revenue issubject to certain risks, including those related to rates of currencyexchange, border disputes, war, terrorism, civil disturbances, embargo, andgovernment activities such as radical changes in tax regulations or investmentlaws. We are exposed to these risks in all of our foreign operations to somedegree, and our exposure could be material to our financial condition andresults of operations where the political and legal environment is less stableand we generate significant revenue or have large local investments, such as inBrazil, Nigeria, and Oman.

Revenue generatingactivities in certain foreign countries may require prior United Statesgovernment approval in the form of an export license and otherwise be subjectto tariffs and import/export restrictions. These laws change over time and mayresult in limitations on our ability to compete globally. In addition, non-U.S.persons employed by our separately incorporated foreign subsidiaries conductbusiness in foreign jurisdictions, some of which have been subject to U.S. tradeembargoes and have been identified by the U.S. government as state sponsors ofterrorism or are subject to sanctions by the U.S. Office of Foreign Assets

7

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Control. Forexample, during fiscal 2006 we generated $5.4 million of revenue from Libyancustomers (Libya was identified by the U.S. government as a state sponsor ofterrorism until September 2004), $0.7 million of revenue from Iranian customersand $7 thousand of revenue from a Syrian customer. We have typically generatedrevenue in these countries through the performance of data processing,reservoir consulting services and the sale of software licenses and softwaremaintenance. The governments of Iran and Syria have been identified by the U.S.government as state sponsors of terrorism and are subject to sanctions by theU.S. Office of Foreign Assets Control and either directly or indirectly controlthe activities of our customers within their borders. Our relations withcustomers in these countries are current and on going. We have procedures inplace to conduct these operations in compliance with applicable U.S. laws.However, failure to comply with U.S. laws on foreign operations could result inmaterial fines and penalties, damage to our reputation, and a reduction in thevalue of our shares of common stock. In addition, our activities in thesecountries could reduce demand for our stock among certain investors.

Finally, some of ouroperational activities result in accounts receivable or accounts payable thatare denominated in foreign currencies and, therefore, subject to fluctuationsin foreign currency exchange rates. There can be no assurance that we will notexperience difficulties in connection with future foreign revenue generationand, in particular, adverse effects from foreign currency fluctuations.

**Weoperate under hazardous conditions that subject us to risk of damage toproperty or personal injuries and may interrupt our business.**

Our seismic dataacquisition activities involve operating under extreme weather and otherhazardous conditions. These operations are subject to risks of loss to propertyand injury to personnel from fires, accidental explosions, ice floes, and highseas. These types of events could result in an interruption of our business orsignificant liability. We may not obtain insurance against all risks or forcertain equipment located from time to time in certain areas of the world.

**The trading price of our securities could be subject to significantfluctuations.**

The trading prices of oursecurities fluctuate. Factors such as fluctuations in our financialperformance, and that of our competitors, as well as general market conditionscould have a significant impact on the future trading prices of our securities.The trading prices also may be affected by weakness in oil prices, changes ininterest rates and other factors beyond our control. Any one or combination ofthese factors may cause a decline in the trading price of our securities.

**We may be unable to repurchaseour Convertible Senior Notes as may be required upon a change in control or onthe specified dates at the option of the holder or to pay the required cashupon conversion of the notes.**

Upon a change incontrol, as defined in the indenture governing our Convertible Senior Notes,and on March 15, 2009, 2014 and 2019, the holders of the notes have the rightto require us to repurchase the notes for cash. In addition, upon conversion ofthe notes, the holders will have the right to receive a cash payment. If we donot have sufficient funds to pay the repurchase price for all of the notestendered upon a change in control, the cash due upon repurchases of the noteson March 15, 2009, 2014 or 2019 or the cash due upon conversion, an event ofdefault under the indenture governing the notes would occur as a result of suchfailure. In addition, cash payments in respect of notes tendered for repurchaseor conversion are subject to limits and might be prohibited, or create an eventof default, under our Credit Facility as well as other agreements relating toborrowings that we may enter into from time to time. Our failure to make cashpayments in respect of the Convertible Senior Notes could result in an event ofdefault under our Credit Facility. There can be no guarantee that our availablesources of cash will be sufficient to allow us to make the required cashpayments.

**Ourbusiness is subject to governmental regulation, which may adversely affect ourfuture operations or the accounting thereof.**

Our operations aresubject to a variety of federal, provincial, state, foreign and local laws andregulations, including environmental laws. We invest financial and managerialresources to comply with these laws and related permit requirements. Failure totimely obtain the required permits may result in crew downtime and operatinglosses. Because laws and regulations change frequently, we cannot predict theimpact of government regulations on our future operations. The adoption of lawsand regulations that have the effect of curtailing exploration by oil and gascompanies could also adversely affect our operations by reducing the demand forour geophysical services.

8

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We follow the generallyaccepted accounting principles of the United States (GAAP) as promulgatedand/or enforced by the Financial Accounting Standards Board, the Securities andExchange Commission and other organizations. GAAP is subject to change, withsuch changes occurring at a rapid rate in recent years. Changes in GAAP canaffect the reporting of our future results.

**Cer****tain provisions of our charter, Delaware law and our shareholder rightsplan may make it difficult for a third party to acquire us, even in situationsthat may be viewed as desirable by our stockholders.**

The General CorporationLaw of the State of Delaware contains provisions that may delay or prevent anattempt by a third party to acquire control of our company. Our certificate ofincorporation and bylaws contain provisions that authorize the issuance ofpreferred stock, and establish advance notice requirements for directornominations and actions to be taken at stockholder meetings. These provisionscould also discourage or impede a tender offer, proxy contest or other similartransaction involving control of us, even if viewed favorably by stockholders.In addition, we have adopted a stockholder rights plan that would likelydiscourage a hostile attempt to acquire control of us.  In September 2006, we amended our shareholderrights plan to provide that no rights will be issued to our currentshareholders in connection with our previously announced plan to merge withCGG.

***The amounts we amortize from our data library eachperiod may fluctuate significantly, and these fluctuations can have asignificant effect on our reported results of operations.***

***How weaccount for our multi-client data library has a significant effect on ourreported results of operations. We amortize the cost of our multi-clientlibrary based primarily upon our estimates of future sales of licenses to data,known as the sales forecast method. Although we also employ a minimumamortization for each survey in our data library based on straight-lineamortization over five years, this amortization is secondary to that derivedfrom the sales forecast method. The estimates used in the sales forecast methodare inherently imprecise and may vary from period to period depending uponmarket developments and our expectations. We update our estimates on aquarterly basis and change our amortization rates accordingly. Substantialchanges in amortization rates can have a significant effect on our reported resultsof operations.***

**We have the ability to issue additional equitysecurities, which would lead to dilution of our issued and outstanding commonstock.**

        Theissuance of additional equity securities or securities convertible into equitysecurities would result in dilution of then existing stockholders’ equityinterests in us. Our board of directors has the authority to issue, withoutvote or action of stockholders, up to 1,000,000 shares of preferred stock inone or more series, and has the ability to fix the rights, preferences,privileges and restrictions of any such series. Any such series of preferredstock could contain dividend rights, conversion rights, voting rights, terms ofredemption, redemption prices, liquidation preferences or other rights superiorto the rights of holders of our common stock. Our board of directors has nopresent intention of issuing any such preferred stock, but reserves the rightto do so in the future. In addition, we are authorized to issue, withoutstockholder approval, up to 78,500,000 shares of common stock, of whichapproximately 35,871,367 shares were outstanding as of July 31, 2006.

## **ITEM1B. Unresolved Staff Comments**

Not applicable.

## **ITEM2. Properties**

Our headquarters islocated in Houston, Texas in a 218,151 square foot office and warehousecomplex, which is leased. The complex houses data processing operations, aswell as executive, accounting, research and development and operatingpersonnel. This lease expires in the beginning of fiscal 2016. We lease additionalspace, aggregating approximately 660,000 square feet, which is used by ouroperations around the world, including the locations identified under Item 1.Business—Principal Operating Assets—Data Processing and Interpretation. Theseleases expire at various times through fiscal 2015. We also own and charterseismic acquisition vessels as listed under Item 1. Business—PrincipalOperating Assets—Marine Acquisition.

9

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## **ITEM3. Legal Proceedings**

On occasion, we are namedas a defendant in litigation relating to our normal business operations.Although we are insured against various business risks to the extent we believeprudent, there is no assurance that the nature and amount of such insurancewill be adequate in every case. As of September 30, 2006, we were not a partyto any legal proceeding that we believed to be material.

**ITEM 4.Submission of Matters to a Vote of Security Holders**

None.

# **PART II**

## **ITEM5. Market for Registrant’s Common Equity, Related Stockholder Matters andIssuer Purchases of EquitySecurities**

### **MarketPrice of and Dividends on the Registrants Common Equity and Related StockholderMatters**

Our common stock islisted on the New York Stock Exchange under the symbol “VTS.” The followingtable sets forth the high and low daily closing sales prices for our commonstock as reported by the New York Stock Exchange for the fiscal periods shown.

|        | ** ** | **Fiscal Period** | ** ** | **High** | ** ** | **Low** | ** ** |
|--------|------------|------------------------|------------|----------|------------|---------|------------|
| 2006   |       | 4th Quarter            |       | $        | 57.27      |    | $          | 43.81 |   |
|   |       | 3rd Quarter            |       | 51.58    |       | 39.18   |       |
|   |       | 2nd Quarter            |       | 45.09    |       | 29.48   |       |
|   |       | 1st Quarter            |       | 37.59    |       | 29.84   |       |
| 2005   |       | 4th Quarter            |       | $        | 31.00      |    | $          | 23.70 |   |
|   |       | 3rd Quarter            |       | 32.18    |       | 24.91   |       |
|   |       | 2nd Quarter            |       | 25.54    |       | 19.72   |       |
|   |       | 1st  Quarter           |       | 25.00    |       | 19.61   |       |

 

On August 31, 2006, therewere approximately 168 record holders of common stock.

We have not paid anydividends on our common stock during the two most recent fiscal years and haveno current plans to pay any dividends. The payment of any future dividends onour common stock would depend upon our financial condition and upon adetermination by our Board of Directors that the payment of dividends would bedesirable. In addition, our current Credit Facility limits the amount of cashdividends.

On June 1, 2005, a formeremployee purchased 7,650 shares of our common stock for an aggregate exerciseprice of $78,284 pursuant to the exercise of outstanding options that had beengranted under our stock option plans. The issuance of the shares was exemptfrom the registration requirements of the Securities Act of 1933 by reason ofthe exemption provided by section 4(2) of such statute for private sales ofsecurities. In connection with his purchase, the former employee representedthat he was acquiring the shares for investment and not with a view to adistribution thereof. The certificates representing the shares purchasedcontain a legend to the effect that sale of the shares was not registered underthe Securities Act of 1933 and the shares may not be transferred exceptpursuant to an effective registration under the Securities Act of 1933 orpursuant to an exemption from such registration requirements. The sale did notinvolve any underwriters.

**SecuritiesAuthorized for Issuance Under Equity Compensation Plans**

Information related toour equity compensation plans as of July 31, 2006 may be found under “SecuritiesAuthorized for Issuance Under Equity Compensation Plans” in Item 12.

10

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### **IssuerPurchases of Equity Securities by the Issuer and Affiliated Purchasers**

The following table summarizesissuer purchases of equity securities during the fourth quarter of fiscal 2006:
| Period          | ** ** | **Total Number of  Shares Purchased(1)** | ** ** | **Average Price  Paid per Share** | ** ** | **Total Number of Shares  Purchased as Part of Publicly  Announced Plans or Programs(2)** | ** ** | **Maximum Number (or  Approximate Value) of Shares  that were Purchased Under  Plans or Programs(2)** | ** ** |
|-----------------|------------|---------------------------------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| May 1-31, 2006  |       | —                                                  |       | —                                           |       | —                                                                                                                                      |       | —                                                                                                                                                  |       |
| June 1-30, 2006 |       | 220                                                     |       | 46.60                                            |       | —                                                                                                                                      |       | —                                                                                                                                                  |       |
| July 1-31, 2006 |       | 176                                                     |       | 51.58                                            |       | —                                                                                                                                      |       | —                                                                                                                                                  |       |
| Total           |       | 396                                                     |       | $                                                | 48.81      |                                                                                                                                        | —     |                                                                                                                                                    | —     |   |
|                 |            |                                                         |            |                                                  |            |                                                                                                                                             |            |                                                                                                                                                         |            |  |

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(1)  During the quarterended July 31, 2006, we repurchased an aggregate of 396 shares other than as apart of a publicly announced plan or program. We repurchased these securitiesin connection with our stock compensation plans, which allow participants touse shares to satisfy tax liabilities arising from the vesting of restrictedstock. The number above does not include unvested shares forfeited back to usfor no consideration pursuant to the terms of our stock compensation plans.

(2)   Asof July 31, 2006, there were no publicly announced plans or programs torepurchase stock.

## **ITEM6. Selected Consolidated Financial Data**

|                                                    | ** ** | **Years Ended July 31,**                               | ** ** |
|----------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                         | ** ** | **2006(1)**                                                           | ** ** | **2005(2)** | ** ** | **2004(3)** | ** ** | **2003(4)** | ** ** | **2002(5)** | ** ** |
| ** **                                         | ** ** | **(In thousands, except per share amounts)** | ** ** |
| **Statement of Operations Data:**                  |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Revenue                                            |       | $                                                                     | 822,188    |   | $ | 634,026 |   | $ | 564,469 |   | $ | 501,821 |   | $ | 452,183 |   |
| Operating income                                   |       | 132,879                                                               |       | 64,241 |   | 27,770 |   | (12,112 | ) | (833 | ) |
| Net income (loss)                                  |       | 82,231                                                                |       | 83,001 |   | 5,221 |   | (59,097 | ) | (24,051 | ) |
|                                               |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Net income (loss) per common  share — basic   |       | 2.33                                                                  |       | 2.45 |   | .16 |   | (1.77 | ) | (.74 | ) |
| Net income (loss) per common  share — diluted |       | 2.08                                                                  |       | 2.37 |   | .15 |   | (1.77 | ) | (.74 | ) |
|                                               |       |                                                                  |       |   |   |   |   |   |   |   |   |
| **Balance Sheet Data:**                            |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Total assets                                       |       | $                                                                     | 1,158,030  |   | $ | 966,598 |   | $ | 776,246 |   | $ | 790,945 |   | $ | 781,403 |   |
| Long-term debt (including current maturities)      |       | 155,000                                                               |       | 155,000 |   | 155,000 |   | 194,225 |   | 140,000 |   |

 

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(1)   Fiscal 2006included a gain on involuntary conversion of assets of $2.0 million.

(2)   Fiscal 2005included a gain on involuntary conversion of assets of $9.9 million and arelease of deferred tax valuation allowances of $36.9 million.

(3)   Fiscal 2004included charges of $22.1 million related to a change in multi-clientaccounting and $7.4 million related to debt refinancing. The change inmulti-client accounting may affect the comparability between periods and ismore fully described in Note 1 of Notes to Consolidated Financial Statements.

(4)   Fiscal 2003included charges of $39.3 million for goodwill impairment, $4.9 million forimpairment of a multi-client survey, $7.6 million loss related to the sale ofour (RC)2 software operations and $21.0 million related to deferred tax assetvaluation allowances.

(5)   Fiscal2002 included charges of $55.3 million for impairment of multi-client surveys,$14.6 million for costs of a terminated merger and $6.5 million valuationallowance for Argentine deferred tax assets.

11

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## **ITEM7. Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

**Overview**

Fiscal 2006 proved to beanother year of strengthening conditions in the seismic industry, as itcontinues to move out of the weak 1999 - 2003 timeframe to what appears to be arobust future. We first noted a change in our marketplace during the secondhalf of calendar 2004, when we began to see exploration and productioncompanies actively competing with each other for access to seismic acquisitionassets in certain markets, driving prices upward. Indeed, the growth of demandin the global marine seismic acquisition market was an industry highlight offiscal 2005, and continued through fiscal 2006 and is an area of strong growthfor us.

Over the last few years,the seismic industry has been able to provide increased fidelity of subsurfacedepiction in difficult areas to image, such as below the massive salt formationsin the Gulf of Mexico, by using advanced acquisition techniques, imagingtechnologies and more powerful computers. Recently, exploration and productioncompanies have begun to show increased interest in these new techniques tofurther illuminate the subsurface. While seismic has traditionally been usedprimarily as an exploration tool, we are seeing increasing interest in newseismic imaging techniques, such as multi- or wide-azimuth marine acquisition,which offer better definition of complex structures, advancing the use ofseismic for reservoir delineation. We have been, and continue to be, the leaderin the area of improved imaging through our cutting edge imaging technologies.Additionally, many of the surveys in our data library have been acquired orenhanced using these advanced techniques. In the data acquisition area, we werean early adopter of multi-component acquisition on land and, in fiscal 2005,were the first company to acquire a large-scale wide-azimuth survey offshore.

The recent increasedinterest in these enhanced acquisition and processing techniques is furtherdriven by the oil industry’s inability to replace reserves at or above theirrate of use. Since the beginning of calendar 1985, on average, global oilproduced has significantly exceeded the annual volume of reserves discovered.Accordingly, estimates of global excess oil capacity have been dropping whiledemand has been increasing. The most obvious result of these trends is theincreasing global oil price, which has remained at relatively high levels.

To increase their reservereplacement rate, we believe most of our customers will respond to thechallenge by increasing their exploration budgets over the next few years.While much of their total exploration budgets may go toward drilling, they willfirst need drillable prospects. The most successful tool for economicallyfinding these prospects is 3D seismic. The applicability of seismic has beenexpanded greatly over the past decade. Where “standard” 3D seismic has not beensufficient, our advanced techniques have been used on certain geologic problemswith spectacular results, as exemplified by the delineation and discovery ofthe large sub-salt reservoirs in the deepwater Gulf of Mexico.

While the increases inpetroleum consumption may change from year to year, overall consumption seemsto be on a continuous climb upward. Similarly, new economic oil reserves seemto be increasingly difficult to find, especially in areas of low politicalrisk. With this supply and demand situation, we are reasonably confident thatexploration spending will continue to rise, but more importantly, we expectthat more of that spending will be directed toward areas of geophysicaldifficulty, requiring the high-end seismic services that we provide.

In this improvingbusiness environment, our strategy to maximize performance has been to:

·      continue the long-termcommitment to building multi-client data libraries in areas such as the Gulf ofMexico, the North Sea and onshore Canada and the United States;

·      invest in data processingand research resources to maintain leadership in subsurface imaging throughcontinuous innovation; and

·      target innovative and highermargin marine and land acquisition contracts in selected regions.

We expect tocontinue our balanced contract and multi-client strategy through fiscal 2007.

Due to our sales andoperational efforts and the more robust seismic market, we have seen ourbacklog increase $154 million from $302 million at July 31, 2005 to $456million at July 31, 2006. We expect that approximately 90% of our July 31, 2006backlog will be completed during the next twelve months. We believe that ourtraditional pattern of revenue generation will occur again during fiscal 2007,with revenue in our second and third fiscal quarters being higher than in ourfirst and fourth quarters. This pattern is driven by end of calendar yearspending, which results in higher library revenue in our second fiscal quarter.

12

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We have organized thecompany into four reportable segments: North and South America (NASA); Europe,Africa, Middle East and Commonwealth of Independent States (EAME); Asia Pacific(APAC); and Veritas Hampson-Russell (VHR). In NASA, EAME and APAC, we conduct geophysical surveys on both acontract and a multi-client basis. When we conduct surveys on a contract basis,we acquire and process data for a single client who pays us to conduct thesurvey and owns the data we acquire. When we conduct surveys on a multi-clientbasis, we acquire and process data for our own account and license that dataand associated products to multiple clients. NASA, EAME and APAC offer a common suite of these products and servicesto their customers, although each product or service may be adapted to meet theneeds of the local markets.  VHR licensesgeophysical software and provides geophysical reservoir consultingservices.  The results of VHR’soperations were previously included in those of the NASA region; however,beginning in fiscal 2006, senior management began to review the results of VHRseparately.  This segmentation of ourcompany is representative of the manner in which it is viewed and managed byour senior managers and our Board of Directors.

###### **Results ofOperations**

***Fiscal 2006 Compared with Fiscal 2005***

*Revenue. *Revenue for the year was up 30% from$634.0 million in fiscal 2005 to $822.2 million in fiscal 2006.  The increases for the year came from allproduct lines and across all geographic segments.

Increased multi clientrevenue was driven by strong marine library sales in the Gulf of Mexico and inBrazil.  Multi client land library sales weremore than double from a year ago primarily due to sales in US and Canada.

Contractrevenue in fiscal 2006 grew $81.1 million or 21% from the prior fiscalyear.  Increased revenue came from bothland and marine work.  Market conditionscontinue to improve and strengthen our business worldwide and we saw much ofthe growth in this fiscal year from land acquisition work in Canada and Alaskaas well as increased imaging revenue across all geographic operatingregions.  Marine acquisition revenueremained strong in all geographic regions.

During fiscal 2006, NASArevenue increased by $152.8 million. This increase is primarily due to marine and land multi-client librarysales in Canada, Gulf of Mexico and Brazil. NASA also increased its land acquisition work primarily in Canada andAlaska.  EAME generated most of itsincreased revenue through its marine acquisition work.  The increased revenue in the APAC segmentcame primarily from its marine acquisition work.

Revenue from ouroperating segments was as follows:
|                | ** ** | **Years Ended July 31,** | ** ** |
|----------------|------------|-----------------------------------------|------------|
| ** **     | ** ** | ** **                              | ** ** | ** ** | ** ** | **Change** | ** ** |
| ** **     | ** ** | **2006**                                | ** ** | **2005** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **     | ** ** | **(In millions)**                  | ** ** |
| NASA           |       | $                                       | 541.4      |   | $ | 388.6 |   | $ | 152.8 |   | 39 | % |
| EAME           |       | 148.7                                   |       | 131.0 |   | 17.7 |   | 14 | % |
| APAC           |       | 112.5                                   |       | 98.2 |   | 14.3 |   | 15 | % |
| VHR            |       | 19.6                                    |       | 16.2 |   | 3.4 |   | 21 | % |
| Total  Revenue |       | $                                       | 822.2      |   | $ | 634.0 |   | $ | 188.2 |   | 30 | % |

 

13

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Revenue consisted of the following:
|               | ** ** | **Years Ended July 31,** | ** ** |
|---------------|------------|-----------------------------------------|------------|
| ** **    | ** ** | ** **                              | ** ** | ** ** | ** ** | **Change** | ** ** |
| ** **    | ** ** | **2006**                                | ** ** | **2005** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **    | ** ** | **(In millions)**                  | ** ** |
| Multi-client: |       |                                    |       |   |   |   |   |   |   |
| Land          |       | $                                       | 109.8      |   | $ | 54.7 |   | $ | 55.1 |   | 101 | % |
| Marine        |       | 242.3                                   |       | 190.3 |   | 52.0 |   | 27 | % |
| Subtotal      |       | 352.1                                   |       | 245.0 |   | 107.1 |   | 44 | % |
| Contract:     |       |                                    |       |   |   |   |   |   |   |
| Land          |       | 203.1                                   |       | 161.6 |   | 41.5 |   | 26 | % |
| Marine        |       | 267.0                                   |       | 227.4 |   | 39.6 |   | 17 | % |
| Subtotal      |       | 470.1                                   |       | 389.0 |   | 81.1 |   | 21 | % |
| Total Revenue |       | $                                       | 822.2      |   | $ | 634.0 |   | $ | 188.2 |   | 30 | % |

 

*Operating income.* Operating income of $132.9 million in fiscal 2006 was $68.6 millionhigher than in fiscal year 2005.  Thisperformance was driven by increases in both multi-client revenue andmulti-client operating margins. The overall operating margin was also driven byincreased revenue and margins in land acquisition work due to increasedactivity in Canada and Alaska.  Operatingincome was also benefited by the $2.7 million reduction in depreciation expenserelated to the land acquisition assets that were considered held for sale forthe last two months of the fiscal year. No depreciation expense was recorded during these two months for theseassets.  General andadministrative expenses of $43.2 million for the fiscal year 2006 increased$11.3 million from the prior fiscal year primarily due to share-basedcompensation expense resulting from the adoption of new accounting rules,increased provision for performance-based incentive compensation, severancecosts, and non-recurring costs related to the preparation of the potential saleof the land acquisition business.

*Interest expense and interestincome.* Interest expense increased by $3.3 million from theprior fiscal year as a result of increases in LIBOR, which is the interest ratethat the $155.0 million convertible debt is based upon.  Interest income increased approximately $6.7million compared to the prior fiscal year due to higher interest rates and ahigher cash balance.

*Involuntary conversion of asset*s.The Company recognized a pre-tax insurance gain of $2 million in the firstquarter of fiscal 2006 related to insurance settlements for the equipment losson the Veritas Viking experienced in the second quarter of fiscal year2005.  In fiscal year 2005, the Companyrecognized a pre-tax gain of $9.9 million related to this insurance settlement.

*Income taxes. *The Company’s effective tax rate for the fiscal year ended July 31,2006 was 41.0%.  This rate includesapproximately $2.5 million of additional tax cost associated with a $55 millionone-time repatriation from one of our foreign subsidiaries pursuant to theAmerican Jobs Creation Act of 2004.  Inthe fourth quarter of fiscal 2005, the Company reversed $36.9 million ofvaluation allowances on certain of its deferred tax assets resulting in a nettax benefit of $37.3 million for the quarter and $6.8 million for the fullfiscal year.

***Fiscal 2005 Compared with Fiscal 2004***

*Revenue.*Revenue increased by 12% from $564.5 million in fiscal 2004 to $634.0 millionin fiscal 2005. This increase was driven by increased contract work, primarilymarine, in all regions and increased sales of multi-client data licenses inEAME partially offset by decreased sales of multi-client data licensesprimarily in the NASA region, which includes the Gulf of Mexico, the UnitedStates, Brazil and Canada. During fiscal 2005, NASA significantly decreased itsland acquisition operations in South America. NASA’s increase in contractmarine work was primarily in the Gulf of Mexico where the Veritas Vantage and twoadditional third party vessels acquired a wide azimuth survey during fiscal2005. APAC’s revenue increase was also generated by marine contract work, as weoperated the Veritas Viking II, the Pacific Sword and Veritas Searcher inAustralia, India, Myanmar and New Zealand during the period. EAME generatedmost of its increased revenue through sales of multi-client data licenses foroffshore Africa and the North Sea.

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Revenue from ouroperating segments was as follows:
|                | ** ** | **Years Ended July 31,** | ** ** |
|----------------|------------|-----------------------------------------|------------|
| ** **     | ** ** | ** **                              | ** ** | ** ** | ** ** | **Change** | ** ** |
| ** **     | ** ** | **2005**                                | ** ** | **2004** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **     | ** ** | **(In millions)**                  | ** ** |
| NASA           |       | $                                       | 388.6      |   | $ | 370.9 |   | $ | 17.7 |   | 5 | % |
| EAME           |       | 131.0                                   |       | 118.5 |   | 12.5 |   | 11 | % |
| APAC           |       | 98.2                                    |       | 60.1 |   | 38.1 |   | 63 | % |
| VHR            |       | 16.2                                    |       | 15.0 |   | 1.2 |   | 8 | % |
| Total  Revenue |       | $                                       | 634.0      |   | $ | 564.5 |   | $ | 69.5 |   | 12 | % |

 

Revenue consisted of the following:
|               | ** ** | **Years Ended July 31,** | ** ** |
|---------------|------------|-----------------------------------------|------------|
| ** **    | ** ** | ** **                              | ** ** | ** ** | ** ** | **Change** | ** ** |
| ** **    | ** ** | **2005**                                | ** ** | **2004** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **    | ** ** | **(In millions)**                  | ** ** |
| Multi-client: |       |                                    |       |   |   |   |   |   |   |
| Land          |       | $                                       | 54.7       |   | $ | 66.0 |   | $ | (11.3 | ) | (17 | )% |
| Marine        |       | 190.3                                   |       | 209.1 |   | (18.8 | ) | (9 | )% |
| Subtotal      |       | 245.0                                   |       | 275.1 |   | (30.1 | ) | (11 | )% |
| Contract:     |       |                                    |       |   |   |   |   |   |   |
| Land          |       | 161.6                                   |       | 154.0 |   | 7.6 |   | 5 | % |
| Marine        |       | 227.4                                   |       | 135.4 |   | 92.0 |   | 68 | % |
| Subtotal      |       | 389.0                                   |       | 289.4 |   | 99.6 |   | 34 | % |
| Total Revenue |       | $                                       | 634.0      |   | $ | 564.5 |   | $ | 69.5 |   | 12 | % |

 

*Operating income (loss).* Operating income increased by $36.4 millionfrom $27.8 million in fiscal 2004 to $64.2 million in fiscal 2005. During thefirst quarter of fiscal 2004, we changed our multi-client amortizationaccounting policy to include a minimum amortization from the date of surveycompletion, instead of only during the last 24 months of the survey’s booklife. As a result of this change, we recorded a charge of $22.1 million in costof services in the first quarter of fiscal 2004. The remaining $14.3 millionincrease in operating income from fiscal 2004 is the result of increasedmargins (revenue less cost of services) of $24.1 million partially offset byincreased research and development costs and general and administrative costs.Our margin increase was primarily due to our revenue increase and a decrease incost of services as a percent of revenue of approximately 2%. Increasedproductivity, favorable mix of jobs and higher pricing contributed to themargin increase.

Research and developmentcosts have increased by $3.4 million from fiscal 2004 primarily due to ourfocus on advanced acquisition and processing and general increases in researchspending. General and administrative expense increased by $6.4 million due tothe expenses associated with the restatement of our historical financialstatements and those associated with our increased efforts in the areas ofdisclosure controls and procedures and internal control over our financialreporting. Research and development expense and general and administrativeexpense both grew due to increased incentive compensation related to ourimproved financial performance.

*Interest expense and interestincome.* Interest expense decreased from $18.9 million infiscal 2004 to $4.0 million in fiscal 2005. This decrease is due primarily tothe issuance of our Convertible Senior Notes in the third quarter of fiscal2004 and the repayment of our term notes with the proceeds. This refinancingresulted in a significantly lower interest rate. Our Convertible Senior Notesaccrue interest at a rate of three month LIBOR less 0.75%, which equated to aweighted average interest rate of 1.72% for fiscal 2005 and is much lower thanthe various tranches of debt in place in fiscal 2004. In addition,approximately $7.4 million of debt issuance costs were expensed in fiscal 2004in connection with the retirement of the term notes.  Interest income increased from $1.6 millionto $5.3 million due to interest earned on the cash balances.

*Involuntary conversion of asset*s.In January 2005, our seismic vessel Veritas Viking experienced an enginefailure while acquiring data in the Gulf of Mexico and lost substantial amountsof overboard seismic equipment. As this seismic equipment was insured at itsreplacement cost, we recognized a $9.9 million gain related to the insurancesettlement.

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*Income taxes.*We reversed $36.9 million of valuationallowances on certain of our deferred tax assets during the fourth quarter offiscal 2005, resulting in a net tax benefit of $6.8 million for fiscal 2005.The deferred tax assets were originally reserved at the end of fiscal 2003primarily due to our historical losses in several tax jurisdictions. As of thefourth quarter of fiscal 2005, we had recognized profits in those jurisdictionsand had a positive operational outlook. The combination of these two factorswas sufficient to cause the reversal of the reserves. This decrease in provision was offset, inpart, by the increased current tax provision resulting from substantiallyhigher income in fiscal 2005. Excludingthe release of valuation allowances, our effective tax rate would have beenapproximately 40%. (See Note 5 of Notes to Consolidated FinancialStatements for further information on income taxes.)

**Liquidity and Capital Resources**

***Sources and Uses***

Our internal sources ofliquidity are cash on hand and cash flow from operations.  External sources include our existing creditfacilities, public financing, equity sales, equipment financing, and tradecredit.  We believe that our current cashbalance and cash flow from operations will be adequate to meet our liquidityneeds over the next twelve months.

Net cash provided byoperating activities was $­­­­­336.6 million for fiscal 2006, which isconsistent with fiscal 2005 of $331.3 million. Net cash used by investing activities of $216.8 million in 2006 wasslightly higher than $206.7 million in 2005 due to the increase in multi-clientlibrary investment and expenditures for property and equipment partially offsetby the receipt of insurance proceeds. Our currently projected cash investments for fiscal 2007 include capitalexpenditures to replace and upgrade existing equipment of approximately $200 to$240 million and investment in our data library of approximately $250 to $300million.  We expect to fund theseinvestments from our current cash on hand and from internally generated funds.

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

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

In March 2006, weentered into an agreement with a third party ship owner to charter a vesselcurrently known as the Veritas Vision, which is currently being converted forseismic operations.  The term of the charter is for a period of eightyears fixed, with options of up to 10 more years.  When delivered in thefirst calendar quarter of 2007, the Veritas Vision will be the seventh seismicvessel in our fleet.  In addition to thecharter, we expect to invest approximately $62 million to equip the vessel forseismic operations.  Of this expected total, approximately $5 million wasspent during the fiscal year ended July 31, 2006 and the remainder isexpected to be spent during the fiscal year ending July 31, 2007.

In September 2006,we entered into an agreement to charter a seismic vessel, currently known as theViking Poseidon, which is currently expected to be in service commencing in thesecond calendar quarter of 2007.  Thisvessel will serve as a replacement for the Seisquest vessel, which is under acharter that expires in May of 2007.

We have alsoentered into a commitment to purchase approximately $26 million of recordingequipment to upgrade a vessel in our existing fleet.  Substantially all of this amount will bespent during the fiscal year ending July 31, 2007.

***DebtStructure***

As of July 31, 2006, ournotes payable consisted of $155.0 million of Convertible Senior Notes due 2024.These notes are classified as a current liability as of July 31, 2006 becausethe conversion feature discussed below results in the notes being convertibleat the option of the holders.

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The Convertible SeniorNotes bear interest at a per annum rate which equals the three-month LIBORrate, adjusted quarterly, minus a spread of 0.75%.  The interest rate of the notes, from June 15,2006 through September 14, 2006, was 4.58%, based on a LIBOR rate of5.33%.  For fiscal 2006, the weightedaverage interest rate on the notes was 3.66%. The notes will mature on March15, 2024 and may not be redeemed by us prior to March 20, 2009. Holders of thenotes may require us to repurchase some, or all, of the notes on March 15,2009, 2014 and 2019. They could also require repurchase upon a change ofcontrol (as defined in the indenture under which the Convertible Senior Noteswere issued).

Under certain circumstances andat the option of the holder, the Convertible Senior Notes are convertible prior to the maturity date into cash andshares of our common stock.  Certain ofthese circumstances may result in classification of the Convertible Senior Notes as current on our balancesheet.  These circumstances include:

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

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

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

4.             theoccurrence of specified corporate transactions.

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

As of the beginning ofthe second fiscal quarter of 2006, the Convertible Senior Notes wereconvertible as the stock price remained greater than 120% of the ConversionPrice for at least 20 trading days in the period of 30 consecutive trading daysending on October 31, 2005.  The notescontinued to be convertible as of July 31, 2006.  Because of the convertibility, the notes havebeen classified as a current liability on our consolidated balance sheet as ofJuly 31, 2006.  The determination of theconvertibility of the notes occurs quarterly. Depending upon the common stock price in the future, the notes may notbe convertible in future quarters and therefore would not be classified ascurrent on our consolidated balance sheet. Assuming a stock price of $57.27 (which was the closing stock price onJuly 31, 2006), conversion of all the notes would result in our payment of $155million in cash and 3.7 million shares of common stock.

In connection with our issuance of the ConvertibleSenior Notes, we entered into a registration rights agreement pursuant to whichwe agreed to register the resale of the notes and underlying common stock bythe holders thereof.  Under the terms ofthat registration rights agreement, we were required to file a shelfregistration statement for the notes and underlying common stock within anagreed amount of time and thereafter to keep it current or useable for two-yearperiod ending in March 2006.  If wefailed to file or keep the shelf registration statement related to this debteffective or usable in accordance with the registration rights agreement, then,subject to certain exceptions, we were required to pay liquidated damages toall holders of notes and all holders of our common stock issued upon conversionof the notes.  The liquidated damages tobe paid were equal to an annual rate of 0.50% of the principal amount.  In November 2005, the shelf registrationstatement became no longer effective and, accordingly, we began accruing andpaying liquidated damages at approximately $2,100 per day.  We are not required to register the resale ofthe notes and underlying common stock after March 10, 2006 and therefore, ourliability for the payment of liquidated damages ended on that date. For thefiscal year end 2006, we have recorded and paid approximately $310,000 ofexpense related to these liquidated damages.

In addition to the notes, wealso have a five-year $85 million revolving loan agreement with a syndicate ofbanks.  We entered into this facility inFebruary 2006.  The facility provides forrevolving loans and the issuance of letters of credit to Veritas DGC Inc. andcertain of its subsidiaries of up to $45 million in the United States, $15million in Canada, $15 million in Singapore and $10 million in the UnitedKingdom.  As of July 31, 2006, there wereno borrowings and $3.8 million of outstanding letters of

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credit, leaving $81.2 million available under therevolving loan facility.  This new creditfacility replaced our previous credit facility that consisted primarily of arevolving loan facility.

The facility is secured bypledges of accounts receivable and the U.S. land data library, which, whenadded together, have a carrying amount of approximately $242  million as of July 31, 2006.  The facility is also secured by certainintercompany notes and stock in certain Veritas subsidiaries.  Veritas and certain of its subsidiaries have alsoissued loan guarantees with respect to certain borrowings. Interest rates onborrowings under the facility are selected by the borrower at the time of anyadvance and the rates so selected may be either at LIBOR plus 1.00% or the BaseRate (defined as the lesser of the applicable prime rate or the federal fundsrate).  These rates may be adjustedupward depending upon our leverage ratio (calculated as a ratio of funded debtversus EBITDA for the previous four quarters) to a maximum of LIBOR plus 1.50%or the base rate plus 0.50%.  The loanagreement and related documents contain customary financial covenants anddefault provisions, including a limit on the amount of cash dividends.  These covenants contain certain financialmeasurements as of quarter ending dates, and, as of our last fiscal quarterended July 31, 2006, we were in compliance with these covenants.

We also have various unsecuredlines of credit, with lending institutions that operate in geographic areas notcovered by the lending institutions in our credit facility, totaling $8.5million that may be used exclusively for the issuance of letters of credit andbank guarantees. As of July 31, 2006, $1.0 million in letters of credit wereoutstanding under these lines.

The following tablepresents our contractual obligations as of July 31, 2006 for the specifiedperiods:
|                                             | ** ** | **Payments Due**   | ** ** |
|---------------------------------------------|------------|-------------------------|------------|
| **Contractual Obligations**            | ** ** | **Total**               | ** ** | **Less than  1 year** | ** ** | **1 – 3  years** | ** ** | **3 – 5  years** | ** ** | **More Than  5 years** | ** ** |
| ** **                                  | ** ** | **(In thousands)** | ** ** |
|                                        |       |                    |       |   |   |   |   |   |   |   |   |
| Long-term  debt (1)                         |       | $                       | 155,000    |   | $ | — |   | $ | — |   | $ | — |   | $ | 155,000 |   |
| Estimated  interest payments (2)            |       | 125,418                 |       | 7,099 |   | 14,198 |   | 14,198 |   | 89,923 |   |
| Operating  leases                           |       | 222,755                 |       | 49,099 |   | 64,944 |   | 49,680 |   | 59,032 |   |
| Capital  leases                             |       | 1,767                   |       | 1,502 |   | 265 |   | — |   | — |   |
| Purchase  obligations                       |       | 86,564                  |       | 86,564 |   | — |   | — |   | — |   |
| Potential  payments under letters of credit |       | 4,816                   |       | 4,579 |   | 237 |   | — |   | — |   |
| Other  long-term liabilities (3)            |       | 34,561                  |       | 85 |   | 1,434 |   | 21 |   | 33,021 |   |
| Total                                       |       | 630,881                 |       | 148,928 |   | 81,078 |   | 63,899 |   | 336,976 |   |
|                                             |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)   Thedebt of $155 million has been classified as a current liability since October31, 2005 because the stock price has remained above the level that triggers theconvertibility features of the debt.

(2)   Theinterest rate on our debt is LIBOR less 0.75%. For purposes of this table, weused our current interest rate of 4.58% based on a LIBOR rate of 5.33%. Each 100basis point increase in LIBOR will increase our annual interest expense by$1.55 million per year.

(3)   Includesincome tax, deferred revenue, pension and retirement obligations for which thetiming of payment is uncertain.

**Off -Balance Sheet Arrangements**

As of July 31, 2006, wehad no off-balance sheet instruments.

**CriticalAccounting Policies**

While all of ouraccounting policies are important in assuring that we adhere to currentaccounting standards, certain policies are particularly important due to theirimpact on our financial statements or the degree of subjectivity inherent inthe assumptions required by the policies. These are described in detail below.

***Revenue Recognition***

Customer contracts forour services vary in terms and conditions. We review the deliverables in eachcontract and, where applicable, apply the accounting guidance contained in EITF00-21, “Accounting for Revenue Contracts with Multiple Deliverables” (EITF00-21).

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For contractservices, we recognize revenue on a proportional performance method based uponoutput measures as work is performed. This method requires that we recognizerevenue based upon quantifiable measures of progress, such as kilometers shotor processed. In contracts where our customer pays separately for the mobilizationof equipment, EITF 00-21 requires us to recognize such mobilization fees asrevenue during the performance of the seismic acquisition, using the sameproportional performance method as for the acquisition work.

Revenue from thelicensing of multi-client surveys is based upon agreed rates set forth in thecontract and are recognized upon physical delivery of, or customer access to,the surveys. During the acquisition and processing phase of a multi-clientsurvey, in most cases we recognize revenue on in—process multi-client surveysafter obtaining a signed license agreement that gives the customers access tosurvey results as they occur, based upon a proportional performance method,using quantifiable measures of progress, such as kilometers shot or processed.After completion of a multi-client survey, we recognize revenue upon deliveryof, or customer access to, the data to our customer or the customer’s designee.

Provisions exist incertain contracts with our customers that provide for a full refund if certaindeadlines are not met or provide for a revenue sharing arrangement with thecustomer such that the final sales price is not fixed or determinable. Forcontracts with these provisions, we do not recognize the revenue under theproportional performance method for that contract and, instead, defer revenuerecognition until performance is complete or the sales price is fixed ordeterminable.

***Multi-Client Data Library***

We collect and processgeophysical data for our own account and retain all ownership rights. Welicense the data to clients on a non-transferable basis. In some circumstances,we have sold, on a non-exclusive basis, rights to data prior to our collectingand processing such data, i.e., we have made the first of what we anticipatewill be multiple discrete sales of licenses to the same data.

We capitalize costsassociated with acquiring and processing the data as an investment in ourmulti-client data library. The capitalized costs of multi-client data arecharged to cost of services in the period sales of licenses occur based uponthe greater of the percentage of total costs to total estimated sales for thefirst five years multiplied by actual sales, a process called the salesforecast method, or five-year straight-line amortization from the date ofsurvey completion. The sales forecast method is our primary method ofcalculating cost of services. We believe this method of amortizing thecapitalized costs aligns the amount of amortization to the period in which theeconomic benefits of the capitalized costs are consumed.

Estimated sales aredetermined based upon discussions with our clients, our experience and ourknowledge of industry trends. Changes in sales estimates may have the effect ofchanging the percentage relationship of cost of services to revenue. Inapplying the sales forecast method, an increase in the projected sales of asurvey will result in lower cost of services as a percentage of revenue, andhigher earnings when revenue associated with that particular survey is recognized,while a decrease in projected sales will have the opposite effect.

Assuming that the overallvolume of sales, the mix of surveys generating revenue in the period, andminimum amortization amounts were held constant in fiscal 2006, an increase of10% in the sales forecasts of all of our surveys would have decreased our costof services by less than 2%, or approximately $12 million.

Our ability to accuratelyforecast sales of our library surveys for several years into the future isaffected by unforeseeable changes in commodity prices, exploration success inthe area of the survey and the overall investment decisions of our customers.Therefore, we update our sales forecast for surveys with a significant bookvalue on a quarterly basis to ensure that the most current market informationis considered.

The totalamortization period of 60 months represents the minimum period over whichbenefits from these surveys are expected to be derived. We have determined theamortization period of 60 months based upon our historical experience thatindicates that the majority of our revenue from multi-client surveys arederived during the acquisition and licensing phases and during the 5 yearssubsequent to survey completion. Any future decrease in the minimum amortizationperiod would have the effect of increasing cost of services and reducing thecarrying value of the multi-client data library.

We periodically reviewthe carrying value of the multi-client data library to assess whether there hasbeen a permanent impairment of value and record losses when it is determinedthat estimated future sales would not be sufficient to cover the carrying valueof the asset. Any future reductions in sales estimates may result in animpairment charge that increases cost of services and reduces the carryingvalue of the multi-client data library.

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#### ***Deferred Tax Asset***

Deferred taxes resultfrom the effect of transactions that are recognized in different periods forfinancial and tax reporting purposes. A valuation allowance, by tax jurisdiction,is established when it is more likely than not that at least some portion ofthe related deferred tax asset will not be realized. The amount of a valuationallowance is later reduced if realization of the related deferred tax assetsubsequently becomes more likely than not. As of July 31, 2006, we had $19.3 million of valuation allowancesrelated to deferred tax assets in jurisdictions where historical losses orcertain limitations on their use indicate realization is doubtful.

#### ***Software Capitalization and Amortization***

Software availablefor sale is included in other assets on our consolidated balance sheets.Software acquired through the purchase of software companies is capitalized atits estimated fair market value through the allocation of the purchase price.For internally developed software, we capitalize costs associated with thedevelopment of the product from the time the product reaches technologicalfeasibility until it is ready for commercial release.

The amortization ofcapitalized software is the greater of the amount computed using (a) the ratiothat current gross revenue for a product bear to the total of current andanticipated future gross revenue for that product or (b) the straight-linemethod over the remaining estimated economic life of the product including theperiod being reported on. The period of amortization begins when the softwareis released to the market. Estimated useful lives of our software productsrange from three to five years.

Estimated sales aredetermined based upon discussions with our clients, our experience and ourknowledge of industry trends. Changes in sales estimates will have the effectof changing cost of services. An increase in projected sales will result inlower cost of services as a percentage of sales and higher earnings. A decreasein projected sales will result in higher cost of services as a percentage ofsales and lower earnings. Any future increases or decreases in our estimates ofuseful lives will have the effect of decreasing or increasing future cost ofservices with an inverse effect on earnings.

***ShareBased Compensation***

#### As of August 1, 2005, we adopted the Financial Accounting StandardBoard Statement No. 123(R) (SFAS 123R) to account for share basedcompensation.  SFAS 123R requires us to recordthe cost of stock options and other equity-based compensation in our incomestatement based upon the estimated fair value of those awards.  We elected to use the modified prospectivemethod for adoption, which requires compensation expense to be recorded for allunvested stock options and other equity-based compensation beginning in thefirst quarter of adoption.  For allunvested options outstanding as of August 1, 2005, the previously measured butunrecognized compensation expense, based on the fair value at the originalgrant date, we began recognizing in the statement of operations over theremaining vesting period. For equity-based compensation granted subsequent toAugust 1, 2005, compensation expense, based on the fair value on the date ofgrant, we began recognizing in the statement of operations over the vestingperiod.  Determining the fair value ofstock based awards at the grant date requires judgment, including estimatingthe expected term of stock options, the expected volatility of our stock andthe amount of stock options to be forfeited. If actual results differ significantly from these estimates, share basedcompensation expense and the results of operations could be materiallyimpacted.  As of July 31, 2006, there wasapproximately $7.3 million of total unrecognized compensation cost related tononvested share-based compensation arrangements.  That cost is expected to be recognized on astraight line basis over the weighted average remaining period which isapproximately 2 years.

***PensionPlan***

We maintain acontributory defined benefit pension plan (the “Pension Plan”) for eligibleparticipating employees in the United Kingdom. Monthly contributions byemployees are equal to 7.0% of their salaries increased from 5.5% effectiveDecember 1, 2005. We provide an additional contribution in an actuariallydetermined amount necessary to fund future benefits to be provided under thePension Plan. Benefits provided are based upon 1/60 of the employee’s finalpensionable salary (as defined in the Pension Plan) for each complete year ofservice up to 2/3 of the employee’s final pensionable salary and increaseannually in line with inflation subject to a maximum of 5% per annum. ThePension Plan also provides for 50% of such actual or expected benefits to bepaid to a surviving spouse upon the death of a participant. Pension Plan assetsconsist mainly of investments in marketable securities that are held andmanaged by an independent trustee.

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The Pension Planis impacted by certain actuarial assumptions, including the discount rate, theexpected rate of return on plan assets and expected salary increases. Theserates are evaluated by outside actuaries and senior management on an annualbasis and adjusted only as appropriate to reflect changes in market rates andoutlook.  In accordance with U.S. GAAP,the net amount by which actual results differ from our assumptions is deferred.If this net deferred amount exceeds 10% of the greater of plan assets orliabilities, a portion of the deferred amount is included in expense for thefollowing year. The cost or benefit of plan changes, such as increasing ordecreasing benefits for prior employee service (prior service cost), isdeferred and included in expense on a straight-line basis over the averageremaining service period of the employees expected to receive benefits.

The expectedlong-term rate of return on plan assets reflects the average rate of earningsexpected on the funds invested or to be invested to provide for the benefitsincluded in the projected benefit obligation. We have used a rate we believe isappropriate for long-term investment in an equity-based portfolio.  For fiscal 2006, the average return on assetsassumption was 6.5% compared to a historical actual rate of return of 6.5% overthe past 10 years.  A 0.25% decrease inthe expected return on plan assets would increase our net periodic pension costby approximately $0.1 million.

The discount rateis determined by using the return available from an index of AA-rated corporatenon-callable bonds of appropriate duration and currency. For fiscal 2006, thediscount rate used was 5.0%. A 0.25% decrease in the discount rate wouldincrease our net periodic pension cost by approximately $0.3 million.

For fiscal 2007,we plan to contribute approximately $1.4 million to the pension scheme and weexpect to continue to fund the pension scheme at an appropriate level over theremaining life of the scheme.

In fiscal 2006, we recorded net pension expense of $2.8 million comparedto $1.2 million in fiscal 2005 and $1.0 million in fiscal 2004.

**Recent Accounting Pronouncements**

InDecember 2004, the FASB issued FASB Staff Position No. 109-1, “Applicationof FASB Statement No. 109, Accounting for Income Taxes, to the TaxDeduction on Qualified Production Activities Provided by the American JobsCreation Act of 2004,” which provides guidance on the recently enacted AmericanJobs Creation Act of 2004 (the “Act”). The Act provides a U.S. tax deductionfor income from qualified domestic production activities beginning in ourfiscal year ended July 31, 2006.   FSP109-1 provides for the treatment of the deduction as a special deduction asdescribed in SFAS No. 109. Accordingly, we will record the amount of anyspecial deductions in the years they are taken. The impact of this deduction did not have a material impact on ourfiscal year 2006 financial statements.

In December 2004,the FASB issued FASB Staff Position No. 109-2, “Accounting and DisclosureGuidance for the Foreign Repatriation Provision within the American JobsCreation Act of 2004,” which provides guidance under SFAS No. 109 withrespect to recording the potential impact of the repatriation provisions of theAct on a company’s income tax expense and deferred tax liability. FSP 109-2states that a company is allowed time beyond the financial reporting period ofenactment to evaluate the effect of the Act on its plan for reinvestment orrepatriation of foreign earnings for purposes of applying SFASNo. 109.  During July 2006, theCompany elected to repatriate $55 million from one of its foreign subsidiariesto realize the benefits of this provision of the Act.  We plan to use the net proceeds forqualifying U.S. expenditures.  The impact of the repatriation wasapproximately $2.5 million increase to the fiscal 2006 tax provision.

InDecember 2004, the FASB issued SFAS No. 153,**“Exchanges of Nonmonetary Assets — anamendment of APB Opinion No. 29,” to address the measurement of exchangesof nonmonetary assets.  SFAS No. 153 eliminates the exception fromfair value measurement for nonmonetary exchanges of similar productive assetsand replaces it with a general exception for exchanges of nonmonetary assetsthat do not have commercial substance.  A nonmonetary exchange hascommercial substance if the future cash flows of the entity are expected tochange significantly as a result of the exchange.  This statement was adopted by the companybeginning August 1, 2005.  The adoption of this statement had no impact onthe company’s financial statements.

In May 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections—a replacement ofAPB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154 requiresretrospective application to prior periods’ financial statements for changes inaccounting principle, unless it is impracticable to determine either theperiod-specific effects or the cumulative effect of the change. SFAS 154 alsorequires that a change in depreciation, amortization, or depletion method forlong-lived, non-financial assets be accounted for as a change in accountingestimate effected by a change in accounting principle. SFAS 154 is

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effective foraccounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005. The implementation of SFAS No. 154 is not expected tohave a material impact on the company’s financial statements.

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

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

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

In September 2006, the FASB issued SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).  SFAS No. 158 requires an employer to: (a) Recognize in its statement of financial position an asset for a plan’soverfunded status or a liability for a plan’s underfunded status; (b) Measure a plan’s assets and its obligations that determine its funded status asof the end of the employer’s fiscal year (with limited exceptions); (c) Recognize changes in the funded status of a defined benefit postretirement planin the year in which the changes occur. Those changes will be reported incomprehensive income of a business entity and in changes in net assets of anot-for-profit organization.  Therequirement to recognize the funded status of a benefit plan and the disclosurerequirements are effective for us for the fiscal year ending on July 31,2007.  The requirement to measure planassets and benefit obligations as of the date of our fiscal year-end balancesheet is effective for us for the fiscal year ending July 31, 2009.  We are currently evaluating the provisions ofthis guidance to determine the impact on our consolidated financial statements.

## **ITEM7A. Quantitative and Qualitative Disclosures Regarding Market Risk**

Asof July 31, 2006, we had $155.0 million Convertible Senior Notes bearinginterest at LIBOR less 0.75% with a fair value of $383 million,based upon the bid price of 247.25 on July 31, 2006. These notes are not hedgedand represent our total exposure to interest rate risk. Each 100 basis pointincrease in the LIBOR rate will increase our interest expense by $1.6 millionper year.  We operate in a number ofinternational areas and are involved in transactions denominated in currenciesother than U.S. dollars, which exposes us to foreign exchange rate risk.  We review these risks on a case-by-casebasis.  We have not entered into anyhedges related to this foreign exchange rate risk in fiscal 2006.

22

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## **ITEM8. Consolidated Financial Statements and Supplementary Data**

**INDEX TO CONSOLIDATED FINANCIALSTATEMENTS**

| Management’s Responsibilities  for Financial Statements                                              |   |   |
|-----------------------------------------------------------------------------------------------------------|--------|--------|
| Report of  Independent Registered Public Accounting Firm                                                  |   |   |
| Consolidated  Statements of Operations and Comprehensive Income for the Three Years Ended  July 31, 2006  |   |   |
| Consolidated Balance  Sheets as of July 31, 2006 and 2005                                                 |   |   |
| Consolidated  Statements of Cash Flows for the Three Years Ended July 31, 2006                            |   |   |
| Consolidated  Statements of Changes in Stockholders’ Equity for the Three Years Ended July  31, 2006 |   |   |
| Notes to  Consolidated Financial Statements                                                               |   |   |
| Financial Statement Schedule - Valuation and Qualifying Accounts and Reserves                             |   |   |

 

23

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Management’s Responsibilities for FinancialStatements

To the Stockholders ofVeritas DGC Inc.:

The accompanyingconsolidated financial statements of Veritas DGC Inc. and its subsidiaries arethe responsibility of management and have been prepared in conformity withaccounting principles generally accepted in the United States of America. Theynecessarily include some amounts that are based on best judgments andestimates. The financial information displayed in other sections of this reportis consistent with these financial statements.

The Board ofDirectors pursues its oversight role in the area of financial reporting andinternal control over financial reporting through its Audit Committee. Thiscommittee, composed solely of independent directors, regularly meets (jointlyand separately) with the independent registered public accounting firm,management and internal auditors to monitor the proper discharge by each oftheir responsibilities relative to internal control over financial reportingand the consolidated financial statements.
|                             |     |                                          |
|-----------------------------|----------|------------------------------------------|
|                        |     |                                     |
| Thierry Pilenko             |     | Mark E. Baldwin                          |
| *Chairman of the Board and* | * * | *Executive Vice President,*              |
| *Chief Executive Officer*   | * * | *Chief Financial Officer and  Treasurer* |

 

Management’s Report on Internal Control overFinancial Reporting

To the Stockholders ofVeritas DGC Inc.:

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting (as defined in Rule 13a – 15(f) under the Securities andExchange Act of 1934). An evaluation of the design and effectiveness of ourinternal control over financial reporting, based on the framework in *Internal Control – Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission, was conductedunder the supervision and with the participation of management, including ourChief Executive Officer and Chief Financial Officer. Based on the results ofthis evaluation, we concluded that our internal control over financialreporting was effective as of July 31, 2006.

Our assessment of theeffectiveness of our internal control over financial reporting as of July 31,2006 has been audited by PricewaterhouseCoopers LLP, an independent registeredpublic accounting firm, as stated in their audit report, which is includedherein.
|                             |     |                                          |
|-----------------------------|----------|------------------------------------------|
|                        |     |                                     |
| Thierry Pilenko             |     | Mark E. Baldwin                          |
| *Chairman of the Board and* | * * | *Executive Vice President,*              |
| *Chief Executive Officer*   | * * | *Chief Financial Officer and  Treasurer* |

 

24

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#### Report ofIndependent Registered Public Accounting Firm

To the Board of Directorsand Stockholders of Veritas DGC Inc.:

We have completedintegrated audits of Veritas DGC Inc.’s 2006 and 2005 consolidated financialstatements and of its internal control over financial reporting as of July 31,2006, and an audit of its 2004 consolidated financial statements in accordancewith the standards of the Public Company Accounting Oversight Board (UnitedStates).  Our opinions, based on ouraudits, are presented below.

Consolidated financial statements and financial statementschedule

In our opinion, theconsolidated financial statements listed in the accompanying index presentfairly, in all material respects, the financial position of Veritas DGC Inc.and its subsidiaries at July 31, 2006 and 2005, and the results of theiroperations and their cash flows for each of the three years in the period endedJuly 31, 2006 in conformity with accounting principles generally accepted inthe United States of America.  Inaddition, in our opinion, the financial statement schedule listed in theaccompanying index  presents fairly, inall material respects, the information set forth therein when read inconjunction with the related consolidated financial statements.  These financial statements and financialstatement schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements and financial statement schedule based on ouraudits.  We conducted our audits of thesestatements in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit of financialstatements includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

As discussed in Note 1 tothe consolidated financial statements, the Company changed its accounting foramortization of multi-client data library on August 1, 2003. As discussed inNote 1 to the consolidated financial statements, the Company changed the mannerin which it accounts for share based compensation in fiscal 2006.

Internal controlover financial reporting

Also, in ouropinion, management’s assessment, included in the accompanying Management’sReport on Internal Control over Financial Reporting, appearing under Item 9A,that the Company maintained effective internal control over financial reportingas of July 31, 2006 based on criteria established in *InternalControl - Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), is fairly stated, in allmaterial respects, based on those criteria. Furthermore, in our opinion, theCompany maintained, in all material respects, effective internal control overfinancial reporting as of July 31, 2006, based on criteria established in *Internal Control - Integrated Framework* issued by theCOSO.  The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting.  Our responsibility is toexpress opinions on management’s assessment and on the effectiveness ofthe Company’s internal control over financial reporting based on our audit. Weconducted our audit of internal control over financial reporting in accordancewith the standards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects.  An audit of internalcontrol over financial reporting includes obtaining an understanding ofinternal control over financial reporting, evaluating management’s assessment,testing and evaluating the design and operating effectiveness of internalcontrol, and performing such other procedures as we consider necessary in thecircumstances.  We believe that our auditprovides a reasonable basis for our opinions.

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles.  Acompany’s internal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation of

25

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financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and(iii) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use, or disposition of the company’sassets that could have a material effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

Houston, Texas

October 4, 2006

26

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#### **VERITAS DGC INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME**

**(In thousands, except per shareamounts)**
| ** **                                                                                                             | ** ** | **For the Years Ended July 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                                             | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                                   |       |                                                      |       |   |   |   |   |
| Revenue                                                                                                                |       | $                                                         | 822,188    |   | $ | 634,026 |   | $ | 564,469 |   |
| Cost  of services                                                                                                      |       | 623,159                                                   |       | 519,008 |   | 495,709 |   |
| Research  and development                                                                                              |       | 22,910                                                    |       | 18,882 |   | 15,536 |   |
| General  and administrative                                                                                            |       | 43,240                                                    |       | 31,895 |   | 25,454 |   |
| Operating  income                                                                                                      |       | 132,879                                                   |       | 64,241 |   | 27,770 |   |
| Interest  expense                                                                                                      |       | 7,319                                                     |       | 3,996 |   | 18,851 |   |
| Interest  income                                                                                                       |       | (11,989                                                   | )          | (5,262 | ) | (1,602 | ) |
| Gain  on involuntary conversion of assets                                                                              |       | (2,000                                                    | )          | (9,861 | ) | — |   |
| Other  (income) expense, net                                                                                           |       | 123                                                       |       | (875 | ) | 1,585 |   |
| Income  before provision (benefit) for income taxes                                                                    |       | 139,426                                                   |       | 76,243 |   | 8,936 |   |
| Provision  (benefit) for income taxes                                                                                  |       | 57,195                                                    |       | (6,758 | ) | 3,715 |   |
| Net  income                                                                                                            |       | $                                                         | 82,231     |   | $ | 83,001 |   | $ | 5,221 |   |
|                                                                                                                   |       |                                                      |       |   |   |   |   |
| **Net  income per share:**                                                                                             | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic:**                                                                                                             | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average common shares                                                                                         |       | 35,260                                                    |       | 33,843 |   | 33,572 |   |
| Income per common share                                                                                                |       | $                                                         | 2.33       |   | $ | 2.45 |   | $ | .16 |   |
|                                                                                                                   |       |                                                      |       |   |   |   |   |
| **Diluted:**                                                                                                           | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average common shares                                                                                         |       | 39,623                                                    |       | 35,054 |   | 34,260 |   |
| Income per common share                                                                                                |       | $                                                         | 2.08       |   | $ | 2.37 |   | $ | .15 |   |
|                                                                                                                   |       |                                                      |       |   |   |   |   |
| **Comprehensive income**                                                                                               |       |                                                      |       |   |   |   |   |
| Net  income                                                                                                            |       | $                                                         | 82,231     |   | $ | 83,001 |   | $ | 5,221 |   |
| Other  comprehensive income (loss) (net of tax, $0 in all periods except as  specified):                               |       |                                                      |       |   |   |   |   |
| Foreign currency translation adjustments                                                                               |       | 7,538                                                     |       | 6,914 |   | 3,835 |   |
| Unrealized gain (loss) on investments-available for sale                                                               |       | —                                                    |       | (159 | ) | (588 | ) |
| Reclassification of unrealized gain on investments recognized in income                                                |       | (197                                                      | )          | — |   | — |   |
| Unrealized gain on hedge transactions                                                                                  |       | —                                                    |       | — |   | 145 |   |
| Minimum pension liability adjustment (net of tax benefit of $409,  $3,074 and $0 in 2006, 2005 and 2004, respectively) |       | (956                                                      | )          | (7,171 | ) | 338 |   |
| Total  other comprehensive income (loss)                                                                               |       | 6,385                                                     |       | (416 | ) | 3,730 |   |
| Comprehensive income                                                                                                   |       | $                                                         | 88,616     |   | $ | 82,585 |   | $ | 8,951 |   |

 

See Notes to Consolidated Financial Statements

27

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**VERITAS DGC INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEET**

**(Dollars in thousands, except parvalue)**
| ** **                                                                                                                                                                              | ** ** | **July 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                              | ** ** | **2006**          | ** ** | **2005** | ** ** |
| ASSETS                                                                                                                                                                                  |       |              |       |   |   |
| Current assets:                                                                                                                                                                         |       |              |       |   |   |
| Cash and cash equivalents                                                                                                                                                               |       | $                 | 401,955    |   | $ | 249,393 |   |
| Restricted cash investments                                                                                                                                                             |       | 302               |       | 237 |   |
| Accounts receivable (net of  allowance for doubtful accounts: $1,895 in 2006 and $1,322 in 2005)                                                                                        |       | 215,244           |       | 165,989 |   |
| Materials and supplies  inventory                                                                                                                                                       |       | 6,366             |       | 5,381 |   |
| Prepayments and other                                                                                                                                                                   |       | 18,917            |       | 18,900 |   |
| Deferred tax asset                                                                                                                                                                      |       | 8,225             |       | 12,486 |   |
| Current assets held for sale                                                                                                                                                            |       | 5,148             |       | — |   |
| Total current assets                                                                                                                                                                    |       | 656,157           |       | 452,386 |   |
| Property and equipment:                                                                                                                                                                 |       |              |       |   |   |
| Land                                                                                                                                                                                    |       | 2,855             |       | 7,005 |   |
| Geophysical equipment                                                                                                                                                                   |       | 200,297           |       | 329,436 |   |
| Data processing equipment                                                                                                                                                               |       | 79,590            |       | 75,337 |   |
| Geophysical vessel                                                                                                                                                                      |       | —            |       | 8,331 |   |
| Leasehold improvements and  other                                                                                                                                                       |       | 76,941            |       | 74,981 |   |
| Total                                                                                                                                                                                   |       | 359,683           |       | 495,090 |   |
| Less accumulated depreciation                                                                                                                                                           |       | 249,079           |       | 367,173 |   |
| Property and equipment, net                                                                                                                                                             |       | 110,604           |       | 127,917 |   |
|                                                                                                                                                                                    |       |              |       |   |   |
| Multi-client data library                                                                                                                                                               |       | 296,603           |       | 316,793 |   |
| Deferred tax asset, net                                                                                                                                                                 |       | 41,511            |       | 45,963 |   |
| Other assets                                                                                                                                                                            |       | 22,699            |       | 23,539 |   |
| Noncurrent assets held for sale                                                                                                                                                         |       | 30,456            |       | — |   |
| Total                                                                                                                                                                                   |       | $                 | 1,158,030  |   | $ | 966,598 |   |
|                                                                                                                                                                                    |       |              |       |   |   |
| LIABILITIES AND STOCKHOLDERS’  EQUITY                                                                                                                                              |       |              |       |   |   |
| Current liabilities:                                                                                                                                                                    |       |              |       |   |   |
| Notes payable                                                                                                                                                                           |       | $                 | 155,000    |   | $ | — |   |
| Accounts payable, trade                                                                                                                                                                 |       | 107,863           |       | 75,810 |   |
| Accrued and deferred income  taxes                                                                                                                                                      |       | 29,224            |       | 9,402 |   |
| Deferred revenue                                                                                                                                                                        |       | 29,280            |       | 42,043 |   |
| Other accrued liabilities                                                                                                                                                               |       | 70,313            |       | 65,193 |   |
| Current liabilities held for  sale                                                                                                                                                      |       | 21,245            |       | — |   |
| Total current liabilities                                                                                                                                                               |       | 412,925           |       | 192,448 |   |
| Non-current liabilities:                                                                                                                                                                |       |              |       |   |   |
| Long-term debt                                                                                                                                                                          |       | —            |       | 155,000 |   |
| Other non-current liabilities                                                                                                                                                           |       | 34,561            |       | 36,602 |   |
| Total non-current liabilities                                                                                                                                                           |       | 34,561            |       | 191,602 |   |
|                                                                                                                                                                                    |       |              |       |   |   |
| Commitments and Contingent Liabilities (Note 6)                                                                                                                                         |       |              |       |   |   |
|                                                                                                                                                                                    |       |              |       |   |   |
| Stockholders’ equity:                                                                                                                                                              |       |              |       |   |   |
|  Common stock, $.01 par value; authorized: 78,500,000 shares;  issued: 37,220,959 shares in 2006 and 35,580,032 shares in 2005 (excluding  Exchangeable Shares of 156,428 in 2005) |       | 372               |       | 355 |   |
|  Additional paid-in capital                                                                                                                                                        |       | 492,387           |       | 452,299 |   |
|  Accumulated earnings                                                                                                                                                              |       | 228,376           |       | 146,145 |   |
|  Accumulated other comprehensive income:                                                                                                                                           |       |              |       |   |   |
| Cumulative foreign currency  translation adjustment                                                                                                                                     |       | 21,783            |       | 14,245 |   |
| Unrealized gain on  investments-available for sale                                                                                                                                      |       | —            |       | 197 |   |
| Minimum pension liability                                                                                                                                                               |       | (9,367            | )          | (8,410 | ) |
|  Unearned compensation                                                                                                                                                             |       | —            |       | (595 | ) |
|  Treasury stock, at cost; 1,349,592 shares in 2006 and 1,320,106  shares in 2005                                                                                                   |       | (23,007           | )          | (21,688 | ) |
| Total stockholders’ equity                                                                                                                                                         |       | 710,544           |       | 582,548 |   |
| Total                                                                                                                                                                                   |       | $                 | 1,158,030  |   | $ | 966,598 |   |

 

See Notes to ConsolidatedFinancial Statements

28

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**VERITAS DGC INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Dollars in thousands)**
| ** **                                                        | ** ** | **For the Years Ended July 31,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                        | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cash flows from operating activities:                             |       |                                                      |       |   |   |   |   |
| Net income                                                        |       | $                                                         | 82,231     |   | $ | 83,001 |   | $ | 5,221 |   |
| Non-cash items included in net  income:                           |       |                                                      |       |   |   |   |   |
| Depreciation and amortization,  net (other than multi-client)     |       | 43,920                                                    |       | 41,583 |   | 40,300 |   |
| Amortization of multi-client  library                             |       | 200,975                                                   |       | 159,725 |   | 209,840 |   |
| Share based compensation                                          |       | 5,957                                                     |       | 350 |   | 385 |   |
| Loss (gain) on disposition of  property and equipment             |       | 302                                                       |       | (445 | ) | (310 | ) |
| Equity in loss of joint  venture                                  |       | —                                                    |       | — |   | 958 |   |
| Deferred income taxes                                             |       | 3,545                                                     |       | (39,280 | ) | (9,678 | ) |
| Changes in operating assets  and liabilities:                     |       |                                                      |       |   |   |   |   |
| Accounts receivable                                               |       | (62,288                                                   | )          | 3,128 |   | (34,452 | ) |
| Materials and supplies  inventory                                 |       | (1,422                                                    | )          | (1,177 | ) | 819 |   |
| Prepayments and other                                             |       | (4,884                                                    | )          | (3,270 | ) | (1,836 | ) |
| Accrued income taxes                                              |       | 23,037                                                    |       | 12,136 |   | 2,649 |   |
| Accounts payable, deferred  revenue and other accrued liabilities |       | 40,602                                                    |       | 69,003 |   | 32,951 |   |
| Other non-current liabilities                                     |       | 4,010                                                     |       | 5,098 |   | (1,844 | ) |
| Other                                                             |       | 630                                                       |       | 1,443 |   | (1,969 | ) |
| Net cash provided by operating  activities                        |       | 336,615                                                   |       | 331,295 |   | 243,034 |   |
| Cash flows used by investing activities:                          |       |                                                      |       |   |   |   |   |
| Investment in multi-client  library, net cash                     |       | (165,634                                                  | )          | (148,373 | ) | (126,250 | ) |
| Purchase of property and  equipment                               |       | (67,903                                                   | )          | (62,375 | ) | (30,543 | ) |
| Sale of (RC)2                                                     |       | —                                                    |       | — |   | 2,000 |   |
| Proceeds from involuntary  conversion of assets                   |       | 15,600                                                    |       | 2,817 |   | — |   |
| Proceeds from sales of  property and equipment                    |       | 1,158                                                     |       | 1,342 |   | 2,307 |   |
| Decrease (increase) in  restricted cash investments               |       | (63                                                       | )          | (126 | ) | 94 |   |
| Net cash used by investing  activities                            |       | (216,842                                                  | )          | (206,715 | ) | (152,392 | ) |
| Cash flows from financing activities:                             |       |                                                      |       |   |   |   |   |
| Borrowings of long-term debt                                      |       | —                                                    |       | — |   | 155,000 |   |
| Payments of long-term debt                                        |       | —                                                    |       | — |   | (194,225 | ) |
| Proceeds from the sale of  common stock                           |       | 27,744                                                    |       | 7,652 |   | 12,543 |   |
| Purchase of treasury stock                                        |       | —                                                    |       | — |   | (20,000 | ) |
| Excess tax benefit from share  based compensation                 |       | 4,277                                                     |       | — |   | — |   |
| Principal payments on capital  lease obligations                  |       | (2,023                                                    | )          | — |   | — |   |
| Net cash provided by (used by)  financing activities              |       | 29,998                                                    |       | 7,652 |   | (46,682 | ) |
| Currency gain on foreign cash                                     |       | 2,791                                                     |       | 862 |   | 242 |   |
| Increase in cash and cash equivalents                             |       | 152,562                                                   |       | 133,094 |   | 44,202 |   |
| Beginning cash and cash equivalents balance                       |       | 249,393                                                   |       | 116,299 |   | 72,097 |   |
| Ending  cash and cash equivalents balance                         |       | $                                                         | 401,955    |   | $ | 249,393 |   | $ | 116,299 |   |

 

See Notes to ConsolidatedFinancial Statements

29

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**VERITAS DGC INC. AND SUBSIDIARIES**

**SUPPLEMENTARY SCHEDULES TO CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Dollars in thousands)**
| ** **                                                                                             | ** ** | **For the Years Ended July 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                             | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                   |       |                                                      |       |   |   |   |   |
| **Schedule of significant non-cash transactions:**                                                     | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Capitalization of depreciation  and amortization resulting in an increase in multi-client data library |       | 13,275                                                    |       | 11,365 |   | 18,648 |   |
| Capital lease obligations  incurred for the purchase of equipment                                      |       | 3,742                                                     |       | — |   | — |   |
| Common stock issued for  purchase of Fairweather Geophysical LLC                                       |       | —                                                    |       | — |   | 500 |   |
| ** **                                                                                             | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Supplemental disclosures of cash flow information:**                                                 |       |                                                      |       |   |   |   |   |
| Cash paid for:                                                                                         |       |                                                      |       |   |   |   |   |
| Interest:                                                                                              |       |                                                      |       |   |   |   |   |
| Convertible notes                                                                                      |       | $                                                         | 5,301      |   | $ | 2,286 |   | $ | 160 |   |
| Term notes                                                                                             |       | —                                                    |       | — |   | 11,830 |   |
| Other                                                                                                  |       | 276                                                       |       | 163 |   | 114 |   |
| Income taxes, net                                                                                      |       | 34,840                                                    |       | 21,809 |   | 3,216 |   |
|                                                                                                        |            |                                                           |            |  |  |  |  |  |  |  |

 

See Notes to ConsolidatedFinancial Statements

30

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**VERITAS DGC INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

**For the years ended July 31, 2006, 2005 and 2004**

**(Inthousands, except share amounts)**
| ** **                                                | ** ** | ** **                                                   | ** ** | ** **              | ** ** | ** **       | ** ** | ** **                   | ** ** | ** **                    | ** ** | **Accumulated**        | ** ** | ** **        | ** ** | ** **             | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------|------------|------------------|------------|------------------------------|------------|-------------------------------|------------|------------------------|------------|-------------------|------------|------------------------|------------|
| ** **                                                | ** ** | ** **                                                   | ** ** | ** **              | ** ** | ** **       | ** ** | ** **                   | ** ** | ** **                    | ** ** | **Earnings from** | ** ** | ** **        | ** ** | ** **             | ** ** |
| ** **                                                | ** ** | **Common Stock**                                        | ** ** | **Treasury Stock** | ** ** | **Additional**   | ** ** | **August 1, 1991** | ** ** | ** **                    | ** ** | **Accumulated**        | ** ** |
| ** **                                                | ** ** | ** **                                                   | ** ** | **Par**                 | ** ** | **At Cost** | ** ** | **Paid-In-**                 | ** ** | **with respect to** | ** ** | **Unearned**           | ** ** | **Comprehensive** | ** ** |
| ** **                                                | ** ** | **Shares**                                                   | ** ** | **Value**               | ** ** | **Shares**       | ** ** | **Cost**                     | ** ** | **Capital**                   | ** ** | **Digicon Inc.**  | ** ** | **Compensation**  | ** ** | **Income (Loss)** | ** ** |
| ** **                                                | ** ** | **(In thousands, except share amounts)** | ** ** |
| ** **                                                | ** ** | ** **                                                   | ** ** | ** **              | ** ** | ** **       | ** ** | ** **                   | ** ** | ** **                    | ** ** | ** **             | ** ** | ** **        | ** ** | ** **             | ** ** |
| **Balance,  July 31, 2003**                               |       | 32,156,781                                                   |       | $                       | 322        |             | (84,143    | )                            | $          | (1,508                        | )          | $                      | 428,402    |              | $          | 57,923                 |       | $ | (340 | ) | $ | 2,718 |   |
| Common  stock issued for exchangeable stock               |       | 1,257,490                                                    |       | 12                      |       | —           |       | —                       |       | (12                           | )          | —                 |       | —            |       | —                 |       |
| Common  stock issued to employees                         |       | 56,353                                                       |       | —                  |       | —           |       | —                       |       | 468                           |       | —                 |       | (649              | )          | —                 |       |
| Common  stock issued for cash                             |       | 1,289,098                                                    |       | 13                      |       | —           |       | —                       |       | 12,530                        |       | —                 |       | —            |       | —                 |       |
| Stock  returned to treasury                               |       | —                                                       |       | —                  |       | (10,895          | )          | (120                         | )          | —                        |       | —                 |       | —            |       | —                 |       |
| Treasury  stock buy back                                  |       | —                                                       |       | —                  |       | (1,222,494       | )          | (20,000                      | )          | —                        |       | —                 |       | —            |       | —                 |       |
| Tax  benefit for share based compensation                 |       | —                                                       |       | —                  |       | —           |       | —                       |       | 95                            |       | —                 |       | —            |       | —                 |       |
| Common  stock exchanged for purchase of Fairweather       |       | 61,576                                                       |       | 1                       |       | —           |       | —                       |       | 499                           |       | —                 |       | —            |       | —                 |       |
| Cumulative  foreign currency translation adjustment       |       | —                                                       |       | —                  |       | —           |       | —                       |       | —                        |       | —                 |       | —            |       | 3,835                  |       |
| Amortization  of unearned compensation                    |       | —                                                       |       | —                  |       | —           |       | —                       |       | —                        |       | —                 |       | 385               |       | —                 |       |
| Unrealized  gain on investments — available for sale |       | —                                                       |       | —                  |       | —           |       | —                       |       | —                        |       | —                 |       | —            |       | (588                   | )          |
| Unrealized  loss on foreign currency hedge                |       | —                                                       |       | —                  |       | —           |       | —                       |       | —                        |       | —                 |       | —            |       | (632                   | )          |
| Unrealized  gain on interest rate swap                    |       | —                                                       |       | —                  |       | —           |       | —                       |       | —                        |       | —                 |       | —            |       | 777                    |       |
| Unrealized  minimum pension liability                     |       | —                                                       |       | —                  |       | —           |       | —                       |       | —                        |       | —                 |       | —            |       | 338                    |       |
| Net  income                                               |       | —                                                       |       | —                  |       | —           |       | —                       |       | —                        |       | 5,221                  |       | —            |       | —                 |       |
| **Balance,  July 31, 2004**                               |       | 34,821,298                                                   |       | $                       | 348        |             | (1,317,532 | )                            | $          | (21,628                       | )          | $                      | 441,982    |              | $          | 63,144                 |       | $ | (604 | ) | $ | 6,448 |   |
| Common  stock issued for exchangeable stock               |       | 25,484                                                       |       | —                  |       | —           |       | —                       |       | (280                          | )          | —                 |       | —            |       | —                 |       |
| Common  stock issued to employees                         |       | 733,250                                                      |       | 7                       |       | —           |       | —                       |       | 8,326                         |       | —                 |       | (341              | )          | —                 |       |
| Stock  returned to treasury                               |       | —                                                       |       | —                  |       | (2,574           | )          | (60                          | )          | —                        |       | —                 |       | —            |       | —                 |       |
| Tax  benefit for share based compensation                 |       | —                                                       |       | —                  |       | —           |       | —                       |       | 2,271                         |       | —                 |       | —            |       | —                 |       |
| Cumulative  foreign currency translation adjustment       |       | —                                                       |       | —                  |       | —           |       | —                       |       | —                        |       | —                 |       | —            |       | 6,914                  |       |
| Amortization  of unearned compensation                    |       | —                                                       |       | —                  |       | —           |       | —                       |       | —                        |       | —                 |       | 350               |       | —                 |       |
| Unrealized  gain on investments — available for sale |       | —                                                       |       | —                  |       | —           |       | —                       |       | —                        |       | —                 |       | —            |       | (159                   | )          |
| Unrealized  minimum pension liability                     |       | —                                                       |       | —                  |       | —           |       | —                       |       | —                        |       | —                 |       | —            |       | (7,171                 | )          |
| Net  income                                               |       | —                                                       |       | —                  |       | —           |       | —                       |       | —                        |       | 83,001                 |       | —            |       | —                 |       |
| **Balance,  July 31, 2005**                               |       | 35,580,032                                                   |       | $                       | 355        |             | (1,320,106 | )                            | $          | (21,688                       | )          | $                      | 452,299    |              | $          | 146,145                |       | $ | (595 | ) | $ | 6,032 |   |
| Common  stock issued for exchangeable stock               |       | 156,428                                                      |       | 2                       |       | —           |       | —                       |       | 1,048                         |       | —                 |       | —            |       | —                 |       |
| Common  stock issued to employees                         |       | 1,484,499                                                    |       | 15                      |       | —           |       | —                       |       | 28,072                        |       | —                 |       | —            |       | —                 |       |
| Reclassification  of unearned compensation                |       | —                                                       |       | —                  |       | —           |       | —                       |       | (595                          | )          | —                 |       | 595               |       | —                 |       |
| Stock  returned to treasury                               |       | —                                                       |       | —                  |       | (29,486          | )          | (1,319                       | )          | —                        |       | —                 |       | —            |       | —                 |       |
| Tax  benefit for share based compensation                 |       | —                                                       |       | —                  |       | —           |       | —                       |       | 6,870                         |       | —                 |       | —            |       | —                 |       |
| Cumulative  foreign currency translation adjustment       |       | —                                                       |       | —                  |       | —           |       | —                       |       | —                        |       | —                 |       | —            |       | 7,538                  |       |
| Share  based compensation expense                         |       | —                                                       |       | —                  |       | —           |       | —                       |       | 4,693                         |       | —                 |       | —            |       | —                 |       |
| Reclassification  of unrealized gain on investments       |       | —                                                       |       | —                  |       | —           |       | —                       |       | —                        |       | —                 |       | —            |       | (197                   | )          |
| Unrealized  minimum pension liability                     |       | —                                                       |       | —                  |       | —           |       | —                       |       | —                        |       | —                 |       | —            |       | (956                   | )          |
| Net  income                                               |       | —                                                       |       | —                  |       | —           |       | —                       |       | —                        |       | 82,231                 |       | —            |       | —                 |       |
| **Balance, July 31, 2006**                                |       | 37,220,959                                                   |       | $                       | 372        |             | (1,349,592 | )                            | $          | (23,007                       | )          | $                      | 492,387    |              | $          | 228,376                |       | $ | — |   | $ | 12,417 |   |

 

See Notes to ConsolidatedFinancial Statements

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**VERITAS DGC INC. ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**For the years ended July 31,2006, 2005 and 2004**

**1. Summary of Significant Accounting Policies**

***Consolidation***

Theaccompanying consolidated financial statements include our accounts and theaccounts of majority-owned domestic and foreign subsidiaries as well as thosevariable interest entities for which we are the primary beneficiary.  All material intercompany balances andtransactions have been eliminated. 

***Use of Estimates***

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions. Theseestimates and assumptions affect the reported amounts of assets and liabilitiesand disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenue and expenses duringthe reporting period. Actual results could differ from those estimates.

***Fair Value of Financial Instruments***

Our financial instrumentsinclude cash and short-term investments, restricted cash investments, accountsreceivable, accounts payable and debt. The approximate fair market value of ourvariable rate debt at July 31, 2006 is $383 million. The carrying value is areasonable estimate of fair value for all other financial instruments.

***Translation of Foreign Currencies***

The U.S. dollar is thefunctional currency of all of our operations except in Canada, which uses theCanadian dollar as its functional currency. Currency gains and losses resultfrom the re-measurement of assets and liabilities denominated in currenciesother than their functional currency and are included in “Other (Income)Expense, Net.”

***Cash Equivalents***

For purposes of theConsolidated Balance Sheets and Consolidated Statements of Cash Flows, wedefine cash equivalents as items readily convertible into known amounts of cashwith original maturities of three months or less.

***Restricted Cash Investments***

Restricted cashinvestments in the amounts of $302,000 at July 31, 2006 and $237,000 at July31, 2005 were pledged as collateral on certain bank guarantees related tocontracts entered into in the normal course of business and are classified asrestricted cash investments on the Consolidated Balance Sheets.

***Accounts Receivable***

Unbilled amounts ofapproximately $62.0 million at July 31, 2006 and $57.4 million at July 31, 2005were included in accounts receivable. These amounts represent work performed orservices or products delivered to customers but not billable at the fiscal yearends in accordance with contract provisions and generally are expected to bebilled in one to four months. Our allowance for doubtful accounts isestablished based upon past due customer accounts specifically identifiedduring our periodic account analyses.

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***Inventories***

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

***Property and Equipment***

Property and equipmentare recorded at cost. Depreciation is computed using the straight-line methodbased on estimated useful lives as follows:

|                                   | ** ** | **Estimated  Useful Life  In Years** | ** ** |
|-----------------------------------|------------|------------------------------------------------|------------|
| Geophysical equipment             |       | 3-5                                            |       |
| Data processing equipment         |       | 3                                              |       |
| Leasehold  improvements and other |       | 3-15                                           |       |

 

Depreciation related toassets used in the production of the multi-client library and development ofcertain software is capitalized. Amounts capitalized were $13.3 million, $11.4million and $18.6 million in fiscal years 2006, 2005 and 2004, respectively.

Expenditures for routinerepairs and maintenance are charged to expense as incurred. We arecontractually obligated to periodically put our chartered vessels into port sothat the vessel owner can perform legally required maintenance and inspections.The ship owner is responsible for all costs of performing the maintenance andinspections, while we continue to incur all of the fixed charges associatedwith operation of the vessel including charter fees, depreciation and personnelcosts. We accrue for these continuing costs in advance of port calls, as theseunavoidable costs are not directly associated with revenue generation. Thebalances of such accruals were $6.0 million and $3.2 million at July 31, 2006and 2005, respectively. Expenditures for additions and improvements, includingcapitalized interest, are capitalized and depreciated over the estimated usefullife of the related assets.

***Multi-Client Data Library***

We collect and processgeophysical data for our own account and retain ownership rights. We licensethe data to customers on a non-transferable basis. In some circumstances, wehave sold, on a non-exclusive basis, rights to data prior to our collecting andprocessing such data, i.e., we have made the first of what we anticipate willbe multiple discrete sales of licenses to the same data. We capitalize all costsdirectly associated with acquiring and processing the data, including thedepreciation of the assets used in production of the surveys. We refer to thesecosts as our gross multi-client investment. All costs, excluding thecapitalized depreciation, are our net multi-client investment, or as used inthis document “investment in multi-client library, net cash,” and representcash investment in the library.

The capitalized cost ofmulti-client data is charged to cost of services in the period sales occur basedon the greater of the percentage of total estimated costs to total estimatedsales in the first five years multiplied by actual sales, known as the salesforecast method, or the straight-line amortization method over five years. Thesales forecast method is our primary method of calculating cost of services. Inaddition to the sales forecast method, through July 31, 2003, any costs thatremained 36 months after completion of a multi-client survey were charged on astraight-line basis to cost of services over a period not to exceed the next 24months. This minimum straight-line amortization was recorded only if minimumamortization exceeded the cost of services calculated using the sales forecastmethod. Effective August 1, 2003, we changed our multi-client policy tocommence the minimum amortization from the date of survey completion, insteadof only during the last 24 months of survey book life.

We periodically reviewthe carrying value of the multi-client data library to assess whether there hasbeen a permanent impairment of value and record losses when it is determinedthat estimated future sales would not be sufficient to cover the carrying valueof the asset. In fiscal 2003, we recognized a $4.9 million pretax impairmentcharge related to a survey in the Gulf of Mexico that we have been unable tolicense. This survey was acquired at right angles to an existing survey and,while a technical success, customers have not been willing to pay for theincreased resolution.

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***Multi-ClientData Library — Change in Estimate Effected by a Change in Accounting Principle***

Effective August 1, 2003,we changed our minimum amortization policy with regard to multi-client data andrecorded a charge of $22.1 million, included in cost of services in ourConsolidated Statement of Operations. Under the prior method, capitalized costsof multi-client surveys were charged to cost of services in the period salesoccurred, using the sales forecast method, over an estimated five-year usefullife. However, during the last 24 months of a survey’s useful life,amortization was the greater of the amount resulting from the sales forecastmethod or straight-line amortization of the remaining book value over theremaining portion of the original five-year estimated useful life. Under thenew method, capitalized costs of multi-client surveys are charged to cost ofservices over an estimated five-year useful life based upon the greater (higherexpense) of the result under the sales forecast method or cumulativestraight-line amortization from survey completion over an estimated five-yearuseful life. Notwithstanding this change, the sales forecast method remains ourprimary method of calculating cost of services. The total amortization periodthat concludes sixty months after survey completion represents the minimumperiod over which the surveys are expected to provide economic benefits. Webelieve that commencing the minimum amortization upon survey completion, asopposed to our prior method of doing so only during the last twenty-four monthsof the survey’s life, better reflects the potential decrease of survey valuewith the passage of time.

***Revenue***

Customer contracts forour services vary in terms and conditions. We review the deliverables in eachcontract and, where applicable, apply the accounting guidance contained in EITF00-21.

Revenue from contractservices is recognized in accordance with the terms of the contract. For fixedprice contracts, the proportional performance method is used based upon outputmeasures. Revenue is measured by the amount of data collected or processedcompared to the total amount of data to be collected or processed. For day ratecontracts, revenue is recognized based on time incurred. In contracts where ourcustomer pays separately for the mobilization of equipment, we recognize suchmobilization fees as revenue during the performance of the seismic acquisition,using the same proportional performance method as for the acquisition work.

Revenue from thelicensing of multi-client surveys is based upon agreed rates set forth in thecontract and are recognized upon delivery of such data. We have no additionalobligations to the customer subsequent to delivery. Revenue generated fromlicensing of in-process multi-client surveys is recognized after obtaining asigned license agreement that gives the customers access to survey results asthey occur based upon a proportional performance method, using quantifiablemeasures of progress, such as kilometers shot or processed, similar to themethod for contract services. For partially completed projects, contractcustomers and customers who enter license agreements on multi-client surveysgenerally have access to the data as it is being collected. There are noprovisions for updates or enhancements in any of our survey licenses. Inaccordance with our license terms, the customer generally does not have theright to return the data for refund. Infrequently we enter into contracts whererevenue recognition is affected by certain contingencies. In some contracts,the ultimate price paid by the customer may not be fixed or determinable due torevenue sharing clauses. In these projects, we recognize revenue from thosecustomers only to the extent that the net price of the data to them is, or hasbecome, fixed. We also enter into contracts where the customer has a right ofreturn based upon date contingencies. In these projects, we do not apply theproportional performance method and, instead, we recognize revenue only afterthe date contingency is resolved.

***Leases***

Our operatingleases include those for office space, specialized geophysical equipment,computer equipment and our geophysical vessels, which are chartered on ashort-term basis, of up to 8 years, relative to their useful economic lives ofapproximately 30 years.

***Mobilization Costs***

Transportation and otherexpenses incurred prior to commencement of geophysical operations in an areaare deferred and amortized over the term of the related contract. Unamortizedmobilization costs of $5.2 million and $4.2 million were included in othercurrent assets at July 31, 2006 and 2005, respectively. Amounts applicable tosurveys performed for our own account are included in the cost of themulti-client data library.

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***Research and Development***

Costsrelated to the research and development,primarily salaries and benefits of employees, are charged to research and development expenses as incurred.

***Share Based Compensation***

As of August 1, 2005, weadopted the Financial Accounting Standard Board Statement No. 123(R) (SFAS123R) to account for share based compensation. SFAS 123R requires us to record the cost of stock options and otherequity-based compensation in our income statement based upon the estimated fairvalue of those awards.  We elected to usethe modified prospective method for adoption, which requires compensationexpense to be recorded for all unvested stock options and other equity-basedcompensation beginning in the first quarter of adoption.  Accordingly, prior periods have not beenrestated to reflect share based compensation. For all unvested options outstanding as of August 1, 2005, thepreviously measured but unrecognized compensation expense, based on the fairvalue at the original grant date, we began recognizing in the statement ofoperations over the remaining vesting period. For equity-based compensationgranted subsequent to August 1, 2005, compensation expense, based on the fairvalue on the date of grant, we began recognizing in the statement of operationsover the vesting period.  For deferredshare units, it is our policy to determine the fair value of the units based onour common stock price at the date of grant which is then expensed over theapplicable service period.  

Prior to August 1, 2005,we accounted for equity-based compensation using the intrinsic method prescribedin Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees,” and related Interpretations. Under that method, compensationexpense is recorded in the accompanying consolidated financial statements whenthe quoted market price of the underlying stock at the grant date or othermeasurement date exceeds the amount an employee must pay to acquire the stock.Our plans do not permit us to grant stock options at a price lower than market,therefore, we did not record any compensation expense related to stockoptions.  As required by SFAS No. 148, “Accountingfor Stock-Based Compensation,” we disclose the pro forma effect of stock-basedcompensation expense on net income and earnings per share that would have beenrecorded had we used the fair value based method. 

We have disclosed belowthe effect on net income and earnings per share of equity-based compensation,including stock options, that would have been recorded using the fair valuebased method for years ended July 31, 2005 and July 31, 2004.
|                                                                                                                                          | ** ** | **Year Ended**         | ** ** | **Year Ended**         | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                               | ** ** | **July 31, 2005** | ** ** | **July 31, 2004** | ** ** |
|                                                                                                                                     |       |                        |       |                        |       |
| Net income as reported                                                                                                                   |       | $                           | 83,001     |                        | $          | 5,221 |   |
| Add:  Compensation expense, net  of related tax effects                                                                             |       | 228                         |       | 250                         |       |
| Less:  Total share based  compensation expense determined under fair value based method for all awards,  net of related tax effects |       | (2,541                      | )          | (4,859                      | )          |
| Pro forma net income                                                                                                                     |       | $                           | 80,688     |                        | $          | 612 |   |
|                                                                                                                                     |       |                        |       |                        |       |
| Earnings per share:                                                                                                                      |       |                        |       |                        |       |
| Basic:                                                                                                                                   |       |                        |       |                        |       |
| As reported                                                                                                                              |       | $                           | 2.45       |                        | $          | .16 |   |
| Pro-forma                                                                                                                                |       | 2.38                        |       | .02                         |       |
|                                                                                                                                     |       |                        |       |                        |       |
| Diluted:                                                                                                                                 |       |                        |       |                        |       |
| As reported                                                                                                                              |       | $                           | 2.37       |                        | $          | .15 |   |
| Pro-forma                                                                                                                                |       | 2.30                        |       | .02                         |       |

 

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The weighted averagegrant date fair values of options granted during fiscal 2005 and 2004 were$10.81 and $6.32, respectively.  Thesevalues were determined using the Black-Scholes option valuation method assumingno expected dividends. Other assumptions used are as follows:
|                         | ** ** | **Year Ended  July 31,** | ** ** |
|-------------------------|------------|------------------------------------|------------|
| ** **              | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| Risk-free interest rate |       | 3.7                                | %          | 3.7 | % |
| Expected volatility     |       | 46.8                               | %          | 64.9 | % |
| Expected  life in years |       | 4.0                                |       | 4.0 |   |

 

***Earnings Per Share***

The computation of basicearnings per share is based on the weighted average common shares outstanding,including exchangeable shares. The computation of diluted earnings per share isbased upon the weighted average common shares outstanding and additional commonshares, utilizing the treasury stock method and average market prices, whichwould have been outstanding if dilutive potential common shares had beenissued. Potentially dilutive securities include stock options and restrictedstock issued to our employees and directors and our Convertible Senior Notes. 

***Recent Accounting Pronouncements***

InDecember 2004, the FASB issued FASB Staff Position No. 109-1, “Applicationof FASB Statement No. 109, Accounting for Income Taxes, to the TaxDeduction on Qualified Production Activities Provided by the American JobsCreation Act of 2004,” which provides guidance on the recently enacted AmericanJobs Creation Act of 2004 (the “Act”). The Act provides a U.S. tax deductionfor income from qualified domestic production activities beginning in ourfiscal year ended July 31, 2006.   FSP109-1 provides for the treatment of the deduction as a special deduction asdescribed in SFAS No. 109. Accordingly, we will record the amount of anyspecial deductions in the years they are taken. The impact of this deduction did not have a material impact on ourfiscal year 2006 financial statements.  

In December 2004,the FASB issued FASB Staff Position No. 109-2, “Accounting and DisclosureGuidance for the Foreign Repatriation Provision within the American JobsCreation Act of 2004,” which provides guidance under SFAS No. 109 withrespect to recording the potential impact of the repatriation provisions of theAct on a company’s income tax expense and deferred tax liability. FSP 109-2states that a company is allowed time beyond the financial reporting period ofenactment to evaluate the effect of the Act on its plan for reinvestment orrepatriation of foreign earnings for purposes of applying SFAS No. 109.  During July 2006, the Company elected torepatriate $55 million from one of its foreign subsidiaries to realize thebenefits of this provision of the Act. We plan to use the net proceeds for qualifying U.S. expenditures.  The impact of the repatriation was approximately $2.5 million increaseto the fiscal 2006 tax provision.   

InDecember 2004, the FASB issued SFAS No. 153,**“Exchanges of Nonmonetary Assets — anamendment of APB Opinion No. 29,” to address the measurement of exchangesof nonmonetary assets.  SFAS No. 153 eliminates the exception fromfair value measurement for nonmonetary exchanges of similar productive assetsand replaces it with a general exception for exchanges of nonmonetary assetsthat do not have commercial substance.  A nonmonetary exchange hascommercial substance if the future cash flows of the entity are expected tochange significantly as a result of the exchange.  This statement was adopted by the companybeginning August 1, 2005.  The adoption of this statement had no impact onthe company’s financial statements.

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

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

36

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that contains an embedded derivative that otherwise would requirebifurcation, (b) clarifies that certain instruments are not subject to therequirements of SFAS 133, (c) establishes a requirement to evaluate interestsin securitized financial assets to identify interests that may contain anembedded derivative requiring bifurcation, (d) clarifies what may be anembedded derivative for certain concentrations of credit risk and (e) amendsSFAS 140 to eliminate certain prohibitions related to derivatives on aqualifying special-purpose entity.  SFAS155 is effective for us for the fiscal year beginning August 1, 2007.  The implementation of SFAS No. 155 isnot expected to have a material impact on the company’s financial statements. 

In July 2006, the FASBissued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty inIncome Taxes — An Interpretation of FASB Statement No. 109.” FIN No. 48 clarifiesthe accounting for uncertainty in income taxes recognized in an enterprise’sfinancial statements in accordance with SFAS No. 109, “Accounting for IncomeTaxes.” FIN No. 48 prescribes a recognition threshold and measurement attributefor the financial statement recognition and measurement of a tax position takenor expected to be taken in a tax return. The new standard also providesguidance on derecognition, classification, interest and penalties, accountingin interim periods and disclosure. The provisions of FIN No. 48 are effectivefor fiscal years beginning after December 15, 2006. We are currently evaluatingthe provisions of FIN No. 48 to determine the impact on our consolidatedfinancial statements.

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

In September 2006, theFASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension andOther Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106,and 132(R).  SFAS No. 158 requires anemployer to:  (a)  Recognize in itsstatement of financial position an asset for a plan’s overfunded status or aliability for a plan’s underfunded status; (b)  Measure a plan’s assetsand its obligations that determine its funded status as of the end of theemployer’s fiscal year (with limited exceptions); (c)  Recognize changesin the funded status of a defined benefit postretirement plan in the year inwhich the changes occur. Those changes will be reported in comprehensive incomeof a business entity and in changes in net assets of a not-for-profitorganization.  The requirement torecognize the funded status of a benefit plan and the disclosure requirementsare effective for us for the fiscal year ending on July 31, 2007.  The requirement to measure plan assets andbenefit obligations as of the date of our fiscal year-end balance sheet iseffective for us for the fiscal year ending July 31, 2009.  We are currently evaluating the provisions ofthis guidance to determine the impact on our consolidated financial statements.

**2. Other assets**

***Software***

For internally developed software designed for externallicensing, we capitalize costs associated with the development of the productfrom the time the product reaches technological feasibility until it is readyfor commercial release. Software available for sale is included in other assetson our Consolidated Balance Sheet.

The capitalized cost of the software, whether developedor purchased, is charged to cost of services in the period sales occur based onthe percentage of total cost to total estimated sales multiplied by actualsales during the period. The software is also subject to a minimum amortizationequal to the unamortized balance at the beginning of the period divided by theremaining book life. Estimated useful lives of our software products range fromthree to five years. Amortization expense for our software was $3.6 million,$3.3 million and $3.1 million for fiscal 2006, 2005 and 2004, respectively.

37

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***Debt Issuance Costs***

We capitalize costs incurred during the process ofobtaining debt financing, including commissions, legal fees, and filing fees.We amortize these costs over the life of the related debt instrument. In thecase of our Convertible Senior Notes, which have a life of 20 years, we areamortizing the debt issuance costs over the 5-year period from the ConvertibleSenior Notes’ issuance to the first date the Convertible Senior Notes areredeemable, absent certain specified conditions. The amortization of debtissuance cost, recorded in interest expense, was $1.3 million, $1.2 million and$7.1 million for fiscal 2006, 2005 and 2004, respectively. The debt issuancecost amortization in fiscal 2004 resulted primarily from the retirement of ourTerm Debt and the expensing of all related issuance costs.

The carrying value of our software and debt issuancecosts is as follows:
|                      | ** ** | **July 31, 2006** | ** ** | **July 31, 2005**   | ** ** |
|----------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **           | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| ** **           | ** ** | **(In thousands)**     | ** ** |
| Software             |       | $                           | 16,861     | ** **                    | $          | 13,200 |   | $ | 3,661 |   | $ | 16,396 | ** ** | $ | 9,610 |   | $ | 6,786 |   |
| Debt  Issuance Costs |       | 6,759                       | ** ** | 2,876                         |       | 3,883 |   | 5,821 | ** ** | 1,597 |   | 4,224 |   |
|                      |            |                             |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**3. Notes payable and debt structure**

As of July 31, 2006, ournotes payable consisted of $155.0 million of Convertible Senior Notes due 2024.These notes are classified as a current liability as of July 31, 2006 becausethe conversion feature discussed below results in the notes being convertibleat the option of the holders.

The Convertible SeniorNotes bear interest at a per annum rate which equals the three-month LIBORrate, adjusted quarterly, minus a spread of 0.75%.  The interest rate of the notes, from June 15,2006 through September 14, 2006, is 4.58%, based on a LIBOR rate of 5.33%.  For fiscal 2006, the weighted averageinterest rate on the notes was 3.66%. The notes will mature on March 15, 2024and may not be redeemed by us prior to March 20, 2009. Holders of the notes mayrequire us to repurchase some, or all, of the notes on March 15, 2009, 2014 and2019. They could also require repurchase upon a change of control (as definedin the indenture under which the Convertible Senior Notes were issued).  

Under certain circumstances andat the option of the holder, the Convertible Senior Notes are convertible prior to the maturity date into cash andshares of our common stock.  Certain ofthese circumstances may result in classification of the Convertible Senior Notes as current on our balancesheet.  These circumstances include:

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

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

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

4.                                       theoccurrence of specified corporate transactions.

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

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As of the beginning ofthe second fiscal quarter of 2006, the Convertible Senior Notes wereconvertible as the stock price remained greater than 120% of the ConversionPrice for at least 20 trading days in the period of 30 consecutive trading daysending on October 31, 2005.  The notescontinued to be convertible as of July 31, 2006.  Because of the convertibility, the notes havebeen classified as a current liability on our consolidated balance sheet as ofJuly 31, 2006.  The determination of theconvertibility of the notes occurs quarterly. Depending upon the common stock price in the future, the notes may notbe convertible in future quarters and therefore would not be classified ascurrent on our consolidated balance sheet. Assuming a stock price of $57.27 (which was the closing stock price onJuly 31, 2006), conversion of all the notes would result in our payment of $155million in cash and 3.7 million shares of common stock.

In connection with our issuance of the ConvertibleSenior Notes, we entered into a registration rights agreement pursuant to whichwe agreed to register the resale of the notes and underlying common stock bythe holders thereof.  Under the terms ofthat registration rights agreement, we were required to file a shelfregistration statement for the notes and underlying common stock within anagreed amount of time and thereafter to keep it current or useable for two-yearperiod ending in March 2006.  If wefailed to file or keep the shelf registration statement related to this debteffective or usable in accordance with the registration rights agreement, then,subject to certain exceptions, we were required to pay liquidated damages toall holders of notes and all holders of our common stock issued upon conversionof the notes.  The liquidated damages tobe paid were equal to an annual rate of 0.50% of the principal amount.  In November 2005, the shelf registrationstatement became no longer effective and, accordingly, we began accruing andpaying liquidated damages at approximately $2,100 per day.  For the fiscal year end 2006, we haverecorded and paid approximately $310,000 of expense related to these liquidateddamages.  We are not required to registerthe resale of the notes and underlying common stock after March 10, 2006 andtherefore, our liability for the payment of liquidated damages ended on thatdate.

In addition to the notes, wealso have a five-year $85 million revolving loan agreement with a syndicate ofbanks.  We entered into this facility inFebruary 2006.  The facility provides forrevolving loans and the issuance of letters of credit to Veritas DGC Inc. andcertain of its subsidiaries of up to $45 million in the United States, $15million in Canada, $15 million in Singapore and $10 million in the UnitedKingdom.  As of July 31, 2006, there wereno borrowings and $3.8 million of outstanding letters of credit, leaving $81.2million available under the revolving loan facility.  This new credit facility replaced ourprevious credit facility that consisted primarily of a revolving loan facility.

The facility is secured bypledges of accounts receivable and the U.S. land data library, which, whenadded together, have a carrying amount of approximately $242  million as of July 31, 2006.  The facility is also secured by certain intercompanynotes and stock in certain Veritas subsidiaries.  Veritas and certain of its subsidiaries havealso issued loan guarantees with respect to certain borrowings. Interest rateson borrowings under the facility are selected by the borrower at the time ofany advance and the rates so selected may be either at LIBOR plus 1.00% or theBase Rate (defined as the lesser of the applicable prime rate or the federalfunds rate).  These rates may be adjustedupward depending upon our leverage ratio (calculated as a ratio of funded debtversus EBITDA for the previous four quarters) to a maximum of LIBOR plus 1.50%or the base rate plus 0.50%.  The loanagreement and related documents contain customary financial covenants anddefault provisions, including a limit on the amount of cash dividends.  These covenants contain certain financialmeasurements as of quarter ending dates, and, as of our last fiscal quarterended July 31, 2006, we were in compliance with these covenants.

We also have various unsecuredlines of credit, with lending institutions that operate in geographic areas notcovered by the lending institutions in our credit facility, totaling $8.5million that may be used exclusively for the issuance of letters of credit andbank guarantees. As of July 31, 2006, $1.0 million in letters of credit wereoutstanding under these lines.

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**4. Other Accrued Liabilities**

Other accrued liabilitiesinclude the following:
|                                       | ** ** | **July 31,**       | ** ** |
|---------------------------------------|------------|-------------------------|------------|
| ** **                            | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                            | ** ** | **(In thousands)** | ** ** |
| Accrued payroll and benefits          |       | $                       | 42,565     |   | $ | 35,679 |   |
| Accrued taxes other than income taxes |       | 5,071                   |       | 5,985 |   |
| Accrued insurance                     |       | 5,676                   |       | 9,105 |   |
| Accrued dry dock                      |       | 6,043                   |       | 3,181 |   |
| Current capital lease obligation      |       | 1,455                   |       | — |   |
| Other                                 |       | 9,503                   |       | 11,243 |   |
| Total                                 |       | $                       | 70,313     |   | $ | 65,193 |   |

 

**5. Income Taxes**

Income (loss)before provision (benefit) for income taxes was earned in the followingjurisdictions: 
|            | ** ** | **For the Years Ended July 31,** | ** ** |
|------------|------------|-----------------------------------------------------------|------------|
| ** ** | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** ** | ** ** | **(In thousands)**                                   | ** ** |
| U.S.       |       | $                                                         | 55,028     |   | $ | 46,224 |   | $ | 4,192 |   |
| Non-U.S.   |       | 84,398                                                    |       | 30,019 |   | 4,744 |   |
| Total      |       | $                                                         | 139,426    |   | $ | 76,243 |   | $ | 8,936 |   |

 

Certain income classifiedas non-U.S. is also subject to U.S. income taxes. Provision (benefit) for income taxes consistsof the following:
|                          | ** ** | **For the Years Ended July 31,** | ** ** |
|--------------------------|------------|-----------------------------------------------------------|------------|
| ** **               | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **               | ** ** | **(In thousands)**                                   | ** ** |
| Current — U.S.      |       | $                                                         | 27,805     |   | $ | 23,444 |   | $ | (3,293 | ) |
| Deferred — U.S.     |       | (538                                                      | )          | (38,380 | ) | — |   |
| Current — Non-U.S.  |       | 25,845                                                    |       | 9,078 |   | 6,052 |   |
| Deferred — Non-U.S. |       | 4,083                                                     |       | (900 | ) | 956 |   |
| Total                    |       | $                                                         | 57,195     |   | $ | (6,758 | ) | $ | 3,715 |   |

 

A reconciliation betweenthe provision (benefit) for income taxes and the amount computed by applyingthe U.S. statutory income tax rate to income (loss) before provision (benefit)for income taxes is as follows:
|                                                                         | ** ** | **For the Years Ended July 31,** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                              | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                              | ** ** | **(In thousands)**                                   | ** ** |
| Income tax provision (benefit) computed at the U.S. statutory rate      |       | $                                                         | 48,799     |   | $ | 26,685 |   | $ | 3,128 |   |
| Increase (decrease) in taxes resulting from:                            |       |                                                      |       |   |   |   |   |
| Non-U.S. activities                                                     |       | 7,173                                                     |       | 3,029 |   | 8,662 |   |
| Adjustments to tax contingencies  and resolution of certain tax matters |       | 1,011                                                     |       | 776 |   | (5,173 | ) |
| Deduction of worthless stock  of a subsidiary                           |       | —                                                    |       | — |   | (3,446 | ) |
| Tax credits                                                             |       | (330                                                      | )          | (3,369 | ) | (1,671 | ) |
| Valuation allowances on  deferred income tax assets                     |       | —                                                    |       | (34,417 | ) | 1,408 |   |
| Non-deductibles                                                         |       | 372                                                       |       | 892 |   | 521 |   |
| Software amortization                                                   |       | —                                                    |       | — |   | 411 |   |
| Other                                                                   |       | 170                                                       |       | (354 | ) | (125 | ) |
| Total                                                                   |       | $                                                         | 57,195     |   | $ | (6,758 | ) | $ | 3,715 |   |

 

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Theincrease in taxes resulting from non-U.S. activities includes non-U.S. earningstaxed at other than the U.S. statutory rate, non-U.S. withholding taxes, U.S.foreign tax credit or deductions, U.S. tax on non-U.S. branch operations orforeign dividends, foreign tax contingencies and changes in valuationallowances on foreign deferred taxes.  

Subsequentto July 31, 2004, we reached a settlement with the Internal Revenue Service onthe audit of certain prior year tax returns. This settlement favorably impactedour 2004 income tax provision.

Deferred income tax assets (liabilities) result from theeffect of transactions that are recognized in different periods for financialand tax reporting purposes. The primary components of our deferred income taxassets (liabilities) are as follows:
|                                               | ** ** | **July 31,**       | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|
| ** **                                    | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                    | ** ** | **(In thousands)** | ** ** |
| Deferred income tax assets:                   |       |                    |       |   |   |
| Net operating loss  carryforwards             |       | $                       | 13,423     |   | $ | 24,156 |   |
| Multi-client data library                     |       | 22,150                  |       | 13,801 |   |
| Property and equipment                        |       | 7,073                   |       | 8,711 |   |
| Tax credit carryforwards                      |       | 8,175                   |       | 540 |   |
| Accrued liabilities                           |       | 8,012                   |       | 5,424 |   |
| Pension liabilities                           |       | 4,345                   |       | 3,106 |   |
| Capitalized costs                             |       | 2,452                   |       | 2,703 |   |
| Equity based compensation                     |       | 1,696                   |       | — |   |
| Deferred revenue                              |       | 2,561                   |       | 6,255 |   |
| Other                                         |       | 1,430                   |       | 2,093 |   |
| Valuation allowances                          |       | (19,255                 | )          | (17,772 | ) |
| Deferred income tax assets –  net        |       | 52,062                  |       | 49,017 |   |
| Deferred income tax liabilities:              |       |                    |       |   |   |
| Partnerships                                  |       | (8,936                  | )          | (5,157 | ) |
| Deferred charges                              |       | (2,691                  | )          | (441 | ) |
| Deferred mobilization                         |       | (1,069                  | )          | (1,278 | ) |
| Other                                         |       | (360                    | )          | — |   |
| Deferred income tax  liabilities              |       | (13,056                 | )          | (6,876 | ) |
| Net  deferred income tax assets (liabilities) |       | $                       | 39,006     |   | $ | 42,141 |   |

 

A valuation allowance, bytax jurisdiction, is established when it is more likely than not that all orsome portion of the deferred income tax assets will not be realized. Thevaluation allowances are periodically adjusted based upon the availableevidence. Adjustments are also made to recognize the expiration of NOL and taxcredit carryforwards, with equal and offsetting adjustments to the relateddeferred income tax asset.  During fiscal 2005, we concluded that certainvaluation allowances were no longer necessary as available evidence, includingrecent profits and estimates of projected future taxable income, supported amore likely than not conclusion that the related deferred tax assets would berealized.  As a result, the fiscal 2005tax benefit included a non-cash benefit of $36.9 million.  

The following schedulesets forth the expiration dates of the non-U.S. NOL carryforwards as of July31, 2006.  We had no U.S. NOLcarryforwards.
| Fiscal Year | ** ** | **Non-U.S.  Net  Operating  Losses** | ** ** |
|------------------|------------|--------------------------------------|------------|
|             |       |                                 |       |
| 2007             |       | $                                    | 853        |   |
| 2008             |       | 1,019                                |       |
| 2009             |       | 2,394                                |       |
| 2010             |       | 411                                  |       |
| 2011             |       | 989                                  |       |
| 2012             |       | 906                                  |       |
| 2013             |       | 929                                  |       |
| 2014             |       | 378                                  |       |
| 2015             |       | 1,631                                |       |
| 2016             |       | 1,392                                |       |
| Indefinite       |       | 33,995                               |       |
| Total            |       | $                                    | 44,897     |   |

 

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During fiscal 2004, weutilized $8.1 million of U.S. NOL carryforwards, and during fiscal year 2005,we utilized $3.9 million of U.S. NOL carryforwards.

Non-U.S. operations hadNOL carryforwards of $44.9 million at July 31, 2006, of which $31.2 million aresubject to valuation allowances. Of the $44.9 million of non-U.S. NOLcarryforwards, approximately $21.8 million relate to Brazilian operations and$6.8 million relate to Australian operations, all of which have an indefinitecarryforward period, and are available to offset future income (subject tocertain limitations).  

We had foreign tax creditcarryforwards of $7.8 million at July 31, 2006, of which $7.7 million aresubject to valuation allowances (due principally to certain U.S.limitations).  Of the $7.8 million offoreign tax credit carryforwards, approximately $7.2 million relate to U.S.operations and expire periodically through fiscal 2016.     

Upon a change in controlof the Company, certain limitations may result in the utilization of NOL andforeign tax credit carryforwards following the change in control. 

We consider the undistributedearnings of our non-U.S. subsidiaries to be permanently reinvested. We have notprovided deferred U.S. income tax on those earnings, as it is not practicableto estimate the amount of additional tax that might be payable should theseearnings be remitted or deemed remitted as dividends or if we should sell ourstock in the subsidiaries. On October 22, 2004, the President signed theAmerican Jobs Creation Act of 2004 (the “Act”). The Act creates a temporaryincentive for U.S. corporations to repatriate accumulated income earned abroadby providing an 85 percent dividends received deduction for certain dividendsfrom controlled foreign corporations.  Inconnection with this temporary incentive, we repatriated $55 million from oneof our foreign subsidiaries during July 2006. We plan to use the net proceeds for qualifying U.S. expenditures. The impact of the repatriation wasapproximately $2.5 million increase to the fiscal 2006 tax provision.

On May 18, 2006, a newtax reform measure was signed into law that substantially revises the Texasstate franchise tax beginning with our 2007 fiscal year.  This new legislation, which will be accountedfor as an income tax in accordance with FASB Statement No. 109, Accounting forIncome Taxes, is not expected to have a material impact on our financialstatements.

**6. Commitments and Contingent Liabilities**

Total rentals of vessels,equipment and office facilities charged to operations amounted to $109.4million, $106.3 million and $83.2 million for the years ended July 31, 2006,2005 and 2004, respectively.

Minimum rentals payableunder operating leases, as of July 31, 2006, principally for office space andvessel charters with remaining non-cancelable terms of at least one year are asfollows:
| Fiscal Year    | ** ** | **Minimum Rentals** | ** ** |
|---------------------|------------|--------------------------|------------|
| ** **          | ** ** | **(In thousands)**  | ** ** |
| 2007                |       | $                        | 49,099     |   |
| 2008                |       | 34,349                   |       |
| 2009                |       | 30,595                   |       |
| 2010                |       | 27,468                   |       |
| 2011                |       | 22,212                   |       |
| 2012 and thereafter |       | 59,032                   |       |
| Total               |       | $                        | 222,755    |   |

 

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Data processing equipmentat July 31, 2006 included $3.7 million of capitalized leases.  Future minimum lease payments undernon-cancelable capital leases as of July 31, 2006 are as follows:

|                                             | ** ** | **Minimum  Rentals**    | ** ** |
|---------------------------------------------|------------|-------------------------|------------|
| ** **                                  | ** ** | **(In thousands)** | ** ** |
| 2007                                        |       | $                       | 1,502      |   |
| 2008                                        |       | 265                     |       |
| Total minimum lease payments                |       | $                       | 1,767      |   |
| Less: imputed interest costs                |       | (48                     | )          |
| Present value of net minimum lease payments |       | $                       | 1,719      |   |

 

We carry workerscompensation insurance that limits our liability on a per claim and per policyyear basis. Management has evaluated the adequacy of the accrual for theliability for incurred but unreported workers compensation claims and hasdetermined that the ultimate resolution of any such claims would not have amaterial adverse impact on our financial position. It is possible that theactual liability for unreported workers compensation claims could exceed theamounts already accrued. It is not possible to reasonably estimate the range ofpossible loss.

We issue purchase ordersfor the procurement of supplies and certain services. As of July 31, 2006, wehad $86.6 million of purchase orders outstanding.

In March 2006, weentered into an agreement with a third party ship owner to charter a vesselcurrently known as the Veritas Vision, which is currently being converted forseismic operations.  The term of the charter is for a period of eightyears fixed, with options of up to 10 more years.  When delivered in thefirst calendar quarter of 2007, the Veritas Vision will be the seventh seismicvessel in our fleet.  In addition to thecharter, we expect to invest approximately $62 million to equip the vessel forseismic operations.  Of this expected total, approximately $5 million wasspent during the fiscal year ended July 31, 2006 and the remainder isexpected to be spent during the fiscal year ending July 31, 2007.

In September 2006,we entered into an agreement to charter a seismic vessel, currently known asthe Viking Poseidon, which is currently expected to be in service commencing inthe second calendar quarter of 2007. This vessel will serve as a replacement for the Seisquest vessel, whichis under a charter that expires in May of 2007.

We have alsoentered into a commitment to purchase approximately $26 million of recordingequipment to upgrade a vessel in our existing fleet.  Substantially all of this amount will bespent during the fiscal year ending July 31, 2007.

**7. Employee Benefits**

***Employee Retirement Plans***

We maintain a 401(k) planin which employees of our majority-owned domestic subsidiaries and certainforeign subsidiaries are eligible to participate. Employees of foreignsubsidiaries who are covered under a foreign deferred compensation plan are noteligible. Employees are permitted to make contributions of up to 50% of theirsalary up to the statutory maximum dollar amount, which is $15,000 for calendar2006. We contribute an amount equal to the employee’s contribution up to amaximum of 5% of the employee’s salary or the statutory maximum. Our matchingcontributions to the 401(k) plan were $2.4 million, $2.1 million and $1.8 million for fiscal 2006, 2005 and2004, respectively.

We maintain a plan, theCanadian RRSP plan, in which employees, primarily in our Canadian subsidiaries,are eligible to participate. Employees are permitted to make contributions ofup to 10% of their salary and we contribute an amount equal to 50% of theemployee’s contribution up to a maximum of 5% of the employees’ salary. Anemployee may contribute an additional amount so that the total contribution tothe employee’s account equals up to 18% of the employee’s salary for the prioryear not to exceed approximately $15,800 for calendar year 2006. Our matchingcontributions to this plan were $1.0 million, $0.8 million and $0.7 million forfiscal 2006, 2005 and 2004, respectively.

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***Share Based Compensation Plans***

As of August 1, 2005, weadopted the Financial Accounting Standard Board Statement No. 123(R) (SFAS123R) to account for share based compensation. SFAS 123R requires us to record the cost of stock options and other equity-basedcompensation in our income statement based upon the estimated fair value ofthose awards.  We elected to use themodified prospective method for adoption, which requires compensation expenseto be recorded for all unvested stock options and other equity-basedcompensation beginning in the first quarter of adoption.  Accordingly, prior periods have not beenrestated to reflect share based compensation. For all unvested options outstanding as of August 1, 2005, thepreviously measured but unrecognized compensation expense, based on the fairvalue at the original grant date, will be recognized in the statement ofoperations over the remaining vesting period. For equity-based compensationgranted subsequent to August 1, 2005, compensation expense, based on the fairvalue on the date of grant, will be recognized in the statement of operationsover the vesting period.  For deferredshare units, it is our policy to determine the fair value of the units based onour common stock price at the date of grant which is then expensed over theapplicable service period.

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

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

On December 11, 2002, weadopted our current Share Incentive Plan that provides for the issuance todirectors, officers and select employees of: (1) nonqualified options topurchase our common stock, (2) incentive options to purchase our common stock,(3) share appreciation rights, (4) deferred share units, (5) restricted sharesand (6) performance shares. Options issued to employees under the ShareIncentive Plan have exercise prices equal to the fair market value at the dateof grant; have five-year lives and vest over three years. Options issued tocontinuing non-employee directors under the Share Incentive Plan have exerciseprices equal to the fair market value at the date of grant, have five-yearlives and vest immediately.  In lieu ofoptions, non-employee directors have been granted the right to receive onedeferred share unit (DSU) for each option which would otherwise have beengranted.  These DSU’s are vestedimmediately and automatically convert to one share of our common stock when theservice as a director terminates.  As ofJuly 31, 2006, 1.3 million shares were reserved for issuance under this plan,with no more than 0.3 million of those shares issuable in any form other thanstock options.

Information related toshare based compensation follows:
|                                                                                       | ** ** | **Year Ended**                                                                | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **July 31, 2006**                                                        | ** ** |
| ** **                                                                            | ** ** | **(in millions of dollars,  expect per share data)** | ** ** |
| Compensation costs recorded for all plans                                             |       | $                                                                                  | 6.0        |   |
| Tax benefit recognized in income statement for share based compensation  arrangements |       | 1.7                                                                                |       |
| Impact of adopting SFAS 123R to:                                                      |       |                                                                               |       |
| Net income                                                                            |       | 4.3                                                                                |       |
| Basic earnings per share                                                              |       | 0.12                                                                               |       |
| Diluted earnings per share                                                            |       | 0.11                                                                               |       |
|                                                                                       |            |                                                                                    |            |  |

 

Share based compensationexpense of approximately $1.1 million was recorded in fiscal 2006 related torestricted stock that would have been recorded under the provisions of APB No.25.  SFAS 123R requires tax benefitsrelating to excess share based compensation deductions to be prospectivelypresented in our statement of cash flows as financing cash inflows.  Accordingly, for the year ended July 31,2006, we reported approximately $4.3 million of excess tax benefits from sharebased compensation as cash provided by financing activities on our statement ofcash flows.  We have elected to adopt thealternative transition method, 

44

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as described inFASB Staff Position FAS123(R)-3, in determining our opening amount of excesstax benefits available to absorb tax deficiencies recognized subsequent to theadoption of SFAS 123R.

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

As of July 31, 2006,there was approximately $7.3 million of total unrecognized compensation costrelated to nonvested share-based compensation arrangements.  That cost is expected to be recognized on astraight line basis over the weighted average remaining period which isapproximately 2 years.

Stock options

The fair value of eachoption award granted after August 1, 2005 is estimated on the date of grantusing a lattice-based option valuation model that uses the assumptions noted inthe following table. Expected volatilities are based on implied volatilitiesfrom traded options on our stock and historical volatility of our stock. We use historical data to estimate option exercise and employee terminationwithin the valuation model; separate groups of employees were reviewed andshown to have similar historical exercise behavior and are considered togetherfor valuation purposes.  The expected term of options granted is derivedfrom the output of the option valuation model and represents the period of timethat options granted are expected to be outstanding.  The risk-free ratefor periods within the contractual life of the option is based on the U.S.Treasury yield curve at the time of grant.
|                          | ** ** | **Year Ended  July 31, 2006** | ** ** |
|--------------------------|------------|----------------------------------------------|------------|
| Expected volatility      |       | 50.8                                         | %          |
| Expected dividends       |       | 0                                            | %          |
| Expected term (in years) |       | 4.0                                          |       |
| Risk  free rate          |       | 4.0                                          | %          |

 

The following tableprovides additional information related to this stock option plan:
|                                 | ** ** | **For the Year Ended July 31, 2006** | ** ** |
|---------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                      | ** ** | **Number of  Shares**                                         | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** | **Weighted  Average  Contractual  Life  In Years** | ** ** | **Aggregate  Intrinsic  Value (000’s)** | ** ** |
| Beginning balance               |       | 2,422,790                                                          |       | $ | 17.52 |   |   |   |   |   |   |   |
| Options granted                 |       | 209,750                                                            |       | 31.94 |   | $ | 13.29 |   | 4.2 |   |   |   |
| Options exercised               |       | (1,414,462                                                         | )          | 17.69 |   |   |   |   |   |   |   |
| Options forfeited               |       | (39,605                                                            | )          | 23.27 |   |   |   |   |   |   |   |
| Total outstanding               |       | 1,178,473                                                          |       | 19.70 |   |   |   | 2.8 |   | $ | 44,280 |   |
| Options  exercisable and vested |       | 873,348                                                            |       | 18.55 |   |   |   | 2.6 |   | $ | 33,817 |   |
|                                 |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |

 

The total intrinsic valueof options exercised during the year ended July 31, 2006, 2005 and 2004 was$32.8 million, $10.3 million and $9.0 million, respectively.  The intrinsic value is the amount by whichthe fair value of the underlying stock exceeds the exercise price of anoption.  Cash received under all share-basedpayment arrangements for the year ended July 31, 2006 was approximately $27.7million.  The tax benefit realized for the tax deductions resulting fromoption exercises of share-based payment arrangements was approximately $4.0million for the year ended July 31, 2006.

Performance shares

During October2005, certain participants were awarded rights to receive restricted shares ofthe company in October 2006.  Restrictedshares will be granted, if earned, in October 2006.  The number of shares is based uponestablished performance targets primarily relating to income before taxprovision.  The vesting of the issuedrestricted shares will be two years after the performance targets are assessedand therefore the service period is from the date of grant through July 31,2008.  These shares were valued initiallyat $31.94 per share for a total value of $2.5 million based upon the marketprice of the shares at the award date and the expected outcome of theperformance targets.  Based on theresults for the year ended July 31, 2006 and that the 

45

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fiscal 2006performance targets were exceeded, we accrued additional share basedcompensation related to the performance shares. The shares were valued at $4.7 million at July 31, 2006, which will berecorded as compensation expense over the applicable service period.  This compensation plan has been recorded as aliability.  We recorded $1.3 millioncompensation expense related to this plan during the 2006 fiscal year.

Restricted Stock

Restricted shares awardedgenerally vest ratably over 3 years.  Thestatus of the restricted stock as of July 31, 2005 and the changes during thefiscal year through July 31, 2006 are presented below:
|                                                  | ** ** | **Number of  Shares** | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|
| Nonvested at July 31, 2005                       |       | 54,134                     |       |
|                                             |       |                       |       |
| Activity for the quarter ended October 31, 2005: |       |                       |       |
| Granted                                          |       | 97,500                     |       |
| Less: Vested                                     |       | 7,167                      |       |
| Less: Forfeited                                  |       | 1,888                      |       |
| Nonvested at October 31, 2005                    |       | 142,579                    |       |
|                                             |       |                       |       |
| Activity for the quarter ended January 31, 2006: |       |                       |       |
| Granted                                          |       | 3,100                      |       |
| Less: Vested                                     |       | 14,540                     |       |
| Less: Forfeited                                  |       | —                     |       |
| Nonvested at January 31, 2006                    |       | 131,139                    |       |
|                                             |       |                       |       |
| Activity for the quarter ended April 30, 2006:   |       |                       |       |
| Granted                                          |       | 2,000                      |       |
| Less: Vested                                     |       | 3,033                      |       |
| Less: Forfeited                                  |       | 4,388                      |       |
| Nonvested at April 30, 2006                      |       | 125,718                    |       |
|                                             |       |                       |       |
| Activity for the quarter ended July 31, 2006:    |       |                       |       |
| Granted                                          |       | 750                        |       |
| Less: Vested                                     |       | 1,499                      |       |
| Less: Forfeited                                  |       | —                     |       |
| Nonvested  at July 31, 2006                      |       | 124,969                    |       |

 

The weighted averagegrant date fair value for the granted restricted stock was $32.23, $22.72 and$11.98 per share for the years ended July 31, 2006, 2005 and 2004,respectively.  The total fair value ofshares vested during the years ended July 31, 2006, 2005 and 2004 was asfollows (in thousands of dollars):
|                              | ** ** | **Year Ended  July 31,** | ** ** |
|------------------------------|------------|------------------------------------|------------|
| ** **                   | ** ** | **2006**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|                         |       |                               |       |   |   |   |   |
| Fair  value of shares vested |       | $                                  | 1,026      |   | $ | 583 |   | $ | 155 |   |
|                              |            |                                    |            |  |  |  |  |  |  |  |

 

Employee Stock Purchase Plan

On November 1, 1997, weinitiated an employee stock purchase plan. This plan was amended and restatedon December 11, 2002. The Board of Directors originally authorized 1,000,000shares available for issuance under the plan and at July 31, 2006, 759,529shares remained available for issuance. Participation is voluntary andsubstantially all full-time employees meeting limited eligibility requirementsmay participate. Contributions are made through payroll deductions and may notbe less than 1% 

46

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or more than 15%of the participant’s base pay as defined. The participant’s option to purchasecommon stock is deemed to be granted on the first day and exercised on the lastday of the fiscal quarter at a price that is the lower of 85% of the marketprice on the first or last day of the fiscal quarter.  During fiscal 2005, 86,940 shares of commonstock were issued with a weighted average fair value at grant date of $18.41per share.  During fiscal 2004, 244,232shares of common stock were issued with a weighted average fair value at grantdate of $7.47 per share.  Informationrelated to the shares granted during fiscal 2006 is below.  The fair value was determined using theBlack-Scholes option valuation method using the assumptions shown below.
|                                          | ** ** | ** **          | ** ** | ** **                                    | ** ** | ** **                           | ** ** | **Assumptions used in valuation model** | ** ** |
|------------------------------------------|------------|---------------------|------------|-----------------------------------------------|------------|--------------------------------------|------------|-------------------------------------------------------------|------------|
| **For the quarter ended** | ** ** | **Shares  granted** | ** ** | **Quarter when  to be issued** | ** ** | **Grant date  fair value** | ** ** | **Risk free  rate**                                    | ** ** | **Volatility** | ** ** | **Expected  life** | ** ** | **Expected  dividends** | ** ** |
| October 31, 2005                         |       | 23,144              |       | Second  FY06                                  |       | $                                    | 7.52       |                                                        | 3.5        | % | 47 | % | 90 days |   | — |   |
| January 31, 2006                         |       | 21,878              |       | Third  FY06                                   |       | $                                    | 7.50       |                                                        | 3.9        | % | 40 | % | 90 days |   | — |   |
| April 30, 2006                           |       | 19,543              |       | Fourth  FY06                                  |       | $                                    | 10.67      |                                                        | 4.7        | % | 39 | % | 90 days |   | — |   |
| July 31, 2006                            |       | 17,807              |       | First FY07                                    |       | $                                    | 12.07      |                                                        | 4.9        | % | 44 | % | 90 days |   | — |   |

 

***Pension Plan***

We maintain acontributory defined benefit pension plan (the “Pension Plan”) for eligibleparticipating employees in the United Kingdom. Monthly contributions byemployees are equal to 7.0% of their salaries increased from 5.5% effectiveDecember 1, 2005. We provide an additional contribution in an actuariallydetermined amount necessary to fund future benefits to be provided under thePension Plan. Benefits provided are based upon 1/60 of the employee’s finalpensionable salary (as defined in the Pension Plan) for each complete year ofservice up to 2/3 of the employee’s final pensionable salary and increaseannually in line with inflation subject to a maximum of 5% per annum. ThePension Plan also provides for 50% of such actual or expected benefits to bepaid to a surviving spouse upon the death of a participant. Pension Plan assetsconsist mainly of investments in marketable securities that are held andmanaged by an independent trustee.

The following is areconciliation of the beginning and ending balances of the benefit obligationand the fair value of plan assets measured at July 31, 2006 and July 31, 2005,respectively:

|                                                  | ** ** | **July 31,**       | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|
| ** **                                       | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                       | ** ** | **(In thousands)** | ** ** |
| Benefit obligation at beginning of year          |       | $                       | 36,447     |   | $ | 19,882 |   |
| Service cost                                     |       | 1,154                   |       | 754 |   |
| Interest cost                                    |       | 1,905                   |       | 1,235 |   |
| Contributions by plan participants               |       | 418                     |       | 431 |   |
| Actuarial loss                                   |       | 5,915                   |       | 16,295 |   |
| Benefits paid                                    |       | (52                     | )          | (186 | ) |
| Foreign currency exchange rate changes           |       | 2,518                   |       | (1,964 | ) |
| Benefit obligation at end of year                |       | $                       | 48,305     |   | $ | 36,447 |   |
|                                             |       |                    |       |   |   |
| Fair value of plan assets at beginning of year   |       | $                       | 18,001     |   | $ | 14,088 |   |
| Actual gain on plan assets                       |       | 2,236                   |       | 3,616 |   |
| Employer contributions                           |       | 994                     |       | 972 |   |
| Plan participants’ contributions            |       | 418                     |       | 431 |   |
| Benefits paid                                    |       | (45                     | )          | (46 | ) |
| Foreign currency exchange rate changes and other |       | 1,202                   |       | (1,060 | ) |
| Fair  value of plan assets at end of year        |       | $                       | 22,806     |   | $ | 18,001 |   |

 

The funded status of thePension Plan is as follows:
|                                                        | ** ** | **July 31,**       | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|
| ** **                                             | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                             | ** ** | **(In thousands)** | ** ** |
| Projected  benefit obligation in excess of plan assets |       | $                       | 25,499     |   | $ | 18,446 |   |
| Unrecognized  prior service costs                      |       | (1,322                  | )          | (1,386 | ) |
| Unrecognized  actuarial loss                           |       | (9,017                  | )          | (5,003 | ) |
| Net  pension liability                                 |       | $                       | 15,160     |   | $ | 12,057 |   |

 

47

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Amounts included in theconsolidated balance sheet consist of:
|                                                                 | ** ** | **July 31,**       | ** ** |
|-----------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                      | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                                      | ** ** | **(In thousands)** | ** ** |
| Accrued benefit obligation                                      |       | $                       | 16,482     |   | $ | 13,443 |   |
| Intangible asset                                                |       | (1,322                  | )          | (1,386 | ) |
| Net pension liability                                           |       | $                       | 15,160     |   | $ | 12,057 |   |
|                                                            |       |                    |       |   |   |
| Net amount recognized                                           |       | (2,310                  | )          | (572 | ) |
| Minimum  pension liability in accumulated comprehensive  income |       | $                       | 12,850     |   | $ | 11,485 |   |

 

Our pension liability isincluded in “Other non-current liabilities” on our balance sheet. The minimumpension liability is recorded in “Accumulated comprehensive income – other” onour balance sheet and, net of tax, was $9.4 million in fiscal 2006 and $8.4million in fiscal 2005.

The net periodic pensioncosts are as follows:
|                                                   | ** ** | **For the Years Ended July 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                        | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                        | ** ** | **(In thousands)**                                   | ** ** |
| Service costs (benefits earned during the period) |       | $                                                         | 1,154      |   | $ | 754 |   | $ | 542 |   |
| Interest cost on projected benefit obligation     |       | 1,905                                                     |       | 1,235 |   | 1,061 |   |
| Expected return on plan assets                    |       | (1,296                                                    | )          | (968 | ) | (787 | ) |
| Net amortization and deferral                     |       | 899                                                       |       | 164 |   | 194 |   |
| Net  periodic pension costs                       |       | $                                                         | 2,662      |   | $ | 1,185 |   | $ | 1,010 |   |

 

The weighted averageassumptions used to determine the projected benefit obligation and the expectedlong-term rate of return on assets are as follows:
|                                              | ** ** | **For the Years Ended July 31,** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Discount rate                                |       | 5.0                                                       | %          | 5.0 | % | 6.0 | % |
| Rates of increase in compensation levels     |       | 5.0                                                       | %          | 4.3 | % | 4.0 | % |
| Expected  long-term rate of return on assets |       | 6.5                                                       | %          | 6.8 | % | 6.5 | % |

 

The expected long-termrate of return on plan assets reflects the average rate of earnings expected onthe funds invested or to be invested to provide for the benefits included inthe projected benefit obligation. We have used a rate we believe is appropriatefor long-term investment in an equity-based portfolio.  The discount rate is determined by using thereturn available from an index of AA-rated corporate non-callable bonds ofappropriate duration and currency

The weighted-averageasset allocations by asset category for the plan assets are as follow:
| Asset Category            | ** ** | **For the Years Ended  July 31,** | ** ** |
|--------------------------------|------------|-------------------------------------------------------|------------|
| ** **                     | ** ** | **2006**                                              | ** ** | **2005** | ** ** |
| Equity securities and property |       | 74.1                                                  | %          | 98.0 | % |
| Cash and bonds                 |       | 25.9                                                  | %          | 2.0 | % |
| Total                          |       | 100.0                                                 | %          | 100.0 | % |

 

In prior years, ourtarget weighted-average asset allocation for the plan assets was 100% in equitysecurities.  In order to further managethe risk of the expected return, during fiscal 2006, this allocation target waschanged to 65% in equity securities, 10% property and 25% in cash and bonds.

48

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For fiscal 2007, we planto contribute approximately $1.4 million to the pension plan. We expect futurebenefit payments of:
| Year               | ** ** | **Amount**              | ** ** |
|--------------------|------------|-------------------------|------------|
| ** **         | ** ** | **(In thousands)** | ** ** |
| 2007               |       | $                       | 61         |   |
| 2008               |       | 85                      |       |
| 2009               |       | 94                      |       |
| 2010               |       | 107                     |       |
| 2011               |       | 138                     |       |
| Years 2012 to 2015 |       | 2,433                   |       |
|                    |            |                         |            |  |

 

**8. Commonand Preferred Stock and Exchangeable Shares**

We are authorized to issue 78.5 million shares of commonstock.

The Board of Directors, without any action by thestockholders, may issue up to one million shares of preferred stock, par value$.01, in one or more series and determine the voting rights, preferences as todividends, liquidation, conversion, and other rights of such stock. There areno shares of preferred stock outstanding as of July 31, 2006.

On May 27, 1997, our Board of Directors declared adistribution of one right for each outstanding share of common stock orExchangeable Stock to shareholders of record at the close of business on June12, 1997 and designated 400,000 shares of the authorized preferred stock as aclass to be distributed under a shareholder rights agreement. Upon theoccurrence of certain events enumerated in the shareholder rights agreement,each right entitles the registered holder to purchase a fraction of a share ofour preferred stock or the common stock of an acquiring company. The rights,among other things, will cause substantial dilution to a person or group thatattempts to acquire our company. The rights expire on May 15, 2007 and may beredeemed prior to that date.  InSeptember 2006, we amended our shareholder rights plan to provide that no rightswill be issued to our current shareholders in connection with our previouslyannounced plan to merge with Compagnie Générale de Géophysique (“CGG”).

In January 2006, it wasannounced that Veritas Energy Services accelerated the automatic redemption dateof its exchangeable shares and its class A exchangeable shares, series 1 to May16, 2006, and that Veritas DGC exercised its right to redeem both classes ofVeritas Energy Services exchangeable shares. On May 16, 2006, the closing date,each exchangeable share of both classes then outstanding was exchanged for oneshare of Veritas DGC common stock. Following the redemption on May 16, VeritasDGC owned all of the issued and outstanding shares of Veritas EnergyServices.  Therefore, since May 16, 2006,we have had only one class of stock outstanding.

**9.Gain on Involuntary Conversion of Assets**

In January 2005, ourseismic vessel Veritas Viking experienced an engine failure while acquiringdata in the Gulf of Mexico and lost substantial amounts of overboard seismicequipment. This seismic equipment was insured at its replacement cost. As aresult, insurance settlements for reimbursement of certain costs and to acquirereplacement equipment in excess of the book value of the equipment lost lessour deductible were recorded as a gain of $9.9 million during the fourthquarter of fiscal year 2005.  Anadditional $2.0 million gain was recorded in the first quarter of fiscal 2006due to the timing of the insurance settlements, which were completed as of July31, 2006.  The gain was included as achange in accounts receivable in the consolidated statement of cash flows.

49

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**10.Other (Income) Expense, Net**

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

|                                                | ** ** | **For the Years Ended July 31,** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                     | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                     | ** ** | **(In thousands)**                                   | ** ** |
| Net foreign currency exchange loss (gain) |       | $                                                         | 1,341      |   | $ | (110 | ) | $ | 1,248 |   |
| Loss from unconsolidated subsidiary (1)        |       | —                                                    |       | — |   | 958 |   |
| Other                                          |       | (1,218                                                    | )          | (765 | ) | (621 | ) |
| Total                                          |       | $                                                         | 123        |   | $ | (875 | ) | $ | 1,585 |   |

 

----

(1)This subsidiary was consolidatedwith our adoption of FIN 46R as of April 30, 2004.

**11.Net Income Per Common Share**

Basic and dilutedearnings per common share are computed as follows:
|                                                                 | ** ** | **For the Years Ended July 31,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                      | ** ** | **(In thousands)**                                   | ** ** |
|                                                            |       |                                                      |       |   |   |   |   |
| Net income                                                      |       | $                                                         | 82,231     |   | $ | 83,001 |   | $ | 5,221 |   |
|                                                            |       |                                                      |       |   |   |   |   |
| **Basic:**                                                      |       |                                                      |       |   |   |   |   |
| Weighted average common shares  (including exchangeable shares) |       | 35,260                                                    |       | 33,843 |   | 33,572 |   |
| Income per share                                                |       | $                                                         | 2.33       |   | $ | 2.45 |   | $ | .16 |   |
|                                                            |       |                                                      |       |   |   |   |   |
| **Diluted:**                                                    |       |                                                      |       |   |   |   |   |
| Weighted average common shares  (including exchangeable shares) |       | 35,260                                                    |       | 33,843 |   | 33,572 |   |
| Shares issuable from assumed  conversion of notes               |       | 3,744                                                     |       | — |   | — |   |
| Shares issuable from assumed  exercise of options               |       | 463                                                       |       | 1,166 |   | 660 |   |
| Shares issuable due to  performance shares agreement            |       | 82                                                        |       | — |   | — |   |
| Shares issuable from assumed  vesting of restricted stock       |       | 74                                                        |       | 45 |   | 28 |   |
| Total                                                           |       | 39,623                                                    |       | 35,054 |   | 34,260 |   |
| Income per share                                                |       | $                                                         | 2.08       |   | $ | 2.37 |   | $ | .15 |   |

 

The shares issuable fromassumed conversion of notes for the year ended July 31, 2006 are based upon a stockprice of $57.27, which was the closing price of Veritas DGC’s common stock atJuly 31, 2006.  The shares issuable dueto performance shares agreement relates to the stock to be issued in relationto meeting certain performance targets. The shares issuable from this program is also based upon a stock priceof $57.27.

The following options topurchase common shares have been excluded from the computation assumingdilution because the exercise prices of the options exceed the average marketprice of the underlying common shares.
|                      | ** ** | **For the Years Ended July 31,** | ** **    |
|----------------------|------------|-----------------------------------------------------------|---------------|
| ** **           | ** ** | **2006**                                                  | ** **    | **2005** | ** ** | **2004** | ** ** |
|                 |       |                                                      |          |   |   |   |   |
| Number of options    |       | 13,705                                                    |          | 681,650 |   | 1,079,591 |   |
| Exercise price range |       | $                                                         | 43.56 - 55.13 |   | $ | 26.00 - $55.13 |   | $ | 14.56 - $55.13 |   |
| Expiring  through    |       | May  2008                                                 |          | March  2012 |   | March  2012 |   |
|                      |            |                                                           |               |  |  |  |  |  |  |  |

 

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**12. Assets and liabilities held for sale**

As ofJuly 31, 2006 the land seismic acquisition business was considered held forsale.  As of July 31, 2006, the balancesheet date, it was expected that this business would be sold to a third partywith an expected closing to occur in the second fiscal quarter of fiscal2007.  The land seismic acquisitionbusiness met the criteria to be considered held for sale and was appropriatelyclassified on the balance sheet in accordance with FAS 144, “Accounting for theImpairment or Disposal of Long-Lived Assets.” Further, approximately $2.7 million of depreciation expense was notrecorded to reflect the depreciation expense from the time the assets met thecriteria until the end of the fiscal year. The assets held for sale were included in the NASA and EAMEsegments.  The land seismic acquisitionbusiness was not considered a discontinued operation due to our continuinginvolvement in the business because of anticipated ongoing contracts.

Subsequentto July 31, 2006, these assets were no longer considered held for sale.  See further discussion in Note 15, SubsequentEvents.

Thegeophysical vessel, the Searcher, and certain related equipment was classifiedas held for sale as of July 31, 2006. This vessel was considered for selling due to the fact that it was anolder vessel and the costs to refurbish it would be significant.  In July 2006, a new vessel, the VeritasVoyager was placed into service as a replacement to the Searcher.  Obtaining a new vessel is expected to reducevessel downtime and maintenance costs. Subsequent to July 31, 2006, the vessel was sold to a third party forapproximately $1 million and a gain of approximately $0.5 million is to berecorded in the first quarter of fiscal 2007. The Searcher was included as part of the Asia Pacific segment.

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

 

**13. Segment and Geographical Information**

We have organizedthe company into four reportable segments: North and South America (NASA);Europe, Africa, Middle East and Commonwealth of Independent States (EAME); AsiaPacific (APAC); and Veritas Hampson-Russell (VHR).  In NASA, EAME and APAC, we conductgeophysical surveys on both a contract and a multi-client basis. When weconduct surveys on a contract basis, we acquire and process data for a singleclient who pays us to conduct the survey and owns the data we acquire. When weconduct surveys on a multi-client basis, we acquire and process data for ourown account and license that data and associated products to multiple clients.  NASA, EAME and APAC offer a common suite ofthese products and services to their customers, although each product orservice may be adapted to meet the needs of the local markets.  VHR licenses geophysical software andprovides geophysical reservoir consulting services.  The results of VHR’s operations werepreviously included in those of the NASA region; however, beginning in fiscal2006, senior management began to review the results of VHR separately.  This segmentation of our company isrepresentative of the manner in which it is viewed and managed by our seniormanagers and our Board of Directors.  Theinformation related to the years ended July 31, 2005 and 2004 have beenrestated to reflect the new 

51

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segmentstructure.  A reconciliation of thereportable segments’ results to those of the total enterprise is given below:
|                                                              | ** ** | **For the Year Ended July 31, 2006** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **NASA**                                                           | ** ** | **EAME** | ** ** | **APAC** | ** ** | **VHR** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                                   | ** ** | **(In thousands)**                                            | ** ** |
| Revenue                                                      |       | $                                                                  | 541,396    |   | $ | 148,739 |   | $ | 112,466 |   | $ | 19,587 |   | $ | — |   | $ | 822,188 |   |
| Depreciation and amortization, net (other than multi-client) |       | 28,778                                                             |       | 5,518 |   | 4,637 |   | 4,004 |   | 983 |   | 43,920 |   |
| Amortization of multi-client library                         |       | 164,940                                                            |       | 36,035 |   | — |   | — |   | — |   | 200,975 |   |
| Operating income (loss)                                      |       | 137,194                                                            |       | 23,533 |   | 18,142 |   | (2,782 | ) | (43,208 | ) | 132,879 |   |
| Net income (loss) before income tax                     |       | 141,417                                                            |       | 24,298 |   | 18,604 |   | (3,106 | ) | (41,787 | ) | 139,426 |   |
| Total  assets                                                |       | 485,989                                                            |       | 191,077 |   | 86,810 |   | 12,436 |   | 381,718 |   | 1,158,030 |   |
|                                                              |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                                                              | ** ** | **For the Year Ended July 31, 2005** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **NASA**                                                           | ** ** | **EAME** | ** ** | **APAC** | ** ** | **VHR** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                                   | ** ** | **(In thousands)**                                            | ** ** |
| Revenue                                                      |       | $                                                                  | 388,632    |   | $ | 130,989 |   | $ | 98,171 |   | $ | 16,234 |   | $ | — |   | $ | 634,026 |   |
| Depreciation and amortization, net (other than multi-client) |       | 27,033                                                             |       | 4,898 |   | 4,519 |   | 3,764 |   | 1,369 |   | 41,583 |   |
| Amortization of multi-client library                         |       | 112,019                                                            |       | 43,420 |   | 4,286 |   | — |   | — |   | 159,725 |   |
| Operating income (loss)                                      |       | 73,429                                                             |       | 18,176 |   | 9,118 |   | (4,811 | ) | (31,671 | ) | 64,241 |   |
| Net income (loss) before income tax                          |       | 83,660                                                             |       | 19,161 |   | 9,677 |   | (4,853 | ) | (31,402 | ) | 76,243 |   |
| Total  assets                                                |       | 501,995                                                            |       | 119,632 |   | 51,915 |   | 14,680 |   | 278,376 |   | 966,598 |   |
|                                                              |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                                                              | ** ** | **For the Year Ended July 31, 2004** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **NASA**                                                           | ** ** | **EAME** | ** ** | **APAC** | ** ** | **VHR** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                                   | ** ** | **(In thousands)**                                            | ** ** |
| Revenue                                                      |       | $                                                                  | 370,916    |   | $ | 118,448 |   | $ | 60,125 |   | $ | 14,980 |   | $ | — |   | $ | 564,469 |   |
| Depreciation and amortization, net (other than multi-client) |       | 29,095                                                             |       | 2,583 |   | 4,438 |   | 3,762 |   | 422 |   | 40,300 |   |
| Amortization of multi-client library                         |       | 148,218                                                            |       | 56,818 |   | 4,804 |   | — |   | — |   | 209,840 |   |
| Operating income (loss)                                      |       | 57,510                                                             |       | 6,026 |   | 1,851 |   | (3,183 | ) | (34,434 | ) | 27,770 |   |
| Net income (loss) before income tax                          |       | 58,772                                                             |       | 5,918 |   | 142 |   | (3,298 | ) | (52,598 | ) | 8,936 |   |
| Total  assets                                                |       | 479,140                                                            |       | 116,158 |   | 38,014 |   | 15,845 |   | 127,089 |   | 776,246 |   |
|                                                              |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Corporate includescorporate overhead and certain non-recurring adjustments.  The assets within the Corporate segmentconsist primarily of cash.

This table presents consolidatedrevenue by geographic area based on the location of the use of the product orservice for the years ended July 31, 2006, 2005 and 2004:
|                    | ** ** | **For the Years Ended July 31,** | ** ** |
|--------------------|------------|-----------------------------------------------------------|------------|
| ** **         | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **         | ** ** | **(In thousands)**                                   | ** ** |
| Geographic areas:  |       |                                                      |       |   |   |   |   |
| United States      |       | $                                                         | 343,299    |   | $ | 287,993 |   | $ | 245,144 |   |
| Canada             |       | 141,667                                                   |       | 92,639 |   | 88,283 |   |
| Latin America      |       | 67,401                                                    |       | 17,178 |   | 57,210 |   |
| Europe             |       | 93,589                                                    |       | 71,852 |   | 79,182 |   |
| Middle East/Africa |       | 60,771                                                    |       | 62,515 |   | 32,513 |   |
| Asia Pacific       |       | 115,461                                                   |       | 101,849 |   | 62,137 |   |
| Total              |       | $                                                         | 822,188    |   | $ | 634,026 |   | $ | 564,469 |   |

 

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This table presentsproperty and equipment, net of depreciation, by geographic area based on thelocation of the assets:
|                    | ** ** | **For the Years Ended July 31,** | ** ** |
|--------------------|------------|-----------------------------------------------------------|------------|
| ** **         | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **         | ** ** | **(In thousands)**                                   | ** ** |
| Geographic areas:  |       |                                                      |       |   |   |   |   |
| United States      |       | $                                                         | 81,773     |   | $ | 93,194 |   | $ | 83,181 |   |
| Canada             |       | 2,962                                                     |       | 14,808 |   | 17,317 |   |
| Latin America      |       | 1,183                                                     |       | 1,176 |   | 1,958 |   |
| Europe             |       | 7,772                                                     |       | 8,212 |   | 8,213 |   |
| Middle East/Africa |       | 2,515                                                     |       | 2,406 |   | 3,491 |   |
| Asia Pacific       |       | 14,399                                                    |       | 8,121 |   | 7,503 |   |
| Total              |       | $                                                         | 110,604    |   | $ | 127,917 |   | $ | 121,663 |   |

 

In fiscal 2006, nocustomer accounted for 10% or more of total revenue. In fiscal 2005, a single,large multi-national oil company represented 12% of our revenue. In fiscal2004, no customer accounted for 10% or more of total revenue.

**14. Selected Quarterly Financial Data (Unaudited)**
|                                             | ** ** | **For the Year Ended July 31, 2006**    | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **1st Quarter**                                                  | ** ** | **2nd Quarter** | ** ** | **3rd Quarter** | ** ** | **4th Quarter** | ** ** |
| ** **                                  | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Revenue                                     |       | $                                                                     | 168,678    |   | $ | 238,860 |   | $ | 236,219 |   | $ | 178,431 |   |
| Net income                                  |       | 11,787                                                                |       | 31,082 |   | 32,876 |   | 6,487 |   |
| Net income per common share — basic    |       | .34                                                                   |       | .89 |   | .92 |   | .18 |   |
| Net  income per common share — diluted |       | .32                                                                   |       | .81 |   | .84 |   | .16 |   |
|                                             |            |                                                                       |            |  |  |  |  |  |  |  |  |  |  |

 
|                                             | ** ** | **For the Year Ended July 31, 2005**    | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **1st Quarter**                                                  | ** ** | **2nd Quarter** | ** ** | **3rd Quarter** | ** ** | **4th Quarter** | ** ** |
| ** **                                  | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Revenue                                     |       | $                                                                     | 129,581    |   | $ | 192,228 |   | $ | 175,510 |   | $ | 136,707 |   |
| Net income                                  |       | 978                                                                   |       | 17,368 |   | 18,407 |   | 46,248 |   |
| Net income per common share — basic    |       | .03                                                                   |       | .51 |   | .54 |   | 1.36 |   |
| Net  income per common share — diluted |       | .03                                                                   |       | .51 |   | .52 |   | 1.31 |   |
|                                             |            |                                                                       |            |  |  |  |  |  |  |  |  |  |  |

 

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

**15.Subsequent Events**

On September 5, 2006, weannounced that we terminated discussions with a third party relating to thepossible sale of the Company’s land seismic acquisition business. Subsequent toJuly 31, 2006, we have incurred costs of approximately $10 million in connectionwith the possible sale of our land seismic acquisition business, which costsinclude amounts paid in settlement of all claims by the third party buyers andprofessional fees, including accounting and legal fees.  The depreciation expense of $2.7 millionpreviously not recorded related to these assets expected to be sold in fiscal2006 will be recorded in fiscal 2007 as if the assets were not held for sale atany time.  For further discussion on theassets and liabilities held for sale, see Note 12 above.

On September 4, 2006, theCompany and CGG, a French société anonyme, entered into an Agreement and Planof Merger, dated as of September 4, 2006 (the “Merger Agreement”), by and amongthe Company, CGG, Volnay Acquisition Co. I, a Delaware corporation and whollyowned subsidiary of CGG (“Merger Sub I”), and Volnay Acquisition Co. II, aDelaware corporation and wholly owned subsidiary of CGG (“Merger Sub II”),under which CGG has agreed to acquire all of the issued and outstanding sharesof common stock, par value $0.01 per share, of the Company (“Company CommonStock”). Under the terms of the Merger Agreement, which was approved by theBoards of Directors of both the Company and CGG, Merger Sub I will merge withand into the Company with the Company continuing as the surviving corporation,and immediately thereafter, the 

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Company will merge with and intoMerger Sub II with Merger Sub II continuing as the surviving corporation as awholly owned subsidiary of CGG.

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

Consummation of thetransactions contemplated by the Merger Agreement is conditioned upon, amongother things, (1) approval by the stockholders of the Company and CGG, (2) thereceipt of all required regulatory approvals and (3) the effectiveness of theregistration statement on Form F-4 and the registration statement on Form F-6relating to the ADSs to be issued in the merger.  In the event of atermination of the Merger Agreement under certain circumstances, the Company orCGG may be required to pay the other party certain termination fees as morefully explained in the Merger Agreement filed as Exhibit 2.1 to Veritas DGCInc.’s Form 8-K dated September 4, 2006.

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

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

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

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

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

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

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**VERITAS DGC INC. AND SUBSIDIARIES**

**Financial Statement ScheduleValuation and Qualifying Accounts and ReservesSchedule II**(In thousands)
| ** **                           | ** ** | ** **                                     | ** ** | **Additions**                                 | ** ** | ** **                           | ** ** | ** **     | ** ** |
|--------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------|------------|----------------|------------|
| **Description**                      | ** ** | **Balance at  Beginning of  Period** | ** ** | **Charged to  Costs and  Expenses** | ** ** | **Charged to  Other  Accounts** | ** ** | **Deductions** | ** ** | **Balance at  End of  Period** | ** ** |
| **Allowance  for doubtful accounts** |       |                                           |       |                                          |       |                                 |       |           |       |   |   |
| 2006                                 |       | $                                              | 1,322      |                                          | $          | 1,172                                |       | $              | —     |   | $ | (599 | ) | $ | 1,895 |   |
| 2005                                 |       | 1,109                                          |       | 775                                           |       | —                               |       | (562           | )          | 1,322 |   |
| 2004                                 |       | 7,953                                          |       | —                                        |       | —                               |       | (6,844         | )          | 1,109 |   |
|                                 |       |                                           |       |                                          |       |                                 |       |           |       |   |   |
| **Accrued  dry dock**                |       |                                           |       |                                          |       |                                 |       |           |       |   |   |
| 2006                                 |       | $                                              | 3,181      |                                          | $          | 5,003                                |       | $              | —     |   | $ | (2,141 | ) | $ | 6,043 |   |
| 2005                                 |       | 2,420                                          |       | 4,612                                         |       | —                               |       | (3,851         | )          | 3,181 |   |
| 2004                                 |       | 3,227                                          |       | 4,604                                         |       | —                               |       | (5,411         | )          | 2,420 |   |
|                                 |       |                                           |       |                                          |       |                                 |       |           |       |   |   |
| **Tax  valuation allowances**        |       |                                           |       |                                          |       |                                 |       |           |       |   |   |
| 2006                                 |       | $                                              | 17,772     |                                          | $          | 9,622                                |       | $              | —     |   | $ | (8,139 | ) | $ | 19,255 |   |
| 2005                                 |       | 73,036                                         |       | 3,195                                         |       | —                               |       | (58,459        | )          | 17,772 |   |
| 2004                                 |       | 61,112                                         |       | 11,924                                        |       | —                               |       | —         |       | 73,036 |   |

 

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## **ITEM9. Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure**

Not Applicable.

## **ITEM9A. Controls and Procedures**

**Evaluation of Disclosure Controls and Procedures**

We carried out anevaluation, under the supervision of and with the participation of ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as to the effectiveness, design and operation of our disclosure controls andprocedures (as defined in Rule 13a-15(e) under the Securities and Exchange Actof 1934) as of July 31, 2006.  Our ChiefExecutive Officer and Chief Financial Officer concluded that the design andoperation of our disclosure controls and procedures were effective as of July31, 2006.

**Management’s Report on Internal Control over Financial Reporting**

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting (as defined in Rule 13a – 15(f) under the Securities andExchange Act of 1934). An evaluation of the design and effectiveness of ourinternal control over financial reporting, based on the framework in *Internal Control — Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission, was conductedunder the supervision and with the participation of management, including ourChief Executive Officer and Chief Financial Officer. Based on the results ofthis evaluation, we concluded that our internal control over financialreporting was effective as of July 31, 2006.

Our assessment of theeffectiveness of our internal control over financial reporting as of July 31,2006 has been audited by PricewaterhouseCoopers LLP, an independent registeredpublic accounting firm, as stated in their audit report, which is includedherein.

**Changes in Internal Control over Financial Reporting**

During the fiscal yearended July 31, 2006, we did not make any change to our internal control overfinancial reporting that materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

## **ITEM9B. Other Information**

Not Applicable

# **PART III**

## **ITEM10. Directors and Executive Officers of the Registrant**

Information required bythis item is incorporated by reference to the material to appear under theheading “Election of Directors” in the Proxy Statement for the 2006 AnnualMeeting of Stockholders, to be filed pursuant to Regulation 14A.

## **ITEM11. Executive Compensation**

Information required bythis item is incorporated by reference to the material to appear under theheading “Management” in the Proxy Statement for the 2006 Annual Meeting ofStockholders, to be filed pursuant to Regulation 14A.

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**ITEM 12.Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters**

### **SecuritiesAuthorized for Issuance Under Equity Compensation Plans**

The followingtable presents data related to all of our equity compensation plans for bothnon-employee directors and employees as of July 31, 2006, and providesinformation related to potential ownership dilution as of such date:

**EquityCompensation Plan Informationas of July 31, 2006**

| Equity Compensation Plan   Category      | ** ** | **Number of securities to  be issued upon exercise  of outstanding options** | ** ** | **Weighted-average  exercise price of  outstanding options** | ** ** | **Number of securities remaining  available for future issuance under  equity compensation plans  (excluding securities to be issued  upon exercise of  outstanding options)** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                    |       |                                                                                                                 |       |                                                                        |       |                                                                                                                                                                                                                                                           |       |
| Equity  compensation plans approved by stockholders     |       | 744,524                                                                                                              | (1)        | $                                                                           | 18.23      |                                                                                                                                                                                                                                                           | 2,123,559  | (2) |
|                                                    |       |                                                                                                                 |       |                                                                        |       |                                                                                                                                                                                                                                                           |       |
| Equity compensation  plans not approved by stockholders |       | 433,949                                                                                                              | (3)        | 22.22                                                                       |       | 0                                                                                                                                                                                                                                                              | (4)        |
|                                                         |            |                                                                                                                      |            |                                                                             |            |                                                                                                                                                                                                                                                                |            |  |

 

----

(1)            Includes 683,779 options issuedunder our Share Incentive Plan approved by stockholders in December 2002.Includes 60,745 options issued beforeDecember 9, 1998 under our 1992 Employee Non-qualified Stock Option Plan.Stockholders approved the 1992 plan initially and in December 1997 approvedamendments increasing the number of shares, which could be issued pursuant tooptions under the 1992 Employee Non-qualified Stock Option Plan. On December 9,1998, our board of directors increased the number of options available underthe 1992 Employee Non-qualified Stock Option Plan without obtaining stockholderapproval. We have assumed that options issued before those dates were issuedunder plans approved by stockholders and that options issued on or after thosedates were issued pursuant to plans not approved by stockholders.

(2)            Includes 759,529 sharesavailable for issuance under our employee stock purchase plan and 1,364,030shares available for issuance under our Share Incentive Plan. Under our ShareIncentive Plan, our compensation committee is authorized to make awards toparticipants in the form of stock options, restricted stock, deferred shareunits, share appreciation rights or performance shares. The aggregate number ofshares available for award under the plan is currently 1,364,030, of which nomore than 334,895 shares may be awarded in any form other than stock options.

(3)            Includes 164,900 options issued on or after December 9, 1998 underour 1992 Employee Non-qualified Stock Option Plan and 72,750 options issued onor after December 9, 1997 under our 1992 Non-employee Director Non-qualifiedStock Option Plan. See note 1 above. Also includes options we assumed inconnection with our acquisitions of Enertec Resource Services Inc. in August1999 and Reservoir Characterization Resource Consulting Inc. in February 2001.The remaining 196,299 options were issued under our 2001 Key EmployeeNon-qualified Stock Option Plan that was not approved by stockholders.

(4)            Effectivein December 2002, we are authorized to award equity compensation only inaccordance with our stockholder approved Share Incentive Plan.

On December 11, 2002, ourstockholders approved the adoption of our current Share Incentive Plan thatprovides for the issuance to directors, officers and select employees: (1)nonqualified options to purchase our common stock, (2) incentive options topurchase our common stock, (3) share appreciation rights, (4) deferred shareunits, (5) restricted shares and (6) performance shares. Effective upon theadoption of Share Incentive Plan, we may not award options, restricted stock orother equity compensation to any director, officer or employee under any otherplan, including those previously approved by stockholders.

Prior to December 11,2002, we had two employee nonqualified stock option plans – our 1992 EmployeeNon-qualified Stock Option Plan (the “1992 Plan”) and our 2001 Key EmployeeNon-qualified Stock Option Plan (the “2001 Plan”). Prior to December 11, 2002,we granted options to select employees, including our officers, under the 1992Plan and to select employees, excluding our officers, under the 2001 Plan.Stockholders approved the adoption of the 1992 Plan in December 1992 and alsoapproved all amendments to the plan through December 1997. In December 1998 andMarch 1999, our board adopted amendments to the 1992 Plan that increased thenumber of options available for grant by 1,204,550 and 550,000, respectively.We did not seek stockholder approval of these amendments as such approval wasnot then required by the terms of the plan, applicable law or stock exchangerequirements. In January 2001, we adopted our 2001 Plan, which allowed theissuance of up to 2 million options. We did not seek stockholder approval ofthe 2001 Plan as such approval was not then required by applicable law or stockexchange requirements.

Options granted under the1992 Plan and 2001 Plan generally vested over three years and were exercisableover a five to ten-year period from the date of grant. The exercise price foreach option is the closing price on the New York Stock Exchange on the

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last trading dayprior to the grant date. As of July 31, 2006, a total of 301,395 options wereoutstanding under the 1992 Plan and 196,299 were outstanding under our 2001Plan. No further options may be issued under either plan after December 11,2002.

Prior to December 11,2002, we also maintained a stock option plan for non-employee directors (the “DirectorPlan”) under which options were granted to our non-employee directors.Stockholders approved the adoption of the Director Plan in December 1992 andalso approved all amendments to the plan through December 1994. In December1997, our board adopted amendments to the Director Plan that increased thenumber of options available for grant by 400,000. We did not seek stockholderapproval of these amendments as such approval was not then required by theterms of the plan, applicable law or stock exchange requirements.

The Director Planprovided that every year each eligible director was granted options to purchase5,000 shares of our common stock which vest over a period of three years fromthe date of grant and are exercisable over five to ten years from the date ofgrant. The exercise price for each option is the closing price on the New YorkStock Exchange on the last trading day prior to the grant date. As of July 31,2006, a total of 72,750 options were outstanding under the Director Plan. Nofurther options may be issued under the Director Plan after December 11, 2002.

Our current ShareIncentive Plan is described further in the Note 7 to Notes to ConsolidatedFinancial Statements above.

Certain informationrequired by this item is incorporated by reference to the material to appearunder the headings “Security Ownership of Certain Beneficial Owners andManagement” in the Proxy Statement for the 2006 Annual Meeting of Stockholders,to be filed pursuant to Regulation 14A.

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## **ITEM13. Certain Relationships and Related Transactions**

Information required bythis item is incorporated by reference to the material to appear under theheading “Certain Relationships and Related Transactions” in the Proxy Statementfor the 2006 Annual Meeting of Stockholders, to be filed pursuant to Regulation14A.

## **ITEM14. Principal Accountant Fees and Services**

Information required bythis item is incorporated by reference to the material to appear under theheading “Ratification of Selection of Independent Accountants” in the ProxyStatement for the 2006 Annual Meeting of Stockholders, to be filed pursuant toRegulation 14A.

# **PART IV**

## **ITEM15. Exhibits and Financial Statement Schedules**

| **(a)(1)** | **INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**                                                           | ** ** |
|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** ** | ** **                                                                                               | ** ** |
|       | Management’s Responsibilities for Financial Statements                                              |       |
|       | Report of Independent Registered Public Accounting  Firm                                                 |       |
|       | Consolidated Statements of Operations and  Comprehensive Income for the Three Years Ended July 31, 2006  |       |
|       | Consolidated  Balance Sheets as of July 31, 2006 and 2005                                                |       |
|       | Consolidated Statements of Cash Flows for the Three  Years Ended July 31, 2006                           |       |
|       | Consolidated Statements of Changes in Stockholders’  Equity for the Three Years Ended July 31, 2006 |       |
|       | Notes to Consolidated Financial Statements                                                               |       |
|       | Financial Statement Schedule - Valuation and Qualifying Accounts and Reserves                            |       |
|       |                                                                                                     |       |
| **(a)(2)** | **CONSOLIDATED FINANCIAL STATEMENT SCHEDULES**                                                           |       |

Financial Statement Schedule II — Valuation andQualifying Accounts and Reserves appears on page 55. All other financial statementschedules are omitted for the reason that they are not required or are notapplicable, or the required information is shown in the consolidated financialstatements or the notes thereto.

Individual financialstatements of 50% or less-owned companies and joint ventures accounted for bythe equity method have been omitted because such 50% or less-owned companiesand joint ventures, considered in the aggregate as a single subsidiary, wouldnot constitute a significant subsidiary.

**(a)(3) **See accompanying Exhibit Index.

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** **

**SIGNATURES**

Pursuant to the requirements of Sections 13 or 15(d) ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned; thereunto duly authorized, onthe 4th day of October, 2006.
|          |     | VERITAS DGC INC. |
|----------|----------|------------------|
|     |     |             |
|     |     | By:              |   | /s/THIERRY PILENKO |
|     |     |             |   | Thierry Pilenko |
| * * | * * | * *         |   | *(Chairman of the Board and Chief Executive Officer)* |

 

Pursuant to the requirements of the Securities ExchangeAct of 1934, the following persons on behalf of the Registrant in the indicatedcapacities have signed this report below on the 4th day of October 2006.
| /s/ THIERRY PILENKO    |   | Chairman of the Board and  Chief Executive Officer, Director     |
|------------------------|--------|------------------------------------------------------------------|
| Thierry Pilenko        |   |                                                             |
|                   |   |                                                             |
| /s/ TIMOTHY L. WELLS   |   | President and Chief Operating  Officer                           |
| Timothy L. Wells       |   |                                                             |
|                   |   |                                                             |
| /s/ MARK E. BALDWIN    |   | Executive Vice President,  Chief Financial Officer and Treasurer |
| Mark E. Baldwin        |   |                                                             |
|                   |   |                                                             |
| /s/ DENNIS S. BALDWIN  |   | Vice President, Corporate  Controller                            |
| Dennis S. Baldwin      |   |                                                             |
|                   |   |                                                             |
| /s/ LOREN K. CARROLL   |   | Director                                                         |
| Loren K. Carroll       |   |                                                             |
|                   |   |                                                             |
| /s/ CLAYTON P. CORMIER |   | Director                                                         |
| Clayton P. Cormier     |   |                                                             |
|                   |   |                                                             |
| /s/ JAMES R. GIBBS     |   | Director                                                         |
| James R. Gibbs         |   |                                                             |
|                   |   |                                                             |
| /s/ JAN A. RASK        |   | Director                                                         |
| Jan A. Rask            |   |                                                             |
|                   |   |                                                             |
| /s/ YORAM SHOHAM       |   | Director                                                         |
| Yoram Shoham           |   |                                                             |
|                   |   |                                                             |
| /s/ DAVID F. WORK      |   | Director                                                         |
| David F. Work          |   |                                                             |
|                   |   |                                                             |
|                   |   | Director                                                         |
| Terence K. Young       |   |                                                             |

 

60

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**EXHIBIT INDEX**

 
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                             |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1         |       | —  Agreement and Plan of  Merger, dated as of September 4, 2006, between and among Veritas DGC Inc.,  Compagnie Générale de Géophysique, Volnay Acquisition Co. I and Volnay  Acquisition Co. II. (Exhibit 2.1 to  Veritas DGC Inc.’s Form 8-K dated September 4, 2006 is incorporated herein by  reference.) |
| 3.1         |       | —  Restated Certificate of  Incorporation with amendments of Veritas DGC 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.)                                                                                          |
| 3.2         |       | —  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.)                                                                                                              |
| 3.3         |       | —  Certificate of Amendment to  Restated Certificate of Incorporation of Veritas DGC Inc. dated September 30,  1999 (Exhibit 3-D to Veritas DGC Inc.’s For 10-K for the year ended July 31,  1999 is incorporated herein by reference.)                                                                                      |
| 3.4         |       | —  Certificate of Amendment to  Restated Certificate of Incorporation of Veritas DGC Inc. dated September 30,  1999 (Exhibit 4.4 to Veritas DGC Inc.’s Registration Statement No. 333-111997  dated January 20, 2004 is incorporated herein by reference.)                                                                   |
| 3.5         |       | —  Bylaws of Veritas DGC  Inc. (including all amendments through June 16, 2006) (Exhibit 3.1 to Veritas DGC Inc.’s Current Report on Form 8-K filed  June 19, 2006 is incorporated herein by reference.)                                                                                                                     |
| 4.1         |       | —  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.)                                                                                                                                                  |
| 4.2         |       | —  Rights Agreement between  Veritas DGC Inc. and ChaseMellon Shareholder Services, L.L.C. dated as of May  15, 1997. (Exhibit 4.1 to Veritas DGC Inc.’s Current Report on Form 8-K filed  May 27, 1997 is incorporated herein by reference.)                                                                                |
| 4.3         |       | —  Indenture dated March 3, 2004  between Veritas DGC Inc. and U.S. Bank National Association, as trustee.  (Exhibit 4.2 to Veritas DGC Inc.’s Current Report on Form 8-K dated March 3,  2004 is incorporated herein by reference.)                                                                                         |
| 4.4         |       | —  Global note representing  $125,000,000 aggregate principal amount of Floating Rate Convertible Senior  Notes Due 2024 (Exhibit 4.3 to Veritas DGC Inc.’s Current Report on Form 8-K  dated March 3, 2004 is incorporated herein by reference.)                                                                            |
| 4.5         |       | —  Registration Rights Agreement  dated as of March 3, 2004 by and between Veritas DGC Inc. and Deutsche Bank  Securities Inc. (Exhibit 4.1 to Veritas DGC Inc.’s Current Report on Form 8-K  dated March 3, 2004 is incorporated herein by reference.)                                                                      |
| 4.6         |       | —  Form of Notice to  Holders of Exchangeable Shares (Exhibit  99.2 to Veritas DGC Inc.’s Current Report on Form 8-K filed January 18,  2006 is incorporated herein by reference.)                                                                                                                                      |
| 4.7         |       | —  Amendment No. 1 to  Rights Agreement between Veritas DGC Inc. and Mellon Shareholder Services,  L.L.C. dated as of May 31, 2005 (Exhibit 4.2 to Veritas DGC Inc.’s Amendment  No. 2 to Registration Statement on Form 8-A filed May 31, 2005 is  incorporated herein by reference.)                                       |
| +4.8        |       | —  Amendment No. 2 to  Rights Agreement between Veritas DGC Inc. and Mellon Shareholder Services,  L.L.C. dated as of September 4, 2006 (attached hereto as Exhibit 4.8 and  incorporated herein by reference.)                                                                                                                   |

 

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| 9.1     |   | —  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.)   |
|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 9.2     |   | —  Voting and Exchange Trust  Agreement dated September 30, 1999 among Veritas DGC Inc., Veritas Energy  Services Inc. and CIBC Mellon Trust Company. (Exhibit 9-B to Veritas DGC  Inc.’s Form 10-K for the year ended July 31, 1999 is incorporated herein by  reference.) |
| 10.1    |   | —  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.)                                              |
| **10.2  |   | —  Form of Restricted Stock Grant  Agreement (Exhibit 10.2 to Veritas DGC Inc.’s Form 10-K for the year ended  July 31, 2004 is incorporated herein by reference.).                                                                                                         |
| **10.3  |   | —  Key Contributor Incentive Plan  as amended and restated March 3, 2003. (Exhibit 10.1 to Veritas DGC Inc.’s  Form 8-K dated March 3, 2005 is incorporated herein by reference.)                                                                                           |
| **10.4  |   | —  1992 Non-Employee Director  Stock Option Plan as amended and restated March 7, 2000. (Exhibit 10-B to  Veritas DGC Inc.’s Form 10-Q for the quarter ended April 30, 2000 is  incorporated herein by reference.)                                                          |
| **10.5  |   | —  1992 Employee Nonqualified  Stock Option Plan as amended and restated March 7, 2000. (Exhibit 10-C to  Veritas DGC Inc.’s Form 10-Q for the quarter ended April 30, 2000 is  incorporated herein by reference.)                                                          |
| **10.8  |   | —  Amended and Restated Employment  Agreement between Veritas DGC Inc. and Stephen J. Ludlow. (Exhibit 10-C to  Veritas DGC Inc.’s Form 10-Q for the quarter ended October 31, 2001 is  incorporated herein by reference.)                                                  |
| **10.9  |   | —  Amendment No. 1 to Amended and  Restated Employment Agreement between Veritas DGC Inc. and Stephen J. Ludlow.  (Exhibit 10-D to Veritas DGC Inc.’s Form 10-Q for the quarter ended October  31, 2001 is incorporated herein by reference.)                               |
| **10.12 |   | —  Amended and Restated Employment  Agreement between Veritas DGC Inc. and Timothy L. Wells. (Exhibit 10-K to  Veritas DGC Inc.’s Form 10-Q for the quarter ended October 31, 2001 is  incorporated herein by reference.)                                                   |
| **10.13 |   | —  Amendment No. 1 to Amended and  Restated EmploymentAgreement between Veritas DGC Inc. and Timothy L. Wells.  (Exhibit 10-L to Veritas DGC Inc.’s Form 10-Q for the quarter ended October  31, 2001 is incorporated herein by reference.)                                 |
| **10.14 |   | —  Employment Agreement between  Veritas DGC Inc. and Larry L. Worden. (Exhibit 10-M to Veritas DGC Inc.’s  Form 10-Q for the quarter ended October 31, 2001 is incorporated herein by  reference.)                                                                         |
| **10.15 |   | —  Amendment No. 1 to Employment  Agreement between Veritas DGC Inc. and Larry L. Worden. (Exhibit 10-N to  Veritas DGC Inc.’s Form 10-Q for the quarter ended October 31, 2001 is  incorporated herein by reference.)                                                      |
| **10.16 |   | —  Deferred Compensation Plan  effective January 1, 2001. (Exhibit 10-Q to Veritas DGC Inc.’s Form 10-Q for  the quarter ended October 31, 2000 is incorporated by reference.)                                                                                              |
| **10.17 |   | —  Rabbi Trust Agreement between  Veritas DGC Inc. and Austin Trust Company relating to the Deferred  Compensation Plan. (Exhibit 10-R to Veritas DGC Inc.’s Form 10-Q for the  quarter ended October 31, 2000 is incorporated herein by reference.)                        |

 

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| **10.18 |   | —  2001 Key Employee Nonqualified  Stock Option Plan effective February 1, 2001. (Exhibit 10-S to Veritas DGC  Inc.’s Form 10-Q for the quarter ended January 31, 2001 is incorporated by  reference.)                                                                                                                                                                                                                                                                                                    |
|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **10.19 |   | —  Key Employee Restricted Stock  Plan effective February 1, 2001. (Exhibit 10-T to Veritas DGC Inc.’s Form  10-Q for the quarter ended January 31, 2001 is incorporated herein by  reference.)                                                                                                                                                                                                                                                                                                           |
| 10.20   |   | —  Credit Agreement among Veritas  DGC Inc., as borrower, and Wells Fargo, Inc., as a bank and agent for the  banks named therein, dated July 19, 2001. (Exhibit 10-W to Veritas DGC Inc.’s  Form 10-K for the year ended July 31, 2001 is incorporated herein by  reference.)                                                                                                                                                                                                                            |
| 10.21   |   | —  Credit Agreement, dated as of  February 14, 2003, among Veritas DGC Inc., Veritas DGC Limited, Veritas  Energy Services Inc., Veritas Energy Services Partnership, Deutsche Bank AG,  New York Branch, as Administrative Agent, Deutsche Bank AG, Canada Branch, as  Canadian Administrative Agent, and the various lending institutions named  therein. (Exhibit 10.1 to Veritas DGC Inc.’s Current Report on Form 8-K dated  February 19, 2003 is incorporated herein by reference.)                 |
| **10.22 |   | —  Veritas DGC Inc. Employee Share  Purchase Plan. (Exhibit 4.8 to Veritas DGC Inc.’s Registration Statement No.  333-111997 dated January 20, 2004 is incorporated herein by reference.)                                                                                                                                                                                                                                                                                                                 |
| 10.23   |   | —  Third Amendment to Credit  Agreement dated February 20, 2004 by and among Veritas DGC Inc., Veritas DGC  Limited, Veritas Energy Services Inc., Veritas Energy Services Partnership,  Deutsche Bank AG, New York Branch, as Administrative Agent, Deutsche Bank AG,  Canada Branch, as Canadian Administrative Agent, and the various lending  institutions named therein. (Exhibit 10.2 to Veritas DGC Inc.’s Form 10-Q for  the quarter ended January 31, 2004 is incorporated herein by reference.) |
| **10.25 |   | —  Employment Agreement between  Veritas DGC Inc. and Thierry Pilenko dated January 26, 2004. (Exhibit 10.3 to  Veritas DGC Inc.’s Form 10-Q for the quarter ended January 31, 2004 is  incorporated herein by reference.)                                                                                                                                                                                                                                                                                |
| **10.26 |   | —  Employment Agreement between  Veritas DGC Inc. and Mark E. Baldwin dated August 24, 2004. (Exhibit 10.27 to  Veritas DGC Inc.’s Form 10-K for the year ended July 31, 2004 is incorporated  herein by reference.)                                                                                                                                                                                                                                                                                      |
| **10.28 |   | —  Veritas DGC Inc. Global  Management Incentive Plan (including all amendments through October 4, 2004)  (Exhibit 10.1 to Veritas DGC Inc.’s Form 8-K dated March 3, 2005 is  incorporated herein by reference.)                                                                                                                                                                                                                                                                                         |
| **10.29 |   | —  Veritas DGC Inc. Key  Contributor Plan (including all amendments through October 4, 2004) (Exhibit  10.1 to Veritas DGC Inc.’s Form 8-K dated March 3, 2005 is incorporated  herein by reference.)                                                                                                                                                                                                                                                                                                     |
| **10.30 |   | —  Description of director  compensation. (Exhibit 10.31 to Veritas DGC Inc.’s Form 10-K for the year  ended July 31, 2004 is incorporated herein by reference.)                                                                                                                                                                                                                                                                                                                                          |
| **10.31 |   | —  Form of Indemnity Agreement for  directors and officers. (Exhibit 10.32 to Veritas DGC Inc.’s Form 10-K for  the year ended July 31, 2004 is incorporated herein by reference.)                                                                                                                                                                                                                                                                                                                        |
| **10.32 |   | —  Form of Stock Option Grant  Agreement. (Exhibit 10.33 to Veritas DGC Inc.’s Form 10-K for the year ended  July 31, 2004 is incorporated herein by reference.)                                                                                                                                                                                                                                                                                                                                          |
| **10.33 |   | —  Form of Deferred Share Unit  Award and Deferral Agreement. (Exhibit 10.34 to Veritas DGC Inc.’s Form 10-K  for the year ended July 31, 2004 is incorporated herein by reference.)                                                                                                                                                                                                                                                                                                                      |

 

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| **10.34 |   | —  Letter Agreement dated October  24, 2005 between Veritas DGC Inc. and Stephen J. Ludlow (Exhibit 10.3 to  Veritas DGC Inc.’s Form 8-K dated October 28, 2005 is incorporated herein by  reference.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **10.35 |   | —  Employment agreement between  Veritas DGC Inc. and Dennis S. Baldwin dated November 7, 2005. (Exhibit 10.1  to Veritas DGC Inc.’s Form 8-K dated November 7, 2005 is incorporated herein  by reference.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.36   |   | —  Loan Agreement ($45,000,000  U.S. Revolving Loan Facility, $15,000,000 Canadian Revolving Loan Facility,  $15,000,000 Singapore Revolving Loan Facility, and $10,000,000 U.K. Revolving  Loan Facility) dated as of February 6, 2006, among Veritas DGC Inc., as  U.S. Borrower, Veritas Energy Services Inc. and Veritas Energy Services  Partnership, as Canadian Borrowers, Veritas Geophysical (Asia Pacific) Pte.  Ltd., as Singapore Borrower, Veritas DGC Limited, as U.K. Borrower, Wells  Fargo Bank, National Association, as U.S. Agent and Lead Arranger, HSBC  Canada, as Canadian Agent, The Hongkong and Shanghai Banking Corporation  Limited, Singapore Branch, as Singapore Agent, HSBC Bank plc, as U.K. Agent,  and the other lenders now or hereafter parties thereto (Exhibit 10.1 to  Veritas DGC Inc.’s Form 8-K dated February 6, 2006 is incorporated herein by  reference.) |
| **10.37 |   | —  Section 4.3(b), as  amended June 16, 2006, of the Veritas DGC Inc. Global Management Incentive  Plan. (Exhibit 10.1 to Veritas DGC Inc.’s  Form 8-K dated June 19, 2006 is incorporated herein by reference.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

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| +4.8  |   | — Amendment No. 2 to Rights Agreement between Veritas DGC Inc.  and Mellon Shareholder Services, L.L.C. dated as of September 4, 2006. |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------|
| +21   |   | — Subsidiaries of the  Registrant.                                                                                                     |
| +23.1 |   | — Consent of Independent  Registered Public Accounting Firm                                                                            |
| +31.1 |   | — Rule 13a-14(a) certification  by CEO.                                                                                                |
| +31.2 |   | — Rule 13a-14(a) certification  by CFO.                                                                                                |
| +32.1 |   | — Section 1350 certification  by CEO.                                                                                                  |
| +32.2 |   | — Section 1350 certification  by CFO.                                                                                                  |

 

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+  Filed herewith

** Management contract or compensatory plan orarrangement

65

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