**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

----

 

**Form 10-K**

 
| **(Mark One)**                                   |                                                            |
|--------------------------------------------------|-----------------------------------------------------------------|
|                                             |                                                            |
| **ý**                                       | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(**d**)**     |
| ** **                                       | **OF THE SECURITIES EXCHANGE ACT  OF 1934**                     |
|                                             |
| **For the fiscal year ended July 31, 2005** |
|                                             |
| **OR**                                           |
| **o**                                            | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(**d**)** |
| ** **                                       | **OF THE SECURITIES EXCHANGE ACT  OF 1934**                     |
|                                             |                                                            |

**For the transition period from       to**

 

**Commission file number 1-7427**

 

**Veritas DGC Inc.**

(Exactname of registrant as specified 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’stelephone number, including area code)

 

Securitiesregistered pursuant to Section 12(b) of the Act:

 
| **Title of Each Class**         | ** ** | **Name of Each Exchange on Which  Registered** |
|---------------------------------|------------|------------------------------------------------|
| Common Stock, $.01 par value    |       | New York Stock Exchange                        |
| Preferred Stock Purchase Rights |       | New York Stock Exchange                        |

 

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

 

Indicate bycheck mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Securities Exchange Act of 1934). Yes ý  No o

 

Indicate bycheck mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). oYes ý No

 

The aggregatemarket value of the registrant’s voting stock held by non-affiliates of theregistrant was $845,216,178 as of January 31, 2005.

 

The number ofshares of the Company’s common stock, $.01 par value, outstanding at September 30,2005 was 34,728,014 (including 142,228 Veritas Energy Services Inc.exchangeable shares which are identical to the Common Stock in all materialrespects).

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Portions ofthe registrant’s definitive proxy statement to be filed in connection with theregistrant’s 2005 Annual Meeting of Stockholders are incorporated by referenceinto Part III of this annual report.

 

 

----

 

**TABLE OF CONTENTS**

 

**FORM 10-K**

 
| PART I |                                                                                                                        |   |
|-------------|-----------------------------------------------------------------------------------------------------------------------------|--------|
|        | ITEM 1. Business                                                                                                            |   |
|        | 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                                                                                                                  |   |
|             |                                                                                                                             |        |  |  |

 

----

 

*This annual report on Form 10-Kcontains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933 and Section 21E of the Securities Exchange Actof 1934. Forward-looking statements include, among other things, businessstrategy and expectations concerning industry conditions, market position,future operations, margins, profitability, liquidity and capital resources. Forward-lookingstatements generally can be identified by the use of terminology such as “may,”“will,” “expect,” “intend,” “estimate,” “anticipate” or “believe” or similarexpressions or the negatives thereof. These expectations are based onmanagement’s assumptions and current beliefs based on currently availableinformation. Although we believe that the expectations reflected in suchstatements are reasonable, we can give no assurance that such expectations willbe correct. You are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date of this annualreport on Form 10-K. Our operations are subject to a number ofuncertainties, risks and other influences, many of which are outside ourcontrol, and any one of which, or a combination of which, could cause ouractual results of operations to differ materially from the forward-lookingstatements. Important factors that could cause actual results to differmaterially from our expectations are disclosed in 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**

 

## **ITEM 1. Business**

 

### **General**

 

Veritas is aleading provider of integrated geophysical information and services to thepetroleum industry worldwide. Our customers include major, national andindependent oil and 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

 

•    optimize development and production ofhydrocarbon reserves.

 

We acquire,process, interpret and market geophysical information that provides 2D and 3Dimages of the subsurface. We also produce 4D surveys, which record fluidmovement in the reservoir, by repeating specific 3D surveys over time.Additionally, we use geophysical data for reservoir characterization to enableour customers to maximize their recovery of oil and natural gas.

 

### **Services andMarkets**

 

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.**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 over 200,000 line kilometers of2D data and over 200,000 square kilometers of 3D data. Our marine data libraryincludes surveys in the Gulf of Mexico, the North Atlantic, 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 productionrights, and as a result, will fluctuate from year to year.

 

1

----

 

The followingtables describe our revenues by contract type and geographic area based on thelocation of the product or service provided:

 

| ** **                     | ** ** | **Years Ended July 31,** | ** ** |
|--------------------------------|------------|-------------------------------|------------|
| **Revenues by Contract Type**  | ** ** | **2005**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                     | ** ** | **(In thousands)**            | ** ** |
| Contract work                  |       | $                             | 389,046    |   | $ | 289,404 |   | $ | 283,873 |   |
| Licensing of multi-client data |       | 244,980                       |       | 275,065 |   | 217,948 |   |
| Total                          |       | $                             | 634,026    |   | $ | 564,469 |   | $ | 501,821 |   |

 

| ** **                      | ** ** | **Years Ended July 31,** | ** ** |
|---------------------------------|------------|-------------------------------|------------|
| **Revenues by Geographic Area** | ** ** | **2005**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                      | ** ** | **(In thousands)**            | ** ** |
| United States                   |       | $                             | 287,993    |   | $ | 245,144 |   | $ | 190,898 |   |
| Canada                          |       | 92,639                        |       | 88,283 |   | 71,911 |   |
| Latin America                   |       | 17,178                        |       | 57,210 |   | 113,754 |   |
| Europe                          |       | 71,852                        |       | 79,182 |   | 33,713 |   |
| Middle East/Africa              |       | 62,515                        |       | 32,513 |   | 54,201 |   |
| Asia Pacific                    |       | 101,849                       |       | 62,137 |   | 37,344 |   |
| Total                           |       | $                             | 634,026    |   | $ | 564,469 |   | $ | 501,821 |   |

 

In fiscal2005, 2004 and 2003, 55%, 57% and 62%, respectively, of our revenues wereattributable to non-U.S. operations and export sales. (See Note 12 of Notes toConsolidated Financial Statements for additional geographic and segmentinformation.)

 

### **PrincipalOperating Assets**

 

We acquire,process, and interpret geophysical information utilizing a wide array of assetsas follows:

 

***Land Acquisition***

 

Our landacquisition activities are performed with technologically advanced geophysicalequipment. As of July 31, 2005, our land survey equipment had a combinedrecording capacity of approximately 49,000 channels. We typically deployequipment in North and South America and Oman by crews of varying size. Ourcrew count varies widely as land acquisition is a seasonal activity in manymarkets, primarily due to weather.

 

Our landoperations include surveying crews, which lay out the lines to be recorded andmark the sites for shot-hole placement or equipment location, and recordingcrews, which use explosive or mechanical vibrating units to produce acousticimpulses and recording units to synchronize the shooting and capture the seismicsignals via geophones. On a land survey where explosives are used, therecording crew is supported by several drill crews, which are typicallyfurnished by third parties under short-term contracts. Drill crews operate inadvance of the recording crew and bore shallow holes for explosive chargeswhich, when detonated by the recording crew, produce the necessary acousticimpulse.

 

***Marine Acquisition***

 

Our marineacquisition crews operate from both owned and chartered vessels that have beenmodified or equipped to our specifications. All of the vessels we utilize areequipped to perform both 2D and 3D geophysical surveys. During the last severalyears, the majority of the marine geophysical data acquisition services weperformed involved 3D surveys. The following table contains certain informationconcerning the geophysical vessels we operate.

 

| **Vessel**        | ** ** | **Year****Entered  Service** | ** ** | **Length** | ** ** | **Beam** | ** ** | **Charter Expiration** | ** ** |
|-------------------|------------|------------------------------|------------|------------|------------|----------|------------|------------------------|------------|
| Pacific Sword     |       | 1999                         |       | 189 feet   |       | 40 feet  |       | October 2006      |       |
| Seisquest         |       | 2001                         |       | 300 feet   |       | 60 feet  |       | May 2006          |       |
| 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 Searcher  |       | 1982                         |       | 217 feet   |       | 44 feet  |       | Owned                  |       |

 

We arereplacing the Veritas Searcher with a new chartered vessel of greatercapability, with expected delivery in mid-2006.

 

2

----

 

Each vessel isequipped with geophysical recording instrumentation, digital geophysicalstreamer cable, cable location and geophysical data location systems, multiplenavigation systems, a source control system that controls the synchronizationof the energy 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 our vessels are equipped with multiple streamers and multiple energysources. These vessels acquire more lines of data with each pass, which reducescompletion time and the acquisition cost. The Veritas Viking, Veritas Viking IIand the Veritas Vantage are each capable of deploying 12 streamerssimultaneously, although each is currently equipped to tow eight. The VeritasViking, Veritas Viking II, Veritas Vantage and Veritas Searcher are equippedwith solid streamers that offer numerous advantages over oil-filled streamers.The solid streamers allow these vessels to work in rougher seas and record moredesirable frequencies with less noise and less downtime than is possible withoil-filled streamers.

 

***Data Processing andInterpretation***

 

We operate 15data processing centers capable of processing 2D and 3D data. Most of our dataprocessing services are performed on 3D seismic data. The centers process datareceived from the field, both from our own crews and from other geophysicalcompanies, to produce an image of the earth’s subsurface using proprietarycomputer software and techniques. We also reprocess older geophysical datausing new techniques designed to enhance the quality of the data. Our dataprocessing centers have opened at various times since 1966 and are at presentlocated in:

 

| **North  America** | ** ** | **South America**       | ** ** | **Europe/Africa/****Middle East** | ** ** | **Asia Pacific**       | ** ** |
|--------------------|------------|-------------------------|------------|-----------------------------------|------------|------------------------|------------|
| Houston, Texas     |       | Buenos Aires, Argentina |       | Crawley, England                  |       | Singapore              |       |
| Calgary, Canada    |       | Caracas, Venezuela      |       | Stavanger, Norway                 |       | Perth, Australia       |       |
|               |       |                    |       | Aberdeen, Scotland                |       | Jakarta, Indonesia     |       |
|               |       |                    |       | Lagos, Nigeria                    |       | Kuala Lumpur, Malaysia |       |
|               |       |                    |       | Luanda, Angola                    |       |                   |       |
|               |       |                    |       | Pau, France                       |       |                   |       |
|               |       |                    |       | Milan, Italy                      |       |                   |       |

 

Our processingcenters operate 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 operatevisualization centers in Houston, Calgary, Perth, and Crawley. These fourcenters allow teams of our customers’ geoscientists and engineers to view andinterpret large volumes of complex 3D data. The visualization centers haveimaging tools used for advanced interpretive techniques that enhance theunderstanding of regional as well as detailed reservoir geology. Thesevisualization centers allow us to offer our expertise combined with the type ofcollaborative geophysical model building that is enabling oil companies toexplore areas of complex geology such as the large sub-salt plays in thedeepwater Gulf of Mexico.

 

We have groupsof scientists and engineers located in Calgary, Houston, and Leoben, Austriawho perform advanced geophysical and geological interpretation on a contractbasis. These experts work around the world, using third party and ourproprietary software to create subsurface models for our clients and advise ourclients on how best to exploit their reservoirs. Their work is related toexploration as well as production activities. Additionally, we license ourproprietary Hampson-Russell software to companies desiring to do their owngeophysical interpretation.

 

### **Technology andCapital Expenditures**

 

Thegeophysical industry is highly technical, and the requirements for theacquisition and processing of geophysical data have evolved continuously duringthe past 50 years. Accordingly, it is critical that our technologicalcapabilities are comparable or superior to those of our competitors. Wemaintain our technological capabilities through continuing research anddevelopment, strategic alliances with equipment manufacturers, and by acquiringtechnology from others.

 

Our researchand development staff includes scientists, engineers or programmers. Ourresearch and development efforts focus on new acquisition technologies andprocesses and on our core processing and imaging software. In 2004, we formed a

 

3

----

 

group to develop and applytechnologies to record, process and interpret multi-component waveforms, anarea of growing interest among our customers. During fiscal 2005, 2004 and2003, research and development expenditures were $18.9 million, $15.5 millionand $11.6 million, respectively. Our research and development budget for fiscal2006 is approximately $19 million.

 

During fiscal2005, 2004 and 2003, capital expenditures for equipment were $62.4 million,$30.5 million and $30.5 million, respectively. Capital expenditures for fiscal2005 included approximately $14.8 million for replacement equipment forequipment lost or damaged on the Veritas Viking in January 2005. Amajority of the cost of this equipment will be reimbursed to us by our insurancecarrier. Because the insurance reimbursement is greater than the book value ofthe equipment, we have recorded a gain on the involuntary conversion. We expectto invest approximately $61 million in capital equipment during fiscal 2006.Most of our fiscal 2006 capital budget is allocated to replacement andupgrading of existing equipment.

 

During fiscal2005, 2004 and 2003, our cash multi-client investment, net of capitalizeddepreciation, was $148.4 million, $126.3 million and $151.8 million, respectively.For fiscal 2006, we are planning a cash multi-client investment ofapproximately $162 million. Our total planned cash investment in the company of$223 million is significantly less than our planned cash flow from operationsand, therefore, we expect to generate an increase in our cash balance duringfiscal 2006.

 

### **Competition**

 

Theacquisition and processing of geophysical data for the oil and gas industry hashistorically been highly competitive worldwide. Success in marketinggeophysical services is based on several factors, including price, crewexperience, equipment availability, technological expertise, reputation forquality and dependability and, in the case of multi-client surveys,availability of surveys in the area of current customer interest.

 

Our largestglobal competitors are Western-Geco (a joint venture between Schlumberger andBaker Hughes), Compagnie Générale de Géophysique S.A. 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.

 

We compete toa lesser degree with large, state-affiliated companies such as BGP of China.These companies are large providers of seismic services in their home countriesand have 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 theconstantly changing configurations of seismic crews and the immense numbers ofchannels in the market, it is impossible to discuss the global competition inland acquisition in any quantitative fashion. Tracking our competition is morefeasible in the marine acquisition market. According to a September 15,2005 report 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, there were temporary and localshortages of vessels of specific capability, which allowed us to increaseseismic acquisition margins in certain regions.

 

### **Backlog**

 

At July 31,2005, our backlog of commitments for future revenue was $301.8 million,compared with $146.6 million at July 31, 2004. Approximately 29% of thisbacklog is related to multi-client surveys. We anticipate that most of the July 31,2005 backlog will be completed over the next twelve months. This backlogconsists of written orders or firm commitments. Contracts for services aresubject to modification by mutual consent and in certain instances arecancelable by the customer on short notice without penalty. As a result ofthese factors, our backlog as of any particular date may not be indicative ofour actual operating results for any succeeding period.

 

### **SignificantCustomers**

 

Our customersinclude major oil and gas companies, national oil companies and independent oiland gas companies. In fiscal 2005, a single, large multi-national oil companyrepresented 12% of our revenues primarily due to the increased revenuegenerated by a large 3D survey acquired in the Gulf of Mexico. In fiscal 2004and 2003, no customer accounted for 10% or more of our total revenue.

 

4

----

 

### **Employees**

 

During fiscal2005, we employed an average of 2,794 people on a full-time basis. Our numberof employees varies greatly due to activity changes in our land acquisitionbusiness, and during fiscal 2005 ranged from a low of 2,381 to a high of 3,471.This variation typically occurs on a seasonal basis, with higher employeecounts and higher revenues occurring during our second and third fiscalquarters, coinciding with the winter seismic acquisition seasons in Alaska andCanada. However, performance of large land surveys in South America or otherlocales can cause a marked shift from this pattern. A total of 31 employees inSingapore are subject to collective bargaining agreements. We consider ourrelations with our employees to be good.

 

### **Our SEC Reporting**

 

Weelectronically file certain documents with the SEC. We file annual reports on Form 10-K;quarterly reports on Form 10-Q; current reports on Form 8-K (asappropriate) and proxy statements; along with any related amendments and supplementsthereto. From time-to-time, we may also file registration statements pertainingto equity or debt offerings. You may read and copy any materials we file withthe SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580,Washington, DC 20549. You may obtain information regarding the Public ReferenceRoom by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintainsan internet website at www.sec.gov that contains reports, proxy and informationstatements, and other information regarding issuers that file with the SEC.

 

We provideelectronic access 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.

 

## **ITEM 2. Properties**

 

Ourheadquarters is located in Houston, Texas in a 218,151 square foot office andwarehouse complex, which is leased. The complex houses data processingoperations, as well as executive, accounting, research and development andoperating personnel. This lease expires in the beginning of fiscal 2016. Welease additional space, aggregating approximately 631,966 square feet, which isused by our operations around the world, including the locations identifiedunder Item 1. Business—Principal Operating Assets—Data Processing andInterpretation. These leases expire at various times through fiscal 2015. Wealso own and charter seismic acquisition vessels as listed under Item 1.Business—Principal Operating Assets—Marine Acquisition.

 

## **ITEM 3. Legal Proceedings**

 

On occasion,we are named as a defendant in litigation relating to our normal businessoperations. Although we are insured against various business risks to theextent we believe prudent, there is no assurance that the nature and amount ofsuch insurance will be adequate in every case. As of August 31, 2005, weare not a party to any legal proceeding that we believe to be material.

 

5

----

 

## **ITEM4. Submission of Matters to a Vote of Security Holders**

 

On June 22,2005, at the annual Meeting of Stockholders, the stockholders voted, asfollows, to elect eight directors of Veritas DGC Inc. and ratifyPricewaterhouseCoopers LLP as the company’s independent accountants.

 

The results ofthe election of the directors by the holders of the Shares were as follows:

 

| **Name**           | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|--------------------|------------|---------------|------------|--------------------|------------|
| Loren K. Carroll   |       | 29,775,236    |       | 721,589            |       |
| Clayton P.  Comier |       | 29,448,433    |       | 1,048,392          |       |
| James R.  Gibbs    |       | 29,565,510    |       | 931,315            |       |
| Stephen J.  Ludlow |       | 29,364,421    |       | 1,132,404          |       |
| Thierry  Pilenko   |       | 29,321,307    |       | 1,175,518          |       |
| Jan Rask           |       | 29,747,696    |       | 749,129            |       |
| David F.  Work     |       | 29,773,296    |       | 723,529            |       |
| Terence K.  Young  |       | 29,027,319    |       | 1,469,506          |       |

 

The results ofthe vote by the holders of Shares on the proposal to ratify the selection ofPricewaterhouseCoopers LLP as the company’s independent accountants were asfollows:

 
| Votes for: |   | 29,583,838 |   |   | Votes  against: |   | 907,079 |   |   | Abstentions: |   | 5,908 |   |
|------------|--------|------------|--------|--------|-----------------|--------|---------|--------|--------|--------------|--------|-------|--------|

 

# **PART II**

 

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

 

### **Market Price ofand Dividends on the Registrants Common Equity and Related Stockholder Matters**

 

Our commonstock is listed on the New York Stock Exchange under the symbol “VTS.” Ourcommon stock is also listed on the Toronto Stock Exchange under the symbol “VTS.”Our exchangeable shares are listed on the Toronto Stock Exchange under thesymbols “VER” and “VER.a.” The following table sets forth the high and lowsales prices for our common stock as reported by the New York Stock Exchangefor the fiscal periods shown.

 

| ** ** | ** ** | **Fiscal Period** | ** ** | **High** | ** ** | **Low** | ** ** |
|------------|------------|-------------------|------------|----------|------------|---------|------------|
| 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   |       |
| 2004       |       | 4th Quarter       |       | $        | 25.01      |    | $          | 17.62 |   |
|       |       | 3rd Quarter       |       | 23.55    |       | 12.05   |       |
|       |       | 2nd Quarter       |       | 13.80    |       | 8.49    |       |
|       |       | 1st Quarter       |       | 9.41     |       | 7.58    |       |

 

On August 31,2005, there were approximately 288 record holders of common stock.

 

Two shares ofour special voting stock are authorized and outstanding, each existing as aseries of our common stock. The shares were issued in 1996 and 1999 inconnection with business combinations. These special voting shares possess anumber of votes equal to the number of Veritas Energy Services Inc., a whollyowned subsidiary, Exchangeable Shares and Veritas Energy Services Inc. Class AExchangeable Shares, Series 1 outstanding at any time. These exchangeableshares were issued to provide beneficial Canadian tax treatment for theCanadian shareholders of the Canadian corporations participating in thecombination transactions. The exchangeable shares may be exchanged on a one-for-onebasis for our common stock and when coupled with the voting rights afforded bythe special voting shares are virtually identical to our common stock. Anyreference to our shares in this annual report refers to all shares, includingthe exchangeable shares, unless the reference expressly excludes theexchangeable shares.

 

We have notpaid any dividends on our common stock during the two most recent fiscal yearsand have no current plans to

 

6

----

 

pay any dividends. The paymentof any future dividends on our common stock would depend upon our financialcondition and upon a determination by our Board of Directors that the paymentof dividends would be desirable. In addition, our current Credit Facility prohibitsthe payment of cash dividends.

 

On June 1,2005, a former employee purchased 7,650 shares of our common stock for anaggregate exercise price of $78,284 pursuant to the exercise of outstandingoptions that had been granted under our stock option plans. The issuance of theshares was deemed exempt from the registration requirements of the SecuritiesAct of 1933 by reason of the exemption provided by section 4(2) ofsuch statute for private sales of securities. In connection with his purchase,the former employee represented that he was acquiring the shares for investmentand not with a view to a distribution thereof. The certificates representingthe shares purchased contain a legend to the effect that sale of the shares wasnot registered under the Securities Act of 1933 and the shares may not betransferred except pursuant to an effective registration under the SecuritiesAct of 1933 or pursuant to an exemption from such registration requirements.The sale did not involve any underwriters.

 

**SecuritiesAuthorized for Issuance Under Equity Compensation Plans**

 

Informationrelated to our equity compensation plans as of July 31, 2005 may be foundunder “Securities Authorized for Issuance Under Equity Compensation Plans” inItem 12.

 

### **Issuer Purchasesof Equity Securities by the Issuer and Affiliated Purchasers**

 

The followingtable summarizes issuer purchases of equity securities during the fourthquarter of fiscal 2005:

 
| **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, 2005  |       | —                                        |       | $                                  | —     |                                                                                                  | —     |                                                                                                        | —     |   |
| June 1-30, 2005 |       | —                                        |       | —                             |       | —                                                                                                |       | —                                                                                                      |       |
| July 1-31, 2005 |       | 176                                           |       | 27.75                              |       | —                                                                                                |       | —                                                                                                      |       |
| Total                |       | 176                                           |       | $                                  | 27.75      |                                                                                                  | —     |                                                                                                        | —     |   |

 

----

(1)          Duringthe quarter ended July 31, 2005, we repurchased an aggregate of 176 sharesother than as a part of a publicly announced plan or program. We repurchasedthese securities in connection with our stock compensation plans, which allowparticipants to use shares to satisfy tax liabilities arising from the vestingof restricted stock. The number above does not include unvested sharesforfeited back to us for no consideration pursuant to the terms of our stockcompensation plans.

(2)          Asof July 31, 2005, there were no publicly announced plans or programs torepurchase stock.

 

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

 
| ** **                                         | ** ** | **Years Ended July 31,**                | ** ** |
|----------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                         | ** ** | **2005(****1)**                              | ** ** | **2004(****2)** | ** ** | **2003(****3)** | ** ** | **2002(****4)** | ** ** | **2001** | ** ** |
| ** **                                         | ** ** | **(In thousands, except per share amounts)** | ** ** |
| **Statement of Operations Data:**                  |       |                                         |       |   |   |   |   |   |   |   |   |
| Revenues                                           |       | $                                            | 634,026    |   | $ | 564,469 |   | $ | 501,821 |   | $ | 452,183 |   | $ | 476,640 |   |
| Operating income                                   |       | 62,241                                       |       | 27,770 |   | (12,112 | ) | (833 | ) | 46,562 |   |
| Net income (loss)                                  |       | 83,001                                       |       | 5,221 |   | (59,097 | ) | (24,051 | ) | 21,440 |   |
|                                               |       |                                         |       |   |   |   |   |   |   |   |   |
| Net income (loss) per common  share — basic   |       | 2.45                                         |       | .16 |   | (1.77 | ) | (.74 | ) | .70 |   |
| Net income (loss) per common  share — diluted |       | 2.37                                         |       | .15 |   | (1.77 | ) | (.74 | ) | .68 |   |
|                                               |       |                                         |       |   |   |   |   |   |   |   |   |
| **Balance Sheet Data:**                            |       |                                         |       |   |   |   |   |   |   |   |   |
| Total assets                                       |       | $                                            | 966,598    |   | $ | 776,246 |   | $ | 790,945 |   | $ | 781,403 |   | $ | 796,389 |   |
| Long-term debt (including  current maturities)     |       | 155,000                                      |       | 155,000 |   | 194,225 |   | 140,000 |   | 135,000 |   |

 

----

(1)          Fiscal 2005 included a gain on involuntaryconversion of assets of $9.9 million and a $6.8 million income tax benefit fromthe release of deferred tax valuation allowances of $36.9 million.

(2)          Fiscal2004 included 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.

(3)          Fiscal2003 included charges of $39.3 million for goodwill impairment, $4.9 millionfor impairment of a multi-client survey, $7.6 million loss related to the saleof our (RC)2 software operations and $21.0 million related todeferred tax asset valuation allowances.

(4)          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.

 

7

----

 

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

 

**Overview**

 

Fiscal 2005proved to be another year of improvement 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 firstquarter of fiscal 2005, 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 the area where we generated most of our growth.

 

Over the lastfew years, the seismic industry has been able to provide increased fidelity ofsubsurface depiction in difficult areas to image, such as below the massivesalt formations in the Gulf of Mexico, by using advanced acquisitiontechniques, processing technologies and more powerful computers. Recently,exploration and production companies have begun to show increased interest inthese new techniques to further illuminate the subsurface. While seismic hastraditionally been used primarily as an exploration tool, we are seeingincreasing interest in new seismic imaging techniques, such as multi- orwide-azimuth marine acquisition, which offer better definition of complexstructures, advancing the use of seismic for reservoir delineation. We havebeen, and continue to be, the leader in the area of improved imaging throughour cutting edge processing technologies, including proprietary pre-stack depthmigration (PSDM) and wave-equation migration methods. Additionally, many of thesurveys in our data library have been acquired or enhanced using these advancedtechniques. In the data acquisition area, we were an early adopter ofmulti-component acquisition on land and, in fiscal 2005, were the first companyto acquire a large-scale wide-azimuth survey offshore.

 

The recentincreased interest in these enhanced acquisition and processing techniques isfurther driven by the oil industry’s inability to replace reserves at or abovetheir rate 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 repeatedly set new records in recentmonths.

 

To increasetheir reserve replacement rate, we believe most of our customers will respondto the challenge by increasing their exploration budgets over the next two tothree years. While much of their total exploration budgets may go towarddrilling, they will first need drillable prospects. The most successful toolfor economically finding these prospects is 3-D seismic. The applicability ofseismic has been expanded greatly over the past decade. Where “standard” 3-Dseismic has not been sufficient, our advanced techniques have been used oncertain geologic problems with spectacular results, as exemplified by thedelineation and discovery of the large sub-salt reservoirs in the deepwaterGulf of Mexico.

 

While theincreases in petroleum consumption may change from year to year, overallconsumption seems to be on a continuous climb upward. Similarly, new, economicoil reserves seem to be increasingly difficult to find, especially in areas oflow political risk. With this supply and demand situation, we are reasonablyconfident that exploration spending will continue to rise, but moreimportantly, we expect that more of that spending will be directed toward areasof geophysical difficulty, requiring the high-end seismic services that weprovide.

 

In thisimproving business environment, our strategy to maximize performance has beento:

•                    continuethe long-term commitment to building multi-client data libraries in areas suchas the Gulf of Mexico, the North Sea and onshore Canada and the United States;

•                    investin data processing and research resources to maintain leadership in subsurfaceimaging through continuous innovation;

•                    targetinnovative and higher margin marine acquisition contracts in selected regions;and

•                    focusour land acquisition resources on the North American and Oman markets and beselective with contracts in Latin America.

We expect to continue thisbalanced contract and multi-client strategy through fiscal 2006.

 

Due to ourselling and operational efforts and the more robust seismic market, we haveseen our backlog increase $155 million from $147 million at July 31, 2004to $302 million at July 31, 2005. We expect to complete most of the workin backlog over the next twelve months. We believe that our traditional patternof revenue generation will occur again during fiscal 2006, with revenues in oursecond and third fiscal quarters being higher than in our first and fourthquarters. This pattern is driven by

 

8

----

 

end of calendar year spending,which results in higher library revenue in our second fiscal quarter and higherland acquisition activity during our second and third fiscal quarters,corresponding with the winter seismic season in Alaska and Canada.

 

During thefirst quarter of fiscal 2005, we reorganized our company into three geographicregions: North and South America (NASA), Europe, Africa, Middle East and theCommonwealth of Independent States (EAME), and Asia Pacific (APAC) and ourfinancial statements and presentation of segment data for prior periods havebeen realigned to conform to this revised organization structure. The managersof these regions are responsible for all facets of sales and operations and arethe primary point of contact with our customer within each region. Centrallymanaged processing, acquisition, and reservoir professionals support thesemanagers from locations around the globe. We feel this new organizationstructure allows our front-line managers to focus exclusively on theircustomers while allowing our company to develop and deploy technologyconsistently across our markets. We have put processes in place that will allowfor the free movement of our seismic equipment across the three regions so thatwe may maximize our return on investment.

 

###### **Results of Operations**

 

***Fiscal 2005 Compared withFiscal 2004***

 

*Revenues.* Revenues increasedby 12% from $564.5 million in fiscal 2004 to $634.0 million in fiscal 2005.This increase was driven by increased contract work, primarily marine, in allregions and increased sales of multi-client data licenses in EAME partiallyoffset by decreased sales of multi-client data licenses primarily in the NASAregion, which includes the Gulf of Mexico, the United States, Brazil andCanada. During fiscal 2005, NASA significantly decreased its land acquisitionoperations in South America. NASA’s increase in contract marine work wasprimarily in the Gulf of Mexico where the Veritas Vantage and two additionalthird party vessels acquired a wide azimuth survey during fiscal 2005. APAC’srevenue increase was also generated by marine contract work, as we operated theVeritas Viking II, the Pacific Sword and Veritas Searcher in Australia, India,Myanmar and New Zealand during the period. EAME generated most of its increasedrevenue through sales of multi-client data licenses for offshore Africa and theNorth Sea.

 

Revenues fromour operating segments were as follows:

 

| ** **     | ** ** | **Years Ended July 31,** | ** ** |
|----------------|------------|-------------------------------|------------|
| ** **     | ** ** | ** **                    | ** ** | ** ** | ** ** | **Change** | ** ** |
| ** **     | ** ** | **2005**                      | ** ** | **2004(****1)** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **     | ** ** | **(In millions)**             | ** ** |
| NASA           |       | $                             | 404.8      |   | $ | 385.9 |   | $ | 18.9 |   | 5 | % |
| EAME           |       | 131.0                         |       | 118.5 |   | 12.5 |   | 11 | % |
| APAC           |       | 98.2                          |       | 60.1 |   | 38.1 |   | 63 | % |
| Total Revenues |       | $                             | 634.0      |   | $ | 564.5 |   | $ | 69.5 |   | 12 | % |

----

(1)     2004segment information has been changed to reflect our current organization (SeeNote 12 of Notes to Consolidated Financial Statements)

 

Revenuesconsisted 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 Revenues |       | $                             | 634.0      |   | $ | 564.5 |   | $ | 69.5 |   | 12 | % |

 

9

----

 

*Operating income (loss).* Operating incomeincreased by $36.4 million from $27.8 million in fiscal 2004 to $64.2 millionin fiscal 2005. During the first quarter of fiscal 2004, we changed ourmulti-client amortization accounting policy to include a minimum amortizationfrom the date of survey completion, instead of only during the last 24 monthsof the survey’s book life. As a result of this change, we recorded a charge of$22.1 million in cost of services in the first quarter of fiscal 2004. Theremaining $14.3 million increase in operating income from fiscal 2004 is theresult of increased margins (revenues less cost of services) of $24.1 millionpartially offset by increased research and development costs and general andadministrative costs. Our margin increase was primarily due to our revenueincrease and a decrease in cost of services as a percent of revenue ofapproximately 2%. Increased productivity, favorable mix of jobs and higherpricing contributed to the margin increase.

 

Research anddevelopment costs have increased by $3.4 million from fiscal 2004 primarily dueto our focus on advanced acquisition and processing and general increases inresearch spending. General and administrative expense increased by $6.4 milliondue to the 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.* Interest expense decreasedfrom $18.9 million in fiscal 2004 to $4.0 million in fiscal 2005. This decreaseis due primarily to the issuance of our Convertible Senior Notes in the thirdquarter of fiscal 2004 and the repayment of our term notes with the proceeds.This refinancing resulted in a significantly lower interest rate. OurConvertible Senior Notes accrue interest at a rate of three month LIBOR less0.75%, which equated to a weighted average interest rate of 1.72% for fiscal2005 and is much lower than the various tranches of debt in place in fiscal2004. In addition, approximately $7.4 million of debt issuance costs wereexpensed in fiscal 2004 in connection with the retirement of the term notes.

 

*Involuntary conversion of asset*s. In January 2005,our seismic vessel Veritas Viking experienced an engine failure while acquiringdata in the Gulf of Mexico and lost substantial amounts of overboard seismicequipment. As this seismic equipment was insured at its replacement cost, werecognized a $9.9 million gain related to this insurance settlement.

 

*Other (income) expense, net.*In fiscal 2005,other income increased to $6.1 million from $0.0 million in fiscal 2004. Thisincrease is primarily due to increased interest income of $3.7 million earnedon our cash balances augmented by a small foreign currency exchange gain infiscal 2005.

 

*Income taxes.*We reversed $36.9 million ofvaluation allowances on certain of our deferred tax assets during the fourthquarter of fiscal 2005, resulting in a net tax benefit of $6.8 million forfiscal 2005. The deferred tax assets were originally reserved at the end offiscal 2003 primarily due to our historical losses in several taxjurisdictions. As of the fourth quarter of fiscal 2005, we had recognizedprofits in those jurisdictions and had a positive operational outlook. Thecombination of these two factors was sufficient to cause the reversal of thereserves. This decrease in provisionwas offset, in part, by the increased current tax provision resulting fromsubstantially higher income in fiscal 2005. Excluding the release ofvaluation allowances, our effective tax rate would have been approximately 40%.(See Note 5 of Notes to Consolidated Financial Statements for furtherinformation on income taxes.)

 

***Fiscal 2004 Compared withFiscal 2003***

 

*Revenues.* Revenuesincreased 12%, from $501.8 million in fiscal 2003 to $564.5 million in fiscal2004. Increased multi-client revenues were responsible for most of the growth,with all three regions showing substantial increases. Contract revenuesincreased by 2%. In the NASA region, land contract acquisition work increasedin North America but was offset by declines in South America. In response tothe South American decline, we are reducing our presence in that region andredeploying our assets and key personnel into other markets. Marine contractacquisition revenues increased overall, but we experienced a significantregional shift as we moved the Veritas Viking II from NASA to APAC.

 

10

----

 

Revenues fromour current operating segments were as follows:

 

| ** **     | ** ** | **Years Ended July 31,** | ** ** |
|----------------|------------|-------------------------------|------------|
| ** **     | ** ** | ** **                    | ** ** | ** ** | ** ** | **Change** | ** ** |
| ** **     | ** ** | **2004(****1)**               | ** ** | **2003(****1)** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **     | ** ** | **(In millions)**             | ** ** |
| NASA           |       | $                             | 385.9      |   | $ | 376.7 |   | $ | 9.2 |   | 2 | % |
| EAME           |       | 118.5                         |       | 91.3 |   | 27.2 |   | 30 | % |
| APAC           |       | 60.1                          |       | 33.8 |   | 26.3 |   | 78 | % |
| Total Revenues |       | $                             | 564.5      |   | $ | 501.8 |   | $ | 62.7 |   | 12 | % |

----

(1)     Segmentinformation has been changed to reflect our current organization (See Note 12of Notes to Consolidated Financial Statements)

 

Revenuesconsisted of the following:

 

| ** **     | ** ** | **Years Ended July 31,** | ** ** |
|----------------|------------|-------------------------------|------------|
| ** **     | ** ** | ** **                    | ** ** | ** ** | ** ** | **Change** | ** ** |
| ** **     | ** ** | **2004**                      | ** ** | **2003** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **     | ** ** | **(In millions)**             | ** ** |
| Multi-client:  |       |                          |       |   |   |   |   |   |   |
| Land           |       | $                             | 66.0       |   | $ | 56.6 |   | $ | 9.4 |   | 17 | % |
| Marine         |       | 209.1                         |       | 161.3 |   | 47.8 |   | 30 | % |
| Subtotal       |       | 275.1                         |       | 217.9 |   | 57.2 |   | 26 | % |
| Contract:      |       |                          |       |   |   |   |   |   |   |
| Land           |       | 154.0                         |       | 157.2 |   | (3.2 | ) | (2 | )% |
| Marine         |       | 135.4                         |       | 126.7 |   | 8.7 |   | 7 | % |
| Subtotal       |       | 289.4                         |       | 283.9 |   | 5.5 |   | 2 | % |
| Total Revenues |       | $                             | 564.5      |   | $ | 501.8 |   | $ | 62.7 |   | 12 | % |

 

*Operating income (loss).* Operating incomeincreased by $39.9 million, from a loss of $12.1 million in fiscal 2003 tooperating income of $27.8 million in fiscal 2004. Fiscal 2003 included chargesof $51.8 million related to asset impairments and reserves while fiscal 2004included a $22.1 million charge related to a change in accounting for ourmulti-client library. The difference in the amount of these charges had theeffect of increasing our operating income by $29.7 million. The remaining $10.2million increase in operating income is the result of increased multi-clientmargins of $10.4 million, increased contract margins of $1.9 million andreduced general and administrative costs of $1.8 million, partially offset by$3.9 million of additional research and development spending.

 

In fiscal2003, contract margin included a $2.9 million charge to establish a reserveagainst an account receivable from one of our customers. This receivable wassettled in the first quarter of fiscal 2004 resulting in a gain of $0.6million.

 

Research anddevelopment expense in fiscal 2004 increased by $3.9 million from fiscal 2003.A substantial amount of the increase was due to work on multi-component(pressure and shear wave) acquisition and processing. We spent the majority ofour research budget on developing advanced processing techniques.

 

General andadministrative expense in fiscal 2004 decreased by $1.8 million from fiscal2003. The decrease was due primarily to lower severance cost in fiscal 2004,partially offset by expenses associated with requirements of the Sarbanes-OxleyAct and related rules.

 

The fiscal2004 charge of $22.1 million, as described above, is included in cost ofservices on the “Consolidated Statements of Operations and Comprehensive Income(Loss)” and relates to a change in accounting for our multi-client library. Thischarge represents the adjustment necessary to reduce each of our surveys as of August 1,2003, the first day of fiscal 2004, to a balance no greater than that whichwould have been recorded had we been using the new method. While the salesforecast method remains our primary means of expensing multi-client surveys, wehave now established a minimum cumulative amortization for each survey basedupon straight-line amortization over five years. The monthly expense recognizedfor each survey is the greater of the amount derived by the sales forecastmethod or the amount of minimum amortization. This is a change from the priormethod that provided for a minimum amortization only during the last two yearsof the survey’s book life.

 

11

----

 

The fiscal2003 charge of $51.8 million includes an impairment of multi-client surveys of$4.9 million, impairment and severance expense related to the sale of (RC)2,our reservoir characterization software business, of $7.6 million, and animpairment charge for goodwill of $39.3 million, with each charge describedmore fully below.

 

Weperiodically review the carrying value of the multi-client data library toassess whether there has been a permanent impairment of value and record losseswhen it is determined that estimated sales would not be sufficient to cover thecarrying value of the asset. In fiscal 2003, we recognized a $4.9 millionpretax impairment charge related to a survey in the Gulf of Mexico that we havebeen unable to license. This survey was acquired at right angles to an existingsurvey and customers have not been willing to pay for the moderately increasedresolution.

 

We had notbeen satisfied with the results of the software operation acquired with the(RC)2 business in February 2001. We were not making thesoftware sales projected in our acquisition plan and were ineffective atbringing any new products to market. In the fourth quarter of fiscal 2003, wedecided to sell this operation and entered into a letter of intent with SeismicMicro-Technology, Inc., a company more focused on software development. Wetook a charge in fiscal year 2003 of $7.6 million related to these operations,of which $5.9 million was applied to reduce the carrying value of the (RC)2software to its estimated market value of $2.0 million. The remaining$1.7 million primarily related to employee severance and facility costs. Thesales agreement allows us to continue using the (RC)2 suite ofsoftware in our reservoir consulting business. In addition, we have enteredinto an agreement that allows us to continue as sales agents of the software.The sale closed in September 2003.

 

Our reducedearnings in fiscal year 2003, coupled with the instability in our industry, ledto a sharp decline in our stock price in fiscal year 2003, leaving our marketvalue below our book value. As a result of our continued weak stock price andthe sale of the (RC)2 software business, we performed an evaluationof our existing goodwill balance at the end of fiscal 2003. This analysisindicated our goodwill was impaired and, as a result, we recognized animpairment charge of $39.3 million, an amount equal to our entire goodwillbalance.

 

*Income taxes.*Our provision for income taxes decreased by $24.5 million fromfiscal 2003 to fiscal 2004 due principally to two reasons. First, fiscal 2003was negatively impacted by unbenefited net operating losses, non-deductibilityof our goodwill impairment and increased valuation allowances on our deferredtax assets. Second, fiscal 2004 was positively affected by the reduction ofcertain tax contingencies and resolution of certain tax matters in earlycalendar year 2005, due to the extended open period of fiscal 2004 caused byour restatement. (See Note 5 of Notes to Consolidated Financial Statements forfurther information on income taxes.)

 

**Liquidity and Capital Resources**

 

***Sources and Uses***

 

Our internalsources of liquidity are cash, cash equivalents and cash flow from operations.External sources include public and private debt financing, equity sales,equipment financing and our revolving loan facility and trade credit. Webelieve that our current cash balance and cash flow from operations areadequate to meet our liquidity needs for the next twelve months.

 

Net cashprovided by operating activities increased 36% from $243.0 million in fiscal2004 to $331.3 million in fiscal 2005 primarily due to improved profitabilityand improvements in working capital. Net cash used by investing activitiesincreased 36% from $152.4 million in fiscal 2004 to $206.7 million in fiscal2005. Our cash investment for fiscal 2005 includes capital expenditures toreplace and upgrade our existing equipment of approximately $62.4 million andinvestment in our data library of approximately $148.4 million. We expect tocontinue to fund these investments from our current cash and cash equivalentson hand and from internally generated funds.

 

For the pastthree fiscal years, cash provided by our operating activities has increasedwhile combined expenditures for capital equipment and multi-client surveys havenot increased at the same rate. We expect spending to increase modestly infiscal 2006, but also expect that cash provided by operating activities willagain exceed our investment in our operations. For fiscal 2006, we expectcapital expenditures of approximately $61 million and cash multi-client libraryinvestment of approximately $162 million for a combined investment ofapproximately $223 million. These amounts are relatively flexible and will beadjusted to meet the needs of the business. In addition to these amounts, weplan to spend approximately $19 million for research and development duringfiscal 2006.

 

12

----

 

While webelieve that we have adequate sources of funds to meet our liquidity needs, ourability to meet our obligations depends on our future performance, which issubject to many factors beyond our control. Key internal factors affectingfuture results include utilization levels of acquisition and processing assetsand the level of multi-client data library licensing, all of which are drivenby the external factors of spending by exploration and production companiesand, ultimately, underlying commodity prices.

 

***Debt Structure***

 

Our long-termdebt consists of $155.0 million of Convertible Senior Notes due 2024. Inaddition, we have a Credit Facility consisting primarily of a revolving loanfacility permitting borrowings of up to $55 million and various unsecured linesof credit totaling $8.5 million.

 

TheConvertible Senior Notes are our senior unsecured obligations and areconvertible under certain circumstances into a combination of cash and ourcommon stock. In general, upon conversion of a note, the holder of such notewill receive cash equal to the principal amount of the note and shares of ourcommon stock for the note’s conversion value in excess of such principalamount. We entered into a registration rights agreement in which we agreed tofile a registration statement with the Securities and Exchange Commissionwithin 90 days of March 3, 2004 to register resales of the notes andassociated shares of common stock. We filed a registration statement on May 28,2004 in compliance with the registration rights agreement; however, theregistration statement was not effective until August 31, 2005. Becauseour registration statement was not effective on August 31, 2004 asrequired by the indenture, we incurred liquidated damages in the aggregateamount of $0.8 million in fiscal 2005.

 

TheConvertible Senior Notes bear interest at a per annum rate which is equal tothe three-month LIBOR rate, adjusted quarterly, minus a spread of 0.75%. Theinterest rate of the notes, from September 15, 2005 through December 14,2005, is 3.12%, based on a LIBOR rate of 3.87%. For fiscal 2005 the weightedaverage interest rate was approximately 1.72% The notes will mature on March 15,2024 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 certaincircumstances and at the option of the holder, the Convertible Senior Notes areconvertible prior to the maturity date into cash and shares of our commonstock. Certain of these circumstances may result in classification of theConvertible Senior Notes as current on our balance sheet. These circumstancesinclude:

 

(1)          if the closing saleprice of our common stock is over 120% of the conversion price, which iscurrently $24.03 (with 120% being $28.84) for 20 trading days in the period of30 consecutive trading days ending on the last trading day of the fiscalquarter preceding the quarter in which the conversion occurs;

(2)          if we called the notesfor redemption and the redemption has not occurred;

(3)          the occurrence of a fiveconsecutive trading day period in which the trading price of the notes was lessthan 95% of the closing sale price of our common stock on such day multipliedby the number of shares of our common stock issuable upon conversion of thenotes; or

(4)          the occurrence ofspecified corporate transactions.

 

Should any ofthese circumstances occur, the Convertible Senior Notes would be convertible atthe then 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, with the additionalamount payable in shares of our common stock. Currently, the maximum amountpayable by us on conversion is $155 million in cash plus approximately 6.5million shares. For clarity, conversion at a $40 stock price would result inour payment of $155 million in cash and 2.575 million shares of common stock.This settlement method is prescribed in the indenture and is not optional atthe discretion of any party. The shares issuable from such conversion areconsidered in the calculation of diluted earnings per share.

 

Given therecent market price for shares of our common stock, it is reasonable to assumethat our debt may become convertible as soon as the second quarter of fiscal2006. Should our stock price remain above the current conversion price, wewould not expect any notes to be converted; however, we would have to classifythe notes as a current liability on our consolidated balance sheet.

 

13

----

 

On February 14,2003, we entered into a Credit Facility with Deutsche Bank AG, New York Branch,as Administrative Agent, Deutsche Bank AG, Canada Branch, as CanadianAdministrative Agent, and certain other lending institutions. In addition toterm loans, which have been retired, the Credit Facility provided a revolvingloan facility aggregating $55.0 million, including a facility for swing-lineloans of up to $10.0 million and the issuance of letters of credit in anaggregate amount of up to $40.0 million. In August 2005, the limit for theissuance of letters of credit was increased to $48.0 million. Loans made underthe revolving loan facility, including swing-line loans, bear interest at avariable rate determined on the date of borrowing that is related to variousbase rates and margins depending upon our leverage ratio and the location ofthe borrowing. The revolving loan facility expires in February 2006. TheCredit Facility prohibits us from, among other things, paying cash dividends.As of July 31, 2005, there were no borrowings and $8.8 million in lettersof credit outstanding under the Credit Facility, leaving $46.2 millionavailable for borrowings.

 

In addition tothe revolving loan facility, we have various unsecured lines of credit withlending institutions that operate in geographic areas not covered by thelending institutions in our Credit Facility, totaling $8.5 million that may beused exclusively for the issuance of letters of credit and bank guarantees. Asof July 31, 2005, $1.4 million in letters of credit were outstanding underthese lines.

 

Borrowingsunder the Credit Facility are secured by assets, including equipment, vehicles,multi-client data library, intellectual property, and stock of certain materialsubsidiaries, owned by us and certain of our subsidiaries. At July 31,2005 the carrying value of the secured assets, including intercompanyreceivables, was $1.2 billion. The Credit Facility and related documentscontain a number of covenants, including financial covenants relating tointerest coverage, leverage and net worth. These covenants relate tomeasurements as of quarter ending dates; as of July 31, 2005, we were incompliance with these financial covenants.

 

During fiscal2005, we obtained waivers from our lenders under the Credit Facility related tothe late filing of our financial statements. The waivers allowed us to deliverour required reports for fiscal 2004 and for the first three quarters of fiscal2005 later than required under the agreement. All required financial statementsfor such periods have now been provided to our lenders under the CreditFacility.

 

The followingtable presents our contractual obligations as of July 31, 2005 for thespecified periods:

 
| ** **                                 | ** ** | **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)            |       | 95,110           |       | 4,836 |   | 9,672 |   | 9,672 |   | 70,930 |   |
| Operating leases                           |       | 105,422          |       | 41,207 |   | 30,385 |   | 17,399 |   | 16,431 |   |
| Purchase obligations                       |       | 10,680           |       | 10,680 |   | — |   | — |   | — |   |
| Potential payments under letters of credit |       | 10,179           |       | 9,877 |   | 302 |   | — |   | — |   |
| Other long-term liabilities (3)            |       | 36,602           |       | — |   | 73 |   | 79 |   | 36,450 |   |
|                                            |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)          Undercertain circumstances the Convertible Senior Notes are convertible prior tomaturity. Certain of these circumstances may result in classification of theConvertible Senior Notes as current on our balance sheet.

(2)          Theinterest rate on our debt is LIBOR less 0.75%. For purposes of this table, weused our current interest rate of 3.12% based on a LIBOR rate of 3.87%. Each100 basis 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 31,2005, we had no off-balance sheet instruments. During fiscal 2005, our limitedhedging program consisted of economic hedge instruments intended to fix theU.S. dollar value of foreign currency payments to be made under a certaincustomer agreements.

 

14

----

 

**Critical Accounting Policies**

 

While all ofour accounting 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***

 

Customercontracts for our services vary in terms and conditions. We review thedeliverables in each contract and, where applicable, apply the accountingguidance contained in EITF 00-21, “Accounting for Revenue Contracts withMultiple Deliverables” (EITF 00-21).

 

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

 

Revenues fromthe licensing of multi-client surveys are based upon agreed rates set forth inthe contract and are recognized upon physical delivery of, or customer accessto, the surveys. During the acquisition and processing phase of a multi-clientsurvey, in most cases we recognize revenues 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 revenues upon deliveryof, or customer access to, the data to our customer or the customer’s designee.

 

Provisionsexist in certain contracts with our customers that provide for a full refund ifcertain deadlines are not met or provide for a revenue sharing arrangement withthe customer 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 andprocess geophysical data for our own account and retain all ownership rights.We license the data to clients on a non-transferable basis. In somecircumstances, we have sold on a non-exclusive basis rights to data prior toour collecting and processing such data, i.e., we have made the first of whatwe anticipate will be multiple discrete sales of licenses to the same data.

 

We capitalizecosts associated 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.

 

Estimatedsales are determined based upon discussions with our clients, our experienceand our knowledge of industry trends. Changes in sales estimates may have theeffect of changing the percentage relationship of cost of services to revenues.In applying 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 isrecognized, while a decrease in projected sales will have the opposite effect.

 

Assuming thatthe overall volume of sales, mix of surveys generating revenue in the period andminimum amortization amounts were held constant in fiscal 2005, an increase of10% in the sales forecasts of all of our surveys would have decreased our costof services by less than 2%, or approximately $8 million.

 

Our ability toaccurately forecast sales of our library surveys for several years into thefuture is affected by unforeseeable

 

15

----

 

changes in commodity prices,exploration success in the area of the survey and the overall investmentdecisions of our customers. Therefore, we update our sales forecast for surveyswith a significant book value on a quarterly basis to ensure that the mostcurrent market information is 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 revenues from multi-client surveys arederived during the acquisition and licensing phases and during the 5 yearssubsequent to survey completion. Any future decrease in the minimumamortization period would have the effect of increasing cost of services andreducing the carrying value of the multi-client data library.

 

Weperiodically review the carrying value of the multi-client data library toassess whether there has been a permanent impairment of value and record losseswhen it is determined that estimated sales would not be sufficient to cover thecarrying value of the asset. Any future reductions in sales estimates mayresult in an impairment charge that increases cost of services and reduces thecarrying value of the multi-client data library. For example, in fiscal 2003,we recognized a $4.9 million pretax impairment charge related to a survey inthe Gulf of Mexico that we had been unable to license.

 

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

 

Deferred taxesresult from the effect of transactions that are recognized in different periodsfor financial and tax reporting purposes. A valuation allowance, by taxjurisdiction, is established when it is more likely than not that at least someportion of the related deferred tax asset will not be realized. This valuationallowance is then adjusted if realization of the related deferred tax assetsubsequently becomes more likely than not.

 

During fiscal2005, our valuation allowances decreased $55.3 million, $36.9 million of whichwas due to the reversal of deferred tax valuation allowances, $16.6 million ofwhich was due to the net utilization of fully reserved deferred tax assets and$1.8 million of which was due to expiration of fully reserved deferred taxassets during the period. As of July 31, 2005, we had $17.8 million ofvaluation allowances related to deferred tax assets in jurisdictions wherehistorical losses indicate realization is doubtful.

 

Since ourquasi-reorganization on July 31, 1991 with respect to Digicon Inc., thetax benefits of net operating loss carryforwards existing at the date of thequasi-reorganization have been recognized through a direct addition toadditional paid-in capital, when realization is more likely than not.Additionally, the utilization of the net operating loss carryforwards existingat the date of the quasi-reorganization is subject to certain limitations.During fiscal 2005, we did not recognize any amount related to these benefits.

 

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

#### *** ***

Softwareavailable for sale is included in other assets on our consolidated balancesheets. Software acquired through the purchase of software companies iscapitalized at its estimated fair market value through the allocation of thepurchase price. For internally developed software, we capitalize costsassociated with the development of the product from the time the product reachestechnological feasibility until it is ready for commercial release.

 

Theamortization of capitalized software is the greater of the amount computedusing (a) the ratio that current gross revenues for a product bear to thetotal of current and anticipated future gross revenues for that product or (b) thestraight-line method over the remaining estimated economic life of the productincluding the period being reported on. The period of amortization begins whenthe software is released to the market. Estimated useful lives of our softwareproducts range from three to five years.

 

Estimatedsales are determined based upon discussions with our clients, our experienceand our knowledge of industry trends. Changes in sales estimates will have theeffect of changing cost of services. An increase in projected sales will resultin lower cost of services as a percentage of sales and higher earnings. Adecrease in projected sales will result in higher cost of services as apercentage of sales and lower earnings. Any future increases or decreases inour estimates of useful lives will have the effect of decreasing or increasingfuture cost of services with an inverse effect on earnings.

 

**Recent AccountingPronouncements**

 

We maintainstock-based compensation plans that are accounted for using the intrinsic valuebased method allowed by APB Opinion No. 25, “Accounting for Stock Issuedto Employees,” and related Interpretations. Under that method, compensation

 

16

----

 

expense is recorded in theconsolidated financial statements when the quoted market price of theunderlying stock at the grant date or other measurement date exceeds the amountan employee must pay to acquire the stock. Our plans do not permit us to grantstock options at a price lower than market, therefore, we do not record anycompensation expense related to stock options. In December 2004, theFinancial Accounting Standards Board released SFAS No. 123R, a revision toSFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS 123R, whichwill become effective for us beginning with our first quarter of fiscal 2006,will require us to record the cost of stock options and other equity-basedcompensation in our income statement based upon the estimated fair value ofthose awards. As required by SFAS No. 148, “Accounting for Stock-BasedCompensation,” we disclose the pro forma effect of stock-based compensationexpense on net income and earnings per share that would have been recorded hadwe used the fair value based method. As presented in Note 1 of the Notes toConsolidated Financial Statements, adoption of SFAS No. 123R will likelyreduce our reported net income or increase our reported net loss in futureperiods.

 

**Risk Factors**

 

**As a provider of geophysicaltechnologies, our business is substantially dependent on the level ofexploration expenditures by oil and gas companies.**

 

Explorationexpenditures by oil and gas companies are affected by several factors,including actual and forecasted petroleum commodity prices and such companies’own short term and strategic plans. These expenditures may also be affected byworldwide economic conditions. Should there be a sustained period ofsubstantially reduced exploration expenditures by oil and gas companies, thedemand for geophysical services likely will drop and have an adverse effect onour results of operations and cash flow during the affected period. In recentyears, many of our customers have been using a substantial portion of theirdiscretionary cash to pay down debt, buy back their stock, drill low-riskprospects and maximize production from existing fields rather than exploringfor new prospects. While we believe this trend has ended, due to recentcommodity price increases and current supply and demand forecasts, there can beno guarantee that oil and gas companies will engage in substantial or prolongedexploration programs involving seismic spending. While petroleum commodityprices are currently high from a historical perspective, history has shownthese prices to be very volatile.

 

**Weak demand or technologicalobsolescence could impair the value of our multi-client data library.**

 

We haveinvested significant amounts in acquiring and processing multi-client data andexpect to continue to do so for the foreseeable future. There is no assurancethat we will recover all the costs of such surveys. Technological, regulatoryor other industry or general economic developments could render all or portionsof our multi-client data library obsolete or reduce its value. For example, infiscal 2003 and fiscal 2002 we incurred $4.9 million and $55.3 million,respectively, in impairment charges related to slow moving surveys in ourmulti-client library. These surveys were found to be impaired for variousreasons, including slow acreage turnover in the case of U.S. land surveys, aborder dispute in the case of a Shetland-Faroes survey and excessiveacquisition cost in the case of a Gulf of Mexico survey. Additionally, ourindividual surveys have a book life of five years, so particular surveys may besubject to significant amortization even though sales of licenses associatedwith that survey are weak or non-existent, thus reducing our profits.

 

**We aredependent on achieving and maintaining technological advances, which creates risksregarding technological obsolescence, requirements for substantial futurecapital expenditures, the unavailability of necessary technology and thefailure of new technologies.**

 

Thedevelopment of geophysical data acquisition and processing equipment has beencharacterized by rapid technological advancements in recent years. We expectthis trend to continue. We will be required to invest substantial capital inthe future to maintain our technology. Furthermore, manufacturers ofgeophysical equipment may develop new systems that render our equipment, evenif recently acquired, obsolete or less desirable, requiring significantadditional capital expenditures. Because some of our competitors are themselvesleading designers and manufacturers of seismic equipment, we may not haveaccess to their technology. Even if critical new and advanced equipment isavailable to us, we may not have funds available or be able to obtain necessaryfinancing on acceptable terms to acquire it. Further, any investment we may makein a perceived technological advance may not be effective, economicallysuccessful or otherwise accepted in the market.

 

**We face intensecompetition in our industry, which could adversely affect our results.**

 

Competitionamong geophysical 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 and

 

17

----

 

reputation for quality, safetyand dependability. Some of our competitors operate substantially more dataacquisition crews and have significantly greater financial and other resourcesthan we do. These larger and better-financed operators could enjoy an advantageover us in a competitive environment for contract awards and data sales and inthe development of new technologies. Other competitors operate with extremelylow overhead and compete vigorously on price in certain markets where that isthe determining factor in awarding work. These low-cost competitors can have acompetitive advantage over us in these markets.

 

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

 

Our businesshas high fixed costs. As a result, downtime or low productivity due to reduceddemand, 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.

 

**Our revenues are subject tofluctuations that are beyond our control, which could adversely affect ourresults of operations in any financial period.**

 

Our operatingresults vary in material respects from quarter to quarter and will most likelycontinue to do so in the future. Factors that cause variations include thetiming of the receipt and commencement of contracts for data acquisition,customers’ budgetary cycles, the timing of offshore lease sales and the effectof such timing on the demand for geophysical activities, seasonal factors andthe timing 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 andretain key employees, which could adversely affect our business.**

 

Our successdepends upon attracting and retaining highly skilled professionals andtechnical personnel. A number of our employees are highly skilled scientistsand highly trained technicians, and our failure to continue to attract andretain such individuals could adversely affect our ability to compete in thegeophysical services industry. We may confront significant and potentiallyadverse competition for key personnel, particularly during periods of increaseddemand for geophysical services. In addition, our success will depend to asignificant extent upon the abilities and efforts of members of our seniormanagement, the loss of whom could adversely affect our business.

 

***We face risks associated with our foreign revenue generatingactivities.***

 

Substantialportions of our revenues are derived from foreign activities. During the fiscalyear ended July 31, 2005, approximately 53% of our revenue, or $337million, was attributable to activities outside the United States. During thefiscal year ended July 31, 2005, we recognized revenue from customersresiding in the following foreign countries that represented more than 1% ofour consolidated revenue on a gross basis for the fiscal year:

 
| **Country of Origin** | ** ** | **Revenue**       | ** ** |
|-----------------------|------------|-------------------|------------|
| ** **            | ** ** | **(in millions)** | ** ** |
| Australia             |       | 38.7              |       |
| Brazil                |       | 6.4               |       |
| Canada                |       | 90.7              |       |
| India                 |       | 12.1              |       |
| Malaysia              |       | 19.2              |       |
| Nigeria               |       | 12.0              |       |
| Norway                |       | 21.5              |       |
| Oman                  |       | 22.3              |       |
| South Africa          |       | 6.9               |       |
| United  Kingdom       |       | 43.1              |       |

 

Foreignrevenues are subject to certain risks, including those related to rates ofcurrency exchange, border disputes, war, terrorism, civil disturbances,embargo, and government activities such as radical changes in tax regulationsor investment laws. We are exposed to these risks in all of our foreignoperations to some degree, and our exposure could be material to our financialcondition and results of operations where the political and legal environment isless stable and we generate significant revenue or have large localinvestments, such as in Brazil, Nigeria, and Oman.

 

Revenuegenerating activities in certain foreign countries may require prior UnitedStates government approval in the form of an export license and otherwise besubject to tariffs and import/export restrictions. These laws change over timeand may result in limitations on our ability to compete globally. In addition,non-U.S. persons employed by our separately incorporated foreign subsidiariesconduct business in foreign jurisdictions, some of which have been subject toU.S. trade embargoes and have been identified by

 

18

----

 

the U.S. government as statesponsors of terrorism or are subject to sanctions by the U.S. Office of ForeignAssets Control. For example, during fiscal 2005 we generated $1.7 million ofrevenue from Libyan customers (Libya was identified by the U.S. government as astate sponsor of terrorism until September 2004), $1.1 million of revenuefrom Iranian customers and $10,000 of revenue from a Syrian customer. We havetypically generated revenue in these countries through the performance of dataprocessing, reservoir consulting services and the sale of software licenses andsoftware maintenance. The governments of Iran and Syria have been identified bythe U.S. government as state sponsors of terrorism and are subject to sanctionsby the U.S. Office of Foreign Assets Control and either directly or indirectlycontrol the activities of our customers within their borders. Our relationswith customers in these countries are current and on going. We have proceduresin place 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, someof our operational activities result in accounts receivable or accounts payablethat are denominated in foreign currencies and, therefore, subject tofluctuations in foreign currency exchange rates. There can be no assurance thatwe will not experience difficulties in connection with future foreign revenuegeneration and, in particular, adverse effects from foreign currencyfluctuations.

 

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

 

Our seismicdata acquisition 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 oursecurities could be subject to significant fluctuations.**

 

The tradingprices of our securities fluctuate. Factors such as fluctuations in ourfinancial performance, and that of our competitors, as well as general marketconditions could have a significant impact on the future trading prices of oursecurities. The trading prices also may be affected by weakness in oil prices,changes in interest rates and other factors beyond our control. Any one orcombination of these factors may cause a decline in the trading price of oursecurities.

 

**We may be unable to repurchase our ConvertibleSenior Notes as required upon a change in control or on the specified dates atthe option of the holder or to pay the required cash upon conversion of thenotes.**

 

Upon a changein control, as defined in the indenture governing our Convertible Senior Notes,and on March 15, 2009, 2014 and 2019, the holders of the notes have theright to require us to repurchase the notes for cash. In addition, upon conversionof the notes, the holders will have the right to receive a cash payment. If wedo not 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 eventof default under the indenture governing the notes would occur as a result ofsuch failure. In addition, cash payments in respect of notes tendered forrepurchase or conversion are subject to limits and might be prohibited, orcreate an event of default, under our Credit Facility as well as otheragreements relating to borrowings that we may enter into from time to time. Ourfailure to make cash payments in respect of the Convertible Senior Notes couldresult in an event of default under our Credit Facility. There can be noguarantee that our available sources of cash will be sufficient to allow us tomake the required cash payments.

 

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

 

Our operationsare subject to a variety of federal, provincial, state, foreign and local lawsand regulations, including environmental laws. We invest financial andmanagerial resources to comply with these laws and related permit requirements.Failure to timely obtain the required permits may result in crew downtime andoperating losses. Because laws and regulations change frequently, we cannotpredict the impact of government regulations on our future operations. Theadoption of laws and regulations that have the effect of curtailing explorationby oil and gas companies could also adversely affect our operations by reducingthe demand for our geophysical services.

 

19

----

 

We follow thegenerally accepted accounting principles of the United States (GAAP) aspromulgated and/or enforced by the Financial Accounting Standards Board, theSecurities and Exchange Commission and other organizations. GAAP is subject tochange, with such changes occurring at a rapid rate in recent years. Changes inGAAP can affect the reporting of our future results.

 

**Cer****tain provisions of our charter,Delaware law and our shareholder rights plan may make it difficult for a third partyto acquire us, even in situations that may be viewed as desirable by ourstockholders.**

 

The GeneralCorporation Law of the State of Delaware contains provisions that may delay orprevent an attempt by a third party to acquire control of our company. Ourcertificate of incorporation and bylaws contain provisions that authorize theissuance of preferred stock, and establish advance notice requirements fordirector nominations and actions to be taken at stockholder meetings. Theseprovisions could also discourage or impede a tender offer, proxy contest orother similar transaction involving control of us, even if viewed favorably bystockholders. In addition, we have adopted a stockholder rights plan that wouldlikely discourage a hostile attempt to acquire control of us.

 

***The amounts we amortize from our data library each period may fluctuatesignificantly, and these fluctuations can have a significant effect on ourreported results of operations.***

 

***How we account for our multi-client datalibrary has a significant effect on our reported results of operations. Weamortize the cost of our multi-client library based primarily upon ourestimates of future sales of licenses to data, known as the sales forecastmethod. Although we also employ a minimum amortization for each survey in ourdata library based on straight-line amortization over five years, thisamortization is secondary to that derived from the sales forecast method. Theestimates used in the sales forecast method are inherently imprecise and may varyfrom period to period depending upon market developments and our expectations.We update our estimates on a quarterly basis and change our amortization ratesaccordingly. Substantial changes in amortization rates can have a significanteffect on our reported results of operations.***

 

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

 

As of July 31,2005, we had $155.0 million Convertible Senior Notes bearing interest at LIBORless 0.75% with a fair value of $221.9 million, based upon the bid price of143.19 on July 29, 2005. These notes are not hedged and represent ourtotal exposure to interest rate risk. Each 100 basis point increase in theLIBOR rate will increase our interest expense by $1.6 million per year.

 

20

----

 

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

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| Management’s  Responsibility for Financial Statements                                                           |   |
|----------------------------------------------------------------------------------------------------------------------|--------|
| Report  of Independent Registered Public Accounting Firm                                                             |   |
| Consolidated  Statements of Operations and Comprehensive Income (Loss) for the Three Years  Ended July 31, 2005 |   |
| Consolidated  Balance Sheets as of July 31, 2005 and 2004                                                       |   |
| Consolidated Statements of  Cash Flows for the Three Years Ended July 31, 2005                                  |   |
| Consolidated  Statements of Changes in Stockholders’ Equity for the Three Years Ended  July 31, 2004       |   |
| Notes to  Consolidated Financial Statements                                                                          |   |
| Financial  Statement Schedule - Valuation and  Qualifying Accounts and Reserves                                 |   |

 

21

----

 

#### ***Management’s Responsibilities for Financial Statements***

 

To theStockholders of Veritas DGC Inc.:

 

Theaccompanying consolidated financial statements of Veritas DGC Inc. and itssubsidiaries are the responsibility of management and have been prepared inconformity with accounting principles generally accepted in the United Statesof America. They necessarily include some amounts that are based on bestjudgments and estimates. The financial information displayed in other sectionsof this report is 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 onInternal Control over Financial Reporting***

 

To theStockholders of Veritas DGC Inc.:

 

Our managementis responsible for establishing and maintaining adequate internal control overfinancial reporting (as defined in Rule 13a – 15(f) under theSecurities and Exchange Act of 1934). An evaluation of the design andeffectiveness of our internal control over financial reporting, based on theframework in *Internal Control – Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission,was conducted under the supervision and with the participation of management,including our Chief Executive Officer and Chief Financial Officer. Based on theresults of this evaluation, we concluded that our internal control overfinancial reporting was effective as of July 31, 2005.

 

Our assessmentof the effectiveness of our internal control over financial reporting as of July 31,2005 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*                    |

 

22

----

 

#### ***Report of Independent Registered Public Accounting Firm***

 

**To the Board of Directors and Stockholders ofVeritas DGC Inc.:**

 

We have completed an integrated audit of Veritas DGC Inc.’s 2005consolidated financial statements and of its internal control over financialreporting as of July 31, 2005 and audits of its 2004 and 2003 consolidatedfinancial statements in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Our opinions, based on our audits,are presented below.

 

Consolidated financial statements and financial statement schedule

 

In our opinion, the financial statements listed in the accompanyingindex present fairly, in all material respects, the financial position ofVeritas DGC Inc. and its subsidiaries at July 31, 2005 and 2004, and theresults of their operations and their cash flows for each of the three years inthe period ended July 31, 2005****in conformitywith accounting principles generally accepted in the United States of America.In addition, in our opinion, the financial statement schedule listed inthe accompanying index presents fairly, in all material respects, theinformation set forth therein when read in conjunction with the relatedconsolidated financial statements. These financial statements and financialstatement schedule are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements andfinancial statement schedule based on our audits. We conducted our auditsof these statements in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

As discussed in Note 1 to the consolidated financial statements, theCompany changed its accounting for amortization of its multi-client data libraryon August 1, 2003.

 

Internal control over financial reporting

 

Also, in our opinion, management’s assessment, included in theaccompanying Management’s Report on Internal Control over Financial Reporting,that the Company maintained effective internal control over financial reportingas of July 31, 2005 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, 2005, based on criteria established in *Internal Control – Integrated Framework* issued by the COSO.The Company’s management is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to expressopinions on management’s assessment and on the effectiveness of the Company’sinternal control over financial reporting based on our audit. We conducted ouraudit of internal control over financial reporting in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. An audit of internal control overfinancial reporting includes obtaining an understanding of internal controlover financial reporting, evaluating management’s assessment, testing andevaluating the design and operating effectiveness of internal control, andperforming such other procedures as we consider necessary in the circumstances.We believe that our audit provides a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. A company’s internalcontrol over financial reporting includes those policies and procedures that (i) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the

 

23

----

 

company are being made only in accordance with authorizations ofmanagement and directors of the company; and (iii) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition,use, or disposition of the company’s assets that could have a material effecton the financial statements.

 

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

 

#### ***PricewaterhouseCoopers LLP***

Houston, Texas

October 10, 2005

 

24

----

 

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

 

**CONSOLIDATED STATEMENTS OF OPERATIONS ANDCOMPREHENSIVE INCOME (LOSS)**

**(In thousands, except per share amounts)**

 
| ** **                                                                              | ** ** | **For the Years Ended  July 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                              | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                    |       |                                   |       |   |   |   |   |
| Revenues                                                                                |       | $                                      | 634,026    |   | $ | 564,469 |   | $ | 501,821 |   |
| Cost of services                                                                        |       | 519,008                                |       | 495,709 |   | 423,271 |   |
| Research and development                                                                |       | 18,882                                 |       | 15,536 |   | 11,630 |   |
| General and administrative                                                              |       | 31,895                                 |       | 25,454 |   | 27,218 |   |
| Loss on (RC)2 sale                                                                      |       | —                                 |       | — |   | 7,627 |   |
| Impairment of multi-client surveys                                                      |       | —                                 |       | — |   | 4,924 |   |
| Impairment of goodwill                                                                  |       | —                                 |       | — |   | 39,263 |   |
| Operating income (loss)                                                                 |       | 64,241                                 |       | 27,770 |   | (12,112 | ) |
| Interest expense                                                                        |       | 3,996                                  |       | 18,851 |   | 18,534 |   |
| Gain on involuntary conversion of assets                                                |       | (9,861                                 | )          | — |   | — |   |
| Other (income) expense, net                                                             |       | (6,137                                 | )          | (17 | ) | 216 |   |
| Income (loss) before provision (benefit) for income taxes                               |       | 76,243                                 |       | 8,936 |   | (30,862 | ) |
| Provision (benefit) for income taxes                                                    |       | (6,758                                 | )          | 3,715 |   | 28,235 |   |
| Net income (loss)                                                                       |       | $                                      | 83,001     |   | $ | 5,221 |   | $ | (59,097 | ) |
|                                                                                    |       |                                   |       |   |   |   |   |
| **Net (loss), per share:**                                                              |       |                                   |       |   |   |   |   |
| **Basic:**                                                                              |       |                                   |       |   |   |   |   |
| Weighted average common shares                                                          |       | 33,843                                 |       | 33,572 |   | 33,305 |   |
| Income (loss) per common share                                                          |       | $                                      | 2.45       |   | $ | .16 |   | $ | (1.77 | ) |
|                                                                                    |       |                                   |       |   |   |   |   |
| **Diluted:**                                                                            |       |                                   |       |   |   |   |   |
| Weighted average common shares                                                          |       | 35,054                                 |       | 34,260 |   | 33,305 |   |
| Income (loss) per common share                                                          |       | $                                      | 2.37       |   | $ | .15 |   | $ | (1.77 | ) |
|                                                                                    |       |                                   |       |   |   |   |   |
| **Comprehensive  income (loss)**                                                        |       |                                   |       |   |   |   |   |
| Net income (loss)                                                                       |       | $                                      | 83,001     |   | $ | 5,221 |   | $ | (59,097 | ) |
| Other comprehensive income  (loss) (net of tax, $0 in all periods except as specified): |       |                                   |       |   |   |   |   |
| Foreign currency translation  adjustments                                               |       | 6,914                                  |       | 3,835 |   | 12,339 |   |
| Unrealized gain (loss) on  investments-available for sale                               |       | (159                                   | )          | (588 | ) | 944 |   |
| Unrealized gain (loss) on hedge  transactions                                           |       | —                                 |       | 145 |   | (939 | ) |
| Minimum pension liability  adjustment (net of tax benefit of $3,074 in 2005)            |       | (7,171                                 | )          | 338 |   | (1,577 | ) |
| Total other comprehensive income (loss)                                                 |       | (416                                   | )          | 3,730 |   | 10,767 |   |
| Comprehensive income (loss)                                                             |       | $                                      | 82,585     |   | $ | 8,951 |   | $ | (48,330 | ) |

 

See Notesto Consolidated Financial Statements

 

25

----

 

**VERITAS DGC INC. AND SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEET**

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

 
| ** **                                                                                                                                                                                             | ** ** | **July 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                             | ** ** | **2005**          | ** ** | **2004** | ** ** |
| ASSETS                                                                                                                                                                                                 |       |              |       |   |   |
| Current assets:                                                                                                                                                                                        |       |              |       |   |   |
| Cash and cash equivalents                                                                                                                                                                              |       | $                 | 249,393    |   | $ | 116,299 |   |
| Restricted cash investments                                                                                                                                                                            |       | 237               |       | 111 |   |
| Accounts and notes receivable  (net of allowance for doubtful accounts: 2005, $1,322; 2004, $1,109)                                                                                                    |       | 165,989           |       | 166,810 |   |
| Materials and supplies  inventory                                                                                                                                                                      |       | 5,381             |       | 4,198 |   |
| Prepayments and other                                                                                                                                                                                  |       | 18,900            |       | 15,599 |   |
| Current and deferred income  taxes                                                                                                                                                                     |       | 12,486            |       | 12,617 |   |
| Total current assets                                                                                                                                                                                   |       | 452,386           |       | 315,634 |   |
| Property and equipment:                                                                                                                                                                                |       |              |       |   |   |
| Land                                                                                                                                                                                                   |       | 7,005             |       | 7,005 |   |
| Geophysical equipment                                                                                                                                                                                  |       | 329,436           |       | 312,429 |   |
| Data processing equipment                                                                                                                                                                              |       | 75,337            |       | 87,792 |   |
| Geophysical ship                                                                                                                                                                                       |       | 8,331             |       | 8,331 |   |
| Leasehold improvements and  other                                                                                                                                                                      |       | 74,981            |       | 64,082 |   |
| Total                                                                                                                                                                                                  |       | 495,090           |       | 479,639 |   |
| Less accumulated depreciation                                                                                                                                                                          |       | 367,173           |       | 357,976 |   |
| Property and equipment, net                                                                                                                                                                            |       | 127,917           |       | 121,663 |   |
|                                                                                                                                                                                                   |       |              |       |   |   |
| Multi-client data library                                                                                                                                                                              |       | 316,793           |       | 313,153 |   |
| Deferred tax asset, net                                                                                                                                                                                |       | 45,963            |       | 1,223 |   |
| Other assets                                                                                                                                                                                           |       | 23,539            |       | 24,573 |   |
| Total                                                                                                                                                                                                  |       | $                 | 966,598    |   | $ | 776,246 |   |
|                                                                                                                                                                                                   |       |              |       |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                              |       |              |       |   |   |
| Current liabilities:                                                                                                                                                                                   |       |              |       |   |   |
| Accounts payable, trade                                                                                                                                                                                |       | $                 | 75,810     |   | $ | 44,907 |   |
| Accrued and deferred income  taxes                                                                                                                                                                     |       | 9,402             |       | 7,145 |   |
| Deferred revenue                                                                                                                                                                                       |       | 42,043            |       | 23,688 |   |
| Other accrued liabilities                                                                                                                                                                              |       | 65,193            |       | 43,962 |   |
| Total current liabilities                                                                                                                                                                              |       | 192,448           |       | 119,702 |   |
| Non-current liabilities:                                                                                                                                                                               |       |              |       |   |   |
| Long-term debt                                                                                                                                                                                         |       | 155,000           |       | 155,000 |   |
| Other non-current liabilities                                                                                                                                                                          |       | 36,602            |       | 11,854 |   |
| Total non-current liabilities                                                                                                                                                                          |       | 191,602           |       | 166,854 |   |
|                                                                                                                                                                                                   |       |              |       |   |   |
| Commitments and Contingent Liabilities (Note 6)                                                                                                                                                        |       |              |       |   |   |
|                                                                                                                                                                                                   |       |              |       |   |   |
| Stockholders’ equity:                                                                                                                                                                             |       |              |       |   |   |
| Common stock, $.01 par value;  authorized: 78,500,000 shares; issued: 35,580,032 shares in 2005 and  34,821,298 shares in 2004 (excluding Exchangeable Shares of 155,370 in 2005  and 185,921 in 2004) |       | 355               |       | 348 |   |
| Additional paid-in capital                                                                                                                                                                             |       | 452,299           |       | 441,982 |   |
| Accumulated earnings                                                                                                                                                                                   |       | 146,145           |       | 63,144 |   |
| Accumulated other comprehensive  income:                                                                                                                                                               |       |              |       |   |   |
| Cumulative foreign currency  translation adjustment                                                                                                                                                    |       | 14,245            |       | 7,331 |   |
| Unrealized gain on  investments-available for sale                                                                                                                                                     |       | 197               |       | 356 |   |
| Minimum pension liability                                                                                                                                                                              |       | (8,410            | )          | (1,239 | ) |
| Unearned compensation                                                                                                                                                                                  |       | (595              | )          | (604 | ) |
| Treasury stock, at cost; 1,320,106 shares in 2005 and 1,317,532  shares in 2004                                                                                                                        |       | (21,688           | )          | (21,628 | ) |
| Total stockholders’ equity                                                                                                                                                                        |       | 582,548           |       | 489,690 |   |
| Total                                                                                                                                                                                                  |       | $                 | 966,598    |   | $ | 776,246 |   |

 

See Notesto Consolidated Financial Statements

 

26

----

 

**VERITAS DGC INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Dollars in thousands)**

 
| ** **                                                    | ** ** | **For the Years Ended  July 31,** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Operating activities:                                         |       |                                   |       |   |   |   |   |
| Net income (loss)                                             |       | $                                      | 83,001     |   | $ | 5,221 |   | $ | (59,097 | ) |
| Non-cash items included in net  income (loss):                |       |                                   |       |   |   |   |   |
| Depreciation and amortization,  net (other than multi-client) |       | 41,583                                 |       | 40,300 |   | 48,486 |   |
| Amortization of multi-client  library                         |       | 159,725                                |       | 209,840 |   | 143,266 |   |
| Impairment of multi-client  library                           |       | —                                 |       | — |   | 4,924 |   |
| Impairment of goodwill                                        |       | —                                 |       | — |   | 39,263 |   |
| Loss on (RC)2 sale                                            |       | —                                 |       | — |   | 7,627 |   |
| Impairment of land acquisition  equipment                     |       | —                                 |       | — |   | 1,780 |   |
| Gain on disposition of property  and equipment                |       | (445                                   | )          | (310 | ) | (171 | ) |
| Equity in (earnings) loss of  joint venture                   |       | —                                 |       | 958 |   | 1,110 |   |
| Deferred taxes provision  (benefit)                           |       | (39,280                                | )          | (9,678 | ) | 18,772 |   |
| Amortization of unearned  compensation                        |       | 350                                    |       | 385 |   | 682 |   |
| Changes in operating assets and liabilities:                  |       |                                   |       |   |   |   |   |
| Accounts and notes receivable                                 |       | 3,128                                  |       | (34,452 | ) | (1,622 | ) |
| Materials and supplies  inventory                             |       | (1,177                                 | )          | 819 |   | 11,066 |   |
| Prepayments and other                                         |       | (3,270                                 | )          | (1,836 | ) | 1,366 |   |
| Current income tax                                            |       | 12,136                                 |       | 2,649 |   | 3,345 |   |
| Accounts payable and other  accrued liabilities               |       | 69,003                                 |       | 32,951 |   | (26,994 | ) |
| Other non-current liabilities                                 |       | 5,098                                  |       | (1,844 | ) | 7,652 |   |
| Other                                                         |       | 1,443                                  |       | (1,969 | ) | (600 | ) |
| Total cash provided by  operating activities                  |       | 331,295                                |       | 243,034 |   | 200,855 |   |
| Investing activities:                                         |       |                                   |       |   |   |   |   |
| Decrease (increase) in  restricted cash investments           |       | (126                                   | )          | 94 |   | (39 | ) |
| Investment in multi-client  library                           |       | (148,373                               | )          | (126,250 | ) | (151,774 | ) |
| Acquisitions, net of cash  received                           |       | —                                 |       | — |   | (9,547 | ) |
| Purchase of property and  equipment                           |       | (62,375                                | )          | (30,543 | ) | (30,497 | ) |
| Sale of (RC)2                                                 |       | —                                 |       | 2,000 |   | — |   |
| Proceeds from involuntary  conversion of assets               |       | 2,817                                  |       | — |   | — |   |
| Proceeds from sales of property  and equipment                |       | 1,342                                  |       | 2,307 |   | 3,071 |   |
| Total cash used by investing  activities                      |       | (206,715                               | )          | (152,392 | ) | (188,786 | ) |
| Financing activities:                                         |       |                                   |       |   |   |   |   |
| Borrowings of long-term debt                                  |       | —                                 |       | 155,000 |   | 308,236 |   |
| Payments of long-term debt                                    |       | —                                 |       | (194,225 | ) | (261,275 | ) |
| Proceeds from the sale of  common stock                       |       | 7,652                                  |       | 12,543 |   | 2,601 |   |
| Purchase of treasury stock                                    |       | —                                 |       | (20,000 | ) | — |   |
| Total cash provided by (used  by) financing activities        |       | 7,652                                  |       | (46,682 | ) | 49,562 |   |
| Currency loss on foreign cash                                 |       | 862                                    |       | 242 |   | 469 |   |
| Change in cash and cash  equivalents                          |       | 133,094                                |       | 44,202 |   | 62,100 |   |
| Beginning cash and cash  equivalents balance                  |       | 116,299                                |       | 72,097 |   | 9,997 |   |
| Ending cash and cash  equivalents balance                     |       | $                                      | 249,393    |   | $ | 116,299 |   | $ | 72,097 |   |

 

See Notesto Consolidated Financial Statements

 

27

----

 

**VERITAS DGC INC. AND SUBSIDIARIES**

 

**SUPPLEMENTARY SCHEDULES TO CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Dollars in thousands)**

 
| ** **                                                                                                               | ** ** | **For the Years Ended  July 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                               | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                               | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Schedule of non-cash transactions:**                                                                              |       |                                   |       |   |   |   |   |
| Utilization of net operating  losses existing prior to the quasi-reorganization resulting in an increase  (decrease) in: |       |                                   |       |   |   |   |   |
| Deferred tax asset valuation  allowance                                                                                  |       | $                                      | —     |   | $ | — |   | $ | (4,496 | ) |
| Additional paid-in capital                                                                                               |       | —                                 |       | — |   | 4,496 |   |
| Tax deduction due to exercise  of stock options resulting in an increase in additional paid-in capital                   |       | 2,271                                  |       | 95 |   | — |   |
| Capitalization of depreciation  and amortization resulting in an increase in multi-client data library                   |       | 11,365                                 |       | 18,648 |   | 24,441 |   |
|                                                                                                                     |       |                                   |       |   |   |   |   |
| Common stock issued for  purchase of Hampson-Russell Software Services, Ltd.                                             |       | —                                 |       | — |   | 7,250 |   |
| Common stock issued for  purchase of Fairweather Geophysical LLC                                                         |       | —                                 |       | 500 |   | — |   |
| Common stock issued to  employees                                                                                        |       | 341                                    |       | 468 |   | 292 |   |
|                                                                                                                     |       |                                   |       |   |   |   |   |
| **Supplemental disclosures of cash flow information:**                                                                   |       |                                   |       |   |   |   |   |
| Cash paid for:                                                                                                           |       |                                   |       |   |   |   |   |
| Interest:                                                                                                                |       |                                   |       |   |   |   |   |
| Convertible notes                                                                                                        |       | $                                      | 2,286      |   | $ | 160 |   | $ | — |   |
| Term notes                                                                                                               |       | —                                 |       | 11,830 |   | 6,289 |   |
| Senior notes                                                                                                             |       | —                                 |       | — |   | 11,899 |   |
| Credit agreements                                                                                                        |       | —                                 |       | — |   | 1,485 |   |
| Other                                                                                                                    |       | 163                                    |       | 114 |   | 67 |   |
| Income taxes, net                                                                                                        |       | 21,809                                 |       | 3,216 |   | 3,585 |   |

 

See Notesto Consolidated Financial Statements

 

28

----

 

**VERITAS DGC INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CHANGES INSTOCKHOLDERS’ EQUITY**

**For the years ended July 31, 2005, 2004 and 2003**

 
| ** **                                                                              | ** ** | ** **                               | ** ** | ** **         | ** ** | ** **     | ** ** | ** **              | ** ** | ** **          | ** ** | **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, 2002**                                                         |       | 31,171,988                               |       | $                  | 311        |           | (76,607    | )                       | $          | (1,432              | )          | $                 | 413,754    |              | $          | 117,020           |       | $ | (872 | ) | $ | (8,049 | ) |
| Common stock issued for exchangeable stock                                              |       | 1,103                                    |       | —             |       | —         |       | —                  |       | —              |       | —            |       | —            |       | —            |       |
| Common stock issued to employees                                                        |       | 34,557                                   |       | —             |       | —         |       | —                  |       | 292                 |       | —            |       | (301              | )          | —            |       |
| Common stock issued for cash                                                            |       | 359,510                                  |       | 5                  |       | (7,536         | )          | (76                     | )          | 2,596               |       | —            |       | —            |       | —            |       |
| Restricted stock returned to treasury                                                   |       | —                                   |       | —             |       | —         |       | —                  |       | 20                  |       | —            |       | 151               |       | —            |       |
| Common stock exchanged for purchase of Hampson-Russell                                  |       | 589,623                                  |       | 6                  |       | —         |       | —                  |       | 7,244               |       | —            |       | —            |       | —            |       |
| Utilization of net operating loss carryforwards existing prior to  quasi-reorganization |       | —                                   |       | —             |       | —         |       | —                  |       | 4,496               |       | —            |       | —            |       | —            |       |
| Cumulative foreign currency translation adjustment                                      |       | —                                   |       | —             |       | —         |       | —                  |       | —              |       | —            |       | —            |       | 12,339            |       |
| Amortization of unearned compensation                                                   |       | —                                   |       | —             |       | —         |       | —                  |       | —              |       | —            |       | 682               |       | —            |       |
| Unrealized gain on investments — available for sale                                |       | —                                   |       | —             |       | —         |       | —                  |       | —              |       | —            |       | —            |       | 944               |       |
| Unrealized loss on foreign currency hedge                                               |       | —                                   |       | —             |       | —         |       | —                  |       | —              |       | —            |       | —            |       | (162              | )          |
| Unrealized loss on interest rate swap                                                   |       | —                                   |       | —             |       | —         |       | —                  |       | —              |       | —            |       | —            |       | (777              | )          |
| Unrealized minimum pension liability                                                    |       | —                                   |       | —             |       | —         |       | —                  |       | —              |       | —            |       | —            |       | (1,577            | )          |
| Net loss                                                                                |       | —                                   |       | —             |       | —         |       | —                  |       | —              |       | (59,097           | )          | —            |       | —            |       |
| **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              |       | —            |       | —            |       | —            |       |
| Restricted stock returned to treasury                                                   |       | —                                   |       | —             |       | (10,895        | )          | (120                    | )          | —              |       | —            |       | —            |       | —            |       |
| Treasury stock buy back                                                                 |       | —                                   |       | —             |       | (1,222,494     | )          | (20,000                 | )          | —              |       | —            |       | —            |       | —            |       |
| Tax deduction for stock option exercises                                                |       | —                                   |       | —             |       | —         |       | —                  |       | 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              | )          | —            |       |
| Restricted stock returned to treasury                                                   |       | —                                   |       | —             |       | (2,574         | )          | (60                     | )          | —              |       | —            |       | —            |       | —            |       |
| Tax deduction for stock option exercises                                                |       | —                                   |       | —             |       | —         |       | —                  |       | 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 |   |

 

See Notesto Consolidated Financial Statements

 

29

----

 

**VERITAS DGC INC. ANDSUBSIDIARIES**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the years ended July 31, 2005, 2004 and 2003**

 

**1. Summary of SignificantAccounting Policies**

 

***Consolidation***

 

The accompanyingconsolidated financial statements include our accounts and the accounts ofmajority-owned domestic and foreign subsidiaries and variable interest entitiesof which we are the primary beneficiary. All material intercompany balances andtransactions have been eliminated. We adopted FIN 46R on April 30, 2004.Adoption did not have a material effect on our financial position or results ofoperations, although it required consolidation of our 80% owned Indonesianjoint venture that was accounted for under the equity method prior to adoptionof FIN 46R.

 

***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 revenues and expenses duringthe reporting period. Actual results could differ from those estimates.

 

***Fair Value of FinancialInstruments***

 

Our financial instrumentsinclude cash and short-term investments, restricted cash investments, accountsand notes receivable, accounts payable and debt. The approximate fair marketvalue of our variable rate debt at July 31, 2005 is $221.9 million. Thecarrying value is a reasonable estimate of fair value for all other financialinstruments.

 

***Translation of ForeignCurrencies***

 

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 $237,000 at July 31, 2005 and $111,000 at July 31,2004 were pledged as collateral on certain bank guarantees related to contractsentered into in the normal course of business and are classified as restrictedcash investments on the Consolidated Balance Sheets.

 

***Accounts and Notes Receivable***

 

Unbilled amounts ofapproximately $57.4 million at July 31, 2005 and $58.8 million at July 31,2004 were included in accounts and notes receivable. These amounts representwork done or services or products delivered to customers but not billable atthe fiscal year ends in accordance with contract provisions and generally areexpected to be billed in one to four months. Our allowance for doubtfulaccounts is established based upon past due customer accounts specificallyidentified during our periodic account analyses.

 

30

----

 

***Inventories***

 

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

 

***Investments available for sale***

 

Our marketable securitiesare considered available for sale and are reported at fair value, with changesin fair values recorded as unrealized gains and losses in “Accumulated othercomprehensive income” within stockholders’ equity. Realized gains and lossesare calculated using the specific identification method.

 

***Property and Equipment***

 

Property and equipmentare recorded at cost. Depreciation is computed using the straight-line method basedon 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 $11.4 million, $18.6million and $24.4 million in fiscal years 2005, 2004 and 2003, 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 $3.2 million and $2.4 million at July 31,2005 and 2004, respectively. Expenditures for additions and improvements,including capitalized interest, are capitalized and depreciated over theestimated useful life 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 the capitalizeddepreciation are our net multi-client investment, or as used in this document “investmentin multi-client library, net cash,” and represent cash investment in thelibrary.

 

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 coststhat remained 36 months after completion of a multi-client survey were chargedon a straight-line basis to cost of services over a period not to exceed thenext 24 months. This minimum straight-line amortization was recorded only ifminimum amortization exceeded the cost of services calculated using the salesforecast method. Effective August 1, 2003, we changed our multi-clientpolicy to commence the minimum amortization from the date of survey completion,instead of only during the last 24 months of survey book life.

 

31

----

 

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 sales would not be sufficient to cover the carrying value of theasset. In fiscal 2003, we recognized a $4.9 million pretax impairment chargerelated to a survey in the Gulf of Mexico that we have been unable to license.This survey was acquired at right angles to an existing survey and, while atechnical success, customers have not been willing to pay for the increased resolution.

 

***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-clientdata and recorded a charge of $22.1 million, included in cost of services inour Consolidated Statement of Operations. Under the prior method, capitalizedcosts of multi-client surveys were charged to cost of services in the periodsales occurred, 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.

 

***Goodwill***

 

We test goodwill forimpairment annually by deriving an approximate fair market value compared tothe net book value of the reporting unit carrying the goodwill. We utilizeseveral methods to determine the fair market value of the reporting unit. Thesemethods are based on a measure of earnings, sales and discounted cash flows.

 

During the performance ofour annual goodwill evaluation in fiscal 2003, we found that the impairmenttest indicated that our goodwill was impaired. The impairment was due primarilyto our financial performance coupled with the instability in the industry atthat time, which resulted in a sharp decline in our stock price, leaving ourcompany’s market value below its book value. This resulted in a charge toearnings of $39.3 million in fiscal 2003 representing all of our goodwill. Themajority of this goodwill, $25.1 million, originated in the (RC)2acquisition. The remainder arose from multiple smaller acquisitions.

 

***Revenues***

 

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.

 

Revenues from contractservices are 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.

 

Revenues from thelicensing of multi-client surveys are 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. Revenues generated fromlicensing of in-process multi-client surveys are 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

 

32

----

 

fixed ordeterminable due to revenue sharing clauses. In these projects, we recognizerevenue from those customers only to the extent that the net price of the datato them is, or has become, fixed. We also enter into contracts where thecustomer has a right of return based upon date contingencies. In theseprojects, we do not apply the proportional performance method and, instead, werecognize revenue only after the date contingency is resolved.

 

***Leases***

 

Our operating leases include those for officespace, specialized geophysical equipment, computer equipment and ourgeophysical vessels, which are chartered on a short-term basis, of up to 8years, relative to their useful economic lives of approximately 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 $4.2 million and $1.4 million were included in othercurrent assets at July 31, 2005 and 2004, respectively and $4.7 millionwas included in other assets at July 31, 2004. Amounts applicable tosurveys performed for our own account are included in the cost of themulti-client data library.

 

***Stock-Based Compensation***

 

We maintainstock-based compensation plans that are accounted for using the intrinsic valuebased method allowed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees,” 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 do not record any compensation expense related to stock options.In December 2004, the Financial Accounting Standards Board released SFAS No. 123R,a revision to SFAS No. 123, “Accounting for Stock-Based Compensation.”SFAS 123R, which will become effective for us beginning with our first quarterof fiscal 2006, will require us to record the cost of stock options and otherequity-based compensation in our income statement based upon the estimated fairvalue of those awards. As required by SFAS No. 148, “Accounting forStock-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. As presented below, adoptionof SFAS No. 123R will likely reduce our reported net income or increaseour reported net loss in future periods.

 

The effect on net incomeand earnings per share that would have been recorded using the fair value basedmethod for our stock compensation plans as required by SFAS 148 is as follows:

 

| ** **                     | ** **                                                                                                                           | **For the Years Ended  July 31,**        | ** ** |
|--------------------------------|--------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------|------------|
| ** **                     | ** **                                                                                                                           | **2005**                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                     | ** **                                                                                                                           | **(In thousands, except per share  amounts)** | ** ** |
| Net income (loss), as reported |                                                                                                                                 | $                                             | 83,001     |   | $ | 5,221 |   | $ | (59,097 | ) |
| Add:                           | Stock based compensation expense included above, net of related tax  effects                                                         |                                          | 228        |   | 250 |   | 443 |   |
| Less:                          | Total stock-based employee compensation expense determined under fair  value based method for all awards, net of related tax effects |                                          | (2,541     | ) | (4,859 | ) | (11,515 | ) |
| Pro forma net income (loss)    |                                                                                                                                 | $                                             | 80,688     |   | $ | 612 |   | $ | (70,169 | ) |
|                           |                                                                                                                                 |                                          |       |   |   |   |   |
| Earnings per share:            |                                                                                                                                 |                                          |       |   |   |   |   |
| Basic - as reported            |                                                                                                                                 | $                                             | 2.45       |   | $ | .16 |   | $ | (1.77 | ) |
| Diluted - as reported          |                                                                                                                                 | 2.37                                          |       | .15 |   | (1.77 | ) |
| Basic - pro forma              |                                                                                                                                 | 2.38                                          |       | .02 |   | (2.11 | ) |
| Diluted - pro forma            |                                                                                                                                 | 2.30                                          |       | .02 |   | (2.11 | ) |

 

The pro forma effect onnet income and earnings per share may not be representative of the pro formaeffects on future net income and earnings per share because some options vestover several years and additional awards may be granted.

 

33

----

 

***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 issued to ouremployees and directors and our Convertible Senior Notes. Because we recordednet losses for fiscal 2003, no securities are dilutive and basic and dilutedearnings per share are the same for that year. (See Note 11.)

 

**2. Other assets**

 

***Software***

 

We developsoftware internally and obtain software through acquisitions such as ReservoirCharacterization Research and Consulting, Inc. (“(RC)2”) andcertain assets from Hampson-Russell Software Services, Ltd. For internallydeveloped software designed for external licensing, we capitalize costsassociated with the development of the product from the time the productreaches technological feasibility until it is ready for commercial release.Software available for sale is included in other assets on our ConsolidatedBalance Sheet. Since the sale of the (RC)2 software operation,detailed below, software available for sale has consisted entirely of theHampson-Russell suite of products.

 

In the fourth quarter of fiscal 2003, we decided to sell the (RC)2 software operation and entered into a letter of intent to sell it to SeismicMicro-Technology, Inc. We recorded a charge in the fourth quarter of $7.6million related to these operations, of which $5.9 million of this charge wasapplied to reduce the carrying value of the (RC)2 software to itsestimated market value of $2.0 million. The remaining $1.7 million primarilyrelates to employee severance and facility costs. The sale closed in the firstquarter of fiscal 2004. The sales agreement allows us to continue using the(RC)2 suite of software in our reservoir consulting business and wehave entered into a dealer arrangement that allows us to continue as salesagents of the software.

 

The capitalizedcost of the software, whether developed or purchased, is charged to cost ofservices in the period sales occur based on the percentage of total cost tototal estimated sales multiplied by actual sales during the period. Thesoftware is also subject to a minimum amortization equal to the unamortizedbalance at the beginning of the period divided by the remaining book life.Estimated useful lives of our software products range from three to five years.Amortization expense for our software was $3.3 million, $3.1 million and $4.7million for fiscal 2005, 2004 and 2003, respectively.

 

***DebtIssuance Costs***

 

We capitalizecosts incurred during the process of obtaining debt financing, includingcommissions, legal fees, and filing fees. We amortize these costs over the lifeof the related debt instrument. In the case of our Convertible Senior Notes,which have a life of 20 years, we are amortizing the debt issuance costs overthe 5-year period from the Convertible Senior Notes’ issuance to the first datethe Convertible Senior Notes are redeemable, absent certain specifiedconditions. The amortization of debt issuance cost, recorded in interestexpense, was $1.2 million, $7.1 million and $1.7 million for fiscal 2005, 2004and 2003, respectively. The debt issuance cost amortization in fiscal 2004resulted primarily from the retirement of our Term Debt and the expensing ofall related issuance costs.

 

The carryingvalue of our software and debt issuance costs is as follows:

 
| ** **          | ** ** | **July 31, 2005**      | ** ** | **July 31, 2004**        | ** ** |
|---------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **          | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| ** **          | ** ** | **(In thousands)**          | ** ** |
| Software            |       | $                           | 16,396     |                          | $          | 9,610 |   | $ | 6,786 |   | $ | 15,656 |   | $ | 6,262 |   | $ | 9,394 |   |
| Debt Issuance Costs |       | 5,821                       |       | 1,597                         |       | 4,224 |   | 5,660 |   | 431 |   | 5,229 |   |
|                     |            |                             |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

34

----

 

**3. Long-term Debt**

 

Our long-term debtconsists of $155.0 million of Convertible Senior Notes due 2024. In addition,we have a Credit Facility consisting primarily of a revolving loan facilitypermitting borrowings of up to $55 million and various unsecured lines ofcredit totaling $8.5 million.

 

The Convertible SeniorNotes are our senior unsecured obligations and are convertible under certaincircumstances into a combination of cash and our common stock. In general, uponconversion of a note, the holder of such note will receive cash equal to theprincipal amount of the note and shares of our common stock for the note’sconversion value in excess of such principal amount. We entered into aregistration rights agreement in which we agreed to file a registrationstatement with the Securities and Exchange Commission within 90 days of March 3,2004 to register resales of the notes and associated shares of common stock. Wefiled a registration statement on May 28, 2004 in compliance with theregistration rights agreement; however, the registration statement was noteffective until August 31, 2005. Because our registration statement wasnot effective on August 31, 2004 as required by the indenture, we incurredliquidated damages in the aggregate amount of $0.8 million in fiscal 2005.

 

The Convertible SeniorNotes bear interest at a per annum rate which is equal to the three-month LIBORrate, adjusted quarterly, minus a spread of 0.75%. The interest rate of thenotes, from September 15, 2005 through December 14, 2005, is 3.12%,based on a LIBOR rate of 3.87%. For fiscal 2005, the weighted average interestrate on the notes was 1.72%. The notes will mature on March 15, 2024 andmay not be redeemed by us prior to March 20, 2009. Holders of the notesmay 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 of control (asdefined in the indenture under which the Convertible Senior Notes were issued).

 

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

 

1.               if the closing saleprice of our common stock is over 120% of the conversion price, currently$24.03 (with 120% being $28.84), for 20 trading days in the period of 30consecutive trading days ending on the last trading day of the fiscal quarterpreceding the quarter in which the conversion occurs;

2.               if we called thenotes for redemption and the redemption has not occurred;

3.               the occurrence of afive consecutive trading day period in which the trading price of the notes wasless than 95% of the closing sale price of our common stock on such daymultiplied by the number of shares of our common stock issuable upon conversionof the notes; or

4.               the occurrence ofspecified corporate transactions;

 

Should any of thesecircumstances occur, the Convertible Senior Notes would be convertible at thethen current stock price times the conversion ratio of 41.6146. This amountwould be payable in cash equal to the principal amount of the notes, the parvalue adjusted for dividends or other equity transactions, and the additionalamount payable in shares of our common stock. Currently, the maximum amountpayable by us on conversion is $155 million in cash plus approximately 6.5million shares. For clarity, conversion at a $40 stock price would result inour payment of $155 million in cash and 2.575 million shares of common stock.This settlement method is prescribed in the indenture and is not optional atthe discretion of any party. The shares issuable from such conversion areconsidered in the calculation of diluted earnings per share.

 

Given the recent marketprice for shares of our common stock, it is reasonable to assume that our debtmay become convertible as soon as the second quarter of fiscal 2006. Should ourstock price remain above the current conversion price, we would not expect anynotes to be converted; however, we would have to classify the notes as acurrent liability on our consolidated balance sheet.

 

On February 14,2003, we entered into a Credit Facility with Deutsche Bank AG, New York Branch,as Administrative Agent, Deutsche Bank AG, Canada Branch, as CanadianAdministrative Agent, and certain other lending institutions. In addition toterm loans, which have been retired, the Credit Facility provided a revolvingloan facility aggregating $55.0 million, including a facility for swing lineloans of up to $10.0 million and the issuance of letters of credit in anaggregate amount of up to $40.0 million. In August 2005, the limit for theissuance of letters of credit was increased to $48.0 million. Loans made underthe revolving loan facility, including swing-line loans, bear interest at avariable rate determined on the date of borrowing that is related to variousbase rates and margins depending upon our leverage ratio and the location ofthe borrowing. The revolving loan

 

35

----

 

facility expiresin February 2006. The Credit Facility prohibits us from, among otherthings, paying cash dividends. As of July 31, 2005, there were noborrowings and $8.8 million in letters of credit outstanding under therevolving loan facility, leaving $46.2 million available.

 

In addition to the CreditFacility, we have various unsecured lines of credit, with lending institutionsthat operate in geographic areas not covered by the lending institutions in ourCredit Facility, totaling $8.5 million that may be used exclusively for theissuance of letters of credit and bank guarantees. As of July 31, 2005,$1.4 million in letters of credit were outstanding under these lines.

 

Borrowings under theCredit Facility are secured by assets, including equipment, vehicles, multi-clientdata library, intellectual property, and stock of certain materialsubsidiaries, owned by us and certain of our subsidiaries. At July 31,2005, the carrying value of the secured assets, including intercompanyreceivables, which are eliminated in consolidation, was $1.2 billion. TheCredit Facility and related documents contain a number of covenants, includingfinancial covenants relating to interest coverage, leverage and net worth.These covenants relate to measurements as of quarter ending dates, and, as ofour last fiscal quarter, ended July 31, 2005, we were in compliance.

 

Duringfiscal 2005, we obtained waivers from our lenders under the Credit Facilityrelated to the late filing of our financial statements. The waivers allowed usto deliver our required reports for fiscal 2004 and for the first threequarters of fiscal 2005 later than required under the agreement. All requiredfinancial statements for such periods have now been provided to our lendersunder the Credit Facility.

 

**4. Other Accrued Liabilities**

 

Other accrued liabilitiesinclude the following:

 

| ** **                            | ** ** | **July 31,**  | ** ** |
|---------------------------------------|------------|--------------------|------------|
| ** **                            | ** ** | **2005**           | ** ** | **2004** | ** ** |
| ** **                            | ** ** | **(In thousands)** | ** ** |
| Accrued payroll and benefits          |       | $                  | 35,679     |   | $ | 19,698 |   |
| Accrued taxes other than income taxes |       | 5,985              |       | 8,083 |   |
| Accrued insurance                     |       | 9,105              |       | 4,728 |   |
| Accrued dry dock                      |       | 3,181              |       | 2,420 |   |
| Other                                 |       | 11,243             |       | 9,033 |   |
| Total                                 |       | $                  | 65,193     |   | $ | 43,962 |   |

 

**5. Income Taxes**

 

Income (loss) beforeprovision (benefit) for income taxes was earned in the following jurisdictions:

 

| ** ** | ** ** | **For the Years Ended  July 31,** | ** ** |
|------------|------------|----------------------------------------|------------|
| ** ** | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** ** | ** ** | **(In thousands)**                     | ** ** |
| U.S        |       | $                                      | 46,224     |   | $ | 4,192 |   | $ | (35,862 | ) |
| Non-U.S    |       | 30,019                                 |       | 4,744 |   | 5,000 |   |
| Total      |       | $                                      | 76,243     |   | $ | 8,936 |   | $ | (30,862 | ) |

 

36

----

 

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,** | ** ** |
|-------------------------|------------|----------------------------------------|------------|
| ** **              | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **              | ** ** | **(In thousands)**                     | ** ** |
| Current — U.S      |       | $                                      | 23,444     |   | $ | (3,293 | ) | $ | 7,513 |   |
| Deferred — U.S     |       | (38,380                                | )          | — |   | 13,341 |   |
| Current — Non-U.S  |       | 9,078                                  |       | 6,052 |   | 2,462 |   |
| Deferred — Non-U.S |       | (900                                   | )          | 956 |   | 4,919 |   |
| Total                   |       | $                                      | (6,758     | ) | $ | 3,715 |   | $ | 28,235 |   |

 

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,** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                              | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                              | ** ** | **(In thousands)**                     | ** ** |
| Income tax provision (benefit)  computed at the U.S. statutory rate     |       | $                                      | 26,685     |   | $ | 3,128 |   | $ | (10,802 | ) |
| Increase (decrease) in taxes  resulting from:                           |       |                                   |       |   |   |   |   |
| Non-U.S. activities                                                     |       | 3,029                                  |       | 8,662 |   | 7,913 |   |
| Adjustments to tax  contingencies and resolution of certain tax matters |       | 776                                    |       | (5,173 | ) | — |   |
| Deduction of worthless stock of  a subsidiary                           |       | —                                 |       | (3,446 | ) | — |   |
| Tax credits                                                             |       | (3,369                                 | )          | (1,671 | ) | (800 | ) |
| Valuation allowances on  deferred income tax assets                     |       | (34,417                                | )          | 1,408 |   | 20,615 |   |
| Non-deductibles                                                         |       | 892                                    |       | 521 |   | — |   |
| Software amortization                                                   |       | —                                 |       | 411 |   | 616 |   |
| Adjustments to prior year tax  returns                                  |       | (566                                   | )          | 103 |   | 2,880 |   |
| Goodwill                                                                |       | —                                 |       | — |   | 7,852 |   |
| Other                                                                   |       | 212                                    |       | (228 | ) | (39 | ) |
| Total                                                                   |       | $                                      | (6,758     | ) | $ | 3,715 |   | $ | 28,235 |   |

 

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 RevenueService on the audit of certain prior year tax returns. This settlementfavorably impacted our 2004 income tax provision.

 

37

----

 

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,**  | ** ** |
|-----------------------------------------------|------------|--------------------|------------|
| ** **                                    | ** ** | **2005**           | ** ** | **2004** | ** ** |
| ** **                                    | ** ** | **(In thousands)** | ** ** |
| Deferred income tax assets:                   |       |               |       |   |   |
| Net operating loss  carryforwards             |       | $                  | 24,156     |   | $ | 33,867 |   |
| Multi-client data library                     |       | 13,801             |       | 20,684 |   |
| Property and equipment                        |       | 8,711              |       | 7,827 |   |
| Tax credit carryforwards                      |       | 540                |       | 5,581 |   |
| Accrued liabilities                           |       | 5,424              |       | 5,062 |   |
| Pension liabilities                           |       | 3,106              |       | 32 |   |
| Capitalized costs                             |       | 2,703              |       | 3,140 |   |
| Deferred revenues                             |       | 6,255              |       | 2,017 |   |
| Other                                         |       | 2,093              |       | 1,949 |   |
| Valuation allowances                          |       | (17,772            | )          | (73,036 | ) |
| Deferred income tax assets –  net        |       | 49,017             |       | 7,123 |   |
| Deferred income tax  liabilities:             |       |               |       |   |   |
| Partnerships                                  |       | (5,157             | )          | (3,840 | ) |
| Deferred charges                              |       | (441               | )          | (3,253 | ) |
| Deferred mobilization                         |       | (1,278             | )          | — |   |
| Other                                         |       | —             |       | (243 | ) |
| Deferred income tax liabilities               |       | (6,876             | )          | (7,336 | ) |
| Net deferred income tax assets  (liabilities) |       | $                  | 42,141     |   | $ | (213 | ) |

 

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. Duringfiscal 2003, we provided an additional $20.1 million valuation allowance as theevidence, including historical losses, did not support a more likely than notconclusion that portions of our deferred tax assets would be realized. As aresult, the fiscal 2003 tax provision included a non-cash charge of $20.1million for the increased valuation allowance. During fiscal 2005, we concludedthat certain valuation allowances were no longer necessary as availableevidence, including recent profits and estimates of projected future taxableincome, supported a more likely than not conclusion that the related deferredtax assets would be realized. As a result, the fiscal 2005 tax benefit includesa non-cash benefit of $36.9 million.

 

During fiscal 2005, ourvaluation allowances decreased $55.3 million. $36.9 million of the decrease wasdue to the reversal of deferred tax valuation allowances, $16.6 million was dueto the net utilization of fully reserved deferred tax assets and $1.8 millionwas due to expiration of fully reserved deferred tax assets during the period.As of July 31, 2005, we had $17.8 million of valuation allowances relatedto deferred tax assets in jurisdictions where historical losses indicaterealization is doubtful.

 

38

----

 

Since thequasi-reorganization with respect to Digicon on July 31, 1991, the taxbenefits of NOL carryforwards existing at the date of the quasi-reorganizationhave been recognized through a direct addition to paid-in capital, whenrealization is more likely than not. The following schedule sets forth theexpiration dates of the non-U.S. NOL carryforwards as of July 31, 2005. Wehad no U.S. NOL carryforwards.

 

| **Fiscal  Year** | ** ** | **Non-U.S.****Net  Operating  Losses** | ** ** |
|------------------|------------|----------------------------------------|------------|
|             |       |                                   |       |
| 2006             |       | $                                      | 3,127      |   |
| 2007             |       | 909                                    |       |
| 2008             |       | 920                                    |       |
| 2009             |       | 1,107                                  |       |
| 2010             |       | 960                                    |       |
| 2011             |       | 245                                    |       |
| 2012             |       | 743                                    |       |
| 2013             |       | 892                                    |       |
| 2014             |       | 378                                    |       |
| 2015             |       | 2,055                                  |       |
| Indefinite       |       | 65,459                                 |       |
| Total            |       | $                                      | 76,795     |   |

 

During fiscal 2003, weutilized $21.0 million of U.S. NOL carryforwards, 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 $76.8 million at July 31, 2005, of which $0.6 millionexisted prior to the quasi-reorganization, and of which $56.6 million aresubject to valuation allowances. Of the $76.8 million of non-U.S. NOLcarryforwards, approximately $33.5 million relate to Brazilian operations,$17.0 million relate to Australian operations, and $8.8 million relate toUnited Kingdom operations, all of which have an indefinite carryforward period,and are available to offset future income (subject to certain limitations).

 

We consider theundistributed earnings of our non-U.S. subsidiaries to be permanentlyreinvested and we have not provided deferred U.S. income tax on those earnings.On October 22, 2004, the President signed the American Jobs Creation Actof 2004 (the “Act”). The Act creates a temporary incentive for U.S.corporations to repatriate accumulated income earned abroad by providing an 85percent dividends received deduction for certain dividends from controlled foreigncorporations. The deduction is subject to a number of limitations and, as oftoday, uncertainty remains as to how to interpret numerous provisions in theAct. As such, we are not yet in a position to decide on whether, and to whatextent, we might repatriate earnings that have not yet been remitted to theU.S.

 

**6. Commitments and ContingentLiabilities**

 

Total rentals of vessels,equipment and office facilities charged to operations amounted to $92.8million, $72.6 million and $72.2 million for the years ended July 31,2005, 2004 and 2003, respectively.

 

Minimum rentals payableunder operating leases, principally for office space and vessel charters withremaining non-cancelable terms of at least one year are as follows:

 

| **Fiscal Year**     | ** ** | **Minimum Rentals** | ** ** |
|---------------------|------------|---------------------|------------|
| ** **          | ** ** | **(In thousands)**  | ** ** |
| 2006                |       | $                   | 41,207     |   |
| 2007                |       | 20,385              |       |
| 2008                |       | 10,000              |       |
| 2009                |       | 9,723               |       |
| 2010 and thereafter |       | 24,107              |       |
| Total               |       | $                   | 105,422    |   |

 

39

----

 

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 a materialadverse impact on our financial position. It is possible that the actualliability for unreported workers compensation claims could exceed the amountsalready 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, 2005,we had $10.7 million of purchase orders outstanding.

 

**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 $14,000 for calendar2005. Prior to January 1, 2003, we contributed an amount equal to one-halfof the employee’s contribution of up to $8,000 or 8% of the employee’s salary(whichever was less). As of January 1, 2003, we contribute an amount equalto the employee’s contribution up to a maximum of 5% of the employee’s salaryor the statutory maximum. Our matching contributions to the 401(k) plan were$2.1 million, $1.8 million and $1.4 million for fiscal 2005, 2004 and 2003,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 $16,500 for calendar year 2005. Our matching contributionsto this plan were $0.8 million, $0.7 million and $0.7 million for fiscal 2005,2004 and 2003, respectively.

 

***Stock Option Plans***

 

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

 

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

 

On December 11,2002, we adopted our current Share Incentive Plan that provides for theissuance to directors, officers and select employees: (1) nonqualifiedoptions to purchase our common stock, (2) incentive options to purchaseour common stock, (3) share appreciation rights, (4) deferred shareunits, (5) restricted shares and (6) performance shares. Optionsissued to employees under the Share Incentive Plan have exercise prices equalto the fair market value at the date of grant; have five-year lives and vestover three years. Options issued to continuing non-employee directors under theShare Incentive Plan have exercise prices equal to the fair market value at thedate of grant, have five-year lives and vest immediately. As of July 31,2005, 1,625,314 shares were reserved for issuance under the Share IncentivePlan, with no more than 432,969 of those shares issuable in any form other thanstock options.

 

Commencing with annualdirector’s fees paid in calendar year 2003, each of our non-employee directorsmay elect to receive deferred share units issued under our Share Incentive Planin lieu of 25, 50, 75 or 100% of his or her annual director’s fees. Oncevested, each share unit is convertible into one share of our common stock. Adirector who elects to receive share units prior to the

 

40

----

 

end of anycalendar year, in lieu of all or a portion of the following year’s annualdirector fees, is entitled to receive on January 1 of the following yearthat number of deferred share units with a fair market value, as defined in theplan, equal to the amount deferred. The share units then issued vest,coinciding with the normal payment of quarterly director’s fees, 25 percent oneach of the following dates: January 1 (the grant date), April 1, July 1and October 1. Vested share units convert to shares of our common stockupon the director’s retirement or other termination. In calendar year 2004 and2003, 2,386 and 3,165 deferred share units were issued, respectively. Nodeferred share units were issued in calendar 2005.

 

The following tablesprovide additional information related to our stock option plans:

 
| ** **          | ** ** | **For the Year Ended July 31, 2005** | ** ** |
|---------------------|------------|-------------------------------------------|------------|
| ** **          | ** ** | **Number of****Shares**                   | ** ** | **Weighted****Average  Exercise  Price** | ** ** | **Weighted****Average  Grant Date  Fair Value** | ** ** | **Weighted****Average  Contractual  Life  In Years** | ** ** |
| Beginning balance   |       | 3,179,873                                 |       | $ | 16.19 |   |   |   |   |   |
| Options granted     |       | 20,000                                    |       | 26.43 |   | $ | 10.81 |   | 4 |   |
| Options exercised   |       | (631,310                                  | )          | 10.94 |   |   |   |   |   |
| Options forfeited   |       | (145,773                                  | )          | 18.12 |   |   |   |   |   |
| Total outstanding   |       | 2,422,790                                 |       | 17.52 |   |   |   |   |   |
| Options exercisable |       | 1,653,172                                 |       | 20.44 |   |   |   |   |   |
|                     |            |                                           |            |  |  |  |  |  |  |  |  |

 

Options by range of exerciseprice:

 
| ** **    | ** ** | ** **      | ** ** | **Total**       | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------|------------|-----------------|------------|-----------------|------------|------------|------------|------------|------------|
| ** **    | ** ** | **Exercisable** | ** ** | **Outstanding** | ** ** | ** ** | ** ** | ** ** | ** ** |
| $0.00-$5.65   |       | 4,333           |       | 4,333           |       |       |       |       |       |
| $5.65-$11.30  |       | 663,443         |       | 1,333,061       |       |       |       |       |       |
| $11.30-$16.95 |       | 79,450          |       | 159,450         |       |       |       |       |       |
| $16.95-$22.60 |       | 186,547         |       | 191,547         |       |       |       |       |       |
| $22.60-$28.25 |       | 332,176         |       | 347,176         |       |       |       |       |       |
| $28.25-$33.90 |       | —          |       | —          |       |       |       |       |       |
| $33.90-$39.55 |       | 371,923         |       | 371,923         |       |       |       |       |       |
| $39.55-$45.20 |       | 8,759           |       | 8,759           |       |       |       |       |       |
| $45.20-$50.85 |       | 4,828           |       | 4,828           |       |       |       |       |       |
| $50.85-$56.50 |       | 1,713           |       | 1,713           |       |       |       |       |       |
| Total         |       | 1,653,172       |       | 2,422,790       |       |       |       |       |       |

 

| ** **          | ** ** | **For the Year Ended July 31, 2004** | ** ** |
|---------------------|------------|-------------------------------------------|------------|
| ** **          | ** ** | **Number of****Shares**                   | ** ** | **Weighted****Average  Exercise  Price** | ** ** | **Weighted****Average  Grant  Date  Fair Value** | ** ** |
| Beginning balance   |       | 4,029,499                                 |       | $ | 15.24 |   |   |   |
| Options granted     |       | 656,400                                   |       | 12.17 |   | $ | 6.32 |   |
| Options exercised   |       | (1,042,866                                | )          | 10.30 |   |   |   |
| Options forfeited   |       | (463,160                                  | )          | 15.74 |   |   |   |
| Total outstanding   |       | 3,179,873                                 |       | 16.19 |   |   |   |
| Options exercisable |       | 1,699,830                                 |       | 20.92 |   |   |   |
|                     |            |                                           |            |  |  |  |  |  |  |

 

41

----

 

| ** **          | ** ** | **For the Year Ended July 31, 2003** | ** ** |
|---------------------|------------|-------------------------------------------|------------|
| ** **          | ** ** | **Number of****Shares**                   | ** ** | **Weighted****Average  Exercise  Price** | ** ** | **Weighted****Average  Grant  Date  Fair Value** | ** ** |
| Beginning balance   |       | 1,884,665                                 |       | $ | 22.97 |   |   |   |
| Options granted     |       | 2,673,137                                 |       | 9.94 |   | $ | 5.36 |   |
| Options exercised   |       | (83,896                                   | )          | 7.09 |   |   |   |
| Options forfeited   |       | (444,407                                  | )          | 17.33 |   |   |   |
| Total outstanding   |       | 4,029,499                                 |       | 15.27 |   |   |   |
| Options exercisable |       | 2,083,780                                 |       | 18.96 |   |   |   |
|                     |            |                                           |            |  |  |  |  |  |  |

 

The weighted average fairvalues of options granted are determined using the Black-Scholes optionvaluation method assuming no expected dividends. Other assumptions used are asfollows:

 

| ** **              | ** ** | **For the Years Ended July 31,** | ** ** |
|-------------------------|------------|---------------------------------------|------------|
| ** **              | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Risk-free interest rate |       | 3.7                                   | %          | 3.7 | % | 3.0 | % |
| Expected volatility     |       | 46.8                                  | %          | 64.9 | % | 69.0 | % |
| Expected life in years  |       | 4.0                                   |       | 4.0 |   | 4.0 |   |

 

On November 1, 1997,we initiated an employee stock purchase plan. This plan was amended andrestated on December 11, 2002 and called the Employee Share Purchase Plan.The Board of Directors originally authorized 1,000,000 shares available forissuance under the plan and at July 31, 2005, 820,262 shares remainedavailable for issuance. Participation is voluntary and substantially allfull-time employees meeting limited eligibility requirements may participate.Contributions are made through payroll deductions and may not be less than 1%or more than 15% of the participant’s base pay as defined. The participant’soption to purchase common stock is deemed to be granted on the first day andexercised on the last day of the fiscal quarter at a price that is the lower of85% of the market price on the first or last day of the fiscal quarter. Duringfiscal 2005, 86,940 shares of common stock were issued with a weighted fairvalue at grant of $18.41 per share. During fiscal 2004, 244,232 shares ofcommon stock were issued with a weighted average fair value at grant date of$7.47. During fiscal 2003, 275,614 shares of common stock were issued with aweighted average fair value at grant of $7.42 per share.

 

On June 9, 1998, weinitiated a restricted stock plan. This plan was amended and restated on March 7,2000 to make an aggregate of 173,975 shares available for issuance under theplan. On March 8, 2001, an additional 200,000 shares were reserved for useunder the plan. On December 11, 2002, the plan was replaced by theEmployee Share Purchase Plan, which allows the granting of restricted stock.The Board of Directors’ Compensation Committee determines the eligibility of anemployee and the terms and amount of each grant. In addition, we have issuedrestricted stock in conjunction with certain employment agreements.

 

The following tablesrepresent the restricted shares issued in fiscal 2005 and 2004:

 

| **Year Ended July 31, 2005** | ** ** |
|-----------------------------------|------------|
| **Number of****Shares Granted**   | ** ** | **Grant Date** | ** ** | **Closing Share Price  on Grant Date** | ** ** | **Vesting****Period (Years)** | ** ** |
| 12,500                            |       | August 2004 |   | $ | 21.23 |   | 3 |   |
| 2,500                             |       | June 2005 |   | 30.15 |   | 3 |   |
|                                   |            |  |  |  |  |  |  |  |

 

| **Year Ended July 31, 2004** | ** ** |
|-----------------------------------|------------|
| **Number of****Shares Granted**   | ** ** | **Grant Date** | ** ** | **Closing Share Price  on Grant Date** | ** ** | **Vesting****Period (Years)** | ** ** |
| 46,289                            |       | January 2004 |   | $ | 11.36 |   | 3 |   |
| 6,000                             |       | February 2004 |   | 12.91 |   | 3 |   |
| 2,000                             |       | July 2004 |   | 23.46 |   | 3 |   |
|                                   |            |  |  |  |  |  |  |  |

 

42

----

 

***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 5.5% of their salaries. We provide an additionalcontribution in an actuarially determined amount necessary to fund future benefitsto be provided under the Pension Plan. Benefits provided are based upon 1/60 ofthe employee’s final pensionable salary (as defined) 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, 2005 and July 31,2004, respectively:

 

| ** **                                        | ** ** | **July 31,**  | ** ** |
|---------------------------------------------------|------------|--------------------|------------|
| ** **                                        | ** ** | **2005**           | ** ** | **2004** | ** ** |
| ** **                                        | ** ** | **(In thousands)** | ** ** |
| Benefit obligation at beginning  of year          |       | $                  | 19,882     |   | $ | 16,338 |   |
| Service cost                                      |       | 754                |       | 542 |   |
| Interest cost                                     |       | 1,235              |       | 1,061 |   |
| Contributions by plan  participants               |       | 431                |       | 369 |   |
| Actuarial loss                                    |       | 16,295             |       | 145 |   |
| Benefits paid                                     |       | (186               | )          | (196 | ) |
| Foreign currency exchange rate  changes           |       | (1,964             | )          | 1,623 |   |
| Benefit obligation at end of  year                |       | $                  | 36,447     |   | $ | 19,882 |   |
|                                              |       |               |       |   |   |
| Fair value of plan assets at  beginning of year   |       | $                  | 14,088     |   | $ | 10,926 |   |
| Actual gain (loss) on plan  assets                |       | 3,616              |       | 951 |   |
| Employer contributions                            |       | 972                |       | 927 |   |
| Plan participants’  contributions            |       | 431                |       | 369 |   |
| Benefits paid                                     |       | (46                | )          | (196 | ) |
| Foreign currency exchange rate  changes and other |       | (1,060             | )          | 1,111 |   |
| Fair value of plan assets at  end of year         |       | $                  | 18,001     |   | $ | 14,088 |   |

 

The funded status of thePension Plan is as follows:

 

| ** **                                            | ** ** | **July 31,**  | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|
| ** **                                            | ** ** | **2005**           | ** ** | **2004** | ** ** |
| ** **                                            | ** ** | **(In thousands)** | ** ** |
| Projected benefit obligation in excess of plan assets |       | $                  | 18,446     |   | $ | 5,794 |   |
| Unrecognized prior service costs                      |       | (1,386             | )          | (1,598 | ) |
| Unrecognized actuarial loss                           |       | (5,003             | )          | (2,602 | ) |
| Net pension liability                                 |       | $                  | 12,057     |   | $ | 1,594 |   |

 

Amounts included in theconsolidated balance sheet consist of:

 

| ** **                | ** ** | **July 31,**  | ** ** |
|---------------------------|------------|--------------------|------------|
| ** **                | ** ** | **2005**           | ** ** | **2004** | ** ** |
| ** **                | ** ** | **(In thousands)** | ** ** |
| Accrued benefit liability |       | $                  | 13,443     |   | $ | 3,192 |   |
| Intangible asset          |       | (1,386             | )          | (1,598 | ) |
| Net pension liability     |       | $                  | 12,057     |   | $ | 1,594 |   |

 

Our pension liability isincluded in “Other non-current liabilities” on our balance sheet. The excess ofour accumulated benefit obligation over our prior service costs is recorded in “Accumulatedcomprehensive income – other” on our balance sheet, and is $8.4 million infiscal 2005 and $1.2 million in fiscal 2004.

 

43

----

 

The net periodic pensioncosts are as follows:

 

| ** **                                        | ** ** | **For the Years Ended  July 31,** | ** ** |
|---------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                        | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                        | ** ** | **(In thousands)**                     | ** ** |
| Service costs (benefits earned during the period) |       | $                                      | 754        |   | $ | 542 |   | $ | 584 |   |
| Interest cost on projected benefit obligation     |       | 1,235                                  |       | 1,061 |   | 810 |   |
| Expected return on plan assets                    |       | (968                                   | )          | (787 | ) | (665 | ) |
| Net amortization and deferral                     |       | 164                                    |       | 194 |   | 222 |   |
| Net periodic pension costs                        |       | $                                      | 1,185      |   | $ | 1,010 |   | $ | 951 |   |

 

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,** | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|
| ** **                                  | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Discount rate                               |       | 5.0                                    | %          | 6.0 | % | 6.0 | % |
| Rates of increase in compensation levels    |       | 4.3                                    | %          | 4.0 | % | 4.0 | % |
| Expected long-term rate of return on assets |       | 6.8                                    | %          | 6.5 | % | 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 weighted-averageasset allocations by asset category for the plan assets are as follow:

 

| ** **          | ** ** | **For the Years Ended****July 31,** | ** ** |
|---------------------|------------|------------------------------------------|------------|
| **Asset  Category** | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| Equity securities   |       | 98.0                                     | %          | 98.8 | % |
| Cash                |       | 2.0                                      | %          | 1.2 | % |
| Total               |       | 100.0                                    | %          | 100.0 | % |

 

Our target weighted-averageasset allocation for the plan assets is 100% in equity securities.

 

For fiscal 2006, we planto contribute approximately $0.9 million to the pension plan. We expect futurebenefit payments of:

 

| **Year**            | ** ** | **Amount**         | ** ** |
|---------------------|------------|--------------------|------------|
| ** **          | ** ** | **(In thousands)** | ** ** |
| 2006                |       | $                  | 43         |   |
| 2007                |       | 56                 |       |
| 2008                |       | 78                 |       |
| 2009                |       | 89                 |       |
| 2010                |       | 103                |       |
| Years 2011  to 2015 |       | 1,669              |       |
|                     |            |                    |            |  |

 

**8. Common and Preferred Stock and Special Voting Stock and ExchangeableShares**

 

We areauthorized to issue 78.5 million shares of common stock.

 

The Board ofDirectors, without any action by the stockholders, may issue up to one millionshares of preferred stock, par value $.01, in one or more series and determinethe voting rights, preferences as to dividends, liquidation, conversion, andother rights of such stock. There are no shares of preferred stock outstandingas of July 31, 2005.

 

On May 27,1997, our Board of Directors declared a distribution of one right for eachoutstanding share of common stock or Exchangeable Stock to shareholders ofrecord at the close of business on June 12, 1997 and designated 400,000shares of the authorized preferred stock as a class to be distributed under ashareholder rights agreement. Upon the occurrence of certain events

 

44

----

 

enumeratedin the shareholder rights agreement, each right entitles the registered holderto purchase a fraction of a share of our preferred stock or the common stock ofan acquiring company. The rights, among other things, will cause substantialdilution to a person or group that attempts to acquire our company. The rightsexpire on May 15, 2007 and may be redeemed prior to that date.

 

Two shares of specialvoting stock of Veritas DGC Inc. are authorized and outstanding, each as aseries of common shares. One special voting share was issued in connection withthe combination of Digicon Inc. (Veritas DGC Inc.’s former name) and VeritasEnergy Services Inc. in August of 1996. The other special voting share wasissued in connection with the combination of Veritas DGC Inc., Veritas EnergyServices and Enertec Resources Inc. in September 1999.

 

These special votingshares possess a number of votes equal to the number of outstanding VeritasEnergy Services exchangeable shares and Veritas Energy Services Class Aexchangeable shares, Series 1 that are not owned by Veritas DGC Inc. orany of its subsidiaries. Such exchangeable shares were issued to the formerstockholders of Veritas Energy Services and Enertec Resources in businesscombinations with Veritas DGC Inc. In any matter submitted to Veritas DGC Inc.stockholders for a vote, each holder of a Veritas Energy Services exchangeableshare has the right to instruct a trustee as to the manner of voting for one ofthe votes comprising the Veritas Energy Services special voting share for eachVeritas Energy Services exchangeable share owned by the holder. Likewise, eachholder of a Veritas Energy Services class A exchangeable share, series 1 hasthe right to instruct a trustee as to the manner of voting for one of the votescomprising the Enertec special voting share for each Veritas Energy Services Class Aexchangeable shares, Series 1 owned by the holder. The Veritas EnergyServices exchangeable shares and the Veritas Energy Services Class Aexchangeable shares, Series 1 are convertible on a one-for-one basis intoshares of the common stock and, when coupled with the voting rights afforded bythe special voting shares, have rights virtually identical to Veritas DGC Inc.common stock. As a result, we treat the exchangeable shares as shares of ourcommon stock for all purposes including the calculation of earnings per shareinformation.

 

**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 is insured at its replacement cost. As aresult, the insurance proceeds for reimbursement of certain costs and toacquire replacement equipment in excess of the book value of the equipment lostless our deductible was recorded as a gain of $9.9 million.

 

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

 

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

 

| ** **                                | ** ** | **For the  Years Ended July 31,** | ** ** |
|-------------------------------------------|------------|----------------------------------------|------------|
| ** **                                | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                | ** ** | **(In thousands)**                     | ** ** |
| Net foreign currency exchange loss (gain) |       | $                                      | (110       | ) | $ | 1,248 |   | $ | (82 | ) |
| Interest income                           |       | (5,262                                 | )          | (1,602 | ) | (960 | ) |
| Loss from unconsolidated subsidiary (1)   |       | —                                 |       | 958 |   | 1,111 |   |
| Other                                     |       | (765                                   | )          | (621 | ) | 147 |   |
| Total                                     |       | $                                      | (6,137     | ) | $ | (17 | ) | $ | 216 |   |

 

----

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

 

45

----

 

**11. Net Income (Loss) PerCommon Share**

 

Net income (loss) percommon share — basic and diluted is computed as follows:

 

| ** **                                                      | ** ** | **For the Years Ended July 31,**         | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                      | ** ** | **2005**                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                      | ** ** | **(In thousands, except per share  amounts)** | ** ** |
|                                                            |       |                                          |       |   |   |   |   |
| Net income (loss)                                               |       | $                                             | 83,001     |   | $ | 5,221 |   | $ | (59,097 | ) |
|                                                            |       |                                          |       |   |   |   |   |
| Basic:                                                          |       |                                          |       |   |   |   |   |
| Weighted average common shares  (including exchangeable shares) |       | 33,843                                        |       | 33,572 |   | 33,305 |   |
|                                                            |       |                                          |       |   |   |   |   |
| Net income (loss) per share                                     |       | $                                             | 2.45       |   | $ | .16 |   | $ | (1.77 | ) |
|                                                            |       |                                          |       |   |   |   |   |
| Diluted:                                                        | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average common shares  (including exchangeable shares) |       | 33,843                                        |       | 33,572 |   | 33,305 |   |
| Shares issuable from the  assumed exercise of options           |       | 1,166                                         |       | 660 |   | — |   |
| Shares issuable from the  assumed vesting of restricted stock   |       | 45                                            |       | 28 |   | — |   |
| Total                                                           |       | 35,054                                        |       | 34,260 |   | 33,305 |   |
|                                                            |       |                                          |       |   |   |   |   |
| Net income (loss) per share                                     |       | $                                             | 2.37       |   | $ | .15 |   | $ | (1.77 | ) |

 

Certain options topurchase common shares have been excluded from the calculation of dilutedweighted average shares because the result would be anti-dilutive. Due to thenet loss for fiscal 2003, all options to purchase common shares have beenexcluded from the computation. Options excluded are shown in the followingtable:

 

| ** **           | ** ** | **For the Years Ended  July 31,** | ** ** |
|----------------------|------------|----------------------------------------|------------|
| ** **           | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Number of options    |       | 681,650                                |       | 1,079,591 |   | 4,029,499 |   |
| Exercise price range |       | $26.00-$55.13                          |       | $14.56-$55.13 |   | $5.25-$55.13 |   |
| Expiring through     |       | March 2012                        |       | March 2012 |   | March 2012 |   |

 

The Convertible SeniorNotes are not convertible as of July 31, 2005 and the shares issuable fromsuch conversion, while considered, are not included in this income per share calculation as they are anti-dilutive(See Note 3 for a description of our Convertible Senior Notes.)

 

**12. Segment and GeographicalInformation**

 

Beginning in fiscal 2005,we organized the company into three geographic regions: North and South America(NASA); Europe, Africa, the Middle East and Commonwealth of Independent States(EAME); and Asia Pacific (APAC). Our geographic segments offer a common suiteof products and services to their customers, although each product or servicemay be adapted to meet the needs of the local markets. This segmentation of ourcompany is representative of the manner in which it is viewed and managed byour senior managers and our Board of Directors. The information related tofiscal 2004 and 2003 has been restated to reflect the new segment structure. Areconciliation of the reportable segments’ results to those of the totalenterprise is given below:

 

| ** **                           | ** ** | **For the Year Ended July 31, 2005** | ** ** |
|--------------------------------------|------------|-------------------------------------------|------------|
| ** **                           | ** ** | **NASA**                                  | ** ** | **EAME** | ** ** | **APAC** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                           | ** ** | **(In thousands)**                        | ** ** |
| Revenues                             |       | $                                         | 404,866    |   | $ | 130,989 |   | $ | 98,171 |   | $ | — |   | $ | 634,026 |   |
| Operating income (loss)              |       | 68,618                                    |       | 18,176 |   | 9,118 |   | (31,671 | ) | 64,241 |   |
| Net income (loss) before income  tax |       | 78,807                                    |       | 19,161 |   | 9,677 |   | (31,402 | ) | 76,243 |   |
| Total assets                         |       | 516,675                                   |       | 119,632 |   | 51,915 |   | 278,376 |   | 966,598 |   |
|                                      |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

46

----

 

| ** **                           | ** ** | **For the Year Ended July 31, 2004** | ** ** |
|--------------------------------------|------------|-------------------------------------------|------------|
| ** **                           | ** ** | **NASA**                                  | ** ** | **EAME** | ** ** | **APAC** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                           | ** ** | **(In thousands)**                        | ** ** |
| Revenues                             |       | $                                         | 385,896    |   | $ | 118,448 |   | $ | 60,125 |   | $ | — |   | $ | 564,469 |   |
| Operating income (loss)              |       | 54,327                                    |       | 6,026 |   | 1,851 |   | (34,434 | ) | 27,770 |   |
| Net income (loss) before income  tax |       | 55,474                                    |       | 5,918 |   | 142 |   | (52,598 | ) | 8,936 |   |
| Total assets                         |       | 494,985                                   |       | 116,158 |   | 38,014 |   | 127,089 |   | 776,246 |   |
|                                      |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                           | ** ** | **For the Year Ended July 31, 2003** | ** ** |
|--------------------------------------|------------|-------------------------------------------|------------|
| ** **                           | ** ** | **NASA**                                  | ** ** | **EAME** | ** ** | **APAC** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                           | ** ** | **(In thousands)**                        | ** ** |
| Revenues                             |       | $                                         | 376,721    |   | $ | 91,329 |   | $ | 33,771 |   | $ | — |   | $ | 501,821 |   |
| Operating income (loss)              |       | 38,019                                    |       | 10,675 |   | 5,724 |   | (66,530 | ) | (12,112 | ) |
| Net income (loss) before income  tax |       | 37,083                                    |       | 11,202 |   | 4,723 |   | (83,870 | ) | (30,862 | ) |
| Total assets                         |       | 540,968                                   |       | 115,697 |   | 37,005 |   | 97,275 |   | 790,945 |   |
|                                      |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Corporate includescorporate overhead and certain non-recurring adjustments. In fiscal 2003, theseadjustments include impairment of goodwill of approximately $35 million.

 

This table presentsconsolidated revenues by geographic area based on the location of the use ofthe product or service for the years ended July 31, 2005, 2004 and 2003:

 

| ** **         | ** ** | **For the Years Ended July 31,** | ** ** |
|--------------------|------------|---------------------------------------|------------|
| ** **         | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **         | ** ** | **(In thousands)**                    | ** ** |
| Geographic areas:  |       |                                  |       |   |   |   |   |
| United States      |       | $                                     | 287,993    |   | $ | 245,144 |   | $ | 190,898 |   |
| Canada             |       | 92,639                                |       | 88,283 |   | 71,911 |   |
| Latin America      |       | 17,178                                |       | 57,210 |   | 113,754 |   |
| Europe             |       | 71,852                                |       | 79,182 |   | 33,713 |   |
| Middle East/Africa |       | 62,515                                |       | 32,513 |   | 54,201 |   |
| Asia Pacific       |       | 101,849                               |       | 62,137 |   | 37,344 |   |
| Total              |       | $                                     | 634,026    |   | $ | 564,469 |   | $ | 501,821 |   |

 

This table presentsproperty and equipment, net of depreciation, by geographic area based on thelocation of the assets:

 

| ** **         | ** ** | **For the Years Ended  July 31,** | ** ** |
|--------------------|------------|----------------------------------------|------------|
| ** **         | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **         | ** ** | **(In thousands)**                     | ** ** |
| Geographic areas:  |       |                                   |       |   |   |   |   |
| United States      |       | $                                      | 93,194     |   | $ | 83,181 |   | $ | 107,159 |   |
| Asia Pacific       |       | 8,121                                  |       | 7,503 |   | 9,125 |   |
| Canada             |       | 14,808                                 |       | 17,317 |   | 15,481 |   |
| Europe             |       | 8,212                                  |       | 8,213 |   | 9,705 |   |
| Latin America      |       | 1,176                                  |       | 1,958 |   | 2,269 |   |
| Middle East/Africa |       | 2,406                                  |       | 3,491 |   | 5,914 |   |
| Total              |       | $                                      | 127,917    |   | $ | 121,663 |   | $ | 149,653 |   |

 

In fiscal 2005, a single,large multi-national oil company represented 12% of our revenues. In fiscal2004 and 2003, no customer accounted for 10% or more of total revenue.

 

We generate our revenuein the exploration and production (“E&P”) sector of the petroleum industryand, therefore, are subject to fluctuations in E&P spending. E&Pspending is directly related to the actual and expected prices of oil and gas,which are subject to wide and relatively unpredictable variations.

 

47

----

 

**13. Selected QuarterlyFinancial Data (Unaudited)**

 

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

 

| ** **                                         | ** ** | **For the Year Ended  July 31, 2004**    | ** ** |
|----------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                         | ** ** | **1st Quarter**                               | ** ** | **2nd Quarter** | ** ** | **3rd Quarter** | ** ** | **4th Quarter** | ** ** |
| ** **                                         | ** ** | **(In thousands, except per share  amounts)** | ** ** |
| Revenues                                           |       | $                                             | 102,407    |   | $ | 145,056 |   | $ | 180,714 |   | $ | 136,292 |   |
| Net income (loss)                                  |       | (26,985                                       | )          | 13,594 |   | 10,064 |   | 8,548 |   |
| Net income (loss) per common  share — basic   |       | (.80                                          | )          | .40 |   | .30 |   | .26 |   |
| Net income (loss) per common  share — diluted |       | (.80                                          | )          | .40 |   | .29 |   | .25 |   |
|                                                    |            |                                               |            |  |  |  |  |  |  |  |  |  |  |

 

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.

 

48

----

 

**VERITAS DGC INC. AND SUBSIDIARIES**

 

**Financial Statement Schedule**

**Valuation and Qualifying Accounts and Reserves**

**Schedule 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** |       |                                 |       |                                |       |                            |       |           |       |   |   |
| 2005                                 |       | $                                    | 1,109      |                                | $          | 775                             |       | $              | —     |   | $ | (562 | ) | $ | 1,322 |   |
| 2004                                 |       | 7,953                                |       | —                              |       | —                          |       | (6,844         | )          | 1,109 |   |
| 2003                                 |       | 4,143                                |       | 3,810                               |       | —                          |       | —         |       | 7,953 |   |
|                                 |       |                                 |       |                                |       |                            |       |           |       |   |   |
| **Accrued  dry dock**                |       |                                 |       |                                |       |                            |       |           |       |   |   |
| 2005                                 |       | $                                    | 2,420      |                                | $          | 4,612                           |       | $              | —     |   | $ | (3,851 | ) | $ | 3,181 |   |
| 2004                                 |       | 3,227                                |       | 4,604                               |       | —                          |       | (5,411         | )          | 2,420 |   |
| 2003                                 |       | 2,857                                |       | 3,351                               |       | —                          |       | (2,981         | )          | 3,227 |   |
|                                 |       |                                 |       |                                |       |                            |       |           |       |   |   |
| **Tax  valuation allowances**        |       |                                 |       |                                |       |                            |       |           |       |   |   |
| 2005                                 |       | $                                    | 73,036     |                                | $          | 3,195                           |       | $              | —     |   | $ | (58,459 | ) | $ | 17,772 |   |
| 2004                                 |       | 61,112                               |       | 11,924                              |       | —                          |       | —         |       | 73,036 |   |
| 2003                                 |       | 28,445                               |       | 37,756                              |       | —                          |       | (5,089         | )          | 61,112 |   |

 

49

----

 

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

 

Not Applicable.

 

## **ITEM 9A. Controls and Procedures**

 

**Evaluationof Disclosure Controls and Procedures**

 

We carried out anevaluation, under the supervision of and with the participation of ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as to the effectiveness, design and operation of our disclosure controls andprocedures (as defined in Rule 13a-15(e) under the Securities andExchange Act of 1934) as of July 31, 2005. The evaluation considered the proceduresdesigned to ensure that information required to be disclosed by us in reportsthat we file or submit under the Exchange Act is recorded, processed,summarized and reported in the time periods specified in the rules andforms of the Securities and Exchange Commission and communicated to ourmanagement as appropriate to allow timely discussions regarding requireddisclosure.  Our Chief Executive Officerand Chief Financial Officer concluded that the design and operation of ourdisclosure controls and procedures were effective as of July 31, 2005.

 

**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 theSecurities and Exchange Act of 1934). An evaluation of the 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, 2005.

 

Our assessment of theeffectiveness of our internal control over financial reporting as of July 31,2005 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**

 

We previouslyrestated our financial statements for the fiscal periods of 2002 through thethird quarter of fiscal 2004 due to our failure to properly record revenue andexpenses in the appropriate periods. Based upon our investigations and those of the Audit Committee of ourBoard of Directors, we concluded that, as of July 31, 2004, we had material weaknessesin the operation of our internal control over financial reporting.  We disclosed these material weaknesses ineach of the first three quarters of fiscal 2005 and took steps to remediatethose material weaknesses through the fourth quarter of fiscal 2005.  During the fourth quarter of fiscal 2005, wecompleted our testing of the design and operating effectiveness of theremediated controls and concluded that the material weaknesses were remediated.

 

Prior to the fourthquarter of fiscal 2005, we strengthened our internal control over financialreporting and our control environment, taking many actions including:

•                  Increased the size and scope of our internal audit department

•                  Increased our documentation, review and remediation efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002

•                  Installed a software-enabled system to monitor and manage our internal controls

•                  Began requiring support certification regarding accounting and controls from operational management and others with particular knowledge or span of control

•                  Began requiring operational accounting staff to provide increased amounts of non-financial information related to changes in operations in general and controls specifically.

•                  Implemented the use of an external agency for our whistle-blower hotline

•                  Began involving corporate finance in the hiring and review of divisional accounting personnel

•                  Established a formal evaluation and implementation process regarding changes in accounting rules

 

With specific regard toaccounting staff, we have:

•                  Replaced certain accounting personnel

•                  Changed reporting relationships

•                  Reorganized the accounting function, emphasizing segregation of duties and review processes

•                  Evaluated and  are addressing staffing requirements, including a sufficient complement and qualifications of personnel

 

50

----

 

We made one change to ourinternal control over financial reporting during the fourth quarter of fiscal2005 that materially affected, or is reasonably likely to materially affect,our internal control over financial reporting. This change was the institutionof a global policy requiring review of all material customer contracts byaccountants knowledgeable in revenue recognition and also requiring signeddocumentation of such reviews. Additionally, as many of the changes we made toour controls and control environment during fiscal 2005 are ongoing in nature,they may lead to future improvements; however, we do not expect any of thesefuture, incremental, improvements to materially affect our internal controlover financial reporting.

 

## **ITEM 9B. 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 the heading“Election of Directors” in the Proxy Statement for the 2005 Annual Meeting ofStockholders, to be filed pursuant to Regulation 14A.

 

## **ITEM 11. Executive Compensation**

## ** **

Information required bythis item is incorporated by reference to the material to appear under theheading “Management” in the Proxy Statement for the 2005 Annual Meeting ofStockholders, to be filed pursuant to Regulation 14A.

 

## **ITEM12. Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters**

## ** **

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

### ** **

The following table presents data related toall of our equity compensation plans for both non-employee directors andemployees as of July 31, 2005, and provides information related topotential ownership dilution as of such date:

 

**EquityCompensation Plan Information**

**asof July 31, 2005**

 
| ** **                                              | ** ** | ** **                  | ** ** | ** **              | ** ** | **Number of securities remaining**      | ** ** |
|---------------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|-----------------------------------------|------------|
| ** **                                              | ** ** | ** **                  | ** ** | ** **              | ** ** | **available for future issuance under** | ** ** |
| ** **                                              | ** ** | ** **                  | ** ** | ** **              | ** ** | **equity compensation plans**           | ** ** |
| ** **                                              | ** ** | **Number of securities to** | ** ** | **Weighted-average**    | ** ** | **(excluding securities to be issued**  | ** ** |
| **Equity Compensation Plan**                            | ** ** | **be issued upon exercise** | ** ** | **exercise price of**   | ** ** | **upon exercise of**                    | ** ** |
| **Category**                                            | ** ** | **of outstanding options**  | ** ** | **outstanding options** | ** ** | **outstanding options)**           | ** ** |
|                                                    |       |                        |       |                    |       |                                    |       |
| Equity compensation plans approved by  stockholders     |       | 1,026,909                   | (1)        | $                       | 13.52      |                                    | 2,445,576  | (2) |
|                                                    |       |                        |       |                    |       |                                    |       |
| Equity compensation plans not approved by  stockholders |       | 1,395,881                   | (3)        | 20.47                   |       | 0                                       | (4)        |
|                                                         |            |                             |            |                         |            |                                         |            |  |

 

----

(1)                             Includes 798,122 options issuedunder our Share Incentive Plan approved by stockholders in December 2002.Includes 208,787 options issued before December 9,1998 under our 1992 Employee Non-qualified Stock Option Plan and 20,000 optionsissued before December 9, 1997 under our 1992 Non-employee DirectorNon-qualified Stock Option Plan. Stockholders approved both of the 1992 plansinitially and in December 1997 approved amendments increasing the numberof shares, which could be issued pursuant to options under the 1992 EmployeeNon-qualified Stock Option Plan. On December 9, 1997, our board ofdirectors increased the number of options available under the 1992 Non-employeeDirector Non-qualified Stock Option Plan without obtaining stockholder approvaland on December 9, 1998, 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 820,262 sharesavailable for issuance under our employee stock purchase plan and 1,625,314shares 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

 

51

----

 

stock options, restricted stock,deferred share units, share appreciation rights or performance shares. Theaggregate number of shares available for award under the plan is currently1,625,314, of which no more than 432,969 shares may be awarded in any formother than stock options.

(3)                             Includes 554,317 options issued on or after December 9, 1998under our 1992 Employee Non-qualified Stock Option Plan and 101,500 optionsissued on or after December 9, 1997 under our 1992 Non-employee DirectorNon-qualified Stock Option Plan. See note 1 above. Also includes options weassumed in connection with our acquisitions of Enertec Resource Services Inc.in August 1999 and Reservoir Characterization Resource Consulting Inc. in February 2001.The remaining 740,064 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, our stockholders approved the adoption of our current Share IncentivePlan that provides for the issuance to directors, officers and selectemployees: (1) nonqualified options to purchase our common stock, (2) incentiveoptions to purchase our common stock, (3) share appreciation rights, (4) deferredshare units, (5) restricted shares and (6) performance shares.Effective upon the adoption of Share Incentive Plan, we may not award options,restricted stock or other equity compensation to any director, officer oremployee under any other plan, including those previously approved bystockholders.

 

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 the1992 Plan and to select employees, excluding our officers, under the 2001 Plan.Stockholders approved the adoption of the 1992 Plan in December 1992 andalso approved all amendments to the plan through December 1997. In December 1998and March 1999, our board adopted amendments to the 1992 Plan thatincreased the number of options available for grant by 1,204,550 and 550,000,respectively. We did not seek stockholder approval of these amendments as suchapproval was not then required by the terms of the plan, applicable law orstock exchange requirements. In January 2001, we adopted our 2001 Plan,which allowed the issuance of up to 2 million options. We did not seekstockholder approval of the 2001 Plan as such approval was not then required byapplicable law or stock exchange 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 lasttrading day prior to the grant date. As of July 31, 2005, a total of884,604 options were outstanding under the 1992 Plan and 740,064 wereoutstanding under our 2001 Plan. No further options may be issued under eitherplan 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 1992and also approved all amendments to the plan through December 1994. In December 1997,our board adopted amendments to the Director Plan that increased the number ofoptions available for grant by 400,000. We did not seek stockholder approval ofthese amendments as such approval was not then required by the terms of theplan, 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 31,2005, a total of 121,500 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 2005 Annual Meeting of Stockholders,to be filed pursuant to Regulation 14A.

 

52

----

 

## **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 2005 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 2005 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  Responsibility for Financial Statements                                                           |   |
|----------------------------------------------------------------------------------------------------------------------|--------|
| Report of  Independent Registered Public Accounting Firm                                                             |   |
| Consolidated  Statements of Operations and Comprehensive Income (Loss) for the Three Years  Ended July 31, 2005 |   |
| Consolidated  Balance Sheets as of July 31, 2005 and 2004                                                       |   |
| Consolidated Statements of Cash Flows for the Three Years Ended  July 31, 2005                                  |   |
| Consolidated Statements of Changes in Stockholders’ Equity for the Three  Years Ended July 31, 2004        |   |
| 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 and Qualifying Accounts and Reserves appears on page 49. Allother financial statement schedules are omitted for the reason that they arenot required or are not applicable, or the required information is shown in theconsolidated financial statements 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) **Seeaccompanying Exhibit Index.

 

53

----

 

# **SIGNATURES**

 

Pursuant to therequirements of Sections 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned; thereunto duly authorized, on the 10th day of October, 2005.

 
|   | VERITAS DGC INC.                                      |
|--------|-------------------------------------------------------|
|   |                                                  |
|   | By:                                                   | /s/THIERRY PILENKO |   |
|   | Thierry Pilenko                                       |
|   | *(Chairman of the Board and Chief Executive Officer)* |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the following persons onbehalf of the Registrant in the indicated capacities have signed this reportbelow on the 10th day of October 2005.

 
| /s/ THIERRY PILENKO    |   | Chairman of the Board and Chief  Executive Officer, Director     |
|------------------------|--------|------------------------------------------------------------------|
| Thierry Pilenko        |   |                                                             |
|                   |   |                                                             |
| /s/ STEPHEN J. LUDLOW  |   | Vice Chairman, Director                                          |
| Stephen J. Ludlow      |   |                                                             |
|                   |   |                                                             |
| /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/ VINCENT M. THIELEN |   | Vice President, Corporate  Controller                            |
| Vincent M. Thielen     |   |                                                             |
|                   |   |                                                             |
| /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          |   |                                                             |
|                   |   |                                                             |
| /s/ TERENCE K. YOUNG   |   | Director                                                         |
| Terence K. Young       |   |                                                             |

 

54

----

 

EXHIBIT INDEX

 
| **Exhibit **No. | ** ** | **Description** |
|----------------------|------------|-----------------|
| 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                  |       |            | — | By-laws of Veritas DGC Inc. as  amended and restated September 23, 2003 (Exhibit 4.5 to Veritas DGC  Inc.’s Registration Statement No. 333-111997 dated January 20, 2004  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.) |
| 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.) |

 

55

----

 
| **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.)                                |
| **10.6  |   |   | — | Amended and Restated Employment  Agreement between Veritas DGC Inc. and Matthew D. Fitzgerald.  (Exhibit 10-A to Veritas DGC Inc.’s Form 10-Q for the quarter ended  October 31, 2001 is incorporated herein by reference.)                         |
| **10.7  |   |   | — | Amendment No. 1 to Amended  and Restated Employment Agreement between Veritas DGC Inc. and Matthew D.  Fitzgerald. (Exhibit 10-B to Veritas DGC Inc.’s Form 10-Q for the  quarter ended October 31, 2001 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.)     |
| **10.10      |   |   | — | Amended and Restated Employment  Agreement between Veritas DGC Inc. and David B. Robson. (Exhibit 10-E to  Veritas DGC Inc.’s Form 10-Q for the quarter ended October 31, 2001  is incorporated herein by reference.)                               |
| **10.11      |   |   | — | Amendment No. 1 to Amended  and Restated Employment Agreement between Veritas DGC Inc. and David B.  Robson. (Exhibit 10-F 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 Employment Agreement 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.)  |
| **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.)                                                   |

 

56

----

 
| 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.) |
| 10.24   |   |   | — | Retirement Agreement between  Veritas DGC Inc. and David B. Robson dated January 1, 2004.  (Exhibit 10.4 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.)                                                                                                                                                                                                                                                                                       |
| **10.27 |   |   | — | Employment agreement between  Veritas DGC Inc. and Vincent M. Thielen dated September 23, 2003.  (Exhibit 10.28 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.)                                                                                                                                                                                                                                                                                                                      |

 

57

----

 
| +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.                  |

 

----

+  Filed herewith

** Management contract or compensatory plan or arrangement

 

58

----