VERITAS DGC INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K
(MARK ONE)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED JULY 31, 2002

OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-7427

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

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

10300 TOWN PARK
HOUSTON, TEXAS 77072
(Address of principal executive offices) (Zip Code)

(832) 351-8300
(Registrant's telephone number, including area code)

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant was $345,419,205 as of September 30, 2002.

The number of shares of the Company's common stock, $.01 par value,
outstanding at September 30, 2002 was 33,217,995 (including 1,444,514 Veritas
Energy Services Inc. exchangeable shares which are identical to the Common Stock
in all material respects).

The registrant's proxy statement to be filed in connection with the
registrant's 2002 Annual Meeting of Stockholders is incorporated by reference
into Part III of this report.

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TABLE OF CONTENTS

FORM 10-K

This report on Form 10-K and the documents incorporated by reference contain
forward-looking statements that involve risks and uncertainties. Forward-looking
statements include, among other things, business strategy and expectations
concerning industry conditions, market position, future operations, margins,
profitability, liquidity and capital resources. Although we believe that the
expectations reflected in such statements are reasonable, we can give no
assurance that such expectation will be correct. You are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date of this report on Form 10-K. Our actual results could differ materially
from those anticipated in the forward-looking statements as a result of certain
factors including those set forth under Item 1. "Business" and Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

PART I
ITEM 1. BUSINESS

GENERAL

We are a leading provider of integrated geophysical services to the
petroleum industry worldwide. Our customers include major, national and
independent oil and gas companies that utilize geophysical technologies to
achieve the following:

o Identify new areas where subsurface conditions are favorable for the
production of hydrocarbons.

o Determine the size and structure of previously identified oil and gas
fields.

o Optimize development and production of hydrocarbon reserves.

We acquire, process, and interpret geophysical data and produce geophysical
surveys that are either 2D or 3D images of the subsurface geology in the survey
area. We also produce 4D surveys, which record fluid movement in the reservoir,
by repeating specific 3D surveys over time. Additionally, we are increasingly
using geophysical data for reservoir characterization to enable our customers to
maximize their recovery of oil and natural gas.

SERVICES AND MARKETS

We conduct geophysical surveys on both a contract and a multi-client basis.
Approximately 50% of our business was done on a multi-client basis in fiscal
year 2002. The high cost of acquiring and processing geophysical data on an
exclusive basis has prompted many oil and gas companies to increase their
licensing of multi-client surveys. In response, we have added significantly to
our multi-client data library, increasing its size and geographic breadth, as
well as enhancing the quality of the data through advanced processing. Currently
our library consists of 178,787 line kilometers of 2D survey data and 135,975
square kilometers of 3D data. The marine library covers areas in the Gulf of
Mexico, the North Atlantic, Southeast Asia, West Africa, North Africa, Canada
and Brazil. The land data library includes surveys in Texas, Mississippi,
Oklahoma, Wyoming and Alberta, Canada.

These tables describe our revenues by contract type and geographic area.

In fiscal 2002, 2001 and 2000, 59%, 60% and 63%, respectively, of our
revenues were attributable to non-U.S. operations and export sales (See Note 13
of Notes to Consolidated Financial Statements for additional geographic
information).
1

PRINCIPAL OPERATING ASSETS

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

LAND ACQUISITION

Our land acquisition activities are performed with technologically advanced
geophysical equipment. The equipment, as of July 31, 2002, had a combined
recording capacity of 45,826 channels.

Each crew consists of a surveying unit which lays out the lines to be
recorded and marks the site for shot-hole placement or equipment location, an
explosive or mechanical vibrating unit that produces the acoustical impulse and
a recording unit that synchronizes the shooting and captures the signal via
geophones. On a land survey where explosives are used, the geophysical crew is
supported by several drill crews, which are typically furnished by third parties
under short-term contracts. Drill crews operate in advance of the geophysical
crew and bore shallow holes for explosive charges which, when detonated by the
geophysical crew, produce the necessary acoustical impulse.

MARINE ACQUISITION

Our marine acquisition crews operate from both owned and chartered vessels
that have been modified or equipped to our specifications. All of the vessels we
utilize are equipped to perform both 2D and 3D geophysical surveys. During the
last several years, a majority of the marine geophysical data acquisition
services we performed involved 3D surveys. The following table contains certain
information concerning the geophysical vessels we operate.

Each vessel generally has an equipment complement consisting of geophysical
recording instrumentation, digital geophysical streamer cable, cable location
and geophysical data location systems, multiple navigation systems, a source
control system that controls the synchronization of the energy source and a
firing system that generates the acoustical impulses. Streamer cables contain
hydrophones that receive the acoustical impulses reflected by variations in the
subsurface strata.

At present, five of our vessels are equipped with multiple streamers and
multiple energy sources. These vessels acquire more lines of data with each
pass, which reduces completion time and the acquisition cost. The Veritas
Vikings and the Veritas Vantage are each capable of deploying 12 streamers
simultaneously, although each is currently equipped to tow eight. In November
2002, we will return the New Venture to its owner.

DATA PROCESSING AND INTERPRETATION

We operate 14 data processing centers capable of processing 2D and 3D data.
Most of our data processing services are performed on 3D seismic data. The
centers process data received from the field, both from our own and other
geophysical crews, to produce an image of the earth's subsurface using
proprietary computer software and techniques. We also reprocess older
geophysical data using new techniques designed to enhance the quality of the
data. Our data processing centers have opened at various times since 1966 and
are at present located in:

2

Our processing centers operate high capacity, advanced technology data
processing systems on high-speed networks. These systems run our proprietary
data processing software. The marine and land data acquisition crews have
software compatible with that utilized in the processing centers, allowing for
ease in the movement of data from the field to the data processing centers. We
operate both land and marine data processing centers and tailor the equipment
and software deployed in an area to meet the local market demands.

We operate four visualization centers in Houston, Calgary, Perth, and
Crawley. These centers allow teams of geoscientists and engineers to view and
interpret large volumes of complex 3D data. The visualization centers are
imaging tools used for advanced interpretive techniques that enhance the
understanding of regional geology and reservoir modeling. These visualization
centers allow us to offer the type of collaborative geophysical model building
that is enabling oil companies to explore areas of complex geology such as the
large sub-salt plays in the deepwater Gulf of Mexico.

We have groups of scientists and engineers located in Calgary, Houston,
Denver, and Leoben, Austria who perform advanced geophysical interpretation on a
contract basis. These geophysical experts work around the world, using
third-party and Veritas proprietary software to create subsurface models for our
clients and advising our clients on how best to exploit their reservoirs. Their
work is related to exploration as well as production activities. Additionally,
we license our proprietary software, obtained through the acquisition of RC2, to
companies desiring to do their own geophysical interpretation.

TECHNOLOGY AND CAPITAL EXPENDITURES

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

Currently, we employ approximately 90 people in our research and development
activities, substantially all of whom are scientists, engineers or programmers.
During fiscal 2002, 2001 and 2000, research and development expenditures were
$11.5 million, $9.9 million, and $8.3 million, respectively. Our research and
development budget for fiscal 2003 is $9.3 million.

During fiscal 2002, 2001 and 2000, capital expenditures for equipment were
$87.1 million, $96.9 million and $57.9 million, respectively. Our capital
expenditure budget for equipment in fiscal 2003 is $57.9 million. The actual
level of future capital expenditures for equipment will depend on the
availability of funding and market requirements as dictated by oil and gas
company spending levels. A substantial portion of our fiscal 2003 capital budget
is allocated to replacement and upgrading of existing equipment. During fiscal
2002, 2001 and 2000, gross multi-client investment including capitalized
depreciation was $198.1 million, $199.6 million and $167.5 million,
respectively. For fiscal 2003, we are planning approximately $197 million gross
multi-client investment including capitalized depreciation. We intend to
maintain flexibility and control capital spending and investment in multi-client
library data in an effort to reach our goal of generating free cash flow in
fiscal 2003.

COMPETITION

The acquisition and processing of geophysical data for the oil and gas
industry has historically been highly competitive worldwide. Success in
marketing geophysical services is based on several competitive factors,
including price, crew experience, equipment availability, technological
expertise, reputation for quality and dependability and, in the case of
multi-client surveys, customer interest in the area surveyed.

As a result of changing technology and increased capital requirements, the
geophysical industry has consolidated substantially since the late 1980's. Our
largest competitors are Western-Geco (a joint venture between Schlumberger and
Baker Hughes), Compagnie Generale Geophysique and Petroleum Geo-Services ASA. We
have a large number of small, mostly local competitors, especially in the land
acquisition and processing areas where financial barriers to entry are minimal.
We attempted to consolidate the industry further through a merger with Petroleum
Geo-Services ASA. After several months of negotiation and due diligence it
became evident to us that such a merger was not in the best interest of Veritas
DGC and our board withdrew support for the merger. The transaction was
subsequently terminated in July 2002.

3

BACKLOG

At July 31, 2002, our backlog of commitments for services was $216.4
million, compared with $193.9 million at July 31, 2001. Approximately 30% of
this backlog is related to multi-client surveys. It is anticipated that a
majority of the July 31, 2002 backlog will be completed in the next 12 months.
This backlog consists of written orders or firm commitments. Contracts for
services are subject to modification by mutual consent and in certain instances
are cancelable by the customer on short notice without penalty. As a result of
these factors, our backlog as of any particular date may not be indicative of
our actual operating results for any succeeding period.

SIGNIFICANT CUSTOMERS

Historically, our principal customers have been major oil and gas companies,
national oil companies and independent oil and gas companies. In fiscal 2002, a
single large national oil company accounted for 12% of our revenue. In fiscal
2001 and fiscal 2000, no customer accounted for 10% or more of total revenues.

EMPLOYEES

During the fiscal year ended July 31, 2002, we employed an average of 3,807
people on a full-time basis. Our number of employees varies greatly due to
changing activity in our land acquisition business and ranged this year from a
low of 3,074 to a high of 5,667. With the exception of 28 employees working at
the Singapore data processing center, none of our employees are subject to
collective bargaining agreements. We consider our relations with our employees
to be good.

ITEM 2. PROPERTIES

In the first quarter of fiscal 2001, we moved all of our Houston employees
into our new 218,151 square foot leased office and warehouse complex. The
complex houses data processing operations, as well as executive, accounting,
research and development and operating personnel. This lease expires in 2015. We
lease additional space aggregating approximately 415,041 square feet, which is
used by operations around the world. These leases expire at various times
through 2015.

ITEM 3. LEGAL PROCEEDINGS

As of September 30, 2002, we were not a party to, nor was our property the
subject of, any material pending legal proceedings.

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

No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended July 31, 2002.

PART II

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

The following table sets forth the high and low sales prices for our common
stock as reported by the New York Stock Exchange for the fiscal periods shown.
Our stock is also listed on the Toronto Stock Exchange.

On September 30, 2002, the last reported sales price for our common stock on
the New York Stock Exchange was $10.81 per share. On September 30, 2002, there
were approximately 331 record holders of common stock.

4

We have not paid any dividends on our common stock and have no plans to pay
any dividends. The payment of any future dividends on common stock would depend
upon our financial condition and upon a determination by our Board of Directors
that the payment of dividends would be desirable. In addition, the indentures
governing our senior notes and our revolving credit facility restrict the
payment of cash dividends.

For information related to equity compensation plans, see Note 8.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

(1) Fiscal 2002 included unusual charges of $55.2 million for impairment of
multi-client surveys, $14.6 million for merger costs and merger termination
expense, and a $6.5 million allowance for Argentine net operating loss.

In July 2001, the Financial Accounting Standards Board issued SFAS No.141
(Business Combinations) and SFAS No.142 (Goodwill and Other Intangible Assets.)
We adopted the use of these new accounting statements in August 2001. SFAS
No.142 defines the booking and subsequent treatment of goodwill and other
intangible assets derived from business combinations and supercedes APB Opinion
No.17. This statement requires us to discontinue our amortization of goodwill.
Goodwill amortization is not included in the net loss for fiscal 2002.

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

OVERVIEW

The market for geophysical services is driven ultimately by commodity
prices, which are currently at relatively high levels. Oil prices have been over
$30 per barrel recently and have averaged in the high $20's since March 2002.
Natural gas prices have been similarly high in the U.S. with contract prices in
the $3 to $4 mcf range. The positive commodity price news has been tempered
somewhat by uncertainty as to the sustainability of these prices and the
continued consolidation in the oil and gas business.

In the fourth quarter of this year, we took a $55.2 million pretax
impairment charge related to 11 of our multi-client library surveys, which we
have shown separately in our income statement as an operating expense. As we
analyzed our fiscal 2003 plans in June and July, it became clear that we are not
likely to recover the remaining book value of these surveys, hence the fourth
quarter charge. Seven of these are land surveys located in the Gulf Coast
region. Exploration spending has been very low in this region since shortly
after we completed these surveys, and we do not anticipate any sales of these
surveys in the foreseeable future. Therefore, we have written these surveys
completely off of our books, with a net charge of $28.8 million. We have one
survey in the Gulf of Mexico that was shot at a cost significantly exceeding its
original budget. As we do not currently forecast enough sales to amortize the
remainder of the cost of the survey, we have written it down by $16.0 million.
This leaves $10.0 million of cost for this survey, an amount we believe to be
the fair value of the survey based on future estimated sales. In the
Shetland-Faroes area of the North Sea, we have a large survey that has been
troubled by an ongoing territorial dispute. When the dispute was settled,
nine-year concessions were awarded to various licensees. Given the length of the
license period, we do not foresee significant near-term additional licensing of
this survey, and we have written it off with a net charge of $9.3 million. We
also have two small 2-D surveys off Africa that were written off with a net
charge of $1.1 million.

Overall, we feel that our data library business is fundamentally sound. Our
current forecasts show that we should recover the costs of the surveys with
remaining value and, except as discussed below for U.S. land surveys, will
generate a reasonable margin. Due to the continued uncertainty of U.S. land
exploration spending, we will generally report no margin on these surveys until
all of their costs are fully amortized. Should the U.S. land business change, we
may find it prudent to increase our forecasts and book margin on these surveys
while costs remain on the books.

5

During fiscal 2002, we spent $7.1 million in legal, accounting and banking
fees related to our terminated merger with Petroleum Geo-Services (PGS), and we
paid PGS $7.5 million to terminate the merger agreement. The total $14.6 million
was expensed as incurred during the last three quarters of the year and has been
shown separately in our income statement as an operating expense. The total of
unusual items for the year, the library impairment and the merger costs, is
$69.8 million pretax, or $1.71 after tax per share.

We are currently forecasting a relatively stable operating environment for
fiscal 2003. Without industry consolidation, it is our view that the industry's
capacity in both the marine and land acquisition businesses will remain greater
than demand for at least the next year, and this will limit increases in
contract margins. Operating margins on multi-client revenue are expected to
decline due to more conservative sales estimates, most significantly in our U.S.
land business.

RESULTS OF OPERATIONS

FISCAL 2002 COMPARED WITH FISCAL 2001

Revenues. Revenues decreased 5%, from $477.3 million in fiscal 2001 to
$455.7 million in fiscal 2002. Multi-client revenues increased 3% due to strong
pre-funded sales in Brazil and the North Sea, offset by declines in licenses of
U.S. land surveys. Contract revenues decreased 11% due to continued overcapacity
and aggressive industry pricing which kept our marine fleet focused on
multi-client projects.

Operating income (loss). Operating income decreased by $49.0 million due to
the impairment of multi-client surveys and merger costs. Operating income,
excluding the unusual charges of $69.8 million, previously described, increased
by 45%. The largest contributor to the increase was improved contract margins
and a favorable revenue mix towards multi-client, rather than proprietary, work.
This is reflected in the reduction in cost of services as a percentage of
revenues from 83% in fiscal 2001 to 78% this year. We also benefited by $2.3
million from the elimination of goodwill amortization in fiscal 2002, due to a
change in accounting rules, and by $2.6 million of reduced general and
administrative costs related to reduced information technology expenses and
lower employee bonuses. We recorded an expense of $2.2 million related to the
doubtful collection of our Miller Exploration Company long-term receivable. Last
year, we released the $1.0 million reserve related to this receivable based on
Miller Exploration Company's public reporting of their intent and ability to pay
amounts owed to us. Partially offsetting these decreases was an additional $1.6
million, a 16% increase, in research and development expense in fiscal 2002.

Other (income) expense. Other (income) expense was reduced from $5.6 million
of income in fiscal 2001 to an expense of $1.8 million in fiscal 2002. Interest
income of $5.1 million in the prior year was reduced to $1.4 million in fiscal
2002 due to lower cash balances. Foreign exchange losses in Argentina and Canada
added $1.3 million of net expense. Additionally, a loss on investment in Miller
Exploration Company's stock and warrants in 2002 contributed $1.4 million of
additional expense. In the fourth quarter of 2002, we initiated a program to
liquidate our investment in Miller Exploration Company and recognized the
unrealized loss as expense, as we feel that the reduction in value is other than
temporary (See Note 9).

Provision for income taxes. The provision for income taxes decreased by
$10.7 million from fiscal 2001 to fiscal 2002 due to the tax loss incurred in
2002. The effective income tax rate in fiscal 2002, before the unusual charges,
was 38% compared to 41% in fiscal 2001. The tax benefit related to the $69.8
million unusual charge was $20.8 million, for a 30% effective rate, and was less
than the statutory rates. Additionally, we recorded a $6.5 million tax valuation
allowance related to net operating losses in Argentina, the value of which are
not likely to be realized due to our suspension of activity there.

FISCAL 2001 COMPARED WITH FISCAL 2000

Revenues. Revenues increased by 35% from fiscal 2000 to fiscal 2001 due to
the upturn in exploration spending driven by higher commodity prices.
Multi-client revenues increased 20% from $181.9 million to $218.9 million, while
contract revenues increased 51%, from $171.2 million to $258.4 million. Contract
revenue showed the stronger year to year increase due to our expansion into new
market areas, such as Alaska, the Canadian Arctic, offshore Canada, and Brazil.

Operating Income. Operating income increased by 100%, from $23.2 million in
fiscal 2000 to $46.4 million in fiscal 2001. Approximately $2 million of this
$23 million increase was due to the adjustment of receivable reserves. This
adjustment was made, in part, due to our belief in the improved ability of a
long-term debtor to repay debt. Cost of services decreased to 83% from 86% due
to improved equipment utilization. Research and development expense increased by
19%, from $8.3 million in fiscal 2000 to $9.9

6

million in fiscal 2001. This increase was due to an increase in employees
dedicated to research and development. Selling, general and administrative
expense increased by 44% due to costs associated with the move to the new
Houston headquarters building, increased corporate marketing efforts, and higher
incentive compensation payments.

Other income. Other income increased by $3.0 million from fiscal 2000 to
fiscal 2001 due partly to an additional $1.5 million in interest income
resulting from the higher cash balances in fiscal 2001. In addition, gains on
sales of assets of $1.3 million in fiscal 2001 were an improvement of $1.6
million over the $0.3 million loss on sales of assets experienced in fiscal
2000.

Provision for income taxes. The provision for income taxes increased by
$10.9 million from fiscal 2000 to fiscal 2001 due to the increased profitability
of the company. The effective income tax rate in fiscal 2001 was 41% compared to
43% in fiscal 2000.

LIQUIDITY AND CAPITAL RESOURCES

SOURCES AND USES

Our internal sources of liquidity are cash, cash equivalents and cash flow
from operations. External sources include public financing, equity sales, the
unutilized portion of a revolving credit facility, equipment financing and trade
credit. We believe that these sources of funds are adequate to meet our
liquidity needs for fiscal 2003.

As of July 31, 2002, we had $135.0 million in Senior Notes outstanding due
in October 2003. These notes contain a change of control provision allowing the
holders to require us to call the notes under certain conditions. There is a
possibility we may call these notes before their maturity, and we are allowed to
do so at par after October 15, 2002. We are evaluating various external
financing alternatives and will use the proceeds of these to retire the Senior
Notes, among other uses. We may retire the Senior Notes before their maturity.

We also have a revolving credit facility due August 2003 from commercial
lenders that provides U.S. advances up to $80.0 million and non-U.S. advances up
to $20 million. Advances bear interest, at our election, at LIBOR plus a spread
or prime rate plus a spread. These spreads are based on either certain of our
financial ratios or our credit rating. At July 31, 2002 the LIBOR spread was
1.25% and the prime rate spread was 0%, based upon our current financial ratios.
The maximum LIBOR and prime rate spreads, should our financial ratios
deteriorate, are 1.75% and 0.50%, respectively. As of July 31, 2002, there were
$5.0 million of outstanding advances under the credit facility and $9.2 million
of the credit facility was utilized for letters of credit, leaving $85.8 million
available for borrowings.

The following represents our financial contractual obligations and
commitments as of July 31, 2002 for the fiscal years 2003 through 2007 and
thereafter:

We require significant amounts of working capital to support our operations
and fund our research and development program. Our capital expenditure for
equipment budget in fiscal 2003 is approximately $58 million, most of which is
designated for replacement and upgrades. For fiscal 2003, we are planning
approximately $167 million of net cash investment in our data library and $9.3
million for research and development spending.

We will require substantial cash flow to continue our investment in
multi-client library, complete our capital expenditure and research and
development programs, and meet our principal and interest obligations with
respect to outstanding indebtedness. While we believe that we have adequate
sources of funds to meet our liquidity needs, our ability to meet our
obligations depends on our future performance, which, in turn, is subject to
many factors beyond our control. Key internal factors affecting future results
include utilization levels of acquisition and processing assets and the level of
multi-client data library licensing, all of which are driven by the external
factors of exploration spending and, ultimately, underlying commodity prices.

7

In August 1999, we filed a shelf registration allowing the issuance of up to
$200 million in debt, preferred stock or common stock. On October 26, 1999, we
filed a prospectus supplement relating to the sale of up to 2.0 million shares
of our common stock, from time to time through ordinary brokerage transactions,
under the shelf registration. As of July 31, 2002, we had issued approximately
1.3 million shares in connection with these transactions, generating
approximately $30.1 million in net proceeds. In October 2000, we sold 3.1
million shares of stock in a public offering and netted $82.4 million in
proceeds.

CRITICAL ACCOUNTING POLICIES

While all of our accounting policies are important in assuring that Veritas
adheres to current accounting standards, certain policies are particularly
important due to their impact on our financial statements. These are described
in detail below.

MULTI-CLIENT DATA LIBRARY

We collect and process geophysical data for our own account and retain all
ownership rights. We license the data to clients on a non-transferable basis. We
capitalize costs associated with acquiring and processing the data. The
capitalized cost of multi-client data is charged to cost of services in the
period sales occur based on the percentage of total estimated costs to total
estimated sales multiplied by actual sales. Any costs remaining 36 months after
completion of a survey are charged to cost of services over a period not to
exceed 24 months. The total amortization period of sixty months represents the
minimum period over which benefits from these surveys are expected to be
derived.

We periodically review the carrying value of the multi-client data library
to assess whether there has been a permanent impairment of value and record
losses when it is determined that estimated sales would not be sufficient to
cover the carrying value of the asset. In the fourth quarter of this year, we
took a $55.2 million pretax impairment charge related to 11 surveys. We recorded
no such impairment charges in fiscal 2001 or fiscal 2000.

During the fourth quarter of fiscal 2001, we changed the useful life of
marine surveys from 48 months to 60 months. We believe that 60 months more
accurately represents the time over which we will derive benefits from our
current portfolio of marine surveys. This change in accounting estimate was made
prospectively and had an immaterial impact on our results for the year ended
July 31, 2001.

DEFERRED TAX ASSET

Deferred taxes result from the effect of transactions that are recognized
in different periods for financial and tax reporting purposes. A valuation
allowance is established when it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The valuation allowance is
then adjusted when the realization of deferred tax assets becomes more likely
than not. Adjustments are also made to recognize the expiration of net operating
loss and investment tax credit carryforwards, with equal and offsetting
adjustments to the related deferred tax asset. Should the income projections
result in the conclusion that realization of additional deferred tax assets is
more likely than not, further adjustments to the valuation allowance are made.

Since our quasi-reorganization on July 31, 1991 with respect to Digicon
Inc., the tax benefits of net operating loss carryforwards existing at the date
of the quasi-reorganization have been recognized through a direct addition to
additional paid-in capital, when realization is more likely than not.
Additionally, the utilization of the net operating loss carryforwards existing
at the date of the quasi-reorganization is subject to certain limitations. For
the year ended July 31, 2002, we recognized $1.1 million related to these
benefits.

OTHER ACCOUNTING POLICIES

We receive some accounts receivable payments in foreign currency. We
currently do not conduct a hedging program because we do not consider our
current exposure to foreign currency fluctuations to be significant, although we
have hedged certain future charter payments to be made in a foreign currency.

In July 2001, the Financial Accounting Standards Board issued SFAS No. 141
(Business Combinations) and SFAS No. 142 (Goodwill and Other Intangible Assets.)
We have adopted the use of these new accounting statements. The main effect of
SFAS No. 141 is to require purchase accounting be used in all future business
combinations, disallowing the pooling-of-interests method allowed under APB
Opinion No. 16. SFAS No. 142 defines the recording and subsequent treatment of
goodwill and other intangible assets derived from business combinations and
supercedes APB Opinion No. 17. This statement requires us to discontinue our
amortization of goodwill and requires that we test goodwill and other intangible
assets for impairment on an annual basis or when certain events trigger such a
test. We performed the initial impairment tests in January 2002, and will retest
at least annually.

8

In August 2001, the Financial Accounting Standards Board issued SFAS No. 143
(Asset Retirement Obligations). This standard requires that obligations
associated with the retirement of a tangible long-lived asset be recorded as a
liability when those obligations are incurred with the liability being initially
measured at fair value. We will adopt the use of this accounting statement in
fiscal 2003 and do not expect adoption to have a material effect on our
financial position or results of operations.

In October 2001, the Financial Accounting Standards Board issued SFAS No.
144 (Accounting for the Impairment or Disposal of Long Lived Assets). This
standard develops one accounting model for long-lived assets that are to be
disposed of by sale, requiring such assets to be measured at the lower of book
value or fair value less cost to sell. The standard also provides guidance on
the recognition of liabilities for the obligations arising from disposal
activities. We will adopt the use of this accounting statement in fiscal 2003
and do not expect adoption to have a material effect on our financial position
or results of operations.

In April 2002, the Financial Accounting Standards Board issued SFAS No. 145
(Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No.
13 and Technical Corrections as of April 2002). Among other things, this
statement addresses how to report gains or losses resulting from the early
extinguishment of debt. Previously, any gains or losses were reported as an
extraordinary item. Upon adoption of SFAS No. 145, an entity will be required to
evaluate whether the debt extinguishment is truly extraordinary in nature, in
accordance with Accounting Principles Board Opinion No. 30. We will adopt the
use of this accounting statement in fiscal 2003. The adoption of this statement
will preclude extraordinary classification of costs related to early debt
extinguishment.

In July 2002, the Financial Accounting Standards Board issued SFAS No. 146
(Accounting for Costs Associated with Exit or Disposal Activities). This
standard requires recognition of costs associated with exit or disposal
activities when they are incurred rather than when management commits to an exit
or disposal plan. Examples of costs covered by this guidance include lease
termination costs, employee severance costs that are associated with
restructuring, discontinued operations, plant closings, or other exit or
disposal activities. We will adopt the use of this accounting statement in
fiscal year 2004. We have not yet completed our evaluation of the effect of this
statement on our accounting practices.

RISK FACTORS

An investment in our common stock is subject to a number of risks discussed
below. You should carefully consider these discussions of risks and the other
information included in this report.

AS A PROVIDER OF GEOPHYSICAL TECHNOLOGIES, OUR BUSINESS IS SUBSTANTIALLY
DEPENDENT ON THE LEVEL OF CAPITAL EXPENDITURES BY OIL AND GAS COMPANIES.

Capital expenditures by oil and gas companies have tended in the past to
follow trends in the price of oil and natural gas, which have fluctuated widely
in recent years. These capital expenditures may also be affected by worldwide
economic conditions. Should there be a sustained period of substantially reduced
capital expenditures by oil and gas companies, as we have experienced in recent
years, the demand for geophysical services likely will drop and there will be an
adverse effect on our results of operations and cash flow during the affected
period.

WEAK DEMAND OR TECHNOLOGICAL OBSOLESCENCE COULD IMPAIR THE VALUE OF OUR
MULTI-CLIENT DATA LIBRARY; CHANGES IN ACCOUNTING PRACTICES COULD AFFECT OUR
METHODS OF ACCOUNTING FOR OUR MULTI-CLIENT DATA LIBRARY.

We have invested significant amounts in acquiring and processing
multi-client data and expect to continue to do so for the foreseeable future.
There is no assurance that we will recover all the costs of such surveys.
Technological, regulatory or other industry or general economic developments
could render all or portions of our multi-client data library obsolete or reduce
its value.

In accordance with industry practice, we capitalize our investments in our
multi-client library and charge these investments to cost of services as sales
are made. Certain accounting authorities are reviewing accounting practices
relating to the capitalization of expenditures made in the development of
certain databases, particularly in the context of "e-commerce" companies. We
cannot predict whether future accounting changes could adversely affect our
balance sheet or results of operations.

WE ARE DEPENDENT ON ACHIEVING AND MAINTAINING TECHNOLOGICAL ADVANCES, WHICH
CREATES RISKS REGARDING TECHNOLOGICAL OBSOLESCENCE, REQUIREMENTS FOR SUBSTANTIAL
FUTURE CAPITAL EXPENDITURES, THE UNAVAILABILITY OF NECESSARY TECHNOLOGY AND THE
FAILURE OF NEW TECHNOLOGIES.

9

The development of geophysical data acquisition and processing equipment has
been characterized by rapid technological advancements in recent years. We
expect this trend to continue. We will be required to invest substantial capital
in the future to maintain our technology. Furthermore, manufacturers of
geophysical equipment may develop new systems that render our equipment, even if
recently acquired, obsolete or less desirable, requiring significant additional
capital expenditures. Since some of our competitors are themselves leading
designers and manufacturers of seismic equipment, we may not have access to
their technology. Even if critical new and advanced equipment is available to
us, we may not have funds available or be able to obtain necessary financing on
acceptable terms to acquire it. Further, any investment we may make in a
perceived technological advance may not be effective, economically successful or
otherwise accepted in the market.

WE FACE INTENSE COMPETITION IN OUR INDUSTRY, WHICH COULD ADVERSELY AFFECT OUR
RESULTS.

Competition among geophysical service providers historically has been, and
will continue to be, intense. Competitive factors in recent years have included
price, crew experience, equipment availability, technological expertise and
reputation for quality, safety and dependability. Some of our competitors
operate substantially more data acquisition crews than we do and have
significantly greater financial and other resources. These larger and
better-financed operators could enjoy an advantage over us in a competitive
environment for contract awards and data sales and in the development of new
technologies. Other competitors operate with extremely low overhead and compete
vigorously on price in certain markets where that is the determining factor in
awarding work. These low-cost competitors can have a competitive advantage over
us in these markets.

HIGH FIXED COSTS COULD RESULT IN OPERATING LOSSES.

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

OUR REVENUES ARE SUBJECT TO FLUCTUATIONS THAT ARE BEYOND OUR CONTROL, WHICH
COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS IN ANY FINANCIAL PERIOD.

Our operating results may, in the future, vary in material respects from
quarter to quarter. Factors that could cause variations include the timing of
the receipt and commencement of contracts for data acquisition, customers'
budgetary cycles, the timing of offshore lease sales and the effect of such
timing on the demand for geophysical activities, seasonal factors and the timing
of sales of geophysical data from our multi-client data library, which may be
significant to us and which are not typically made in a linear or consistent
pattern. Combined with our high fixed costs, these revenue fluctuations could
produce unexpected adverse results of operations in any fiscal period.

WE MAY BE UNABLE TO ATTRACT AND RETAIN KEY EMPLOYEES, WHICH COULD ADVERSELY
AFFECT OUR BUSINESS.

Our success depends upon attracting and retaining highly skilled
professionals and other technical personnel. A number of our employees are
highly skilled scientists and highly trained technicians, and our failure to
continue to attract and retain such individuals could adversely affect our
ability to compete in the geophysical services industry. We may confront
significant and potentially adverse competition for key personnel, particularly
during periods of increased demand for geophysical services. In addition, our
success will depend to a significant extent upon the abilities and efforts of
members of our senior management, the loss of whom could adversely affect our
business.

WE FACE RISKS ASSOCIATED WITH OUR FOREIGN REVENUE GENERATING ACTIVITIES.

Substantial portions of our revenues are derived from foreign activities
and, as a result, significant portions of our revenues are denominated in
foreign currencies. These revenues are impacted by foreign currency
fluctuations. In addition, net assets reflected on the balance sheets of our
foreign subsidiaries, and therefore on our consolidated balance sheet, are
subject to currency fluctuations. Foreign revenues are also subject to special
risks that may disrupt markets, including the risk of war, terrorism, civil
disturbances, embargo, and government activities. Revenue generating activities
in certain foreign countries may require prior United States government approval
in the form of an export license and otherwise be subject to tariffs and
import/export restrictions. There can be no assurance that we will not
experience difficulties in connection with future foreign revenues and, in
particular, adverse effects from foreign currency fluctuations.

10

WE OPERATE UNDER HAZARDOUS CONDITIONS THAT SUBJECT US TO RISK OF DAMAGE TO
PROPERTY OR PERSONAL INJURIES AND MAY INTERRUPT OUR BUSINESS.

Our seismic data acquisition activities involve operating under extreme
weather and other hazardous conditions. These operations are subject to risks of
loss to property and injury to personnel from fires, accidental explosions, ice
floes, and high seas. These events could result in an interruption of our
business or significant liability. We may not obtain insurance against all risks
or for certain equipment located from time to time in certain areas of the
world.

THE TRADING PRICE OF OUR SECURITIES COULD BE SUBJECT TO SIGNIFICANT
FLUCTUATIONS.

The trading prices of our securities fluctuate. Factors such as fluctuations
in our financial performance, and that of our competitors, as well as general
market conditions could have a significant impact on the future trading prices
of our securities. The trading prices also may be affected by weakness in oil
prices, changes in interest rates and other factors beyond our control. These
factors may have an adverse effect on the trading price of our securities.

OUR BUSINESS IS SUBJECT TO GOVERNMENTAL REGULATION, WHICH MAY ADVERSELY AFFECT
OUR FUTURE OPERATIONS.

Our operations are subject to a variety of federal, provincial, state,
foreign and local laws and regulations, including environmental laws. We invest
financial and managerial resources to comply with these laws and related permit
requirements. Failure to timely obtain the required permits may result in crew
downtime and operating losses. Because laws and regulations change frequently,
we cannot predict the impact of government regulations on our future operations.
The adoption of laws and regulations that have the effect of curtailing
exploration by oil and gas companies could also adversely affect our operations
by reducing the demand for our geophysical services.

CERTAIN PROVISIONS OF OUR CHARTER, DELAWARE LAW AND OUR SHAREHOLDER RIGHTS PLAN
MAY MAKE IT DIFFICULT FOR A THIRD PARTY TO ACQUIRE US, EVEN IN SITUATIONS THAT
MAY BE VIEWED AS DESIRABLE BY OUR STOCKHOLDERS.

The General Corporation Law of the State of Delaware contains provisions
that may delay or prevent an attempt by a third party to acquire control of the
company. Our certificate of incorporation and bylaws contain provisions that
authorize the issuance of preferred stock, and establish advance notice
requirements for director nominations and actions to be taken at stockholder
meetings. These provisions could also discourage or impede a tender offer, proxy
contest or other similar transaction involving control of us, even if viewed
favorably by stockholders. In addition, we have adopted a stockholder rights
plan that would likely discourage a hostile attempt to acquire control of us.

CAUTIONARY STATEMENTS ABOUT FORWARD-LOOKING STATEMENTS

This report on Form 10-K and the documents incorporated by reference contain
forward-looking statements, within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
statements include statements incorporated by reference to other Veritas DGC
documents filed with the SEC. Forward-looking statements include, among other
things, business strategy and expectations concerning industry conditions,
market position, future operations, margins, profitability, liquidity and
capital resources. Forward-looking statements generally can be identified by the
use of terminology such as "may," "will," "expect," "intend," "estimate,"
"anticipate" or "believe" or the negatives thereof. Although we believe that the
expectations reflected in such statements are reasonable, we can give no
assurance that such expectation will be correct. You are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date of this report on Form 10-K. Our operations are subject to a number of
uncertainties, risks and other influences, many of which are outside our
control, and any one of which, or a combination of which, could cause our actual
results of operations to differ materially from the forward-looking statements.
Important factors that could cause actual results to differ materially from our
expectations are disclosed in "Risk Factors" and elsewhere in this report on
Form 10-K.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK

At July 31, 2002, we had limited market risk related to foreign currencies.
In March 2001, we entered into a contract requiring payments in Norwegian kroner
to charter the seismic vessel M/V Seisquest. The contract requires 36 monthly
payments commencing on June 1, 2001. To protect our exposure to exchange rate
risk, we entered into multiple forward contracts as cash flow hedges fixing our
exchange rates for Norwegian kroner to the U.S. dollar. The total fair value of
the open forward contracts at July 31, 2002 in U.S. dollars is $6.8 million. At
July 31, 2002, we had $135.0 million of 9.75% fixed rate debt maturing in
October 2003 with a fair value of $135.4 million at July 31, 2002.

11

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

12

REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive income (loss), of
changes in stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Veritas DGC Inc. and its
subsidiaries at July 31, 2002 and 2001, and the results of their operations and
their cash flows for each of the three years in the period ended July 31, 2002
in conformity with accounting principles generally accepted in the United States
of America. In addition, in our opinion, the financial statement schedule listed
in the accompanying index presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

As discussed in Note 3 to the consolidated financial statements, effective
August 1, 2001, the Company changed its method of accounting for goodwill in
accordance with Statement of Financing Accounting Standards No. 142, Goodwill
and Other Intangible Assets.

PRICEWATERHOUSECOOPERS LLP

Houston, Texas
October 3, 2002

13

VERITAS DGC INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

See Notes to Consolidated Financial Statements

14

VERITAS DGC INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)

See Notes to Consolidated Financial Statements

15

VERITAS DGC INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

See Notes to Consolidated Financial Statements

16

VERITAS DGC INC. AND SUBSIDIARIES

SUPPLEMENTARY SCHEDULES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

See Notes to Consolidated Financial Statements

17

VERITAS DGC INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 2002, 2001 AND 2000

See Notes to Consolidated Financial Statements

18

VERITAS DGC INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2002, 2001 AND 2000

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION

We provide integrated geophysical technologies to the petroleum industry
worldwide. The accompanying consolidated financial statements include our
accounts and the accounts of majority-owned domestic and foreign subsidiaries.
Investment in an 80% owned joint venture is accounted for on the equity method
due to provisions in the joint venture agreement that give minority shareholders
the right to exercise control. All material intercompany balances and
transactions have been eliminated.

USE OF ESTIMATES

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

RECLASSIFICATION OF PRIOR YEAR BALANCES

Certain prior year balances have been reclassified for consistent
presentation. Depreciation and amortization expense is now included in cost of
services on the "Consolidated Statements of Operations and Comprehensive Income
(Loss)."

FAIR VALUE OF FINANCIAL INSTRUMENTS

Our financial instruments include cash and short-term investments,
restricted cash investments, accounts and notes receivable, accounts payable and
debt. The fair market value of the $135.0 million of 9.75% fixed rate debt
maturing in October 2003 is $135.4 million at July 31, 2002. The carrying value
is a reasonable estimate of fair value for all other financial instruments.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board issued SFAS No. 141
(Business Combinations) and SFAS No. 142 (Goodwill and Other Intangible Assets.)
We have adopted the use of these new accounting statements. The main effect of
SFAS No. 141 is to require purchase accounting be used in all future business
combinations, disallowing the pooling-of-interests method allowed under APB
Opinion No. 16. SFAS No. 142 defines the recording and subsequent treatment of
goodwill and other intangible assets derived from business combinations and
supercedes APB Opinion No. 17. This statement requires us to discontinue our
amortization of goodwill and requires that we test goodwill and other intangible
assets for impairment on an annual basis or when certain events trigger such a
test. We performed the initial impairment tests in January 2002, and we will
retest at least annually.

In August 2001, the Financial Accounting Standards Board issued SFAS No. 143
(Asset Retirement Obligations). This standard requires that obligations
associated with the retirement of a tangible long-lived asset be recorded as a
liability when those obligations are incurred with the liability being initially
measured at fair value. We will adopt the use of this accounting statement in
fiscal 2003 and do not expect adoption to have any effect on our financial
position and results of operations.

In October 2001, the Financial Accounting Standards Board issued SFAS No.
144 (Accounting for the Impairment or Disposal of Long Lived Assets). This
standard develops one accounting model for long-lived assets that are to be
disposed of by sale, requiring such assets to be measured at the lower of book
value or fair value less cost to sell. The standard also provides guidance on
the recognition of liabilities for the obligations arising from disposal
activities. We will adopt the use of this accounting statement in fiscal 2003
and do not expect adoption to have a material effect on our financial position
and results of operations.

19

In April 2002, the Financial Accounting Standards Board issued SFAS No. 145
(Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No.
13 and Technical Corrections as of April 2002). Among other things, this
statement addresses how to report gains or losses resulting from the early
extinguishment of debt. Previously, any gains or losses were reported as an
extraordinary item. Upon adoption of SFAS No. 145, an entity will be required to
evaluate whether the debt extinguishment is truly extraordinary in nature, in
accordance with Accounting Principles Board Opinion No. 30. We will adopt the
use of this accounting statement in fiscal 2003. The adoption of this statement
will preclude extraordinary classification of costs related to early debt
extinguishment.

In July 2002, the Financial Accounting Standards Board issued SFAS No. 146
(Accounting for Costs Associated with Exit or Disposal Activities). This
standard requires recognition of costs associated with exit or disposal
activities when they are incurred rather than when management commits to an exit
or disposal plan. Examples of costs covered by this guidance include lease
termination costs, employee severance costs that are associated with
restructuring, discontinued operations, plant closings, or other exit or
disposal activities. We will adopt the use of this accounting statement in
fiscal year 2004. We have not yet completed our evaluation of the effect of this
statement on our accounting practices.

TRANSLATION OF FOREIGN CURRENCIES

The U.S. dollar is the functional currency of all of our operations except
Canada, which uses the Canadian dollar as its functional currency. Currency
gains and losses result from the remeasurement of assets and liabilities
denominated in currencies other than their functional currency. (See Note 12)

CASH EQUIVALENTS

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

RESTRICTED CASH INVESTMENTS

Restricted cash investments in the amounts of $166,000 at July 31, 2002 were
pledged as collateral on certain bank guarantees related to contracts entered
into in the normal course of business.

ACCOUNTS RECEIVABLE

Unbilled amounts of approximately $47.8 million and $51.7 million are
included in accounts and notes receivable at July 31, 2002 and 2001,
respectively. Such amounts were not billable to the customer at the fiscal year
end in accordance with contract provisions and generally will be billed in one
to four months.

INVENTORIES

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

INVESTMENTS AVAILABLE FOR SALE

Our marketable securities are considered available for sale and are reported
at fair value, with change in fair values recorded as unrealized gains and
losses in Accumulated Other Comprehensive Income within stockholders' equity.
Realized gains and losses are calculated using the specific identification
method. In the fourth quarter of 2002, we initiated a program to liquidate our
investment in Miller Exploration Company and recognized the unrealized loss as
expense, as we consider the decline in fair value to be other than temporary.

20

PROPERTY AND EQUIPMENT

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

Depreciation related to assets used in the production of the multi-client
library and development of certain software is capitalized. Amounts capitalized
were $29.2 million, $22.6 million and $29.8 million in fiscal years 2002, 2001,
and 2000, respectively.

Expenditures for routine repairs and maintenance are charged to expense as
incurred. We are contractually obligated to periodically put our chartered
vessels into port so that the vessel owner can have legally required maintenance
and inspections performed. We accrue for the costs of these port calls in
advance. Such accruals were $2.9 million and $1.4 million at July 31, 2002 and
2001, respectively. Expenditures for additions and improvements, including
capitalized interest, are capitalized and depreciated over the estimated useful
life of the related assets. The net gain or loss on disposed property and
equipment is included in other (income) expenses (See Note 12).

MULTI-CLIENT DATA LIBRARY

We collect and process geophysical data for our own account and retain all
ownership rights. We license the data to clients on a non-transferable basis. We
capitalize costs associated with acquiring and processing the data. The
capitalized cost of multi-client data is charged to cost of services in the
period sales occur based on the percentage of total estimated costs to total
estimated sales multiplied by actual sales. Any costs remaining 36 months after
completion of a survey are charged to cost of services over a period not to
exceed 24 months. The total amortization period of sixty months represents the
minimum period over which benefits from these surveys are expected to be
derived.

We periodically review the carrying value of the multi-client data library
to assess whether there has been a permanent impairment of value and record
losses when it is determined that estimated sales would not be sufficient to
cover the carrying value of the asset. In the fourth quarter of this year, we
took a $55.2 million pretax impairment charge related to 11 of our multi-client
library surveys, which we have shown separately in our income statement as an
operating expense. As we analyzed our fiscal 2003 plans in June and July, it
became clear that we are not likely to recover the remaining book value of these
surveys, hence the fourth quarter charge. Seven of these are land surveys
located in the Gulf Coast region. Exploration spending has been very low in this
region since shortly after we completed these surveys and we do not anticipate
any sales of these surveys in the foreseeable future. Therefore, we have written
these surveys completely off of our books, with a net charge of $28.8 million.
We have one survey in the Gulf of Mexico that was shot at a cost significantly
exceeding its original budget. As we do not currently forecast enough sales to
amortize the remainder of the cost of the survey, we have written it down by
$16.0 million. This leaves $10.0 million of cost for this survey, an amount we
believe to be the fair value of the survey based on future estimated sales. In
the Shetland-Faroes area of the North Sea we have a large survey that has been
troubled by an ongoing territorial dispute. When the dispute was settled,
nine-year concessions were awarded to various licensees. Given the length of the
license period we do not foresee significant near-term additional licensing of
this survey, and we have written it off with a net charge of $9.3 million. We
also have two small 2-D surveys off Africa that were written off with a net
charge of $1.1 million. We recorded no such impairment charges in the years
ended July 31, 2001 and 2000.

During the fourth quarter of fiscal 2001, we changed the useful life of
marine surveys from 48 months to 60 months. We believe that 60 months more
accurately represents the time over which we will derive benefits from our
current portfolio of marine surveys. This change in accounting estimate was made
prospectively and had an immaterial impact on our results for the year ended
July 31, 2001.

21

GOODWILL

For acquisitions accounted for under the purchase method, we record the
purchase price of businesses or joint venture interests in excess of the fair
value of net assets acquired as goodwill. During fiscal 2001 and 2000, goodwill
was amortized using the straight-line method over a period of 10 to 20 years,
which approximates the period in which benefits were expected to be derived.
This amortization was discontinued in the beginning of fiscal 2002 with our
adoption of SFAS No. 142 (See Note 3).

MOBILIZATION COST

Transportation and other expenses incurred prior to commencement of
geophysical operations in an area, that would not have been incurred otherwise,
are deferred and amortized over the lesser of the term of the related contract
or one year. Amounts applicable to operations performed for our own account are
included in the cost of the multi-client data library. Included in other assets
at July 31, 2002 and 2001, are unamortized mobilization costs approximating $2.6
million and $5.1 million, respectively.

LEASES

Operating leases include those for office space, specialized geophysical
equipment, and our geophysical vessels, which are chartered on a short-term
basis relative to their useful economic lives.

REVENUES

Revenues from the licensing of multi-client data surveys are based upon
agreed rates set forth in the contract and are recognized upon delivery of such
data. Revenues from contract services are recognized on the
percentage-of-completion method measured by the amount of data collected or
processed to the total amount of data to be collected or processed or by time
incurred to total time expected to be incurred. Revenues generated from external
pre-funding of data library projects are recognized on a similar
percentage-of-completion method, modified slightly to account for the timing of
pre-funding.

STOCK-BASED COMPENSATION

We maintain stock-based compensation plans that are accounted for using the
intrinsic value based method allowed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related Interpretations.
Under that method, compensation expense is recorded in the accompanying
consolidated financial statements when the quoted market price of stock at the
grant date or other measurement date exceeds the amount an employee must pay to
acquire the stock. Our plans do not permit us to grant options at a price lower
than market, therefore, we do not record any compensation expense related to
stock options. As required by SFAS No. 123, "Accounting for Stock-Based
Compensation," we disclose the pro forma effect of stock option expense on net
income and earnings per share that would have been recorded using the fair value
based method (See Note 8).

EARNINGS PER SHARE

The computation of earnings per share -- basic is based on the weighted
average common shares outstanding (including the exchangeable shares -- see
Notes 2 and 10). The computation of earnings per share -- diluted is based upon
the weighted average common shares outstanding (including the exchangeable
shares) and additional common shares, utilizing the treasury stock method and
average market prices, which would have been outstanding if dilutive potential
common shares had been issued. Since we recorded a net loss for fiscal 2002 no
securities are dilutive and basic and diluted earnings per share are equal for
that year (See Note 13).

22

2. BUSINESS COMBINATIONS

See Note 16, Subsequent Events, for a description of the Hampson-Russell
acquisition.

During fiscal 2002, we entered into negotiations with Petroleum Geoservices
ASA to merge our two companies. During this process we incurred banking, legal,
and other professional fees of $7.1 million. We incurred an additional $7.5
million of expense due to the termination of the merger. The $14.6 million of
total expense related to the proposed merger is presented as operating expense
on the Statement of Operations.

On February 2, 2001, we consummated a merger with Reservoir Characterization
Research and Consulting, Inc., ("RC2"), a Colorado corporation. Under the terms
of the agreement, we acquired 100% of RC2 in exchange for 1,137,466 shares of
our common stock. The total purchase price of RC2 was $34.4 million, comprised
of $33.0 million of stock and $1.4 million of options. The acquisition was
accounted for as a purchase with the allocation of purchase price, in accordance
with APB 16, yielding $2.2 million of current assets, $8.5 million of property
and long term assets, $2.3 million of liabilities, and $26.0 million of
goodwill.

On September 30, 1999, Veritas DGC, Veritas Energy Services Inc. ("VES") and
Enertec Resource Services Inc. ("Enertec"), a Canadian company, consummated a
business combination (the "Combination") whereby Enertec became a wholly owned
subsidiary of VES. As a result of the Combination, each share of Enertec stock
was converted into the right to receive VES Class A Exchangeable Series 1 stock
(the "Class A shares") at an exchange ratio of 0.345 of a Class A share for each
share of Enertec. All of the holders of Enertec common shares became holders of
Class A shares and accordingly, 2,437,527 Class A shares were issued. Each Class
A share is convertible, at the option of the holder, into one share of common
stock of Veritas DGC. Outstanding options to purchase shares of Enertec stock
were converted into options to purchase approximately 236,000 shares of common
stock of Veritas DGC.

The total purchase price of Enertec was approximately $28.0 million,
comprised of approximately $24.7 million of stock, $0.9 million of our stock
options and $2.4 million of business combination costs. The acquisition was
accounted for as a purchase with the allocation of purchase price, in accordance
with APB 16, yielding approximately $4.9 million of current assets, $13.4
million of property and long-term assets, $2.6 million of liabilities and $12.3
million of goodwill. On April 28, 2000, we sold Enertec's marine high-resolution
survey business, KC Offshore, L.L.C. and its subsidiary Kinco Operating, Inc.,
to the Racal Corporation for $6.9 million

Pro forma revenue, net income before extraordinary item, net income and
earnings per share of the combined Veritas DGC/Enertec entity, presented as if
the Combination had occurred on August 1, 1999 are shown below. This pro forma
financial information is not necessarily indicative of the actual results that
would have been achieved had the Combination occurred at the beginning of the
periods presented.

23

3. GOODWILL

In July 2001, the Financial Accounting Standards Board issued SFAS No. 142
(Goodwill and Other Intangible Assets). We adopted SFAS No. 142 as of August 1,
2001. SFAS No. 142 defines the accounting treatment of goodwill and other
intangible assets derived from business combinations and supersedes APB Opinion
No. 17. This statement requires us to discontinue amortization of goodwill and
requires that we test goodwill and other intangible assets for impairment in a
specific manner on an annual basis or when certain events trigger such a test.
The as adjusted effect of implementing SFAS No. 142 is as follows:

4. LONG-TERM DEBT

Long-term debt is as follows:

The Senior Notes are due in October 2003 with interest payable semi-annually
at 9 3/4% per annum. The Senior Notes are unsecured and are effectively
subordinated to any of our secured debt, with respect to the assets securing
such debt, and to all debt of our subsidiaries whether secured or unsecured. The
indenture relating to the Senior Notes contains certain covenants that limit our
ability to, among other things, incur additional debt, pay dividends and
complete mergers, acquisitions and sales of assets. Upon a change in our
control, as defined in the indenture, each holder of the senior notes has the
right to require us to purchase all or a portion of such holder's Senior Note at
a price equal to 101% of the aggregate principal amount. We have the right to
redeem the senior notes, in whole or part, on or after October 15, 2000. On
September 24, 1999, we repurchased $5.5 million of 9 3/4% Senior Notes on the
open market at a price of $5.7 million, resulting in an extraordinary loss of
$0.2 million, net of tax. On December 3, 1999, we reissued $1.0 million of
9 3/4% Senior Notes at a price of $1.0 million. On December 10, 1999, we
reissued $4.6 million of 9 3/4% Senior Notes at a price of $4.7 million.

We maintain a revolving credit agreement expiring August 2003 with
commercial lenders that provides for U.S. advances up to $80.0 million and
non-U.S. advances up to $20.0 million. Advances bear interest, at our election,
at LIBOR plus a spread or prime rate plus a spread, with the spread based on
certain financial ratios maintained by us or our credit rating. At July 31, 2002
the LIBOR spread was 1.25% and the prime rate spread was 0%. Covenants in the
agreement limit, among other things, our right to take certain actions,
including creating indebtedness. In addition, the agreement requires us to
maintain certain financial ratios. Advances of $5.0 million were outstanding at
July 31, 2002 under the credit agreement, and $9.2 million in letters of credit
have been issued under the facility, leaving $85.8 million available for
borrowing.

24

During the year ended July 31, 2002, we incurred interest costs of $14.7
million. For the years ended July 31, 2002 and 2001, we capitalized $1,114,000
and $523,000, respectively. No amount was capitalized for the year ended July
31, 2000. The capitalized amounts are related to capital improvements made to
the chartered vessels Veritas Viking II and the Veritas Vantage.

5. OTHER ACCRUED LIABILITIES

Other accrued liabilities include the following:

6. INCOME TAXES

Pretax income (loss) was taxed under the following jurisdictions:

The provision for income taxes consists of the following:

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

The tax effect resulting from foreign activities category includes non-U.S.
earnings taxed at other than the U.S. statutory rate, non-U.S. losses with no
tax recovery, foreign tax credits and deductions, foreign withholding taxes and
U.S. tax on Subpart F income, dividends and foreign branch operations. In fiscal
2002 we recorded $6.5 million of expense related to net operating losses in
Argentina that are not expected to be utilized, due to our suspension of
activity in that country.

25

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

A valuation allowance is established when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The
valuation allowance is then adjusted when the realization of deferred tax assets
becomes more likely than not. Adjustments are also made to recognize the
expiration of net operating loss and investment tax credit carryforwards, with
equal and offsetting adjustments to the related deferred tax asset. Should the
income projections result in the conclusion that realization of additional
deferred tax assets is more likely than not, further adjustments to the
valuation allowance are made. Since the quasi-reorganization with respect to
Digicon on July 31, 1991, the tax benefits of net operating loss carryforwards
existing at the date of the quasi-reorganization have been recognized through a
direct addition to paid-in capital, when realization is more likely than not.

As of July 31, 2002, we had U.S. net operating loss carryforwards of
approximately $31.7 million. Approximately $11.8 million of net operating loss
carryforwards existed prior to the quasi-reorganization.

The following schedule sets forth the expiration dates of the U.S. and
non-U.S. net operating losses.

Internal Revenue Service regulations restrict the utilization of U.S. net
operating loss carryforwards and other tax benefits (such as investment tax
credits) for any company in which an "ownership change" (as defined in Section
382 of the Internal Revenue Code) has occurred. We performed the required
testing and concluded that two "ownership changes" occurred. The first occurred
in connection with the issuance of common stock through a public offering we
made on January 6, 1992. The utilization of U.S. net operating loss
carryforwards existing at the date of the first "ownership change" is limited to
approximately $4.0 million per year. The second "ownership change" occurred in
1996 as a result of the stock acquisition of Veritas Energy Services Inc. The
utilization of U.S. net operating losses incurred between the first and second
ownership changes is limited to approximately $8.9 million per year, which
includes the limitation of approximately $4.0 million from the first ownership
change. For the year ended July 31, 2001, we utilized $8.9 million of limitation
carryover. For the year ended July 31, 2002, we generated a U.S. net operating
loss of $27.9 million which we expect to carry back and utilize against prior
years' taxable income.

26

Non-U.S. operations had net operating loss carryforwards of approximately
$42.4 million at July 31, 2002, of which approximately $10.8 million existed
prior to the quasi-reorganization. Approximately $23.0 million of the total
non-U.S. net operating loss carryforwards are related to United Kingdom
operations, have an indefinite carryforward period, and are available to offset
future profits in our current trade or business. Approximately $10.2 million of
the United Kingdom net operating loss carryforwards existed prior to the
quasi-reorganization.

We consider the undistributed earnings of our non-U.S. subsidiaries to be
permanently reinvested. We have not provided deferred U.S. income tax on those
earnings, as it is not practicable to estimate the amount of additional tax that
might be payable should these earnings be remitted or deemed remitted as
dividends or if we should sell our stock in the subsidiaries.

7. COMMITMENTS AND CONTINGENT LIABILITIES

Total rentals of vessels, equipment and office facilities charged to
operations amounted to $65.6 million, $78.8 million and $57.0 million for the
years ended July 31, 2002, 2001 and 2000, respectively.

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

We carry workers compensation insurance that limits our liability on a per
claim and per policy year basis. Management has evaluated the adequacy of the
accrual for the liability for incurred but unreported workers compensation
claims and has determined that the ultimate resolution of any such claims would
not have a material adverse impact on our financial position.

8. EMPLOYEE BENEFITS

We maintain a 401(k) plan in which employees of our majority-owned domestic
subsidiaries and certain foreign subsidiaries are eligible to participate.
Employees of foreign subsidiaries who are covered under a foreign deferred
compensation plan are not eligible. Employees are permitted to make
contributions of up to 50% of their salary to a maximum of $11,000 per year.
Generally, we contribute an amount equal to one-half of the employee's
contribution of up to $8,000 or 8% of the employee's salary (whichever is less).
However, if consolidated pre-tax income for any fiscal year is less than the
amount we are required to contribute, we may elect to reduce our contribution,
but in no event may we reduce the total contribution to less than 25% of the
employee contribution. We may make additional contributions from our current or
cumulative net profits in an amount determined by the Board of Directors. Our
matching contributions to the 401(k) plan were $1,083,000 in 2002, $971,000 in
2001 and $821,000 in 2000.

We have two employee nonqualified stock option plans under which options are
granted to officers and key employees. Options generally vest over three years
and are exercisable over a ten-year period from the date of grant. The exercise
price for each option is the fair market value of the common stock on the grant
date. Our Board of Directors has authorized 5,954,550 shares of common stock to
be issued under the option plans.

27

We also maintain a stock option plan for non-employee directors (the
"Director Plan") under which options are granted to our non-employee directors.
The Director Plan provides that every year each eligible director is granted
options to purchase 5,000 shares of our common stock which vest over a period of
three years from the date of grant and are exercisable over ten years from the
date of grant. The exercise price for each option granted is the fair market
value at the date of grant. The Board of Directors has authorized 600,000 shares
of common stock to be issued under the Director Plan. The following tables
provide additional information related to our stock option plans:

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

(1) Based upon current exercise and forfeiture history, we now estimate
the expected life of our 10 year options to be 6.3 years.

On November 1, 1997, we initiated an employee stock purchase plan. This plan
was amended and restated on December 11, 2001 to make an aggregate 1,000,000
shares available for issuance under the plan. Participation is voluntary and
substantially all full-time employees meeting limited eligibility requirements
may participate. Contributions are made through payroll deductions and may not
be less than 1% or more than 15% of the participant's base pay as defined. The
participant's option to purchase common stock is deemed to be granted on the
first day and exercised on the last day of the fiscal quarter at a price that is
the lower of 85% of the market price on the first or last day of the fiscal
quarter. During the year ended July 31, 2002, 187,998 shares of common stock
were issued with a weighted average grant date fair value of $12.42. During the
year ended July 31, 2001, 61,001 shares of common stock were issued with a
weighted fair value at grant of $27.04 per share. During the year ended July 31,
2000, 130,744 shares of common stock were issued with a weighted average grant
date fair value of $13.57 per share.

On June 9, 1998, we initiated 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 the plan. On March 8, 2001, an additional 200,000 shares were
reserved for use under the new 2001 plan. The Board of Directors' Compensation
Committee determines the eligibility of an employee and the terms and amount of
the grant. In addition, we have issued restricted stock in conjunction with
certain employment agreements.

These tables represent the restricted shares issued for fiscal 2002 and
2001.

Compensation expense relating to the stock-based compensation plans
described above was $654,000, $712,000 and $1.1 million the years ended July 31,
2002, 2001 and 2000, respectively. The effect on net income and earnings per
share that would have been recorded using the fair value based method for stock
options as allowed by SFAS 123 is as follows:

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

The following table presents data related to all of our equity-based
compensation plans, for both directors and employees, and provides information
related to potential ownership dilution:

(1) The 1992 employee non-qualified stock option plan was approved by
stockholders, however the number of shares available for grant under that
plan was amended once without stockholder approval. The number of shares
added to the plan without stockholder approval was 1,754,550.

(2) Restricted stock vests upon completion of specified years of service. No
cash payment is required from the recipient.

30

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

The funded status of the Pension Plan is as follows:

Amounts included in the consolidated balance sheet consist of:

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

31

The following is a reconciliation of the beginning and ending balances of
the benefit obligation and the fair value of plan assets:

9. UNREALIZED LOSS ON INVESTMENTS -- AVAILABLE FOR SALE

In April 1999, we exchanged a $4.7 million account receivable from Miller
Exploration Company ("Miller"), a publicly traded company, for a long-term
interest-bearing note. Interest is paid in Miller common stock warrants, with an
exercise price of $0.01 per share. During fiscal 2001 we exchanged 500,000
warrants for 496,923 shares of Miller common stock.

In the fourth quarter of 2002, we initiated a program to liquidate our
investment in Miller and therefore, recognized the unrealized loss as an expense
during fiscal 2002.

10. HEDGE TRANSACTION

In March 2001, we entered into a contract requiring payments in Norwegian
kroner to charter the seismic vessel M/V Seisquest. The contract requires 36
monthly payments commencing on June 1, 2001. To protect our exposure to exchange
rate risk, we entered into multiple forward contracts as cash flow hedges
effectively locking our exchange rate for Norwegian kroner to the U.S. dollar.
The unrealized gain (loss) on the hedge transaction is summarized below:

Assuming no changes in exchange rates after July 31, 2002, we expect to
recognize $490,000 of the unrealized gain in fiscal year 2003.

11. COMMON AND PREFERRED STOCK AND SPECIAL VOTING STOCK AND EXCHANGEABLE SHARES

The Board of Directors, without any action by the stockholders, may issue up
to one million shares of preferred stock, par value $.01, in one or more series
and determine the voting rights, preferences as to dividends, liquidation,
conversion, and other rights of such stock. There are no shares of preferred
stock outstanding as of July 31, 2002.

On May 27, 1997, our Board of Directors declared a distribution of one right
for each outstanding share of common stock or

32

Exchangeable Stock to shareholders of record at the close of business on June
12, 1997 and designated 400,000 shares of the authorized preferred stock as a
class to be distributed under a shareholder rights agreement. Upon the
occurrence of certain events enumerated in the shareholder rights agreement,
each right entitles the registered holder to purchase a fraction of a share of
our preferred stock or the common stock of an acquiring company. The rights,
among other things, will cause substantial dilution to a person or group that
attempts to acquire Veritas DGC. The rights expire on May 15, 2007 and may be
redeemed prior to that date.

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

These special voting shares possess a number of votes equal to the number of
outstanding Veritas Energy Services exchangeable shares and Veritas Energy
Services Class A exchangeable shares, Series 1 that are not owned by Veritas DGC
or any of its subsidiaries. Such exchangeable shares were issued to the former
stockholders of Veritas Energy Services and Enertec Resources in business
combinations with Veritas DGC. In any matter submitted to Veritas DGC
stockholders for a vote, each holder of a Veritas Energy Services exchangeable
share has the right to instruct a trustee as to the manner of voting for one of
the votes comprising the Veritas Energy Services special voting share for each
Veritas Energy Services exchangeable share owned by the holder. Likewise, each
holder of a Veritas Energy Services class A exchangeable share, series 1 has the
right to instruct a trustee as to the manner of voting for one of the votes
comprising the Enertec special voting share for each Veritas Energy Services
Class A exchangeable shares, Series 1 owned by the holder. The Veritas Energy
Services exchangeable shares and the Veritas Energy Services Class A
exchangeable shares, Series 1 are convertible on a one-for-one basis into shares
of the common stock and, when coupled with the voting rights afforded by the
special voting shares, have rights virtually identical to Veritas DGC common
stock.

12. OTHER (INCOME) EXPENSE

Other (income) expense consist of the following:

13. EARNINGS PER COMMON SHARE

Earnings per common share -- basic and earnings per common share -- diluted
are computed as follows:

(1) The outstanding options are anti-dilutive in fiscal 2002 due to the net
loss.

33

The following options to purchase common shares have been excluded from the
computation assuming dilution for the years ended July 31, 2002, 2001 and 2000
because the options' exercise price exceeded the average market price of the
underlying common shares or the options are anti-dilutive due to a net loss.

14. SEGMENT AND GEOGRAPHICAL INFORMATION

We have two segments, land and marine operations, both of which provide
geophysical products and services to the petroleum industry. The two segments
have been aggregated, as they are so similar in their economic characteristics
and the nature of their products, production processes and customers. A
reconciliation of the reportable segments' results to those of the total
enterprise is given below.

This table presents consolidated revenues by geographic area based on the
location of the use of the product or service for the years ended July 31, 2002,
2001 and 2000:

34

This table presents long-lived assets by geographic area based on the
location of the assets:

In fiscal 2002, a single large national oil company accounted for 12% of our
revenue. In fiscal 2001 and 2000 no customer accounted for 10% or more of total
revenue.

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

15. SELECTED UNAUDITED QUARTERLY FINANCIAL DATA

(1) The fourth quarter of fiscal 2002 includes unusual charges of $55.2
million for impairment of multi-client surveys, $10.2 million for merger
costs and merger termination expense, and a $6.5 million allowance for
Argentine net operating losses.

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

16. SUBSEQUENT EVENTS

On August 1, 2002, we paid Petroleum Geoservices ASA $7.5 million related to
the termination of our proposed merger.

On August 21 2002, we acquired Hampson-Russell Software Services Ltd., a
Canadian provider of software tools and consulting services related to reservoir
interpretation. Under the terms of the agreement, we acquired substantially all
of the assets of Hampson-Russell in exchange for a cash payment of $9,250,000,
transfer of 589,623 shares of Veritas common stock ($12.57 per share), and
Hampson-Russell's right to receive a percentage of the revenues generated by the
purchased assets over the five years following the closing of the transaction,
provided that certain financial targets are obtained. Our preliminary allocation
of the $16.8 million purchase price, including approximately $0.1 million of
fees and expenses, is as follows: $13.2 million to software, $4.2 million to
goodwill, $1.1 million to accrued liabilities and $0.5 million to other assets.
The software will be amortized over no more than five years. David B. Robson,
Veritas DGC's Chairman and Chief Executive Officer, beneficially owns a
controlling interest in Vada Industries Ltd., which was a 25% shareholder of
Hampson Russell at the time of the acquisition.

35

VERITAS DGC INC. AND SUBSIDIARIES

FINANCIAL STATEMENT SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II

(1) Estimates were revised due to improved collections of past due receivables.

(2) Estimate was revised due to published report of debtor's intent and ability
to repay debt.

36

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

Not Applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this item is incorporated by reference to the
material to appear under the headings "Election of Directors -- Nominees" and
"Other Information -- Executive Officer Tenure and Identification" in the Proxy
Statement for the 2002 Annual Meeting of Stockholders.

ITEM 11. EXECUTIVE COMPENSATION

Information required by this item is incorporated by reference to the
material to appear under the heading "Other Information -- Executive
Compensation" in the Proxy Statement for the 2002 Annual Meeting of
Stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required by this item is incorporated by reference to the
material to appear under the headings "Election of Directors" and "Other
Information -- Certain Stockholders" in the Proxy Statement for the 2002 Annual
Meeting of Stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by this item is incorporated by reference to the
material to appear under the heading "Other Information -- Certain Transactions"
in the Proxy Statement for the 2002 Annual Meeting of Stockholders.

PART IV

ITEM 14. CONTROLS AND PROCEDURES

Not Applicable.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

CONSOLIDATED FINANCIAL STATEMENTS

37

CONSOLIDATED FINANCIAL STATEMENT SCHEDULES

Financial Statement Schedule II -- Valuation and Qualifying Accounts appears
on page 36. All other financial statement schedules are omitted for the reason
that they are not required or are not applicable, or the required information is
shown in the consolidated financial statements or the notes thereto.

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

FORM 8-K REPORTS FILED DURING THE QUARTER ENDED JULY 31, 2002

On July 30, 2002, we announced that our Board of Directors had withdrawn its
approval and recommendation supporting the previously announced business
combination with Petroleum Geo-Services ASA ("PGS"). On July 31, 2002, we
announced that the Agreement and Plan of Merger and Exchange Agreement with PGS
had been formally terminated and filed a Form 8-K to that effect.

38

SIGNATURES

Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned; thereunto duly authorized, on the 7th day of
October, 2002.

VERITAS DGC INC.

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

Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons on behalf of the Registrant in the indicated capacities have
signed this report below on the 7th day of October 2002.

/s/ DAVID B. ROBSON Chairman of the Board and Chief Executive
- ------------------------------------------------ Officer, Director
David B. Robson

/s/ STEPHEN J. LUDLOW Vice Chairman, Director
- ------------------------------------------------
Stephen J. Ludlow

/s/ TIMOTHY L. WELLS President and Chief Operating Officer
- ------------------------------------------------
Timothy L. Wells

/s/ MATTHEW D. FITZGERALD Executive Vice President, Chief Financial
- ------------------------------------------------ Officer and Treasurer
Matthew D. Fitzgerald

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

Director
- ------------------------------------------------
Lawrence C. Fichtner

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

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

/s/ BRIAN F. MACNEILL Director
- ------------------------------------------------
Brian F. MacNeill

/s/ JAN RASK Director
- ------------------------------------------------
Jan Rask

39

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, David B. Robson, certify that:

1. I have reviewed this annual report on Form 10-K of Veritas DGC Inc.

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report; and

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.

October 7, 2002

/s/ David B. Robson
-----------------------------------
David B. Robson
Chief Executive Officer

40

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Matthew D. Fitzgerald, certify that:

1. I have reviewed this annual report on Form 10-K of Veritas DGC Inc.

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report; and

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.

October 7, 2002

/s/ Matthew D. Fitzgerald
-----------------------------------
Matthew D. Fitzgerald
Chief Financial Officer

41

EXHIBIT INDEX

42

9-A -- 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-B -- Voting and Exchange Trust Agreement dated September 30, 1999
among Veritas DGC Inc., Veritas Energy Services Inc. and
CIBC Mellon Trust Company.

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

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

10-E -- 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-F -- 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-G -- 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-D -- 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-E -- 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-F -- 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-G -- Amended and Restated Employment Agreement between Veritas
DGC Inc. and Anthony Tripodo. (Exhibit 10-G to Veritas DGC,
Inc.'s Form 10-Q for the quarter ended October 31, 2001 is
incorporated herein by reference.)

10-H -- Amendment No. 1 to Amended and Restated Employment Agreement
between Veritas DGC Inc. and Anthony Tripodo. (Exhibit 10-H
to Veritas DGC, Inc.'s Form 10-Q for the quarter ended
October 31, 2001 is incorporated herein by reference.)

43

10-I -- Amended and Restated Employment Agreement between Veritas
DGC Inc. and Rene M.J. VandenBrand. (Exhibit 10-I to Veritas
DGC, Inc.'s Form 10-Q for the quarter ended October 31, 2001
is incorporated herein by reference.)

10-J -- Amendment No. 1 to Amended and Restated Employment Agreement
between Veritas DGC Inc. and Rene M.J. VandenBrand. (Exhibit
10-J to Veritas DGC, Inc.'s Form 10-Q for the quarter ended
October 31, 2001 is incorporated herein by reference.)

10-K -- 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-L -- 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-M -- 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-N -- 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-Q -- Deferred Compensation Plan effective January 1, 2001.
(Exhibit 10-Q to Veritas DGC Inc.'s for 10-Q for the quarter
ended October 31, 2000 is incorporated by reference.)

10-R -- 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-S -- 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-T -- Key Employee Restricted Stock Plan effective February 1,
2001. (Exhibit 10-T to Veritas DGC Inc.'s Form 10-Q for the
quarter ended January 31, 2001 is incorporated herein by
reference.)

10-U -- Employment Agreement between Veritas DGC Inc. and Matthew D.
Fitzgerald. (Exhibit 10-U to Veritas DGC Inc.'s Form 10-Q
for the quarter ended April 30, 2001 is incorporated herein
by reference.)

10-V -- Employment Agreement between Veritas DGC Inc. and Anthony
Tripodo. (Exhibit 10-V to Veritas DGC Inc.'s Form 10-K for
the year ended July 31, 2002 is incorporated herein by
reference.)

10-W -- 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.)

*21 -- Subsidiaries of the Registrant.

*23 -- Consent of PricewaterhouseCoopers LLP.

*99.1 -- Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 by David B. Robson.

*99.2 -- Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 by Matthew D. Fitzgerald.

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* Filed herewith

44