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TABLE OF CONTENTS FORM 10-K
ITEM 8. Consolidated Financial Statements and Supplementary Data
PART IV

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

For the transition period from            to            

Commission file number 1-7427

Veritas DGC Inc.
(Exact name of registrant as specified in its charter)

(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 o No ý

        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. o

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

        The aggregate market value of the registrant's voting stock held by non-affiliates of the registrant was $412,830,734 as of January 30, 2004.

        The number of shares of the Company's common stock, $.01 par value, outstanding at March 31, 2005 was 33,849,816 (including 155,370 Veritas Energy Services Inc. exchangeable shares which are identical to the Common Stock in all material respects).

TABLE OF CONTENTS

FORM 10-K

Restatement of Financial Statements

        The historical financial information in this document has been restated due to accounting errors in prior periods. In September 2004, we found various types of errors in our balance sheet related primarily to clerical and account reconciliation errors associated with the intercompany transfers of property and foreign currency items. In addition, we found errors in the accounting for certain customer contracts that contained provisions for customer payment of equipment mobilization fees, revenue sharing with customers and certain other contingencies. Correction of these errors resulted in a decrease of net income of $1.4 million relating to the first three fiscal quarters of fiscal 2004 and $2.6 million related to periods prior to fiscal 2004, as shown in the table below. Since recording the required adjustments in the fourth quarter of fiscal 2004 would have had a material impact on the financial statements of the fourth quarter and those of the full fiscal year, we determined that a restatement of our prior years' financial statements was appropriate. The effect of this restatement on prior periods is given in detail in Notes 16 and 18 of Notes to Consolidated Financial Statements. Item 9A. Controls and Procedures contains information related to our internal control weaknesses and steps we are taking to correct them. A summary of the effects of the restatement is presented in the following table:

        The restatement has not caused us to be in default under any of our financial debt covenants or lease agreements. We obtained waivers from our lenders under our Credit Agreement related to the timing of our delivery of financial statements to them, extending the due date to May 15, 2005. Additionally, the restatement has delayed the registration of our Convertible Senior Notes, resulting in our payment of liquidated damages to the holders of the Convertible Senior Notes in the amount of $2,153 per day from August 31, 2004 until the registration is completed.

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        This annual report on Form 10-K contains 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. 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 similar expressions or the negatives thereof. These expectations are based on management's assumptions and current beliefs based on currently available information. Although we believe that the expectations reflected in such statements are reasonable, we can give no assurance that such expectations 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 annual 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 Item 1. "Business" and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Factors" and elsewhere in this annual report on Form 10-K.

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:

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



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



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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 by repeating specific 3D surveys over time. Our customers use the differences between these subsequent recordings for reservoir characterization. Additionally, we use 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. When we conduct surveys on a contract basis, we acquire and process data for a single client who pays us to conduct the survey and owns the data we acquire. When we conduct surveys on a multi-client basis, we acquire and process data for our own account and license that data and associated products to multiple clients. The high cost of acquiring and processing geophysical data on an exclusive basis has prompted many oil and gas companies to license surveys on a multi-client basis. In response to this demand, we have built a large library of surveys consisting of 201,550 line kilometers of 2D data and 194,536 square kilometers of 3D data. Our marine data library includes surveys in the Gulf of Mexico, the North Atlantic, Southeast Asia, West Africa, North Africa, Canada and Brazil. Our land data library includes surveys in Texas, Mississippi, Oklahoma, Wyoming and Utah in the United States as well as Alberta and British Columbia in Canada. The portion of our revenue generated from the sale of multi-client data licenses is influenced by a number of factors and, as a result, will fluctuate from year to year. Approximately half of our fiscal 2004 revenue was generated through the licensing of multi-client data.

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        The following tables describe our revenues by contract type and geographic area:

        In fiscal 2004, 2003 and 2002, 57%, 62% and 60%, respectively, of our revenues were attributable to non-U.S. operations and export sales. (See Note 14 of Notes to Consolidated Financial Statements for additional geographic and segment information.)

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. As of July 31, 2004, our land survey equipment had a combined recording capacity of approximately 45,000 channels. We typically deploy equipment in North and South America and Oman by crews of varying size. Our crew count varies widely as land acquisition is a seasonal activity in many markets, primarily due to weather.

        Our land operations include surveying crews, which lay out the lines to be recorded and mark the sites for shot-hole placement or equipment location, and recording crews, which use explosive or mechanical vibrating units to produce acoustic impulses and recording units to synchronize the shooting and capture the seismic signals via geophones. On a land survey where explosives are used, the recording 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 recording crew and bore shallow holes for explosive charges which, when detonated by the recording crew, produce the necessary acoustic 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, the majority of the marine geophysical

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data acquisition services we performed involved 3D surveys. The following table contains certain information concerning the geophysical vessels we operate.

        Each vessel is equipped with 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 acoustic impulses. Streamer cables contain hydrophones that receive the acoustic 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. The Veritas Vikings, Veritas Vantage and Veritas Searcher are equipped with solid streamers that offer numerous advantages over oil-filled streamers. The solid streamers allow these vessels to work in rougher seas and record more desirable frequencies with less noise and less downtime than is possible with oil-filled streamers. (See Note 15 of the Notes to Consolidated Financial Statements for a subsequent event related to the Veritas Viking.)

Data Processing and Interpretation

        We operate 15 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 from 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:

        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. Our centers can

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generally process both land and marine data and we tailor the equipment and software deployed in an area to meet the local market demands.

        We operate visualization centers in Houston, Calgary, Perth, and Crawley. These four centers allow teams of our customers' geoscientists and engineers to view and interpret large volumes of complex 3D data. The visualization centers have imaging tools used for advanced interpretive techniques that enhance the understanding of regional as well as detailed reservoir geology. These visualization centers allow us to offer our expertise combined with 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, and Leoben, Austria who perform advanced geophysical interpretation on a contract basis. These geophysical experts work around the world, using third-party and our proprietary software to create subsurface models for our clients and advise our clients on how best to exploit their reservoirs. Their work is related to exploration as well as production activities. Additionally, we license the proprietary software obtained through our acquisition of Hampson-Russell 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 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 from others.

        Currently, we employ approximately 100 people in our research and development activities, substantially all of whom are scientists, engineers or programmers. Our research and development efforts focus on new acquisition technologies and processes and on our core processing and imaging software. In 2004, we formed a group to develop and apply technologies to record, process and interpret multi-component waveforms, an area of growing interest among our customers. During fiscal 2004, 2003 and 2002, research and development expenditures were $15.5 million, $11.6 million and $11.5 million, respectively. Our research and development budget for fiscal 2005 is approximately $18 million.

        During fiscal 2004, 2003 and 2002, capital expenditures for equipment were $30.5 million, $30.5 million and $87.1 million, respectively. The higher capital spending in 2002 was due primarily to the outfitting of a new seismic vessel. Our original capital expenditure budget for equipment in fiscal 2005 was $43 million, however, we currently expect to spend approximately $79 million, with the majority of the difference due to the replacement of lost equipment on the Veritas Viking (see Note 15 of Notes to Consolidated Financial Statements.) Most of this additional spending should be reimbursed through our insurance coverage. Most of our fiscal 2005 capital budget is allocated to replacement and upgrading of existing equipment. During fiscal 2004, 2003 and 2002, our cash multi-client investment, net of capitalized depreciation, was $126.3 million, $151.8 million and $169.2 million, respectively. For fiscal 2005, we are planning a cash multi-client investment of approximately $128 million. Our total planned cash investment in the company of $171 million is significantly less than our planned cash flow from operations and, therefore, we expect to generate a significant increase in our cash balance during fiscal 2005. At January 31, 2005, our cash balance had increased to $205 million.

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 factors,

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including price, crew experience, equipment availability, technological expertise, reputation for quality and dependability and, in the case of multi-client surveys, availability of surveys in the area of current customer interest.

        Our largest global competitors are Western-Geco (a joint venture between Schlumberger and Baker Hughes), Compagnie Générale de Géophysique S.A. and Petroleum Geo-Services ASA. Additionally, there are a large number of seismic companies, mostly small and local, in the land acquisition and land data processing areas where financial and technical barriers to entry are minimal. In the multi-client library business, we compete with the full-service seismic companies mentioned above, as well as with specialty library companies such as TGS Nopec Geophysical Company ASA and Seitel Inc.

        We compete to a lesser degree with large, state-affiliated companies such as BGP of China. These companies are large providers of seismic services in their home countries and have recently been expanding their operations to include other parts of the world. They are particularly aggressive in price sensitive markets, such as those involving large tenders to national oil companies, where low price is of paramount importance.

        Due to the constantly changing configurations of seismic crews and the immense numbers of channels in the market, it is impossible to discuss the global competition in land acquisition in any quantitative fashion. Tracking is easier in the marine acquisition market. As of July 31, 2004, our competitive analysis showed a total of 66 towed-streamer vessels working in the world, including: 26 3D vessels capable of towing eight or more streamers, 18 smaller 3D vessels and 22 2D vessels. Additionally, we estimate that there are approximately 17 vessels conducting ocean bottom cable seismic operations, a service we do not offer. In 2004, global vessel capacity exceeded demand, often resulting in aggressive price competition in this business, although temporary and local shortages of vessels with specific capabilities occasionally offered margin improvement opportunities. Between contract and multi-client work, we have been able to obtain relatively full utilization of our fleet with very little downtime between projects.

Backlog

        At July 31, 2004, our backlog of commitments for future revenue was $146.6 million, compared with $173.2 million at July 31, 2003. Approximately 29% of this backlog is related to multi-client surveys. We anticipate that the vast majority of the July 31, 2004 backlog will be completed in fiscal 2005. At January 31, 2005, our backlog had increased to approximately $300 million. 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

        Our customers include major oil and gas companies, national oil companies and independent oil and gas companies. In fiscal 2004 and fiscal 2003, no customer accounted for 10% or more of our total revenue. In fiscal 2002, Petroleo Brasileiro S.A., the national oil company of Brazil, accounted for 12% of our revenue due to their licensing of several multi-client surveys in Brazil.

Employees

        During fiscal 2004, we employed an average of 2,871 people on a full-time basis. Our number of employees varies greatly due to activity changes in our land acquisition business and during fiscal 2004 ranged from a low of 2,307 to a high of 3,561. This variation typically occurs on a seasonal basis, with higher employee counts and higher revenues occurring during our second and third fiscal quarters,

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coinciding with the winter seismic acquisition seasons in Alaska and Canada. However, performance of large land surveys in South America or other locales can cause a marked shift from this pattern. A total of 7 employees in Argentina, and 32 in Singapore are subject to collective bargaining agreements. We consider our relations with our employees to be good.

Our SEC Reporting

        We electronically file certain documents with the SEC. We file annual reports on Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K (as appropriate) and proxy statements; along with any related amendments and supplements thereto. From time-to-time, we may also file registration statements pertaining to equity or debt offerings. You may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain information regarding the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file with the SEC.

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

ITEM 2.    Properties

        Our headquarters is located in Houston, Texas in a 218,151 square foot office and warehouse complex, which is leased. The complex houses data processing operations, as well as executive, accounting, research and development and operating personnel. This lease expires in the beginning of fiscal 2016. We lease additional space, aggregating approximately 658,360 square feet, which is used by our operations around the world, including the locations identified under Item 1. Business—Principal Operating Assets—Data Processing and Interpretation. These leases expire at various times through fiscal 2013. We also own and charter seismic acquisition vessels as listed under Item 1. Business—Principal Operating Assets—Marine Acquisition.

ITEM 3.    Legal Proceedings

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

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, 2004.

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PART II

ITEM 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

        Our common stock is listed on the New York Stock Exchange under the symbol "VTS." 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.

        On March 31, 2005, the last reported sales price for our common stock on the New York Stock Exchange was $29.96 per share. On March 31, 2005, there were approximately 345 record holders of common stock.

        Two shares of our special voting stock are authorized and outstanding, each existing as a series of our common stock. The shares were issued in 1996 and 1999 in connection with business combinations. These special voting shares possess a number of votes equal to the number of Veritas Energy Services Inc. Exchangeable Shares and Veritas Energy Services Inc. Class A Exchangeable Shares, Series 1 outstanding at any time. Veritas Energy Services Inc. is a wholly owned subsidiary. These exchangeable shares were issued to provide beneficial Canadian tax treatment for the Canadian shareholders of the Canadian corporations participating in the combination transactions. The exchangeable shares may be exchanged on a one-for-one basis for our common stock and when coupled with the voting rights afforded by the special voting shares are virtually identical to our common stock. Any reference to our shares in this annual report refers to all shares, including the exchangeable shares, unless the reference expressly excludes the exchangeable shares.

        Our common stock and the exchangeable shares are listed on the Toronto Stock Exchange. Although our common stock and exchangeable shares continue to be listed on the Toronto Stock Exchange, trading in our common stock and our exchangeable shares is currently not allowed in any of the provinces within which the shares were registered, including the Provinces of Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland, Nova Scotia, Ontario, Quebec and Saskatchewan Canada. The securities commissions in those provinces have each issued orders that trading in our common stock and exchangeable shares cease until such time as we file with them our financial statements for the fiscal year ended July 31, 2004 and the quarters ended October 31, 2004 and January 31, 2005 and obtain an order reinstating trading. We intend to file our financial statements with each provincial securities commission and seek such orders reinstating trading as soon as the financial statements are completed.

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Issuer Purchases of Equity Securities

        The following table summarizes stock repurchases for the fiscal year ended July 31, 2004:

(1)

During the year ended July 31, 2004, we repurchased an aggregate of 5,579 shares other than as a part of a publicly announced plan or program. We repurchased these securities in connection with our stock compensation plans, which allow participants to use shares to satisfy tax liabilities arising from the vesting of restricted stock. The number above does not include unvested shares forfeited back to us pursuant to the terms of our stock compensation plans.

(2)

As of July 31, 2004, there were no publicly announced plans or programs to repurchase stock.

(3)

Includes 1,222,494 shares repurchased in connection with the issuance of our Convertible Senior Notes. (See Note 5 to the Notes to Consolidated Financial Statements.)

        We have not paid any dividends on our common stock during the two most recent fiscal years and have no current plans to pay any dividends. The payment of any future dividends on our 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. Our current bank debt agreement prohibits the payment of cash dividends.

Equity Compensation Plan Information

        Information related to our equity compensation plans for both non-employee directors and key employees as of July 31, 2004, and information related to potential ownership dilution as of such date, may be found under "Equity Compensation Plan Information" in Item 12.

        Our stock option and restricted stock plans are described further in Note 9 of Notes to Consolidated Financial Statements.

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ITEM 6.    Selected Consolidated Financial Data

(1)

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

(2)

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

(3)

Periods prior to fiscal 2004 have been restated to reflect correction of certain accounting errors as described in Note 16 of Notes to Consolidated Financial Statements.

(4)

The results of fiscal years 2001 and 2000 have been restated for correction of clerical and account reconciliation errors described in Note 16 of Notes to Consolidated Financial Statements, with the restatement decreasing net income in both years by $1.0 million and $0.9 million respectively.

(5)

Fiscal 2002 included charges of $55.3 million for impairment of multi-client surveys, $14.6 million for costs of a terminated merger and $6.5 million valuation allowance for Argentine deferred tax assets.

ITEM 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

        Seismic spending during fiscal 2004 followed different patterns than in the past, with large numbers of seismic vessels being operated in the Asia Pacific region and employed by national oil companies. Major petroleum resource holders such as ONGC in India, PEMEX in Mexico and Petronas Carigali in Malaysia, together utilized up to 15 out of an estimated global fleet of 66 towed-streamer seismic vessels. In June 2004, 24 vessels, or 36% of the estimated global towed-streamer seismic fleet, were operating in Asia, leaving some areas of the world, such as the North Sea, capacity constrained for the first time in many years. Due to the time lag between bidding and actual performance of work, this short-term supply imbalance did not affect pricing of fiscal 2004 work. However, we are currently experiencing price improvement in some markets and believe pricing in the overall industry should improve during the remainder of fiscal 2005.

        Multi-client investment by the seismic industry has declined precipitously over the last two to three years. In years past, it was common to find half of the global seismic fleet occupied on multi-client

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work; now we estimate the figure is in the 20% range. Today, many seismic companies are striving for the immediate and relatively certain cash flows offered by contract work versus the potentially higher but riskier cash flows offered by multi-client investments. Ordinarily, a shift out of multi-client work of this magnitude would have led to a severe downturn in the industry. However, large-scale contract projects sponsored by national oil companies have utilized much of the shifted capacity.

        Assuming that oil and gas prices remain near the current historically high range, we believe that the demand for seismic data will increase on a global basis. The national oil companies, in general, are currently very active in exploring for oil, and are venturing beyond their own borders to do so. Independent oil and gas companies also seem very optimistic about exploration and, from our experience, are very willing to exploit the advantages offered by multi-client data: its immediate availability and relatively low price as compared to proprietary surveys. Accessing large reserves in the Middle East and former Soviet Union is proving more complicated than anticipated, fueling growing concerns about reserve replacement and production sustainability, particularly among the largest oil and gas companies. We are seeing an increase in exploration expenditures by oil and gas companies, which, if the trend continues, bodes well for the seismic industry. Oil and gas companies have started to react to this surge of exploration activity, trying to secure drilling rigs and seismic vessels several months in advance, a pattern that we have not seen in the recent past because of industry overcapacity.

        We believe that we are well positioned to take advantage of a market upturn. We have a large, strategically positioned data library that includes many surveys that have not only been acquired and processed with the latest technology, but that have been enhanced with secondary processing techniques such as pre-stack depth migration. We have invested heavily in new technology, both in the acquisition and in the processing areas, and we now find that our solid streamer equipped vessels and advanced processing capabilities are in demand where the highest data quality and latest processing techniques are required. As the positive trends in the market continue, we believe we will generate improved results over recent years in the form of higher revenue, earnings and cash flow.

Restatement

        As described on page 1 of this annual report, we have restated our financial statements to correct certain accounting errors. The restatement has not caused us to be in default under any of our debt covenants. We obtained waivers from our lenders related to the timing of our delivery of financial statements to them, extending the due date to May 15, 2005. As of March 31, 2005, the total amount utilized under our Credit Agreement was $2.4 million, all in the form of letters of credit. Additionally, the restatement has delayed the registration of our Convertible Senior Notes, resulting in our payment of liquidated damages to the holders of the Convertible Senior Notes in the amount of $2,153 per day from August 31, 2004 until the registration is completed.

Results of Operations

Fiscal 2004 Compared with Fiscal 2003 (Restated)

        Revenues.    Revenues increased 12%, from $501.8 million in fiscal 2003 to $564.5 million in fiscal 2004. Multi-client revenues were responsible for most of the increase, growing by 26%. Contract revenues increased by a net 2% due to a shift of our vessels from multi-client to contract work, offset by a decline in our contract land acquisition revenue in South America. In response to this decline, we are reducing our land acquisition presence in South America and redeploying our assets and key personnel into other markets.

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        Revenues consisted of the following:

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

        In fiscal 2003, contract margin included a $2.9 million charge to establish a reserve against an account receivable from one of our customers. This receivable was settled in the first quarter of fiscal 2004 resulting in a gain of $0.6 million.

        General and administrative expense decreased by $1.8 million. The decrease was due primarily to lower severance cost in the current year, partially offset by expenses associated with requirements of the Sarbanes-Oxley Act and related rules.

        Research and development expense increased by $3.9 million. A substantial amount of the increase was due to work on multi-component (pressure and shear wave) acquisition and processing. We spend the majority of our research budget on developing advanced processing techniques.

        The fiscal 2004 charge of $22.1 million is included in cost of services on the "Consolidated Statements of Operations and Comprehensive Income (Loss)" and relates to a change in accounting for our multi-client library. This charge represents the adjustment necessary to reduce each of our surveys as of August 1, 2003, the first day of fiscal 2004, to a balance no greater than that which would have been recorded had we been using the new method. While the sales forecast method remains our primary means of expensing multi-client surveys, we have now established a minimum cumulative amortization for each survey based upon straight-line amortization over five years. The monthly expense recognized for each survey is the greater of the amount derived by the sales forecast method or the amount of minimum amortization. This is a change from the prior method that provided for a minimum amortization only during the last two years of the survey's book life.

        The fiscal 2003 charge of $51.8 million includes an impairment of multi-client surveys of $4.9 million, an impairment and severance expense related to the sale of (RC)², our reservoir characterization software business, of $7.6 million, and an impairment charge for goodwill of $39.3 million, with each charge described more fully below.

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        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 fiscal 2003, we recognized a $4.9 million pretax impairment charge related to a survey in the Gulf of Mexico that we have been unable to license. This survey was acquired at right angles to an existing survey and customers have not been willing to pay for the moderately increased resolution.

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

        Our reduced earnings in fiscal year 2003, coupled with the instability in our industry, led to a sharp decline in our stock price in fiscal year 2003, leaving our market value below our book value. As a result of our continued weak stock price and the sale of the (RC)² software business, we performed an evaluation of our existing goodwill balance at the end of fiscal 2003. This analysis indicated our goodwill was impaired and, as a result, we recognized an impairment charge of $39.3 million, an amount equal to our entire goodwill balance.

        Income taxes.    Our provision for income taxes decreased by $24.5 million from fiscal 2003 to fiscal 2004 due principally to two reasons. First, fiscal 2003 was negatively impacted by unbenefited net operating losses, non-deductibility of our goodwill impairment and increased valuation allowances on our deferred tax assets. Second, fiscal 2004 was positively affected by the reduction of certain tax contingencies and resolution of certain tax matters in early calendar year 2005, due to the extended open period of fiscal 2004 caused by our restatement. (See Note 7 of Notes to Consolidated Financial Statements for further information on income taxes.)

Fiscal 2003 (Restated) Compared with Fiscal 2002 (Restated)

        Revenues.    Revenues increased 11%, from $452.2 million in fiscal 2002 to $501.8 million in fiscal 2003. Multi-client revenues decreased 2% primarily due to lower sales of completed surveys in the Gulf of Mexico and Canada offshore, partially offset by increased revenue from the Canadian foothills, Nigeria and Brazil. Contract revenues increased 24% due to projects in the Gulf of Mexico, Trinidad, Asia Pacific and U.S. onshore. Contract revenue represented 57% of the total revenue in fiscal 2003, compared to 51% in 2002.

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        Revenues consisted of:

        Operating income (loss).    Our operating loss increased from $0.8 million in fiscal 2002 to $12.1 million in fiscal 2003. Fiscal 2003 includes an impairment charge for goodwill of $39.3 million, an impairment of multi-client surveys of $4.9 million and a reserve for the sale of (RC)² of $7.6 million. Fiscal 2002 included a $55.3 million impairment of multi-client surveys and a $14.6 million charge related to our proposed merger with Petroleum Geo-Services ASA. The total charges described above were $51.8 million in fiscal 2003 and $69.9 million in fiscal 2002, which had the effect of decreasing our operating loss from fiscal 2002 to fiscal 2003 by $18.1 million. Several other items offset this positive change. Although contract margins increased due to higher pricing and favorable geographic mix, overall margins declined due to lower margins from multi-client revenue caused by lower sales of fully amortized, 100% margin, surveys. Operating income in fiscal 2003 was further reduced by $10.6 million of forced amortization of slow moving multi-client surveys, as compared to $5.3 million of forced amortization in fiscal 2002. Forced amortization is the amortization required to reduce the book value of a survey to the value that would have been recorded had the survey been subject to straight-line amortization over the last 24 months of book life, rather than amortization resulting from application of the sales forecast method. (See Note 1 of Notes to Consolidated Financial Statements for a detailed description of multi-client accounting.) Forced amortization does not indicate that a survey is impaired, only that sales-to-date have been insufficient to maintain a minimum cumulative amortization. Our operating loss in fiscal 2003 was increased by $2.9 million as a result of a charge to establish a reserve against our account receivable from one of our customers. Our balance sheet exposure to this claim was $2.9 million, as of July 31, 2003. This issue was resolved in the first quarter of fiscal 2004, resulting in a gain of $0.6 million.

        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 fiscal 2003, we recognized a $4.9 million pretax impairment charge related to a survey in the Gulf of Mexico that we have been unable to license. This survey was acquired at right angles to an existing survey, and while a technical success, customers have not been willing to pay for the increased resolution.

        In fiscal 2002, we recognized a $55.3 million pretax impairment charge related to 11 of our multi-client library surveys. Seven of these were land surveys located in the Gulf Coast region. Exploration spending was very low in this region since we completed these surveys, and we did not anticipate any sales of these surveys in the foreseeable future. Therefore, these surveys were written off, 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 did not forecast enough sales to amortize the remainder of the

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cost of the survey, we wrote it down by $16.0 million. This left $10.0 million of cost for this survey, an amount we believed 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 did not foresee significant near-term additional licensing of this survey, and we wrote it off with a net charge of $9.4 million. We also have two small 2D surveys that were written off with a net charge of $1.1 million.

        We had not been satisfied with the results of the software operation acquired with the (RC)² business in February 2001. We were not making the software sales projected in our acquisition plan and were ineffective at bringing any new products to market. In the fourth quarter of fiscal 2003, we decided to sell this operation and entered into a letter of intent with Seismic Micro-Technology, Inc., a company more focused on software development. We took a charge in the fourth quarter of fiscal 2003 of $7.6 million related to these operations, of which $5.9 million of this charge was applied to reduce the carrying value of the (RC)² software to its estimated market value of $2 million. The remaining $1.7 million primarily relates to employee severance and facility costs. The sales agreement allows us to continue using the (RC)² suite of software in our reservoir consulting business. The sale closed in September 2003.

        Our reduced earnings, coupled with the instability in our industry, led to a sharp decline in our stock price, leaving our company's market value below our book value. As a result of our weak stock price and the sale of the (RC)² software business, we performed an evaluation of our existing goodwill balance at the end of fiscal 2003. This analysis indicated our goodwill was impaired and, as a result, we recognized an impairment charge of $39.3 million, an amount equal to our entire goodwill balance.

        General and administrative expense increased by $3.4 million from the prior year primarily due to severance costs related to our overhead reduction efforts.

        Interest expense increased by 36%, or $4.9 million, due to the increased average balance of outstanding long-term debt and the expensing of the remainder of unamortized debt issuance costs associated with our senior notes, which were retired in the third quarter of fiscal 2003.

        Other (income) expense, net.    Other (income) expense, net decreased from $4.4 million in fiscal 2002 to $0.2 million in fiscal 2003. Foreign exchange losses in Argentina and Canada contributed $4.0 million of net expense to fiscal 2002. Additionally, a loss on an investment contributed $1.4 million of additional expense in fiscal 2002. This was partially offset by a decrease in interest income from $1.4 million in fiscal 2002 to $1.0 million in fiscal 2003 as a result of lower cash balances in the first half of the fiscal 2003 as compared to fiscal 2002. Additionally, our unconsolidated joint venture in Indonesia incurred a loss of $1.1 million in fiscal 2003 compared to income of $0.2 million in fiscal 2002. (See Note 1 of Notes to Consolidated Financial Statements for information related to the consolidation of our joint venture.)

        Income taxes.    Our provision for income taxes increased by $23.0 million from fiscal 2002 to fiscal 2003 due primarily to the impact in fiscal 2003 of unbenefited net operating losses, non-deductibility of our goodwill impairment and increased valuation allowances on our deferred tax assets.

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 and private debt financing, equity sales, equipment financing and our revolving loan facility and trade credit. We believe that our current cash balance and cash flow from operations are adequate to meet our liquidity needs for the next twelve months and expect to increase our cash balance during fiscal 2005.

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        For the past three fiscal years, cash provided by our operating activities has increased while combined expenditures for capital equipment and multi-client surveys have declined. We expect spending to increase modestly in fiscal 2005, but also expect that cash provided by operating activities will again exceed our investment in our operations. For fiscal 2005, we budgeted capital expenditures of approximately $43 million and cash multi-client library investment of approximately $128 million for a combined investment of approximately $171 million. These amounts are relatively flexible and will be adjusted to meet the needs of the business. We expect replacement of equipment lost from the Veritas Viking will increase our capital expenditures for fiscal 2005 to approximately $79 million, but we expect reimbursement of most of this additional amount in the form of insurance proceeds. In addition to these amounts, we plan to spend approximately $18 million for research and development. During the six months ended January 31, 2005, we have spent $17.2 million on capital expenditures, $58.7 million for multi-client library investment and $9.1 million on research and development.

Debt Structure

        On March 3, 2004, we sold $125.0 million aggregate principal amount of Floating Rate Convertible Senior Notes Due 2024 to an initial purchaser in a private placement. On March 11, 2004, we sold an additional $30.0 million of these Convertible Senior Notes to the initial purchaser. The notes are our senior unsecured obligations and are convertible under certain circumstances described below into a combination of cash and our common stock at a fixed conversion price of $24.03 (subject to adjustment in certain circumstances), which is equivalent to an initial conversion ratio of approximately 41.6 shares of our common stock per $1,000 principal amount of Convertible Senior Notes, or a maximum of approximately 6.5 million shares for the $155.0 million aggregate principal amount outstanding. In general, upon conversion of a note, the holder of such note will receive cash equal to the $1,000 principal amount of the note and shares of our common stock for the note's conversion value in excess of such principal amount. We used $129.0 million of net proceeds from the sale of the Convertible Senior Notes to repay in full the term C loan and to prepay portions of the term A and B loans under our credit facility described below. The remaining $20.0 million of net proceeds from the Convertible Senior Notes was used to repurchase, in negotiated transactions, 1,222,494 shares of our common stock sold by certain purchasers of the Convertible Senior Notes in connection with the offering.

        The Convertible Senior Notes bear interest at a per annum rate which is equal to the three-month LIBOR rate, adjusted quarterly, minus a spread of 0.75%. The interest rate of the notes, from March 15, 2005 through June 14, 2005, is 2.26%, based on a LIBOR rate of 3.01%. The notes will mature on March 15, 2024 and may not be redeemed by us prior to March 20, 2009. Holders of the notes may require us to repurchase some, or all, of the notes on March 15, 2009, 2014 and 2019. They could also require repurchase upon a change of control (as defined in the indenture under which the Convertible Senior Notes were issued.)

        Under certain circumstances and at the option of the holder, the Convertible Senior Notes are convertible prior to the maturity date into cash and shares of our common stock. Certain of these circumstances may result in classification of the Convertible Senior Notes as current on our balance sheet. These circumstances include.

(1)

the closing sale price of our common stock is over 120% of the conversion price for a specified number of trading days;



(2)

if we called the notes for redemption and the redemption has not occurred;



(3)

the occurrence of a five consecutive trading day period in which the trading price of the notes was less than 95% of the closing sale price of our common stock on such day multiplied by the number of shares our common stock issuable upon conversion of the notes; or



(4)

the occurrence of specified corporate transactions.

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        The Convertible Senior Notes were sold to Deutsche Bank Securities, Inc., the initial purchaser, under an exemption provided by section 4(2) of the Securities Act. The initial purchaser concurrently sold the notes only to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended. The notes and the underlying common stock issuable upon conversion have not been registered under the Securities Act or any applicable state securities laws and may not be offered or sold in the United States absent registration or an applicable exemption from such registration requirements. We entered into a registration rights agreement in which we agreed to file within 90 days of March 3, 2004 a registration statement with the SEC to register resales of the notes and the underlying shares of common stock. We filed a registration statement on May 28, 2004 in compliance with the registration rights agreement; however, due to the delay in filing required reports as a result of our restatement of our financial information the registration statement is not yet effective. Because we are required to pay liquidated damages in the event the registration statement was not effective on or before August 31, 2004, or under certain other circumstances, we have been incurring such damages in the amount of $2,153 per day since August 31.

        On February 14, 2003, we entered into a Credit Agreement (the "Credit Agreement") with Deutsche Bank AG, New York Branch, as Administrative Agent, Deutsche Bank AG, Canada Branch, as Canadian Administrative Agent, and certain other lending institutions. The Credit Agreement provided term financing of $195.0 million under term A, term B and term C tranches (the "Term Loans"), a revolving loan facility aggregating $55.0 million, including a facility for swing line loans of up to $10.0 million and the issuance of letters of credit in an aggregate amount of up to $40.0 million. Proceeds from the Term Loans were used to satisfy the obligations under our previous credit agreement and our Senior Notes due October 2003. We used $129.0 million of net proceeds from the Convertible Senior Notes described above to repay in full the term C loan and to prepay portions of the term A and B loans. In addition, we prepaid the remaining $51.3 million of Term Loans using cash on hand. We recorded $7.4 million in charges relating to the retirement of the $180.3 million Term Loans which included expensing of debt issuance costs, cancellation of interest rate swaps and prepayment penalties. These charges are included in interest expense on the "Consolidated Statement of Operations and Comprehensive Income (Loss)." The revolving loan facility is still available to us, although not currently drawn upon. Loans made under the revolving loan facility, including swing-line loans, bear interest at a variable rate determined on the date of borrowing that is related to various base rates and margins depending upon our leverage ratio and the location of the borrowing. The revolving loan facility expires in February 2006.

        As of July 31, 2004, there were $2.7 million in letters of credit outstanding under the revolving loan facility, leaving $52.3 million available for borrowings. In addition to the revolving loan facility, we have various unsecured lines of credit with lending institutions that operate in geographic areas not covered by the lending institutions in our revolving loan facility, totaling $8.5 million that may be used exclusively for the issuance of letters of credit and bank guarantees. As of July 31, 2004, $4.1 million in letters of credit were outstanding under these lines. The Credit Agreement prohibits us from, among other things, paying cash dividends.

        Borrowings under the Credit Agreement are secured by assets, including equipment, vehicles, multi-client data library, intellectual property, and stock of certain material subsidiaries, owned by us and certain of our subsidiaries. At July 31, 2004, the carrying value of the secured assets, including intercompany receivables, was $1.1 billion. The Credit Agreement and related documents contain a number of covenants, including financial covenants relating to interest coverage, leverage and net worth. These covenants relate to measurements as of quarter ending dates; as of July 31, 2004 and as of our last fiscal quarter, ended January 31, 2005, we were in compliance of these financial covenants. During March 2005, we obtained waivers from our lenders under the Credit Agreement related to the late filing of our financial statements. The waivers allow us to deliver our required reports for fiscal 2004 and for the first and second quarters of fiscal 2005 to the lenders by no later than May 15, 2005.

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If we are unable to meet this deadline or are unable to extend it further, our ability to borrow under the Credit Agreement may be restricted.

        The following table presents our contractual obligations as of July 31, 2004 for the specified periods:

(1)

The interest rate on our debt is LIBOR less 0.75%. For purposes of this table we used our current interest rate of 2.26% based on a LIBOR rate of 3.01%. Each 100 basis point increase in LIBOR will increase our annual interest expense by $1.55 million per year.

(2)

Includes income tax, deferred revenue, pension and retirement obligations for which the timing of payment is uncertain.

        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.

Off-Balance Sheet Arrangements

        As of July 31, 2004, we had no off-balance sheet instruments. Our limited hedging program has consisted of off-balance sheet instruments to fix the U.S. dollar value of foreign currency payments to be made under a Norwegian vessel charter and interest rate swap contracts that effectively fixed the interest rate on $80.0 million of our variable rate long-term bank debt. These instruments are described in detail in Item 7A. "Quantitative and Qualitative Disclosures Regarding Market Risk" as well as in Note 10 of Notes to Consolidated Financial Statements included elsewhere in this report.

Critical Accounting Policies

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

Revenue Recognition

        Customer contracts for our services vary in terms and conditions. We review the deliverables in each contract and, where applicable, apply the accounting guidance contained in EITF 00-21, "Accounting for Revenue Contracts with Multiple Deliverables (EITF 00-21)".

        For most contract services, we recognize revenue on a proportional performance method based upon output measures as work is performed. This method requires that we recognize revenue based upon quantifiable measures of progress, such as kilometers shot or processed. In contracts where our

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customer pays separately for the mobilization of equipment, EITF 00-21 requires us to recognize such mobilization fees as revenue during the performance of the seismic acquisition.

        Revenues from the licensing of multi-client surveys are based upon agreed rates set forth in the contract and are recognized upon physical delivery of, or customer access to, the surveys. During the acquisition and processing phase of a multi-client survey, in most cases we recognize revenue on in-process multi-client surveys after obtaining a signed license agreement that gives the customers access to survey results as they occur, based upon a proportional performance method, using quantifiable measures of progress, such as kilometers shot or processed. After completion of a multi-client survey, we recognize revenue upon delivery of data to our customer or the customer's designee. Provisions exist in certain contracts with our customers that provide for a full refund if certain deadlines are not met or provide for a revenue sharing arrangement with the customer such that the final sales price is not fixed or determinable. For contracts with these provisions, we will not recognize the revenue under the proportional performance method for that contract and, instead, will defer revenue recognition until performance is complete or the sales price is fixed or determinable.

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. In some circumstances, we have sold on a non-exclusive basis rights to data prior to our collecting and processing such data, i.e., we have made the first of what we anticipate will be multiple discrete sales of licenses to the same data.

        We capitalize costs associated with acquiring and processing the data as an investment in our multi-client data library. The capitalized costs of multi-client data are charged to cost of services in the period sales of licenses occur based upon the greater of the percentage of total costs to total estimated sales for the first five years multiplied by actual sales, a process called the sales forecast method, or five-year straight-line amortization from the date of survey completion. Effective August 1, 2003, we changed our minimum amortization policy with regard to multi-client data and recorded a charge of $22.1 million, included in cost of services in our Consolidated Statement of Operations. Under the prior method, capitalized costs of multi-client surveys were charged to cost of services in the period sales occurred, using the sales forecast method, over an estimated five-year useful life. However, during the last 24 months of a survey's useful life, amortization was the greater of the amount resulting from the sales forecast method or straight-line amortization of the remaining book value over the remaining portion of the original five-year estimated useful life. Under the new method, capitalized costs of multi-client surveys are charged to cost of services over an estimated five-year useful life based upon the greater of the result (higher expense) under the sales forecast method or cumulative straight-line amortization from survey completion over an estimated five-year useful life. However, the sales forecast method remains our primary method of calculating cost of services. We believe this method of amortizing the capitalized costs aligns the amount of amortization to the period in which the economic benefits of the capitalized costs are consumed.

        Estimated sales are determined based upon discussions with our clients, our experience and our knowledge of industry trends. Changes in sales estimates may have the effect of changing the percentage relationship of cost of services to revenues. In applying the sales forecast method, an increase in the projected sales of a survey will result in lower cost of services as a percentage of revenue, and higher earnings when revenue associated with that particular survey is recognized, while a decrease in projected sales will have the opposite effect.

        Assuming that the overall volume of sales, mix of surveys generating revenue in the period and minimum amortization amounts were held constant in fiscal 2004, an increase of 10% in the sales forecasts of all of our surveys would have decreased our cost of services by approximately 2%, or approximately $10 million.

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

        The total amortization period of 60 months represents the minimum period over which benefits from these surveys are expected to be derived. We have determined the amortization period of 60 months based upon our historical experience that indicates that the majority of our revenues from multi-client surveys are derived during the acquisition and licensing phases and during the 5 years subsequent to survey completion. Any future decrease in the minimum amortization period would have the effect of increasing cost of services and reducing the carrying value of the multi-client data library.

        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. Any future reductions in sales estimates may result in an impairment charge that increases cost of services and reduces the carrying value of the multi-client data library. For example, in fiscal 2003, we recognized a $4.9 million pretax impairment charge related to a survey in the Gulf of Mexico that we had been unable to license.

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, by tax jurisdiction, 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 if the realization of deferred tax assets subsequently becomes more likely than not.

        During fiscal 2004, our valuation allowances increased $11.9 million principally because historical losses indicated that future taxable income may not be sufficient to realize deferred tax benefits. If we do not record cumulative losses in future periods, we may determine that the realization of tax assets is more likely than not and revise our valuation allowance. As of July 31, 2004, we had recorded $73.0 million in valuation allowances, all of which are subject to periodic evaluation.

        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. During fiscal 2004, we did not recognize any amount related to these benefits.

Software Capitalization and Amortization

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

        The amortization of capitalized software is the greater of the amount computed using (a) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product or (b) the straight-line method over the remaining estimated economic life of the product including the period being reported on. The period of amortization begins when the

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software is released to the market. Estimated useful lives of our software products range from three to five years.

        Estimated sales are determined based upon discussions with our clients, our experience and our knowledge of industry trends. Changes in sales estimates will have the effect of changing cost of services. An increase in projected sales will result in lower cost of services as a percentage of sales and higher earnings. A decrease in projected sales will result in higher cost of services as a percentage of sales and lower earnings. Any future increases or decreases in our estimates of useful lives will have the effect of decreasing or increasing future cost of services with an inverse effect on earnings.

Recent Accounting Pronouncements

        We maintain stock-based compensation plans that are accounted for using the intrinsic value based method allowed by APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Under that method, compensation expense is recorded in the consolidated financial statements when the quoted market price of the underlying 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 stock options at a price lower than market, therefore, we do not record any compensation expense related to stock options. In December 2004, the Financial Accounting Standards Board released SFAS No. 123R, a revision to SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS 123R, which will become effective for us beginning with our first quarter of fiscal 2006, will require us to record the cost of stock options and other equity-based compensation in our income statement based upon the estimated fair value of those awards. As required by SFAS No. 148, "Accounting for Stock-Based Compensation," we disclose the pro forma effect of stock-based compensation expense on net income and earnings per share that would have been recorded had we used the fair value based method. As presented in Note 1 of the Notes to Consolidated Financial Statements, adoption of SFAS No. 123R will likely reduce our reported net income or increase our reported net loss in future periods.

        In December 2003, the Financial Accounting Standards Board issued FIN 46R, a revision to FIN 46 "Consolidation of Variable Interest Entities". FIN 46R replaces FIN 46 and provides additional clarification on the application of ARB No. 51, "Consolidated Financial Statements", to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. We adopted FIN 46R on April 30, 2004. Adoption did not have a material effect on our financial position or results of operations, however, it required consolidation as of April 30, 2004 on a prospective basis of our 80% owned Indonesian joint venture, which was accounted for under the equity method prior to adoption of FIN 46R. The 80% owned joint venture provides processing and acquisition services and licenses to our multi-client data. This change is reflected in an increase of multi-client data of $2.3 million, an increase in current assets net of current liabilities of $0.6 million and a decrease in investment in and advances to joint ventures of $3.1 million.

        In December 2003, the Financial Accounting Standards Board issued SFAS No. 132 (Revised 2003), "Employer's Disclosures about Pension and Other Postretirement Benefits." This statement retains the disclosures required by SFAS No. 132 and adds additional disclosures. Those disclosures include information describing the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows, and components of net periodic benefit cost recognized during interim periods. We adopted SFAS No. 132 (Revised 2003) in the quarter ended April 30, 2004.

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Risk Factors

As a provider of geophysical technologies, our business is substantially dependent on the level of capital expenditures by oil and gas companies, and is more specifically dependent on exploration expenditures.

        Capital expenditures by oil and gas companies are affected by several factors including actual and forecasted petroleum commodity prices and the companies' own short term and strategic plans. These capital expenditures may also be affected by worldwide economic conditions. Should there be a sustained period of substantially reduced exploration expenditures by oil and gas companies the demand for geophysical services likely will drop, adversely affecting our results of operations and cash flow during the affected period. In recent years, many of our customers have been using a substantial portion of their discretionary cash to pay down debt, buy back their stock, drill low-risk prospects and maximize production from existing fields rather than exploring for new prospects. While we believe this trend has ended, due to recent commodity price increases and current supply and demand forecasts, there can be no guarantee that oil and gas companies will engage in substantial or prolonged exploration programs involving seismic spending. While petroleum commodity prices are currently high from a historical perspective, history has shown these prices to be very volatile.

Weak demand or technological obsolescence could impair the value of 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. For example, in fiscal 2003 and fiscal 2002 we incurred $4.9 million and $55.3 million, respectively, in impairment charges related to slow moving surveys in our multi-client library. These surveys were found to be impaired for various reasons, including slow acreage turnover in the case of U.S. land surveys, a border dispute in the case of a Shetland-Faroes survey and excessive acquisition cost in the case of a Gulf of Mexico survey. Additionally, our individual surveys have a book life of five years, so particular surveys may undergo significant amortization even though sales of licenses are weak or non-existent, reducing the profits of the company.

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.

        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. Because 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 we expect 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

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competitors operate substantially more data acquisition crews and have significantly greater financial and other resources than we do. 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 vary in material respects from quarter to quarter and will most likely continue to do so in the future. Factors that 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 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 are still in the process of improving our internal controls and procedures, which we determined were materially weak.

        As disclosed in the explanatory note on page 1, Item 9A. "Controls and Procedures," we have identified material weaknesses in our internal controls that have allowed accounting errors to occur and remain undetected for lengthy periods of time. In response to these deficiencies in our internal controls, we have begun the process of improving our internal control structure and internal control procedures across our company. Full implementation of these improvements will be accomplished over a period of time, but until these efforts are successfully completed, we could experience future accounting and financial reporting problems. Accounting and financial reporting problems could result in, among other things, securities litigation claims, investigations by the SEC and possible fines and penalties, and a loss of investor confidence which could adversely affect the trading prices of our debt and equity securities and adversely affect our ability to access financing sources.

We face risks associated with our foreign revenue generating activities.

        Substantial portions of our revenues are derived from foreign activities. During the fiscal year ended July 31, 2004, approximately 57% of our revenue, or $319.3 million, was attributable to activities outside the United States. During the fiscal year ended July 31, 2004, we recognized revenue from the

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following foreign countries that represented 1% or more of our consolidated revenue on a gross basis for the fiscal year:

        Foreign revenues are subject to certain risks, including those related to rates of currency exchange, border disputes, war, terrorism, civil disturbances, embargo, and government activities such as radical changes in tax regulations or investment laws. We are exposed to these risks in all of our foreign operations to some degree, and our exposure could be material to our financial condition and results of operations where the political and legal environment is less stable and we generate significant revenue or have large local investments, such as in Argentina, Brazil, Nigeria, and Oman.

        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. These laws change over time and may result in limitations on our ability to compete globally. In addition, non-U.S. persons employed by our separately incorporated foreign subsidiaries conduct business in foreign jurisdictions that are subject to U.S. trade embargoes, have been identified by the U.S. government as state sponsors of terrorism or are subject to sanctions by the U.S. Office of Foreign Assets Control. For example, during fiscal 2004 we generated $1.5 million of revenue from Libyan customers, $428,000 of revenue from Iranian customers and $9,000 of revenue from a Syrian customer. We have typically generated revenue in these countries through the performance of data processing, reservoir consulting services and the sale of software licenses and software maintenance. The governments of Libya, Iran and Syria have been identified by the U.S. government as state sponsors of terrorism and are subject to sanctions by the U.S. Office of Foreign Assets Control and either directly or indirectly control the activities of our customers within their borders. Our relations with customers in these countries are current and on going. We have procedures in place to conduct these operations in compliance with applicable U.S. laws. However, failure to comply with U.S. laws on foreign operations could result in material fines and penalties.

        Finally, some of our operational activities result in accounts receivable or accounts payable that are denominated in foreign currencies and, therefore, subject to fluctuations in foreign currency exchange rates. There can be no assurance that we will not experience difficulties in connection with future foreign revenue generation and, in particular, adverse effects from foreign currency fluctuations.

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. On January 18, 2005, our seismic vessel

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Veritas Viking experienced an engine failure, which resulted in interrupting an ongoing project and damage to her trailing equipment. See Note 15 of Notes to Consolidated Financial Statements. These types of 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.

We may be unable to repurchase our Convertible Senior Notes as required upon a change in control or on the specified dates at the option of the holder or to pay the required cash upon conversion of the notes.

        Upon a change in control, as defined in the indenture governing our Convertible Senior Notes, and on March 15, 2009, 2014 and 2019, the holders of the notes have the right to require us to repurchase the notes for cash. In addition, upon conversion of the notes, the holders will have the right to receive a cash payment. If we do not have sufficient funds to pay the repurchase price for all of the notes tendered upon a change in control, the cash due upon repurchases of the notes on March 15, 2009, 2014 or 2019 or the cash due upon conversion, an event of default under the indenture governing the notes would occur as a result of such failure. In addition, cash payments in respect of notes tendered for repurchase or conversion are subject to limits and might be prohibited, or create an event of default, under our Credit Agreement as well as other agreements relating to borrowings that we may enter into from time to time. Our failure to make cash payments in respect of the Convertible Senior Notes could result in an event of default under our Credit Agreement. There can be no guarantee that our available sources of cash will be sufficient to allow us to make the required cash payments.

Our business is subject to governmental regulation, which may adversely affect our future operations or the accounting thereof.

        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.

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

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

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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.

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

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

ITEM 7A.    Quantitative and Qualitative Disclosures Regarding Market Risk

        At July 31, 2004, we had limited market risk related to foreign currencies. From time to time, we enter into financial transactions designed to reduce our exposure to foreign currency. In May 2004 and July 2004, we entered into contracts in which we receive payments in pounds sterling. In order to minimize our exposure to currency risk, we purchased several put and call options. As of July 31, 2004, we had realized a loss of $249,000 from these transactions.

        On February 25, 2003, we entered into interest rate swaps in order to reduce our exposure to the variable interest rates under our Credit Agreement described above. These swaps, with notional amounts totaling $80.0 million, effectively hedged 41% of our exposure to interest rate changes for the two-year term of the swaps and had no value at inception. On March 29, 2004, upon prepayment of amounts outstanding under our bank credit facility, the swap agreement was amended to an amount totaling $10.9 million. On June 10, 2004, upon final payment of amounts outstanding under our bank credit facility, the interest rate swap was terminated. The amendment and subsequent termination of the swap resulted in an expense of $441,000 and is included in interest expense for fiscal 2004 on the "Consolidated Statements of Operations and Comprehensive Income (Loss)."

        In March 2001, we entered into a contract requiring payments in Norwegian Kroner to charter the seismic vessel M/V Seisquest. The contract required 36 monthly payments commencing on June 1, 2001. To protect against exposure to exchange rate risk, we entered into multiple forward contracts as cash flow hedges effectively fixing our exchange rate for Norwegian Kroner to the U.S. dollar. This contract expired on April 30, 2004.

        As of July 31, 2004, we had $155.0 million Convertible Senior Notes bearing interest at LIBOR less 0.75% with a fair value of $199.0 million, based upon the trading price of 128.375 on July 29, 2004. These notes are not hedged and represent our total exposure to interest rate risk. Each 100 basis point increase in the LIBOR rate will increase our interest expense by $1.6 million per year.

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ITEM 8.    Consolidated Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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Report of Independent Registered Public Accounting Firm

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

        In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Veritas DGC Inc. and its subsidiaries at July 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 2004 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 Notes 1 and 16 to the consolidated financial statements, the Company has restated its consolidated financial statements for the fiscal years ended July 31, 2003 and 2002.

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

PricewaterhouseCoopers LLP

Houston, Texas
April 28, 2005

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VERITAS DGC INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts)

See Notes to Consolidated Financial Statements

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VERITAS DGC INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(Dollars in thousands, except par value)

See Notes to Consolidated Financial Statements

30

VERITAS DGC INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

See Notes to Consolidated Financial Statements

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VERITAS DGC INC. AND SUBSIDIARIES

SUPPLEMENTARY SCHEDULES TO CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)