UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-KSB

|[X]ANNUAL REPORT UNDER SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934        
|---------------------------------------------------------------------------------------------
|For the fiscal year
    ended                                                                
|                                                                                             
|                                                                                             
|[   ]TRANSITIONAL
    REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period from                                                               

Commission file number: 333-64122

|VERDISYS, INC.                                
|----------------------------------------------
|                                              
|(Name of small business issuer in its charter)

|California              
|------------------------
|                        
|(State of incorporation)

|22-3755993                          
|------------------------------------
|                                    
|(IRS Employer Identification Number)

|25025 I-45 North,
    Suite 525         
|----------------------------------------
|The Woodlands, Texas 77380              
|                                        
|(Address of principal executive offices)
|(281) 364-6999                          
|                                        
|(Telephone
    number)                  

Securities registered under Section 12(b) of the Exchange
Act: None

Securities registered under Section 12(g) of the Exchange
Act: Common Stock, $.001 Par Value

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

Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-KSB or any
amendments to this Form 10-KSB. [X]

Issuers revenues for the most recent fiscal year:
$885,441

The aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference to the average bid and asked
price of such common equity, as of March 25, 2004 is $99,564,922.

The number of shares outstanding of each of the
issuers classes of common equity, as of December 31, 2003:

Common Stock: 29,627,265 shares

No (1) annual report to security holders; (2) proxy or
information statement; or (3) any prospectus filed pursuant to Rule 424(b) or (c) of the
Securities Act of 1933; are incorporated by reference into any part of this Form 10-KSB.

Transitional Small Business Disclosure Format: [
  ]Yes; [X] No

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Table of Contents

|                                                                   | PART I            |    | 
|------------------------------------------------------------------ | ----------------- | -- | 
|DESCRIPTION OF BUSINESS                                            |                   | 3  | 
|FORWARD-LOOKINGSTATEMENTS                                          |                   | 3  | 
|BUSINESSDEVELOPMENT                                                |                   | 3  | 
|BUSINESSSEGMENTS                                                   |                   | 3  | 
|INDUSTRY                                                           |                   | 4  | 
|LATERALDRILLINGSERVICES                                            |                   | 5  | 
|Market                                                             |                   | 8  | 
|Competition                                                        |                   | 10 | 
|SATELLITESERVICES                                                  |                   | 11 | 
|Major Customers                                                    |                   | 12 | 
|Market                                                             |                   | 12 | 
|Competition                                                        |                   | 13 | 
|PATENTS                                                            |                   | 13 | 
|GOVERNMENTALREGULATION                                             |                   | 14 | 
|DESCRIPTION OF PROPERTY                                            |                   | 15 | 
|LEGAL PROCEEDINGS                                                  |                   | 16 | 
|SUBMISSION OF MATTERS TO A VOTE
    OF SECURITY HOLDERS            | 17                |   
|                                                                   | PART II           |    | 
|MARKET FOR COMMON EQUITY AND
    RELATED STOCKHOLDER MATTERS       | 17                |   
|MANAGEMENTS DISCUSSION
    AND ANALYSIS OR PLAN OF OPERATION      | 21                |   
|FINANCIAL STATEMENTS                                               |                   | 25 | 
|CHANGES IN / DISAGREEMENTS WITH
    ACCOUNTANTS                    | 46                |   
|CONTROLS AND PROCEDURES                                            |                   | 46 | 
|                                                                   | PART III          |    | 
|DIRECTORS, EXECUTIVE OFFICERS,
    PROMOTERS AND CONTROL PERSONS   | 47                |   
|COMPLIANCE
    WITHSECTION16(A)                                    | OF THEEXCHANGEACT | 49 | 
|CODE OF ETHICS                                                     |                   | 49 | 
|EXECUTIVE COMPENSATION                                             |                   | 50 | 
|SECURITY OWNERSHIP OF CERTAIN
    BENEFICIAL OWNERS AND MANAGEMENT | 52                |   
|CERTAIN RELATIONSHIPS AND
    RELATED TRANSACTIONS                 | 54                |   
|EXHIBITS AND REPORTS ON FORM
    8-K                               | 56                |   
|PRINCIPAL ACCOUNTANTS FEES AND
    SERVICES                        | 59                |   
|                                                                   |                   |    | 
|SIGNATURES                                                         |                   | 60 | 

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Verdisys, Inc. Annual Report

Description of Business

Forward-Looking Statements

Certain statements concerning the Company's plans and
intentions included herein may constitute forward-looking statements for purposes of the
Securities Litigation Reform Act of 1995 for which the Company claims a safe harbor under
that Act. There are a number of factors that may affect the future results of the Company,
including, but not limited to, (a) the ability of the Company to obtain additional funding
for operations, (b) the continued availability of management to develop the business plan
and (c) successful development and market acceptance of the Companys products. This
annual report may contain both historical facts and forward-looking statements. Any
forward-looking statements involve risks and uncertainties. Moreover, future revenue and
margin trends cannot be reliably predicted.

Business Development

In September 2000, the company was incorporated as Rocker
& Spike Entertainment, Inc, a California corporation. Until December 31, 2000,
operations consisted of organizational matters and the search for an operating company
with which to perform a merger or acquisition. Effective January 1, 2001, the company
purchased the assets and web domain of Accident Reconstruction Communications Network from
its sole proprietor. Following the acquisition, the company changed its name from Rocker
& Spike Entertainment, Inc. to Reconstruction Data Group, Inc. At that time, the
company provided research, communication and marketing exposure to the accident
reconstruction industry through our website and seminars.

In April 2003, the company entered into a merger agreement
with Verdisys, Inc. (Verdisys). Verdisys was initially incorporated as
TheAgZone Inc. in 1999 as a California corporation. Its purpose was to provide e-Commerce
satellite services to agribusiness. They changed their name to Verdisys in 2001, and in
2003, with the acquisition of exclusive rights to a proprietary lateral drilling process
throughout most of the U.S. and Canada, they changed their market focus to concentrate on
services to the oil and gas industry.

The merger agreement with Verdisys called for us to be the
surviving company. In connection with the merger, our name changed to Verdisys, our
articles of incorporation and bylaws remained in effect, the officers and directors of
Verdisys became our officers and directors, each share of Verdisys common stock was
converted into one share of our common stock, and our accident reconstruction assets were
sold.

Verdisys historical financial statements replaced
ours. We now provide specialty services to oil and gas production companies located
primarily in Oklahoma, Texas and Louisiana, and we have exclusive rights to the lateral
drilling process throughout the vast majority of the U.S. and Canada.

Business Segments

Verdisys, Inc. currently operates in the oil and gas
service industry in two distinct business segments. Our mission is to substantially
improve the economics of existing and evolving oil and gas operations through the
application of Verdisys licensed technologies.

Our primary segment is providing a service that enhances
the recovery of oil and gas from new and existing wells. This service is performed by our
specially fabricated mobile drilling rigs equipped to utilize a proprietary lateral
drilling system known as Verdisys Lateral Drilling Services, or VLDS. With VLDS, we offer
drilling services up to 300 feet horizontally from an existing well bore, in selected
formations, down to a depth of 5,800 feet. We can provide our services in a few days at a
fraction of the cost of conventional methods. The combination of low front-end costs,
effectiveness and speed of the process should make VLDS attractive to oil and gas
companies. We believe that there exists a large potential market in North America for the
application of the VDLS technology.

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Verdisys, Inc. Annual Report

Our secondary business segment is providing satellite
services to oil and gas producers, allowing them to remotely monitor and control well
head, pipeline and drilling operations. Using satellite, and other wireless technology, we
provide oil and gas producers the ability to dispense with a manual structure and move to
a real-time, automated, energy management program. With our services, production levels
can be optimized to respond to current market conditions and commitments.

Industry

Verdisys, Inc. operates in the oilfield service industry.
This industry provides a wide range of services to oil and gas companies including
exploration support, equipment supply, construction, logistics, drilling and completion,
production enhancement, etc. The oil and gas industry out sources service functions to
augment its in-house capability and to take advantage of the expertise of the specialty
service providers.

The energy industry is comprised of a diversity of
operators, ranging from the very small to the extremely large. While the major portion of
oil and gas production is provided by large international oil companies, there are also a
large number of smaller independent companies which own the vast majority of existing
wells.

The services industry includes a large number of smaller
companies which focus on serving smaller producers or providing specialized services to
the large ones. We are one of the latter category and will be providing lateral drilling
and satellite services to both small and large companies. We have positioned ourselves to
cater to all segments of the industry in situations where the application of our services
can add value.

Demand for our services depends on our ability to
demonstrate improved economics to the oil and gas production sector we serve. We believe
that they will use our lateral drilling service where it costs less than alternative
services and/or when it generates additional revenue. It will also be driven by
macroeconomic factors driving oil and gas fundamentals. The report of the Energy
Information Agency of the U.S. Department of Energy entitled International Energy
Outlook 2000 forecasts that world oil consumption will increase at an annual rate of
approximately 2% through 2020 and that world gas consumption will increase at an annual
rate of approximately 3% over the same period. The projected increase in demand for oil is
based on worldwide economic and population growth, primarily in developing countries. The
projected increase in gas consumption over this period is expected to result from higher
demand across residential, industrial and commercial sectors, as well as from the
increasing use of gas as a source of fuel for electric power generation, particularly in
North and South America. We also believe that reliance on traditional sources of oil and
gas will be limited due to the inadequate delivery infrastructure and political unrest in
major supplying countries.

According to the Wall Street Journal, June 20, 2003
The good news is that America is swimming in gas: The U.S. Geological Survey
estimates there are 1,400 Tcf of recoverable gas resources in the U.S.  enough to
last decadesBut most of it is off-limits to recover because of restrictive
environmental rules and lawsuits. This is particularly the case with drilling
moratoriums on the East and West Coasts of America, parts of the Rocky Mountain Area and
Alaska. The American Petroleum Institute advocates A multi-pronged approach is
essential for meeting future U.S. natural gas demand: (1) using energy wisely and
conserving where possible; (2) developing more U.S. supplies; (3) diversifying supplies
through pipelines to bring Arctic gas to consumers; (4) facilitating more liquefied
natural gas (LNG) imports. Obviously (3) and (4) are going to take time to develop, are
expensive, face significant regulatory problems and political opposition. A more immediate
impact can be made by developing more U.S. supplies. Developing such supplies is dependent
on drilling new wells in existing fields, or new reserves in expensive less accessible
fields. The alternative to growing domestic supply is to build the infrastructure and
logistics to be able to import large quantities of LNG from overseas. Verdisys believes
its lateral drilling technology can access previously uneconomic reserves and bring them
to market cost effectively thereby helping to resolve this supply/demand imbalance.

Page 4

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Verdisys, Inc. Annual Report

The Office of Fossil Energy, U.S. Department of Energy,
estimates there are nearly 500,000 oil wells and 230,000 natural gas wells that are
marginal or classified as stripper wells. These stripper wells produce either
15 barrels or less of oil a day or 60 thousand cubic feet of gas or less a day. Although
low producing stripper wells account for the same of the amount of oil that America
imports from Saudi Arabia according to the Office of Fossil Energy Together
(stripper wells) account for 1.25 trillion cubic feet of natural gas, or about 8 per cent
of the natural gas produced. Such wells are potentially considered uneconomic or
marginal with the strong potential of being abandoned due to poor production economics.
Indeed approximately 150,000 marginal wells were abandoned between 1993 and 2000
costing the U.S. more than $3.5 billion in lost economic output according to
the Office of Fossil Energy. In seeking to revitalize marginal and stripper wells both the
Department of Energy and American Petroleum Institute have emphasized the need for new
technologies to access more of the reserves available. Verdisys has the ability to
leverage existing facilities rather than drilling new wells. With its unique lateral
drilling technology, Verdisys can provide potentially improved recovery rates rather than
leaving a field because of the depletion of oil or natural gas. Production companies now
have the ability to enhance the pay zones through lateral drilling to significantly extend
economic field life.

We believe that producing companies will react to the
combination of the increased demand and the decreased supply of oil and gas in a manner
that requires them to utilize both segments of our business. We believe that oil and gas
producers have great economic incentive to recover additional production and reserves from
known reservoirs rather than pursuing a more risky exploration approach. Our extraction
methods permit producers to add value by potentially recovering a significant additional
percentage of the oil and gas from a reservoir. We believe that there exists a large
potential market in North America that comprises logical candidates to apply our lateral
drilling method.

Activity in the energy services industry tends to be
cyclical with oil and gas prices. In addition to the currently positive industry
fundamentals, we believe the following sector-specific trends enhance the growth potential
of our business:

- While oil prices are unpredictable, they have remained and
    are projected to remain relatively high by historic terms for several years. Continuing
    high consumption, limitations in delivery infrastructures and political unrest in major
    supplying countries are expected to be contributing factors.
- Natural gas prices are projected to remain high for several
    years due to the combination of strong demand and major supply constraints. About one-half
    of U.S. reserves have been depleted with the remainder increasingly expensive and
    difficult to reach. Significant new supplies from Alaska and the Canadian north require
    the construction of new pipelines which are estimated to be several years away. The
    situation is serious enough that Federal Reserve Bank Chairman Greenspan has expressed
    concern as to its effect as a constraint to US economic growth.
- There is no substitution threat to oil and gas in the
    foreseeable future. In particular, any significant substitution by hydrogen is believed to
    be some decades away.

Lateral Drilling Services

Verdisys Lateral Drilling Service VLDS

Our VLDS segment is our primary business.The
process can be equally applied to new and existing wells. We operate specially fabricated
drilling rigs equipped with VLDS, a patented horizontal jetting technology licensed to us
on exclusive basis for the vast majority of the U.S. and Canada from the inventor, Carl
Landers. We have the ability to access previously uneconomic reserves and bring them to
market at cost effective prices, due to our unique and environmentally sound drilling
process. These services and our small fleet of drilling rigs have appeal for both small
independent operators as well as large integrated companies.

In the U.S. and Canada, we have the rights to provide oil
and gas companies with a proprietary lateral drilling service utilizing specially
fabricated mobile drilling rigs. This technology is protected by three issued patents.
Verdisys has acquired the rights to the vast majority of the North American market for
this drilling technology that has great potential for increasing the production of oil and
gas

Page 5

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Verdisys, Inc. Annual Report

A significant volume of the known oil and gas in the U.S.
remain untapped in existing well bores. By extending 2 channels up to 300 feet in 4
or more directions from the casing of the well at any given depth, the Verdisys drilling
solution provides an economic way to enhance production levels of existing reservoirs,
thereby reducing the need for new or foreign sources of oil and gas. The lateral drilling
operation uses a patented ultra-high pressure water jetting process, which is capable of
drilling lateral holes from existing wells up to 300 feet in length in wells as deep as
5,800 feet.

With this technology, Verdisys has the ability to drill up
to 4 or more laterals in only two days into an existing pay zone at an average price
ranging from $35,000 to $45,000 per well depending upon the size of the project.
Specialized drilling competitors typically charge an average of $250,000 to drill
horizontally in only one direction and in only one horizon and require up to two weeks per
well. Verdisys ability to target new or previously untapped deposits makes its
technology potentially very compelling.

At these lower comparative costs, Verdisys has made it
feasible to enhance production from a large potential market in North America that would
otherwise be cost prohibitive to recover. The existing oil and gas independent producers
in North America are potential customers of this patented lateral drilling service.
According to the Department of Energy Report  Natural Gas Fundamentals, June, 2003,
there are Over 7,000 small independent businesses (that) drill 85% of wells and
produce 65% of natural gas in the U.S. . from over 350,000 U.S. wells. All
7,000 independent producers are potential customers for the service.

In the same report it estimates 10,000 to 15,000 new
natural gas wells are drilled and completed each year costing anywhere from less than
$100,000 to several million. These new wells are necessary just to replace depleted
supplies from existing wells in an effort to maintain current U.S. production levels.
Verdisys lateral drilling service directly competes with the need for new wells by
laterally drilling from existing wells to extend the pay zone and bring new supplies
through existing well bores. By extending the accessibility of reserves through the
existing well Verdisys technology can negate the need for new wells to be drilled in
existing fields. This is not only compelling economically but also is very environmentally
friendly in using previously established well bores rather than drilling new holes.

With VLDS, we can provide an economic production recovery
service. With conventional horizontal drilling, the transition from drilling vertically to
horizontal drilling may take 200 feet or more and take many days to accomplish. Verdisys,
with its patented technology, can make this transition in 2 feet instead of the industry
normal of 200 feet and do it in a matter of minutes not hours. This enables Verdisys to be
extremely precise in targeting and staying within specific pay zones for a potentially
significant enhancement to the production of the well.

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Verdisys, Inc. Annual Report

Many of the nation's old oil and gas fields contain new
infield reservoir compartments and bypassed pockets of reservoirs that have not been
economic to produce. VLDS will make it economically viable to produce from those deposits
for the first time.



VLDS utilizes patented technology in the areas of the
design and manufacture of the Deflecting Shoe and the process of high pressure waterjet
drilling. The figure below more precisely illustrates the process.



Verdisys lateral drilling (VLDS) works on both new and
existing wells. Where VLDS may have greater attraction, though, is on marginal wells that
may be otherwise ready to be abandoned because they are no longer economically viable. The
strong market potential is that this negates the continual need for more exploration, new
drilling and denser infield drilling. Such fields that may be ready to be abandoned and
have remaining resource potential can have their production re-established and their
economic lives significantly extended.

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Verdisys, Inc. Annual Report

The figure below demonstrates how lateral drilling can
drastically expand the production area within a given field relative to vertical wells. An
average well will recover petroleum from an area of up to 120 feet from the well bore.
However, each VLDS Lateral extends up to 300 feet from the well bore, thus potentially
increasing the area of production several fold.



Features of Lateral Drilling:

- The lateral drilling process is fast. Average time the rig
    is on the well is only two days.
- Cuts a two inch diameter hole horizontally up to 300 feet
    from the well bore in multiple directions.
- Lateral holes can be drilled at several vertical producing
    horizons down to 5,800 feet.

Potential Benefits:

- Increase production rate and recoverable reserves from
    marginal wells.
- Improves injection rates in water disposal/injection wells.
- Allows directional treatment of wells with acid, steam,CO2, etc.
- Allows multi-layer application in thicker reservoir zones.
- Enhances recovery most effectively on old, low productivity
    wells.
- Provides an economic alternative to denser infield drilling
    programs.
- Dispenses with large, expensive rotary rigs.
- Dispenses with mud pits that can damage the environment.
- Dispense with casing milling equipment.
- Dispenses with additional stimulation.
- Rapid drilling rates limit the time the well is out of
    production.
- Dispenses with logging expense and the need to change
    well-bore configuration.

Major Customers

When the Company commenced its lateral drilling operations
in 2003 it was dependent upon three customers, two of which were related parties, and one
that had no experience in the oil and gas industry. Since that time it has discontinued
doing business with two of the customers due to disputes regarding the services performed
and payment for those services, and has revised its contract with the third.

Page 8

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Verdisys, Inc. Annual Report

In January, 2004 the Company changed its customer focus to
small to medium size independent oil and gas production companies seeking to enhance
production from their existing fields in the U.S. and Canada. It also adopted a new
business model that emphasizes a payment for services rather than production participation
rights. To date the Company has signed pilot contracts to perform drilling services for
Amvest Osage, Inc., Esperada Energy Partners, L.L.C. and Maxim Energy, Inc. It is also in
discussion with a number of other Companies regarding pilot projects to prove out the
technology with a view to further work. The Company expects to continue such focus for the
balance of fiscal year 2004.

Customer Acceptance

The Company is encouraged by the level of interest from
several customers in the lateral drilling technology as it relates to both conventional
oil and gas production as well as coal bed methane opportunities. Recent experience in
Oklahoma revealed that, due to operator error and possible equipment issues, the Company
did not completely mill through the casing of certain wells. Based on the testing to date,
certain wells showed modest improvement in natural gas volumes while other wells failed to
show any improvement. Verdisys plans to re-drill certain wells to gain additional insight
and to perfect the technique.

The Company has instituted a successful above-ground
milling test, which visually demonstrated that improved operating procedures will resolve
the milling issue. The Company plans to make continued improvements to the technology and
operating procedures in order to provide its customers with a quality, value added and
consistent service.

Market

The United States was the worlds largest consumer of
natural gas in 1999 according to the World Energy Council  Survey of Energy
Resources, consuming 21.7 trillion cubic feet (Tcf) of Natural Gas or 26 per cent of the
Worlds total consumption. Natural Gas meets 24 per cent of U.S. energy requirements
according to the American Petroleum Institute and heats 61 per cent of U.S. households.
Natural Gas, as a clean and efficient fuel, has become ubiquitous to the American
lifestyle in heating the home, cooking, drying clothes and running cars. The advent of the
additional need for electricity in America has also spawned heavy demand from Power Plants
along with traditional users in pulp and paper, cement and asphalt, chemicals, plastics
and petroleum refining. In the last several years 95 per cent of the new power generation
capacity in the U.S. was fueled by natural gas, according to the U.S. Department of Energy
2003 Report.

The U.S. Department of Energy expects U.S. demand to grow
at 1.5 per cent per year between 2001 and 2025 representing a 50 per cent growth from 23
Tcf to 35 Tcf. Today, domestic supplies meet 84 per cent of our Nations
natural gas requirements, with nearly all of the balance coming from Canada.,
according to the U.S. Department of Energy Report, But future natural gas
consumption is expected to increase more rapidly than domestic production. In
2001 about 19.5 Tcf of natural gas was produced from over 350,000 U.S. wells
according to the same report, Most production came from Texas (26%), Gulf of Mexico
(8%) and Oklahoma, Louisiana and Wyoming (7% each). However, according to the American
Petroleum Institute U.S. production has been essentially flat for the past two
decades.

Indeed, to Business Week in their March 1, 2004 edition
said Demand for clean-burning natural gas has marched steadily upwards during the
past two decades, and the output from North American gas fields hasnt kept pace.
Last year, in fact, U.S. production fell by 3%, while demand rose 2.2%. Prices have
doubled since the 1990s, to around $5 per thousand cubic feet (mcf). The ability of
the United States to meet such demand will have a major effect on the economy for the next
two decades. How will the U.S. meet the supply shortfall?

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Verdisys, Inc. Annual Report

Competition

Verdisys lateral drilling service directly competes
with the need for new wells by laterally drilling from existing wells to extend the
recovery from the pay zone and bring new supplies through existing well bores. By
extending the accessibility of reserves through the existing well bores, Verdisys
technology can negate the need to drill more densely spaced wells in existing fields. This
is not only compelling economically but also is very environmentally friendly in using
previously established wells rather than drilling new ones.



Source: Department of Energy  Natural Gas
Fundamentals, June, 2003

We operate in a niche that lies below the more expensive
and higher impact horizontal drilling business and the much cheaper and lower impact
perforation business. Our lateral drilling service can provide significant reservoir
exposure, and therefore greater production potential, like horizontal drilling at closer
to the cost of the perforation service.

Conventional horizontal or directional drilling is slow and
significantly more expensive to the extent that it is only being used if its much longer
drilling radius was required as is necessary in offshore or environmentally sensitive
areas. Companies offering this service include Halliburton, Baker Hughes, Schlumberger and
other independent drilling companies. They traditionally drill one lateral through the
existing well bore. That lateral can take over 200 feet to achieve the turn to the
horizontal and be limited to only one pay zone. It usually costs over $250,000
and positive financial returns require very high producing rates.

Other water jet drilling methods in use have a limited
radius of about 10 feet and can be repeated 4 or more times in any direction around the
well bore. The competitive advantage of the Verdisys system is sustainable through the
life of the patents. A key patent involving the nozzle design was issued in 1998. A
further patent was issued in 2003 covering a variation of the process and further patents
can be expected as the process is further refined to extend its range, depth, and other
capabilities.

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Verdisys, Inc. Annual Report

Our VLDS offers several advantages over
conventional oil and gas recovery enhancement services provided by our competitors
because:

- The lateral drilling process is fast. Average time the rig
    is on the well is two days.
- It cuts a two inch diameter hole horizontally up to 300 feet
    from the well bore.
- Lateral holes can be drilled at numerous vertical producing
    horizons.
- It increases production rate and recoverable reserves.
- There is no need for large, expensive rotary rigs.
- There are no mud pits that may damage the environment.
- Casing milling equipment is not necessary.
- Logging expenses are not required.
- Additional stimulation services such as acidizing may be
    substituted by VLDS.

However, many of our competitors are better financed,
equipped and staffed than Verdisys, Inc.

Satellite Services

The Satellite Private Network (SPNs)
services utilize two-way satellite broadband to provide oil and gas companies with a wide
variety of remote energy management applications. Our satellite services can be optimized
to provide cost effective applications such as Voice over Internet VoIP,
Virtual Private Networking VPN and Real-time Supervisory Control and Data
Acquisition Systems, commonly referred to as SCADA. SCADA permits oil and gas companies to
dispense with a manual structure and move to a real-time, automated, energy management
program. Utilizing SCADA, production levels can be optimized to meet current market
conditions and commitments. At present, the Company is shipping modem hardware from ViaSat
and Spacenet, space segment services from SES and Loral and hub services from Spacenet and
Immeon. The current product line supports QoS (Quality of Service), multiple protocols,
including the ones most used for Point of Sale and SCADA. SPN uses satellite
communications that are low cost and that ensure worldwide availability, even in
geographic areas with a poor communications infrastructure. SPN is based on industry
standards to lower implementation costs and to simplify the integration into existing
systems Reliability and availability are critical considerations for SCADA. SPN is
provided twenty four hours a day seven days a week with 99.99% availability virtually
anywhere in the world and there are fewer points of failure than comparable terrestrial
services. It provides uniform service levels, and is faster and more cost effective to
deploy. SPN is also very flexible and easily accommodates site additions, relocations,
bandwidth expansion, and network reconfiguration.

Additionally, security, integrity, and reliability have
been designed into SPN to ensure that information is neither corrupted nor compromised.
SPN communications are more secure than many normal telephone lines.

Verdisys Satellite Private Networks, or SPN, allow energy
companies to control their production effectively by providing worldwide real-time access
to information. SPN enables real-time Supervisory Control and Data Acquisition and
provides a new opportunity for energy companies to automate functions that are currently
manual. Applications include oil and gas exploration, production, refining, power
distribution, and many other related energy management functions. It is common practice
today to gather much of the data involved in energy management manually. This is not only
expensive but also causes a significant time lag in the availability of critical
management information. Supervisory control also has many manual components that raise
costs and cause companies to be unable to react quickly to problems or changing market
conditions.

The local site utilizes Wi-Fi, a wireless Local Area
Network (LAN) that provides high-speed data transmission at less than $300 average cost
per connection. Wi-Fi is inherently flexible and does not incur the normal high wiring
costs of a cable LAN. Internet connections are also used to provide maximum flexibility
and to reduce costs.

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Verdisys, Inc. Annual Report



SPN provides uniform service levels, and is faster as well
as more cost effective to deploy. SPN is also very flexible and easily accommodates site
additions, relocations, bandwidth expansion, and network reconfiguration.

Secure encryption is used and the Wi-Fi implementation does
not allow access to unauthorized users. SPN is based on industry standards such as TCP/IP
and IEEE802.11b to lower implementation costs and to simplify the integration into
existing systems.

Major Customers

Our current satellite services customers include Apache
Corporation with 40 remote sites, British Petroleum with 9 remote sites and Noble Energy
with 25 remote sites. Contracts are usually for hardware, backhaul, and 36 months of
bandwidth. The Company is dependent upon a small number of customers which tend to be
large companies with extensive remote operations. However, virtually any oil and gas
producer, of which there are thousands, is a potential customer for our satellite
services.

Market

There are an estimated 1.7 million petroleum wells that
could benefit from the economics of Verdisys high speed connectivity services. The
Companys focus is serving the needs of oil and gas producers worldwide to control
their production effectively and to enhance customer satisfaction by providing worldwide
real-time access to information. This market for satellite services is very competitive
with increasing pressure on margins as Verdisys larger competitors offer services at
substantially discounted prices. Verdisys attempts to compete against such competitors by
addressing niche market needs and offering alternative solutions that solve
customers more difficult communication problems at more cost effective rates.
Verdisys utilizes satellite, Wi-Fi and other wireless technology for the last mile of
wellhead connectivity for these customers and focuses almost exclusively on the oil and
gas market. The common denominator throughout is MPLS/ATM (Multiple Protocol Label
Switching) network transport services.

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Verdisys, Inc. Annual Report

Competition

The satellite communication industry is intensely
competitive due to overcapacity, but the competition is less severe in the oil and gas
producing sector. Other satellite services providers in the oil and gas industry include
Petrocom, Stratus, and Caprock. Caprock and Stratus are focused on the top 5% of the
market, particularly offshore platforms, and Petrocom is focused on the offshore market
using a traditional wireless network. Our satellite services offer advantages over those
services by:

- Customizing the provided service to better meet the
    customers needs;
- Offering superior speed;
- Providing single vendor convenience; and
- Offering lower up-front infrastructure and operating costs.

Patents

On April 24, 2003 we entered into an agreement to license
the Landers Horizontal Drilling Process, based on U.S. Patent Nos. 5,413,184, 5,853,056,
and 6,125,949 relating to certain oil and gas well production enhancement techniques and
devices and related trade secrets with the inventor and holder of the patents and trade
secrets, Carl Landers. The license gives us exclusive rights to apply the technology in
all of the U.S. (except for part of Colorado West of the Rockies, and Utah) and Canada to
use the Landers Horizontal Drill and the related trade secrets. Mr. Landers also reserves
the rights to certain applications in which he has a direct interest. The license
terminates upon the expiration of the underlying patents, the earliest date being October
1, 2013. We amended the license on September 4, 2003, to provide for consideration to Mr.
Landers of a fixed amount of $500 for every well drilled in which the Landers Horizontal
Drill method is utilized, instead of the original 10% royalty payment, and 500,000 shares
of our restricted common stock. In addition, in exchange for a reduction of the note
payable associated with the license from $2,750,000 to $2,500,000, we issued an additional
125,000 shares of our restricted common stock and agreed to register the shares in a
subsequent Registration Statement. Additionally, Mr. Landers was appointed as one of our
directors for the duration of the license, subject to shareholder approval. He has since
resigned his appointment.

We amended the license again in February 2004 when
$1,695,000 of outstanding payment obligations to Mr. Landers for technology fees were
waived in exchange for the issue of 300,000 common shares in Verdisys, Inc.and the payment
of $100,000 in cash and the promise to pay $400,000 in cash prior to May 15, 2004. If
Verdisys fails to pay the $400,000 by May 15, 2004, the license may be revoked. The
Company also agreed to register the 500,000 common shares previously granted in a
subsequent Registration Statement.

The licensor retains some self use rights but may not
compete with the licensee. Any improvements to the technology remain the sole property of
the licensor but are provided to Verdisys without additional licensing fees.

The lateral drilling technology and related trade secrets
are instrumental to our competitive edge in the oil and gas service industry. We are
committed to protecting the technology. We cannot assure our investors that the scope of
any protection we are able to secure for our license will be adequate to protect it, or
that we will have the financial resources to engage in litigation against parties who may
infringe on our exclusive license. We also can not provide our investors with any degree
of assurance regarding the possible independent development by others of technology
similar to that which we have licensed, thereby possibly diminishing our competitive edge.

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Verdisys, Inc. Annual Report

Governmental Regulation

Our operations are subject to various local, state and
federal laws and regulations intended to protect the environment. Our operations routinely
involve the handling of waste materials, some of which are classified as hazardous
substances. Consequently, the regulations applicable to our operations include those with
respect to containment, disposal and controlling the discharge of any hazardous oilfield
waste and other non-hazardous waste material into the environment, requiring removal and
cleanup under certain circumstances, or otherwise relating to the protection of the
environment. Laws protecting the environment have become more stringent in recent yeas,
and may in certain circumstances impose strict liability, rendering a party
liable for environmental damage without regard to negligence or fault on the part of such
party. Such laws may expose us to liability for the conduct of, or conditions caused by,
others, or for our acts, which were in compliance with all applicable laws at the times
such acts were performed. Cleanup costs and other damages arising as a result of
environmental laws, and costs associated with changes in environmental laws could be
substantial and could have a material adverse effect on our financial condition.
Management believes that it conducts our operations in substantial compliance with all
material federal, state and local laws as they relate to the environment. Although we have
incurred certain costs in complying with environmental laws, such amounts have not been
material to our financial results.

We depend on the demand for our products and services from
oil and natural gas companies. This demand is affected by changing taxes, price controls
and other laws relating to the oil and gas industry generally, including those
specifically directed to oilfield operations. The adoption of laws curtailing exploration
and development drilling for oil and natural gas in our areas of operation could also
adversely affect our operations by limiting demand for our products and services. We
cannot determine the extent to which our future operations and earnings may be affected by
new legislation, new regulations or changes in existing legislation regulations or
enforcement.

Employees

As of December 31, 2003, we had less than 10 full-time
employees. A new president and chief financial officer were brought into the Company in
January 2004.We also utilize a number of independent contractors and
consultants to assist us conducting the drilling operations, installing the
telecommunications equipment, maintaining and supervising such services, and the like, in
order to complement our existing work force, as needed from time to time. Our agreements
with these independent contractors and consultants are usually short-term. We are not a
party to any collective bargaining agreement with any employees, and believe relations
with our employees, independent contractors and consultants are good.

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Verdisys, Inc. Annual Report

Description of Property

Office Facilities

Verdisys office is in The Woodlands, Texas. In
December 2003, Verdisys renewed the Woodlands lease for 12 months for $6,071 per month.
Future minimum lease payments under the lease as of December 31, 2003 are $66,781 in 2004.
Rent expense was $42,325 and $47,627 in 2003 and 2002, respectively.

Verdisys prior office was in Houston, Texas. The
offices for 2001 and part of 2002 were in Aliso Viejo, California. The Aliso Viejo lease
was for $1,800 per month and expired August 2002. The Houston office was in the home of an
employee on a monthly basis for $900 per month through August 2002. In September 2002,
Verdisys signed a 13-month office lease for $1,483 per month. Future minimum lease
payments under the lease as of December 31, 2002 were $13,343 in 2003.

Property and Equipment

Property and equipment consisted of the following at
December 31, 2003:

|Description                    | Life    |   | Amount   | 
|------------------------------ | ------- | - | -------- | 
|                               |         |   |          | 
|Lateral drilling equipment     | 5 years | $ | 427,420  | 
|Computer equipment             | 3 years |   | 56,949   | 
|Office furniture and equipment | 7 years |   | 20,712   | 
|                               |         |   |          | 
|                               |         |   | 505,081  | 
|Less: accumulated depreciation |         |   | (65,714) | 
|                               |         |   |          | 
|                               |         | $ | 439,367  | 
|                               |         |   |          | 

The primary plant and equipment of Verdisys, Inc. are four
mobile lateral drilling units, which can be driven to oil and gas fields throughout North
America. Lateral drilling equipment consists of heavy trucks mounted with high powered
water compressors, flexible hose and other assorted downhole equipment which is used to
conduct the lateral drilling process with high pressure jetting technology. Verdisys, Inc.
also maintains certain satellite communication and computer equipment at its home office.

Insurance

Our operations are subject to hazards inherent in the oil
and gas industry, such as accidents, blowouts, explosions, craterings, fires and oil
spills. These conditions can cause:

|a) | personal injury or loss of life                                        
|-- | -----------------------------------------------------------------------
|b) | damage to or destruction of property,
    equipment and the environment
|c) | suspension of operations                                               

In addition, claims for loss of oil and gas production and
damage to formations can occur in the well service industry. Litigation arising from a
catastrophic occurrence at a location where our equipment and services are being used may
result in us being named as a defendant in lawsuits asserting large claims.

We maintain insurance coverage that we believe to be
customary in the industry against these hazards. However, we may not be able to maintain
adequate insurance in the future at rates we consider reasonable. In addition, our
insurance is subject to coverage limits and some policies exclude coverage for damages
resulting from environmental contamination. The occurrence of a significant event or
adverse claim in excess of the insurance coverage that we maintain or that is not covered
by insurance could have a materially adverse effect on our financial condition and results
of operations.

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Verdisys, Inc. Annual Report

Legal Proceedings

Breach of Promissory Note / Breach of Security
Agreement

In August 2002, Verdisys settled a lawsuit filed against it
in late 2001 for breach of promissory note and breach of security agreement, by agreeing
to pay $228,494. Verdisys agreed to pay $15,000 on October 1, 2002 and $5,000 per month
from November 2002 through August 2004. Verdisys settled the debt in 2003 by paying
$180,000 cash and issuing 200,000 shares of common stock for a cashless exercise of 20,000
warrants at $.10 per share.

Declaratory Judgment Action

Verdisys initiated a lawsuit against Edge Capital that
requests a declaratory judgment that a purported agreement between Verdisys and Edge is
not enforceable. It was filed in Montgomery County, Texas in February 2004. The lawsuit
arises from Edges contention that one of Verdisys ex-officers committed the
company to purchase certain alleged oil and gas properties from Edge. Although Verdisys
contends that the alleged agreement is not binding, if the court does not grant
Verdisys request for declaratory judgment, Edge may seek to enforce the terms of the
agreement. An enforcement action may lead to damages for breach of contract or specific
performance, either of which may have a material adverse effect on Verdisys
financial condition. Edge, however, has not asserted any claim to enforce the purported
agreement.

Class Action Lawsuits

Verdisys has learned that it is a defendant in two
purported class action lawsuits brought by former shareholders. The lawsuits, which
according to press releases about the lawsuits issued by the plaintiffs lawyers
appear in substance to be practically identical, allege that Verdisys and its former CEO,
Dan Williams, and the Company's former CFO, Andrew Wilson, violated Sections 10(b) and
20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. The
lawsuits allege that defendants made materially misstatements about Verdisys
financial results. More specifically, the Complaints allege that defendants failed to
disclose and indicate: (1) that Verdisys had materially overstated its net income and
earnings per share; (2) that defendants prematurely recognized revenue from contracts
between Verdisys, Edge Capital and Energy 2000 in violation of GAAP and its own revenue
recognition policy; (3) that Verdisys lacked adequate internal controls and was therefore
unable to ascertain the true financial condition of the company; and (4) that as a result
of recognizing revenue prematurely, Verdisys financial results were inflated at all
relevant times. Verdisys has not yet been served in the lawsuits and continues to evaluate
its defense to these allegations, as well as the potential impact that an adverse judgment
would have on it.

Securities and Exchange Commission Investigation
InquiriesVerdisys has received notice that the Securities and Exchange Commission
has initiated a formal investigation into its reporting practices and public statements
about the Company in 2003.

The SEC has requested substantiation and documentary
evidence from the Company concerning the performance of certain lateral drilling services
by subcontractors in the period from May, 2003 to September 2003, supervision of such
services by the Companys executive management at the time, revenue recognition
related to the performance of such services, the third quarter 2003 earnings restatement,
public statements concerning the services performed, and related matters. The SEC has also
requested information and documentary evidence related to the Verdisys acquisition
of certain assets of QuikView, Inc., a related party company, in June, 2003. In its
letters to Verdisys requesting documents, the SEC stated that the staffs inquiry
should not be construed as an indication that any violations of securities laws have
occurred or as an adverse reflection on any persons, company or security.

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Verdisys, Inc. Annual Report

Since December 2003, the Company has taken several steps to
address issues related to the SECs inquiries, including the termination and
replacement of the previous Chief Executive Officer and Chief Operating Officer and the
reassignment of its Chief Financial Officer based upon his desire not to relocate to
Houston In addition, two directors have resigned from the Companys board. Internal
controls have been strengthened overall, particularly with respect to the public release
of Company information and the recognition of revenue. The Company has also initiated an
internal investigation of the matters of concern to the SEC. Consequently, the Company is
restating its second and third quarter financial statements and has decided to defer all
revenue related to the aforementioned period until such time that it can substantiate
whether or not the services were performed. Further, the Company is evaluating its options
for rescinding its purchase of certain assets from Quikview, Inc. As such, the
Companys purchase consideration of two million common shares may be cancelled.
Verdisys is cooperating fully with the SEC, including the provision of numerous documents
and voluntary testimony by our current executives.Verdisys is not aware of any pending or threatened enforcement or
other actions that might be initiated by the SEC. Although the Company is working to bring
the matter to a prompt conclusion, it cannot make any assurance that the investigation
will be resolved positively or that it will not have negative effects on the
Companys limited resources or its ability to raise capital and use its stock as
acquisition currency during the period of the investigation.

Concluding Statement

Verdisys has never been in bankruptcy, receivership or any
similar legal proceeding. Other than described above, Verdisys is not aware of any other
threatened legal proceedings. The foregoing is also true with respect to each officer,
director and control shareholder as well as any entity owned by any officer, director and
control shareholder, over the last five years. As part of its regular operations, Verdisys
may become party to various pending or threatened claims, lawsuits and administrative
proceedings seeking damages or other remedies concerning its commercial operations,
products, employees and other matters. Although Verdisys can give no assurance about the
outcome of these or any other pending legal and administrative proceedings and the effect
such outcomes may have on the company, except as described above, Verdisys believes that
any ultimate liability resulting from the outcome of such proceedings, to the extent not
otherwise provided for or covered by insurance, will not have a material adverse effect on
Verdisys financial condition or results of operations.

Submission of Matters to a Vote of Security Holders

No matter was submitted during the fourth quarter of the
fiscal year covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.

Market for Common Equity and Related Stockholder Matters

Our common stock has been listed for trading on the OTC
Bulletin Board since January 13, 2003 under the symbol RDGI, but active
trading in our common stock did not begin until May 2, 2003. After the consummation of the
merger between us and Verdisys, our common stock commenced trading on the OTC Bulletin
Board on July 18, 2003 under the symbol VDYS. The following table sets forth,
for the periods indicated, the high and low bid prices of a share of our common stock as
reported on the OTC Bulletin Board since active trading began on May 2, 2003. The
quotations provided are for the over the counter market which reflect interdealer prices
without retail mark-up, mark-down or commissions, and may not represent actual
transactions.

|                                  |  |   | HIGH  |  |   | LOW   | 
|--------------------------------- |  | - | ----- |  | - | ----- | 
|                                  |  |   |       |  |   |       | 
|2003                              |  |   |       |  |   |       | 
|                                  |  |   |       |  |   |       | 
|Second Quarter (from May 2, 2003) |  | $ | 1.72  |  | $ | 1.53  | 
|Third Quarter                     |  | $ | 6.32  |  | $ | 5.65  | 
|Fourth Quarter                    |  | $ | 11.03 |  | $ | 10.14 | 
|2004                              |  |   |       |  |   |       | 
|                                  |  |   |       |  |   |       | 
|March 25, 2004                    |  | $ | 3.75  |  | $ | 3.75  | 

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Verdisys, Inc. Annual Report

The company has never paid cash dividends. At present, the
company does not anticipate paying any dividends on its common stock in the foreseeable
future and intends to devote any earnings to the development of the companys
business.

Holders

As of March 31, 2004, Verdisys, Inc. had 30,792,036 shares
of common stock issued and outstanding and held by approximately 763 shareholders.

Recent Sales of Unregistered Securities

On July 18, 2003, we, as RDGI, executed an Agreement and
Plan of Merger with Verdisys whereby the shareholders of Verdisys received 25,103,223
shares of our common stock in exchange for all of the 25,103,223 shares of Verdisys common
stock then outstanding. The operations and management of Verdisys became our own, and we
changed our name to Verdisys Inc. The shares of stock were issued in the transaction we
believe to be exempt from registration under Regulation D promulgated under Section 4(2)
of the Securities Act. The issuances were a share for share exchange resulting in a
similar investment to that originally contemplated due to the continuation of management
and business plan; the recipients in the exchange were accredited investors as defined in
Rule 501 of Regulation D promulgated under Section 4(2) of the Securities Act, and took
their shares for investment purposes without a view to distribution; they had access to
information concerning our Company and our business prospects; there was no general
solicitation or advertising for the purchase of our shares; there were no commissions
paid; and the securities are restricted pursuant to Rule 144. In July 2003, we issued
125,000 shares of our common stock to Mr. Carl Landers in exchange for a $250,000
reduction of a note payable. The shares of stock were issued in a transaction we believe
to be exempt from registration under Section 4(2) of the Securities Act. The recipient of
our stock was an accredited investor as defined in Rule 501 of Regulation D promulgated
under Section 4(2) of the Securities Act, and he took his shares for investment purposes
without a view to distribution. Furthermore, he had access to information concerning our
Company and our business prospects; there was no general solicitation or advertising for
the purchase of our shares; there were no commissions paid; and the securities are
restricted pursuant to Rule 144.

From July through August 2003, we sold 609,000 shares of
our common stock at a price of $2.00 per share in a private offering we believe to be
exempt from registration under Regulation D promulgated under Section 4(2) of the
Securities Act. The sales of stock were to individuals and entities, each of whom was an
accredited investor, as that term is defined in Rule 501 of Regulation D promulgated under
Section 4(2) of the Securities Act and had adequate access to information pertaining to
our Company. Furthermore, no advertisements were made and the securities are restricted
pursuant to Rule 144. Offering costs consisted of 59,400 shares of restricted common stock
and 9,501 warrants exercisable at $2 per share until September 5, 2008.

In September 2003, we granted 500,000 shares of our common
stock to Mr. Carl Landers in exchange for an amendment to our licensing agreement. As part
of the renegotiation of Mr. Landers license in February, 2004 the Company agreed to
register the 500,000 shares in its next Registration Statement. The shares of stock were
issued in a transaction we believe to be exempt from registration under Section 4(2) of
the Securities Act,, The recipient of our stock was an accredited investor as defined in
Rule 501 of Regulation D promulgated under Section 4(2) of the Securities Act, and he took
his shares for investment purposes without a view to distribution. Furthermore, he had
access to information concerning our Company and our business prospects; there was no
general solicitation or advertising for the purchase of our shares; there were no
commissions paid; and the securities are restricted pursuant to Rule 144.

On October 23, 2003, we sold 833,333 shares of our common
stock to Gryphon Master Fund, L.P. at $6.00 per share for total proceeds of $5,000,000.
Stonegate Securities, Inc. served as our placement agent and offering costs associated
with the sale were $420,000 in cash, warrants to purchase 83,334 of our shares of common
stock at $6 per share expiring October 24, 2008 and 20,000 shares of our common stock. The
warrants are exercisable until October 24, 2008 by paying cash at the exercise price or by
electing a cashless exercise. If a cashless exercise is elected, the holder will receive a
percentage of the shares defined as the market price at the time of exercise less the
exercise price multiplied by the number of warrants exercised.

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Verdisys, Inc. Annual Report

If we fail to meet certain milestones related to
registration of such shares, we are required to pay in cash liquidated damages equal to 1
percent of the purchase price of the shares paid for the first 30 days the event is not
cured and 2 percent of the purchase price paid for each thirty day period thereafter until
cured. In no event, however, shall we be required to pay more than aggregate liquidated
damages of 8 percent of the purchase price or $400,000.

The transaction was a private offering we believe to be
exempt from registration under Regulation D promulgated under Section 4(2) of the
Securities Act. The sales of stock were to individuals or entities, each of whom was an
accredited investor, as that term is defined in Rule 501 of Regulation D promulgated under
Section 4(2) of the Securities Act and had adequate access to information pertaining to
our Company. Furthermore, no advertisements were made and the securities are restricted
pursuant to Rule 144.

In addition, if in the ten months subsequent to the
agreement, the 30 day average closing price of Verdisys common stock drops below $6
per share, such drops could result in the issuance of a maximum of 277,778 additional
shares of common stock for no additional compensation. If this occurs, a total of
1,111,111 common shares will have been issued for an average price of $4.50 per share. As
of April 2, 2004, Verdisys has incurred $283,333 of liquidated damages for failing to file
a registration statement timely.

Common Stock Options and Warrants

In the second quarter of 2003, director and employee
options were exercised at $.10 per share for 2,409,291 shares of common stock. In lieu of
cash, Verdisys agreed to expense the exercise price as compensation of $240,929.

In the second quarter of 2003, 1,580,000 warrants were
exercised for 1,580,000 shares of common stock. $56,500 in cash was received for the
exercise of 430,000 warrants, accounts payable was reduced by $95,000 for the exercise of
950,000 warrants and notes payable to investor was reduced by $20,000 for the exercise of
200,000 warrants.

In the third quarter of 2003, 269,547 warrants were
exercised for 269,547 shares of common stock. $177,751 in cash was received for the
exercise.

In the fourth quarter of 2003, 245,631 warrants and 100,000
options were exercised for $29,564 and $10,000, respectively.

Options

In April 2003, Verdisys issued 1,280,000 ten year $.10
options to employees. 30,000 options vest monthly over three months, 750,000 options vest
quarterly over four years, 300,000 options vest quarterly over one year and 200,000
options vest quarterly over two years. The intrinsic value of these options totals
$512,000 which approximated their fair value.

In August 2003, Verdisys issued an employee 100,000 five
year options with an exercise price of $4.10. There was no intrinsic value associated with
the issuance. The fair value of the options was $321,024.

In December 2003, Verdisys granted 500,000 options to
purchase Verdisys common stock to the chairman and interim CEO. The options expire in 10
years, have an exercise price of $9.55 based upon price at date of grant. 50,000 vested
immediately, 50,000 were performance options and did not vest and the remaining 400,000
options vest evenly over 12 months in 2004. The fair value associated with these options
totaled $4,061,703 of which $507,713 is presented as a pro forma expense. $714,524 of
intrinsic value associated with options vesting in 2003 was expensed in 2003.

In 2002, Verdisys issued 7,155,000 ten year options to
employees and directors with exercise prices of $.10.

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Verdisys, Inc. Annual Report

Warrants

In April 2003, Verdisys issued 200,000 $.10 warrants, of
which 100,000 expire in January 2007 and 100,000 expire in January 2008. The warrants have
a fair value of $80,000 which was expensed when the warrants were granted.

During the summer of 2003, Verdisys negotiated settlements
with nine vendors plus the two original founders for various debts carried on the books.
One of the founders was issued 150,000 warrants exercisable at $.10 and valued at $.40 or
$60,000.

During the fall of 2003, Verdisys issued 92,835 warrants,
83,334 at $6 per share that expire October 2008 and 9,501 at $2 per share that expire
September 2008. The warrants were issued in connection with raising the $5,000,000 from
Gryphon and their fair value of $822,738 has been treated as a cost of fundraising. The
warrants are exercisable at any time prior to expiration by paying cash at the exercise
price or by electing a cashless exercise. If a cashless exercise is elected, the holder
would receive a percentage of the shares defined as the market price at the time of
exercise less the exercise price multiplied by the number of warrants exercised.

Verdisys issued, 2,644,438 in warrants in 2003 at an
exercise price of $.10. The fair value of $1,050,687 has been expensed accordingly in
2003. 83,133 of the warrants were exercised in 2003. In 2003, 232,334 previously expired
warrants were extended and exercised. The extension resulted in the granting of 232,334
warrants to purchase Verdisys stock at $.75. They were exercised in 2003. During 2002,
Verdisys issued 120,000 warrants with an exercise price of $.10 to investors. 100,000
expire in March 2006 and 20,000 expire in November 2007. The fair value of $4,800 was
recognized as interest expense for the issuance.

During 2002, Verdisys issued 980,000 warrants with an
exercise price of $.10 to consultants. The fair value of $392,000 was recognized as
compensation cost.

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Verdisys, Inc. Annual Report

Managements Discussion and Analysis or Plan of
Operation

The following discussion does not purport to be complete
and should be read in conjunction with the Financial Statements and Notes thereto included
in this report. This discussion contains certain forward-looking statements that involve
substantial risks and uncertainties. When used in this report the words
anticipate, believe, estimate, expect and
similar expressions as they relate to our management or us are intended to identify such
forward-looking statements. Our actual results, performance or achievements could differ
materially from those expressed in, or implied by, these forward-looking statements.
Historical operating results are not necessarily indicative of the trends in operating
results for any future period.

Overview

On July 18, 2003, Reconstruction Data Group, Inc. and
Verdisys merged with and into one another. The merger agreement with Verdisys called for
us to be the surviving company. Immediately following the merger, our name changed to
Verdisys, our articles of incorporation and bylaws remained in effect, the officers and
directors of Verdisys became our officers and directors, each share of Verdisys
common stock was converted into one share of our common stock, and our accident
reconstruction assets were sold. Additionally, Verdisys historical financial
statements replaced ours.

Financial Summary

Fiscal Year ended December 31, 2003 Compared to the
Fiscal Year Ended December 31, 2002

We had $885,441 in revenues and $7,356,045 in net losses
for the year ended December 31, 2003 as compared to $287,190 in revenues and $3,128,782 in
net losses for the year ended December 31, 2002. The significant increase in revenues for
the year ended December 31, 2003 was due to lateral drilling services utilizing our
proprietary lateral drilling technology for which we commenced recognizing revenue in
2003. Initial start-up costs and low initial operating margins adversely affected total
cost of services provided resulting in a negative gross margin of $717,228 for the year
ended December 31, 2003. The deferral of a significant amount of revenue relating to the
lateral drilling services that the Company is currently attempting to substantiate also
had a negative effect on the gross margin for the year. The Company increased selling,
general and administrative expenses for the year ended December 31, 2003 as it expanded
its operations and incurred several non-recurring expenses. This contributed to
significantly increased losses for the year. There were no comparable lateral drilling
revenues in 2002 as the license to the proprietary lateral drilling technology was
acquired in April 2003.

In January, 2004 the Company focused to small to medium
size independent oil and gas production companies seeking to enhance production from their
existing fields in the U.S. and Canada. It also adopted a new business model that
emphasizes a payment for services rather than production participation rights. The Company
expects to continue such focus for the balance of fiscal year 2004.

Revenues

Lateral Drilling Services(See Financial Notes 3 and
22)

Lateral Drilling Services revenues were $465,194 and
$0 for the year ended December 31, 2003 and the year ended December 31, 2002,
respectively. During the fourth quarter, we drilled 7 wells located in the Monroe Field
with our proprietary drilling rigs. These wells were drilled for two related party
Companies, Energy 2000 NGC, Inc. (E2000) and Natural Gas Systems, Inc. (NGS) in the period
from October, 2003 through December 2003 by a subcontractor utilizing the first of the
Companys new drilling rigs. These services have been substantiated by the Company.

The Company also drilled an additional 6 wells for Energy
2000 and 29 wells for Edge Capital Group, Inc. in the second and third quarters of 2003.
These additional wells were drilled by different third party subcontractors utilizing the
Carl Landers drilling rigs. The Company has not been able to substantiate whether
the services, if any, were preformed. Consequently, no revenue has been recognized for the
performance of these services. The Company continues to investigate whether it can
substantiate and invoice for these services. Edge Capital Group, Inc. has paid the Company
$497,000 for services performed which the Company has deferred recognition of at this time
and Edge Capital is disputing whether the service was performed. No revenue was recognized
relating to the Energy 2000 wells.

Page 21

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Verdisys, Inc. Annual Report

E2000 is a subsidiary of Berg McAfee Companies. Berg McAfee
Companies beneficially owns 27.3% of our outstanding common stock Additionally, Eric
McAfee, 50 per cent co-owner of Berg McAfee Companies beneficially owns 0.7% of our
outstanding common stock and Clyde Berg, 50 per cent co-owner of Berg McAfee Companies,
beneficially owns 1.2% of our outstanding common stock; therefore, Messrs. McAfee and Berg
have a total beneficial ownership of 29.2% of our outstanding common stock In addition to
the fee of $65,000 per well for our drilling services, we will receive an 80% interest in
the net operating income from E2000s portion of the properties income (the
E2000 Royalty) after E2000 has fully recovered all drilling service fees,
capital expenditures, including the cost of acquiring the property, and related expenses
incurred for all wells drilled as part of the contract. The E2000 Royalty will be
calculated as 80% of the net lease after recovery by E2000 and/or its third party
financing sources of E2000s costs related to the drilling services, including
principal, interest, fees and costs for financing such drilling services, cost of
acquisition of the lease, land owner royalties or other royalties to third parties other
than E2000 or us, and field operating costs. Therefore, after completion of the
re-development of the field, E2000 will secure for us an 80% listing with the gatherer for
direct payment of net proceeds. It is not anticipated that we will receive any royalties
from this agreement E2000 is an entity in which Mr. McAfee, co-owner of Berg McAfee
Companies, and other affiliates have an 80% beneficial ownership interest.

Our revenue recognition policy with regards to drilling
operations is to recognize revenue when collectibility is reasonably assured. We have
determined that based upon our current contract with E2000, collectibility is reasonably
assured when amounts outstanding are paid. Consequently, we have deferred any revenue
associated with the contract with E2000 that has not been paid. During the year ended
December 31, 2003, we signed an agreement with NGS to provide drilling services for a
number of wells in the Delhi field in Louisiana. This contract was subsequently modified
on January 27, 2004 by a new contract that negated any participation rights the Company
had in the Delhi field and formalized a fee for service arrangement. In the year ended
December 31, 2003 2 wells were drilled for NGS for total revenue of $130,000. It is not
anticipated that we will receive any royalties from this agreement. NGS is an entity in
which Mr. McAfee, co-owner of Berg McAfee Companies, and other affiliates have a 23.0%
beneficial ownership interest.

In April, 2003 the Company entered into a licensing
agreement with Carl Landers for the exclusive rights to use Mr. Landers proprietary
lateral drilling technology in North America. The license required the payment of
$2,750,000 in the form of a note plus interest at 8 percent. It also required the Company
to pay Mr. Landers 10 percent of the net revenues from services utilizing the lateral
drilling technology. The Company amended lateral drilling license agreement with Carl
Landers in August, 2003. Mr. Landers agreed to retroactively eliminate the royalty fees of
10% of the net revenues on our lateral drilling, in exchange for 500,000 shares of our
restricted common stock plus a flat fee of $500 per well drilled. The parties also agreed
to amend a certain term of the license regarding the expiration dates associated with the
patents to the lateral drilling technology. We capitalized $2,275,000 associated with the
500,000 shares issued and are amortizing the amounts associated with the license over a
period of 14 years. In July 2003, we exchanged 125,000 shares of our restricted common
stock for a reduction of $250,000 to the principal balance of the note payable to Mr.
Landers. Pursuant to our license agreement with Mr. Landers, we were scheduled to pay Mr.
Landers $500,000 on December 31, 2003. In February, 2004 the license with Mr. Landers was
further amended to require the balance of any sums outstanding relating to the note would
be paid in the form of 300,000 shares of common stock, immediate payment of $100,000 and a
final payment of $400,000 on or before May 15, 2004. If Verdisys fails to pay the $400,000
by May 15, 2004, the license may be revoked. In addition the Company agreed to register
the 500,000 common shares previously granted in its next Registration Statement. (See
Financial Note 5)

Page 22

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Verdisys, Inc. Annual Report

Satellite Communications Services

Satellite Communication Services revenues for the
year ended December 31, 2003 were $419,247 compared to the year ended December 31, 2002 of
$287,190. This increase for the year was primarily related to the first full year of
service to our largest customer, Apache Corporation, and the large order from Noble
Energy. As hardware is sold, the Company recognizes the revenue in the period it is
delivered to the customer. The bandwidth revenue is amortized over the period benefited.
Cash collected for bandwidth is recorded as deferred revenue. At December 31, 2003, there
was $271,485 reflected in the balance sheet as deferred revenue relating to Satellite
Communication Services.

Net Loss

The net loss for the year ended December 31, 2003 increased
to $7,356,045 from $3,128,782 for the year ended December 31, 2002. The increased loss was
due to significant increase in selling, general and administrative expenses as the Company
built its lateral drilling business and negative gross margins realized from both its
lateral drilling and satellite communications businesses.

The level of selling, general and administrative expenses
in 2003 was $6,638,817 compared to $3,139,518 in 2002. Several major non-recurring items
were incurred during 2003 for a total of $5,843,518. This was composed of $3,468,650 for
stock for service, option, and warrant expenses (see Financial Note 13); $1,000,000 for
compensation to a related party (see Financial Note 19); $620,000 for the payment of an
option to purchase a gas field and related costs (see Financial Note 20); and $300,000 for
a guarantee of third party debt (see Financial Note 8); In addition to the non-recurring
items, legal expenses increased to $496,628 in 2003 from $1,337 in 2002 due to an
abnormally high level of legal activity last year.

Liquidity and Capital Resources

Capital Expenditures

The Company ordered four new lateral drilling rigs during
the year ended December 31, 2003 to support its new lateral drilling business. This was
the Companys only significant capital expenditure. As of December 31, 2003 the
Company had taken receipt of two of the rigs and took delivery of the two additional rigs
in January, 2004.

Liquidity

As of December 31, 2003 the Companys cash balance was
$1,373,627. As noted in the Independent Auditors Report (See Financial Note 2) due to the
continued substantial operating losses that the Company has incurred raises substantial
doubt as to the Companys ability to continue as a going concern. The Company is in
an early stage of development and is rapidly depleting its cash resources, therefore it
has determined that it will need to raise additional financing in the short term to
continue in operation and fund future growth. In particular, the Company has a $400,000
payment due to its technology provider who has the right to revoke the lateral drilling
license if not paid by May 15, 2004. (See Financial Note 7) The Company is also incurring
liquidated damages up to a cap of $400,000 related to the timing of providing registration
rights for the private financing that it arranged in November 2003. If we are unable to
restructure the scheduled technology payment or financing and associated damages, this
would have a material adverse effect on the Company.

The Company currently plans to raise additional financing
in the quarter ending June 30, 2004. The use of stock for currency in financing or making
acquisitions may be heavily curtailed while the Company is under SEC investigation. (See
Financial Note 16) If we are unable to arrange new financing or generate sufficient
revenue from new business arrangements, the Company will be unable to continue in its
current form and will be forced to restructure or seek creditor protection.

Page 23

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Verdisys, Inc. Annual Report

In July and August 2003, the Company sold 609,000 shares of
our restricted common stock at $2.00 per share in a private placement for total proceeds
of $1,218,000 gross. In the absence of an effective registration statement, the shares can
be sold pursuant only to some exception from registration such as Rule 144 of the
Securities Act which requires, among other conditions, that the shares must be held for a
minimum of one year.Fees associated with the placement consisted of $19,000 in
cash, 39,400 shares of our restricted common stock and warrants to purchase 9,501 shares
of our common stock at $2.00 per share. In connection with the offering, the Company
issued 9,501 warrants for the purchase of our common stock at a price of $2.00 per share
to certain principals of the investment bank that assisted us with the offering. The
warrants may be exercised at any time prior to September 5, 2008 by paying cash at the
warrant price. Prior to us filing a registration statement, such warrants may be exercised
by surrendering such number of shares of our common stock received upon exercise of the
warrants with a current market price equal to the warrant price.

The Companys only outstanding debt is to Mr. Landers
for the note related to the license of his technology. The Company has guaranteed $300,000
of third party debt during 2003. (See Financial Note 8) On October 24, 2003, we sold
833,333 shares of our restricted common stock at a purchase price of $6.00 per share for a
total purchase price of $5,000,000. In the absence of an effective registration statement,
the shares can be sold pursuant only to some exception from registration such as Rule 144
of the Securities Act which requires, among other conditions, that the shares must be held
for a minimum of one year. We have paid fees associated with this sale totaling $420,000
resulting in net proceeds to us of $4,580,000.

The subscription agreement for the sale also confers
registration rights to the purchaser for all of the common stock purchased in this
transaction and an additional 300,000 shares of our common stock purchased by the same
purchaser from Dr. Joe Penbera, our director, in a prior unrelated private transaction.
The purpose of this offering was to provide additional operating capital to assist us in
fulfilling our current commitments and expanding our operations.

In November 2003, the Company purchased an exclusive option
whereby for a specific time period the Company could decide to purchase a large natural
gas field with significant current gas production. The option required the Company to pay
a non-refundable deposit of $500,000, and incur fees to date of $120,000 associated with
the transaction. The Company did not purchase the natural gas filed prior to the
expiration of the option in November 2003 resulting in a forfeiture of our deposit. (See
Financial Note 20)

Restatement of Second and Third Quarters of 2003

Verdisys, Inc. has restated its second and third quarter of
2003 financial results to reverse the effects of certain revenues that could not be
substantiated and to reclassify a software impairment expense to compensation (see
Financial Notes 19 and 22).

Research and Development, Patents and Licenses

The Company believes that its future success depends on the
ability to effectively utilize the lateral drilling technology obtained in a license
granted by Mr. Landers. The Company also believes that its future success depends on the
ability to enhance existing products and services and introduce or acquire new
commercially viable products and services addressing the demands of the evolving energy
service markets.

Page 24

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Verdisys, Inc. Annual Report

Financial Statements

Index to Financial Statements

|                                       | Page    | 
|-------------------------------------- | ------- | 
|                                       |         | 
|Independent Auditors Report           | 26      | 
|Balance Sheet at December 31, 2003     | 27      | 
|Statements of Operations               |         | 
|Years ended December 31, 2003 and 2002 | 28      | 
|Statements of Stockholders Equity     |         | 
|Years ended December 31, 2003 and 2002 | 29      | 
|Statements of Cash Flows               |         | 
|Years ended December 31, 2003 and 2002 | 31      | 
|Notes to Financial Statements          | 32 - 45 | 

Page 25

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Verdisys, Inc. Annual Report

INDEPENDENT AUDITORS REPORT

|To the Board of Directors
|-------------------------
|Verdisys, Inc.           
|The Woodlands, Texas     

We have audited the accompanying balance sheet of Verdisys,
Inc. as of December 31, 2003 and the related statements of operations, stockholders
equity and cash flows for each of the two years then ended. These financial statements are
the responsibility of Verdisys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of Verdisys, Inc. as of
December 31, 2003 and the results of its operations and cash flows for each of the two
years then ended in conformity with accounting principles generally accepted in the United
States of America.

The accompanying financial statements have been prepared
assuming that Verdisys will continue as a going concern. As discussed in Note 2 to the
financial statements, Verdisys suffered recurring losses from operations and has a working
capital deficiency, which raises substantial doubt about its ability to continue as a
going concern. Managements plans regarding those matters also are described in Note
2. The financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

|MALONE & BAILEY, PLLC
|---------------------
|www.malone-bailey.com
|Houston, Texas       
|                     
|April 2, 2004        

Page 26

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|                                                                     | VERDISYS          | NC.    |         |          
|-------------------------------------------------------------------- | ----------------- | ------ | ------- | ---------
|                                                                     | BALANCE SHEET     |        |         |          
|                                                                     | December 31, 2003 |        |         |          
|                                                                     |                   |        |         |          
|ASSETS                                                               |                   |        |         |          
|Current Assets                                                       |                   |        |         |          
|Cash                                                                 |                   |        |         | $        
|Accounts receivable, net of
    allowance for doubtful accounts of $ | 50,000            |        | 140,146 |          
|Accounts receivable from related parties                             |                   |        |         |          
|                                                                     |                   |        |         |          
|Total Current Assets                                                 |                   |        |         |          
|Property and equipment, net of
    accumulated depreciation of       | $                 | 65,714 |         | 439,367  
|License, net of accumulated amortization of $                        | 195,811           |        |         |          
|Deposits on two new rigs                                             |                   |        |         |          
|                                                                     |                   |        |         |          
|Total Assets                                                         |                   |        |         | $        
|                                                                     |                   |        |         |          
|                                                                     |                   |        |         |          
|LIABILITIES AND
    STOCKHOLDERS EQUITY                             |                   |        |         |          
|Current Liabilities                                                  |                   |        |         |          
|Accounts payable                                                     |                   |        |         | $        
|Accrued expenses                                                     |                   |        |         |          
|Related party deferred revenues                                      |                   |        |         |          
|Deferred revenue                                                     |                   |        |         |          
|Customer deposit                                                     |                   |        |         |          
|Guarantee of third party debt                                        |                   |        |         |          
|Notes payable on license to related
    party                        |                   |        |         |          
|                                                                     |                   |        |         |          
|Total Current
    Liabilities                                        |                   |        |         |          
|Long Term Liabilities                                                |                   |        |         |          
|Deferred revenue, less current portion                               |                   |        |         |          
|                                                                     |                   |        |         |          
|Total Liabilities                                                    |                   |        |         |          
|                                                                     |                   |        |         |          
|Commitments & Contingencies                                          |                   |        |         |          
|                                                                     |                   |        |         |          
|Stockholders Equity                                                 |                   |        |         |          
|                                                                     |                   |        |         |          
|Common Stock, .001 par value,
    50,000,000 shares authorized, $    |                   |        |         |          
|29,627,265 shares issued and outstanding                             |                   |        |         |          
|Additional paid-in capital                                           |                   |        |         |          
|Accumulated deficit                                                  |                   |        |         |          
|                                                                     |                   |        |         |          
|Total
    Stockholders Equity                                       |                   |        |         |          
|                                                                     |                   |        |         |          
|Total Liabilities and
    Stockholders Equity                       |                   |        | $       | 7,146,289
|                                                                     |                   |        |         |          

See accompanying summary of accounting
policies and notes to financial statements.

Page 27

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|                                        | VERDISYS, INC.                             |             |  |            |             | 
|--------------------------------------- | ------------------------------------------ | ----------- |  | ---------- | ----------- | 
|                                        | STATEMENTS OF OPERATIONS                   |             |  |            |            
|                                        | Years Ended December 31, 2003 and
    2002 |             |  |            |            
|                                        |                                            |             |  |            |             | 
|                                        |                                            | 2003        |  |            | 2002        | 
|                                        |                                            |             |  |            |             | 
|Revenue                                 |                                            |             |  |            |             | 
|Satellite Services                      |                                            |             |  |            |             | 
|Third parties                           | $                                          | 419,247     |  | $          | 287,190     | 
|Drilling Services                       |                                            |             |  |            |             | 
|Third parties                           |                                            | 7,444       |  |            |             | 
|Related parties                         |                                            | 458,750     |  |            |             | 
|                                        |                                            |             |  |            |             | 
|Total Revenue                           |                                            | 885,441     |  |            | 287,190     | 
|                                        |                                            |             |  |            |             | 
|Cost of Services Provided               |                                            |             |  |            |             | 
|Satellite Services                      |                                            |             |  |            |             | 
|Third parties                           |                                            | 588,498     |  |            | 276,454     | 
|Drilling Services                       |                                            |             |  |            |             | 
|Third parties                           |                                            | 787,560     |  |            |             | 
|Related parties                         |                                            | 226,611     |  |            |             | 
|                                        |                                            |             |  |            |             | 
|Total Cost of Services Provided         |                                            | 1,602,669   |  |            | 276,929     | 
|Gross Margin (Loss)                     |                                            | (717,228)   |  |            | 10,736      | 
|Selling, general & administrative       |                                            | 5,669,538   |  |            | 3,002,470   | 
|Depreciation and amortization           |                                            | 219,692     |  |            | 11,380      | 
|Bad debts                               |                                            | 172,003     |  |            | 9,368       | 
|Debt forgiveness income                 |                                            | (460,235)   |  |            |             | 
|Gain on sale of property                |                                            | (120,000)   |  |            |             | 
|Interest income                         |                                            | (417)       |  |            | (21)        | 
|Interest expense                        |                                            | 1,158,236   |  |            | 116,321     | 
|                                        |                                            |             |  |            |             | 
|Total expenses                          |                                            | 6,638,817   |  |            | 3,139,518   | 
|                                        |                                            |             |  |            |             | 
|NET LOSS                                | $                                          | (7,356,045) |  | $          | (3,128,782) | 
|                                        |                                            |             |  |            |             | 
|                                        |                                            |             |  |            |             | 
|Basic and diluted net loss per share    | $                                          | (.33)       |  | $          | (.23)       | 
|Weighted average shares
    outstanding | 22,180,185                                 |             |  | 13,553,139 |            

See accompanying summary of accounting
policies and notes to financial statements.

Page 28

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|                                                           | V                                          | ERDISYS, INC. |           |           |            |  |      
|---------------------------------------------------------- | ------------------------------------------ | ------------- | --------- | --------- | ---------- |  | -----
|                                                           | STATEMENT OF STOCKHOLDERS
    EQUITY      |               |           |           |            | 
|                                                           | Years Ended December 31, 2002 and
    2003 |               |           |           |            | 
|                                                           |                                            |               |           |           |            |  |      
|                                                           |                                            | Shares        |           | Amount    | Shares     |  |      
|                                                           |                                            |               |           |           |            |  |      
|Balances, December 31, 2001                                |                                            | 650,000       | $         | 325,000   | 13,553,139 |  | $    
|Series B preferred stock issued for cash                   |                                            | 760,000       |           | 380,000   |            |  |      
|Options issued for services                                |                                            |               |           |           |            |  |      
|Warrants issued for services                               |                                            |               |           |           |            |  |      
|Warrants issued for interest                               |                                            |               |           |           |            |  |      
|Net loss                                                   |                                            |               |           |           |            |  |      
|Balances, December 31, 2002                                |                                            | 1,410,000     |           | 705,000   | 13,553,139 |  |      
|Series B preferred stock exchanged
    for common stock    | (1,410,000)                                |               | (705,000) | 1,410,000 |            |  | 1,410
|Stock issued for:                                          |                                            |               |           |           |            |  |      
|Cash, net of fundraising costs                             |                                            |               |           |           | 2,740,733  |  |      
|Services                                                   |                                            |               |           |           | 4,679,194  |  |      
|Accounts payable                                           |                                            |               |           |           | 33,333     |  |      
|Notes payable and accrued interest                         |                                            |               |           |           | 2,890,688  |  |      
|Cash exercise of warrants and options                      |                                            |               |           |           | 1,995,178  |  |      
|Cashless exercise of warrants for
    note payment         |                                            |               |           | 200,000   |            |  | 200  
|Note payment on lease                                      |                                            |               |           |           | 125,000    |  |      
|Reduction of royalty                                       |                                            |               |           |           | 500,000    |  |      
|RDGI merger                                                |                                            |               |           |           | 1,500,000  |  |      
|Fair value of options and warrants
    issued for services |                                            |               |           |           |            |  |      
|Contribution to capital                                    |                                            |               |           |           |            |  |      
|Net Loss                                                   |                                            |               |           |           |            |  |      
|Balances, December 31, 2003                                |                                            | -             | $         | -         | 29,627,265 |  | $    
|                                                           |                                            |               |           |           |            |  |      

Page 29

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|                                                           | VERDISYS, INC.                             |            |  |   |              |           |             | 
|---------------------------------------------------------- | ------------------------------------------ | ---------- |  | - | ------------ | --------- | ----------- | 
|                                                           | STATEMENT OF STOCKHOLDERS
    EQUITY      |            |  |   |              |           |            
|                                                           | Years Ended December 31, 2002 and
    2003 |            |  |   |              |           |            
|                                                           |                                            |            |  |   |              |           |             | 
|                                                           |                                            | Paid-In    |  |   | Retained     |           |             | 
|                                                           |                                            | Capital    |  |   | Deficit      |           | Totals      | 
|                                                           |                                            |            |  |   |              |           |             | 
|Balances, December 31, 2001                                | $                                          | 5,300,833  |  | $ | (7,815,692)  | $         | (2,176,306) | 
|Series B preferred stock issued for cash                   |                                            |            |  |   |              |           | 380,000     | 
|Options issued for services                                |                                            | 401,291    |  |   |              |           | 401,291     | 
|Warrants issued for services                               |                                            | 392,000    |  |   |              |           | 392,000     | 
|Warrants issued for interest                               |                                            | 4,800      |  |   |              |           | 4,800       | 
|Net loss                                                   |                                            |            |  |   | (3,128,782)  |           | (3,128,782) | 
|                                                           |                                            |            |  |   |              |           |             | 
|Balances, December 31, 2002                                |                                            | 6,098,924  |  |   | (10,944,474) |           | (4,126,997) | 
|Series B preferred stock exchanged
    for common stock    | 703,590                                    |            |  |   |              | -         |            
|Stock issued for:                                          |                                            |            |  |   |              |           |             | 
|Cash, net of fundraising costs                             |                                            | 6,559,409  |  |   |              |           | 6,562,150   | 
|Services                                                   |                                            | 1,619,660  |  |   |              |           | 1,624,339   | 
|Accounts payable                                           |                                            | 16,633     |  |   |              |           | 16,666      | 
|Notes payable and accrued interest                         |                                            | 1,503,299  |  |   |              |           | 1,506,190   | 
|Cash exercise of warrants and options                      |                                            | 366,820    |  |   |              |           | 368,815     | 
|Cashless exercise of warrants for
    note payment         | 19,800                                     |            |  |   |              | 20,000    |            
|Note payment on lease                                      |                                            | 249,875    |  |   |              |           | 250,000     | 
|Reduction of royalty                                       |                                            | 2,274,500  |  |   |              |           | 2,275,000   | 
|RDGI merger                                                |                                            | (1,500)    |  |   |              |           | -           | 
|Fair value of options and warrants
    issued for services | 1,844,311                                  |            |  |   |              | 1,844,311 |            
|Contribution to capital                                    |                                            | 488,000    |  |   |              |           | 488,000     | 
|Net Loss                                                   |                                            |            |  |   | (7,356,045)  |           | (7,356,045) | 
|                                                           |                                            |            |  |   |              |           |             | 
|Balances, December 31, 2003                                | $                                          | 21,743,321 |  | $ | (18,300,519) | $         | 3,472,429   | 
|                                                           |                                            |            |  |   |              |           |             | 

Page 30

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|                                                                                | VERDISYS, INC.                             |           |             |      |        
|------------------------------------------------------------------------------- | ------------------------------------------ | --------- | ----------- | ---- | -------
|                                                                                | STATEMENT OF CASH FLOWS                    |           |             |      |        
|                                                                                | Years Ended December 31, 2003
    and 2002 |           |             |      |        
|                                                                                |                                            |           |             |      |        
|                                                                                |                                            | 2003      |             | 2002 |        
|Cash Flows From Operating Activities                                            |                                            |           |             |      |        
|Net loss                                                                        |                                            | $         | (7,356,045) |      | $      
|Adjustments to reconcile net loss
    to net cash used in operating activities: |                                            |           |             |      |        
|Stock issued for
    services                                                   |                                            |           | 1,624,339   |      |        
|Issuance of options and warrants
    for services                               |                                            | 1,844,311 |             |      | 793,291
|Issuance of stock options for
    interest expense                              |                                            |           |             |      | 4,800  
|Depreciation and
    amortization                                               |                                            |           | 219,692     |      |        
|Debt forgiveness
    income                                                     |                                            |           | (460,235)   |      |        
|Guarantee of third
    party debt                                               |                                            |           | 300,000     |      |        
|Gain on sale of
    property                                                    |                                            |           | (120,000)   |      |        
|Bad debts                                                                       |                                            |           | 172,003     |      |        
|Changes in:                                                                     |                                            |           |             |      |        
|Accounts
    receivable                                                         |                                            |           | (201,747)   |      |        
|Accounts
    receivable  related party                                         |                                            |           | (23,960)    |      |        
|Employee
    advances                                                           |                                            |           | 42,620      |      |        
|Accounts
    payable                                                            |                                            |           | (277,755)   |      |        
|Accrued
    expenses                                                            |                                            |           | (171,815)   |      |        
|Deferred
    revenue                                                            |                                            |           | 724,648     |      |        
|Customer
    deposit                                                            |                                            |           | 68,282      |      |        
|                                                                                |                                            |           |             |      |        
|Net Cash Used In Operating Activities                                           |                                            |           | (3,615,662) |      |        
|                                                                                |                                            |           |             |      |        
|Cash Flows From Investing Activities                                            |                                            |           |             |      |        
|Purchase of property and equipment                                              |                                            |           | (459,493)   |      |        
|Cash payments for license                                                       |                                            |           | (100,000)   |      |        
|Proceeds from sale of property                                                  |                                            |           | 120,000     |      |        
|Deposit on purchase of two (2) new rigs                                         |                                            |           | (340,000)   |      |        
|Loan to third party                                                             |                                            |           | (100,000)   |      |        
|                                                                                |                                            |           |             |      |        
|Net Cash Used In Investing Activities                                           |                                            |           | (879,493)   |      |        
|                                                                                |                                            |           |             |      |        
|Cash Flows From Financing Activities                                            |                                            |           |             |      |        
|Proceeds from sales of common stock                                             |                                            |           | 6,562,150   |      |        
|Proceeds from exercise of options
    and warrants                              |                                            | 368,815   |             |      |        
|Proceeds from notes payable to
    stockholders                                 |                                            | 50,000    |             |      | 3,558  
|Payments on notes payable to
    stockholders                                   |                                            | (363,558) |             |      |        
|Payments on note payable related
    to license                                 |                                            | (748,760) |             |      |        
|Proceeds from sales of preferred stock                                          |                                            |           |             |      |        
|                                                                                |                                            |           |             |      |        
|Net Cash Provided By Financing
    Activities                                   |                                            | 5,868,647 |             |      | 383,558
|                                                                                |                                            |           |             |      |        
|                                                                                |                                            |           |             |      |        
|Net change in cash                                                              |                                            |           | 1,373,492   |      |        
|Cash at beginning of year                                                       |                                            |           | 135         |      |        
|                                                                                |                                            |           |             |      |        
|Cash at end of year                                                             |                                            | $         | 1,373,627   |      | $      
|                                                                                |                                            |           |             |      |        
|Cash paid during the year for:                                                  |                                            |           |             |      |        
|Interest                                                                        |                                            | $         | 176,240     |      | $      
|Income taxes                                                                    |                                            | $         | -           |      | $      

Page 31

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VERDISYS,INC.

NOTES
TOFINANCIALSTATEMENTS

NOTE 1 - SUMMARY OF ACCOUNTING POLICIES

Business. Verdisys, Inc. (Verdisys) was formed
in California on April 7, 1999 as TheAgZone, Inc. In January 2001 the name was changed to
Verdisys, Inc. In May 2001, Verdisys began selling secure intra-company and wide-area
network satellite communications systems to energy companies to manage distant oil and gas
producing wells, power distribution and other equipment sites by remote computer control.

In June 2003, Verdisys began selling a lateral drilling
technique using high pressure water jetting for the enhancement and production of oil and
gas reserves using licensed technology acquired in April 2003.

On July 18, 2003, Verdisys signed an Agreement and Plan of
Merger with Reconstruction Data Group, Inc. (RDGI), a publicly-reporting inactive entity.
The shareholders of Verdisys received 25,202,539 shares of RDGI in exchange for all of the
25,202,539 shares of Verdisys then outstanding. Verdisys became a wholly-owned subsidiary
of RDGI. As of that transfer, Verdisys shareholders owned 94.4% of the outstanding stock
of the combined entity.

Certain amounts in financial statements of prior years have
been reclassified to conform to the presentation of the current year for comparative
purposes.

Management estimates. The preparation of financial
statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses, as well as certain
financial statement disclosures. While management believes that the estimates and
assumptions used in the preparation of the financial statements are appropriate, actual
results could differ from these estimates.

Cash Equivalents. Highly liquid investments with original
maturities of three months or less are considered cash equivalents.

Revenue Recognition. All revenue is recognized when
persuasive evidence of an arrangement exists, the service or sale is complete, the price
is fixed or determinable and collectibility is reasonably assured. Revenue is derived from
sales of satellite hardware, satellite bandwidth, satellite service and lateral drilling
services. Revenue from satellite hardware is recognized when the hardware is installed.
Revenue from satellite bandwidth is recognized evenly over the term of the contract.
Revenue from satellite service is recognized when the services are performed. Verdisys
provides no warranty but sells commercially obtained 3 to 12 month warranties for
satellite hardware. Verdisys has a 30 day return policy. Revenue for lateral drilling
services is recognized when the services are performed and collectibility is reasonably
assured and when collection is uncertain, revenue is recognized when cash is collected.

Allowance for Doubtful Accounts. Bad debt expense is
recognized based on managements estimate of likely losses per year, based on past
experience and an estimate of current year uncollectible amounts.

Property and equipment is valued at cost. Additions are
capitalized and maintenance and repairs are charged to expense as incurred. Gains and
losses on dispositions of equipment are reflected in operations. Depreciation is provided
using the straight-line method over the estimated useful lives of the assets, which are
three to seven years.

Impairment of Long-Lived Assets. Verdisys reviews the
carrying value of its long-lived assets annually or whenever events or changes in
circumstances indicate that the historical cost-carrying value of an asset may no longer
be appropriate. Verdisys assesses recoverability of the carrying value of the asset by
estimating the future net cash flows expected to result from the asset, including eventual
disposition. If the future net cash flows are less than the carrying value of the asset,
an impairment loss is recorded equal to the difference between the assets carrying
value and fair value.

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Verdisys, Inc. Annual Report

VERDISYS,INC.

NOTES
TOFINANCIALSTATEMENTS

Stock options and warrants. Verdisys accounts for non-cash
stock-based compensation issued to non-employees in accordance with the provisions of SFAS
No. 123 and EITF No. 96-18, Accounting for Equity Investments That Are Issued to
Non-Employees for Acquiring, or in Conjunction with Selling Goods or Services. Common
stock issued to non-employees and consultants is based upon the value of the services
received or the quoted market price, whichever value is more readily determinable.
Verdisys accounts for stock options and warrants issued to employees under the intrinsic
value method. Under this method, Verdisys recognizes no compensation expense for stock
options or warrants granted when the number of underlying shares is known and the exercise
price of the option or warrant is greater than or equal to the fair market value of the
stock on the date of grant. The following table illustrates the effect on net loss and net
loss per share if Verdisys had applied the fair value provisions of FASB Statement No.
123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

|                           |                              |               | 2003        | 2002
|-------------------------- | ---------------------------- | ------------- | ----------- | ----
|                           |                              |               |             |     
|Net loss as reported       | $(7,356,045 )                | $(3,128,782 )
|Less:                      | stock based compensation     |               |             |     
|                           | determined under fair value- |               |             |     
|                           | based method                 | (             | 828,737 )   |     
|                           |                              |               |             |     
|Pro forma net loss         | $(8,184,782 )                | $(3,128,782 )
|                           |                              | ===========   | ===========
|Basic and diluted net loss |                              |               |            
|per common share:          |                              |               |            
|As reported                |                              | $(.33 )       | $(.23 )    
|Pro forma                  |                              | (.37 )        | (.23 )     

The weighted average fair value of the stock options
granted during 2003 and 2002 was $7.30 and $.50, respectively. Variables used in the
Black-Scholes option-pricing model include (1) 1.5% risk-free interest rate, (2) expected
option life is the actual remaining life of the options as of each year end, (3) expected
volatility is zero, and (4) zero expected dividends.

Income Taxes. Income tax expense is based on reported
earnings before income taxes. Deferred income taxes reflect the impact of temporary
differences between assets and liabilities recognized for financial reporting purposes and
such amounts recognized for tax purposes, and are measured by applying tax rates in effect
in years in which the differences are expected to reverse.

Basic and diluted earnings per share. Basic earnings per
share equals net earnings divided by weighted average shares outstanding during the year.
Diluted earnings per share include the impact of common stock equivalents using the
treasury stock method when the effect is dilutive. There were no dilutive securities
during the periods presented.

Recently issued accounting pronouncements. Verdisys does
not expect the adoption of recently issued accounting pronouncements to have a significant
impact on their results of operations, financial position or cash flow.

NOTE 2  GOING CONCERN

As shown in the accompanying financial statements, Verdisys
incurred recurring net losses of $7,356,045 and $3,128,782 in 2003 and 2002, respectively,
has an accumulated deficit of $18,258,759 and a working capital deficit of $1,837,467 as
of December 31, 2003. These conditions create an uncertainty as to Verdisys ability
to continue as a going concern. Management is trying to raise additional capital through
sales of common stock or convertible instruments as well as seeking financing from third
parties. The financial statements do not include any adjustments that might be necessary
if Verdisys is unable to continue as a going concern.

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Verdisys, Inc. Annual Report

VERDISYS,INC.

NOTES
TOFINANCIALSTATEMENTS

NOTE 3  RELATED PARTY ACCOUNTS RECEIVABLE AND
REVENUES

In April 2003, Verdisys signed a drilling service contract
with Energy 2000 NGC, Inc. of Louisiana ("Energy 2000"), whereby Energy 2000
would have paid Verdisys a minimum of $1,800,000 for lateral drilling of 45 wells. This
contract was a fixed amount due to Verdisys dependent upon the number of wells drilled and
offshoot lateral bores drilled. In addition, Verdisys would receive an 80 percent interest
in the net operating income after payback from these properties and also be reimbursed for
20 percent of its field costs. In September, 2003 Verdisys entered into another contract
with Energy 2000 for an additional 57 wells with terms similar to the original contract.
This contract was suspended for lack of payment.

In September 2003, Verdisys signed a drilling service
contract with Natural Gas Systems, Inc. (NGS), whereby NGS would have paid
Verdisys a minimum of $7,800,000 for lateral drilling of 120 wells. This contract was a
fixed amount due to Verdisys dependent upon the number of wells drilled and offshoot
lateral bores drilled. In addition, Verdisys would receive a 70 percent interest in the
net operating income after payback from these properties. This contract was renegotiated
in February 2004 to a smaller agreement with an initial four well commitment and removed
the Verdisys rights to post-production.

Energy 2000 is a subsidiary of Berg McAfee Energy, LLC,
which is a wholly owned subsidiary of Berg McAfee Companies. Natural Gas Systems is an
independent company with substantial shareholdings owned by Eric McAfee, a 50 per cent
owner of Berg McAfee Companies and former Director of Verdisys, and Berg McAfee Companies.
They are beneficially owned 80% and 23% respectively by Berg McAfee or Eric McAfee
personally.

Verdisys billed $666,250 and $153,960 to Energy 2000 and
NGS, respectively, for services performed in 2003. Verdisys received $397,500 and
$130,000, respectively. However, Verdisys has inadequate documentation to substantiate
whether some of the services were performed. For Energy 2000, Verdisys was able to
substantiate $328,750 of revenue leaving $68,750 in deferred revenue. As of December 31,
2003, deferred revenues totaled $92,710.

Lateral drilling services for these two customers ceased in
December 2003 because of a change in Verdisys management, and are expected to resume for
NGS in the second quarter of 2004.

NOTE 4  PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at
December 31, 2003:

|Description                    | Life    | Amount   |         
|------------------------------ | ------- | -------- | --------
|                               |         |          |         
|Lateral drilling equipment     | 5 years | $        | 427,420 
|Computer equipment             | 3 years |          | 56,949  
|Office furniture and equipment | 7 years |          | 20,712  
|                               |         |          |         
|                               |         |          | 505,081 
|Less: accumulated depreciation |         |          | (65,714)
|                               |         |          |         
|                               |         | $        | 439,367 
|                               |         | ======== |         

Lateral drilling equipment consists of two heavy trucks
mounted with high powered water compressors, flexible hose and other assorted downhole
equipment which is used to conduct the lateral drilling process with high pressure jetting
technology.

Depreciation expense totaled $23,881 and $11,380 in 2003
and 2002, respectively.

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Verdisys, Inc. Annual Report

VERDISYS,INC.

NOTES
TOFINANCIALSTATEMENTS

NOTE 5  LATERAL DRILLING LICENSE & NOTE
PAYABLE ON LICENSE TO RELATED PARTY

In April 2003, an individual licensed his lateral drilling
technology and equipment to Verdisys for $2,750,000 plus 10% of related gross revenue from
lateral drilling operations. Verdisys paid $100,000 upon signing and signed a note payable
for $2,650,000 plus effective interest of 12.14% due in monthly installments from May 2003
through March 2004.

In July 2003, Verdisys issued 125,000 shares in exchange
for a $250,000 reduction of the note payable. In August 2003, Verdisys and the licensor
amended the agreement whereby, in exchange for 500,000 shares of Verdisys common stock and
the grant of a board seat, the licensor agreed to eliminate the 10% royalty and instead
receive $500 per well serviced. The stock price at the time of the amendment was $4.55 per
share, resulting in a $2,275,000 increase in the carrying value of the license.

At December 31, 2003 the total cost of the license was
$5,025,000 with $195,811 of accumulated amortization. The license is amortized over the
remaining life of the patent, or 14 years. The balance of the note payable at December 31,
2003 was $1,651,240.

Verdisys did not make the December 2003 or January 2004
payment on the note payable. In February 2004, Verdisys and the licensor agreed to
restructure the note payments. Verdisys agreed to issue the licensor 300,000 shares of
common stock, $100,000 cash and a note payable for $400,000 due on May 15, 2004 for the
unpaid amounts due under the original note. If Verdisys fails to pay the $400,000 by May
15, 2004, the license may be revoked. The 300,000 shares had a value of $1,920,000 with
$975,000 reducing the overall note balance and $945,000 recognized as interest expense.

NOTE 6  DEPOSITS ON 2 NEW RIGS

Verdisys paid $340,000 in December 2003 for two flatbed
trucks with attached drilling equipment that Verdisys took possession of in January 2004.
This brings the total number of lateral drilling units owned by Verdisys to four.

NOTE 7  DEFERRED REVENUE/CUSTOMER DEPOSIT

Typical satellite bandwidth contracts cover 36 months.
Verdisys receives the cash in advance and recognizes revenue evenly over the contract.
Deferred revenue related to satellite services totaled $271,485. $142,440 will be
recognized in 2004 and $129,045 will be recognized during 2005 and 2006.

Verdisys also deferred revenue collected for lateral
drilling service contracts. In June 2003, Verdisys signed an agreement to drill wells for
Edge Capital (Edge). Edge, through a third party financing source, paid
Verdisys $497,000 in 2003. Edge currently disputes whether services were actually
performed and is requesting the $497,000 be returned to the third party financing source
but has not initiated any court action. Verdisys has inadequate documentation to
substantiate what services were actually performed. Management is attempting to
substantiate what services were actually performed and continues to gather evidence to
substantiate the services. As of December 31, 2003, the $497,000 is included in deferred
revenue.

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Verdisys, Inc. Annual Report

VERDISYS,INC.

NOTES
TOFINANCIALSTATEMENTS

NOTE 8 - GUARANTEE OF THIRD PARTY DEBT

In July 2003, Verdisys guaranteed Edges purchase of
oil and gas properties from another entity for $450,000. Edge paid $150,000 and signed a
note payable for $300,000 plus 12% interest due in 2004. Edge defaulted on this note and
requested Verdisys pay the amounts due. In accordance with FASB Interpretation 45
(FIN 45) Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, Verdisys
recorded a liability of $300,000. . In November 2003, Verdisys loaned $100,000 to Cypress
Drilling, Inc. (Cypress), with 8% interest and due on demand. Cypress leased
drilling equipment from Mixon Bros. Drilling, Inc. (Mixon). Mixon was in
default on the equipment note payable to Homeland Federal Savings Bank
(Homeland). Cypress agreed to give Mixon $64,384, which Mixon agreed to give
to Homeland to bring the note to Homeland current to release the equipment to Mixon. Mixon
then released the equipment to Cypress so Cypress could do subcontract work for Verdisys.
Verdisys agreed to guarantee Mixons remaining note payments to Homeland which
approximated $68,000. The guarantee is for one year beginning October 30, 2003. If
Verdisys were required to honor the guarantee, Verdisys would receive the equipment.
Verdisys fully reserved the Cypress $100,000 note receivable because collectibility is
uncertain. Verdisys has not recorded any liability under the guarantee as of December 31,
2003.

NOTE 9 - NOTES PAYABLE

At the beginning of 2003, Verdisys owed $1,579,562 in notes
payable to stockholders. In early 2003, Verdisys issued a convertible promissory note in
the amount of $50,000 with 100,000 $.01 warrants that expire in January 2008 to a
stockholder.

In 2003, Verdisys settled the entire $1,629,562 of notes
payable by paying $360,000 in cash, allowing a cashless exercise of 200,000 $.10 warrants
for $20,000, reclassifying $4,562 to accrued interest and issuing 2,890,688 shares of
common stock for $1,245,000 of principal plus accrued interest of $261,190.

NOTE 10 - INCOME TAXES

Verdisys uses the liability method, where deferred tax
assets and liabilities are determined based on the expected future tax consequences of
temporary differences between the carrying amounts of assets and liabilities for financial
and income tax reporting purposes. During 2003 and 2002, Verdisys incurred net losses and,
therefore, has no tax liability. The net deferred tax asset generated by the loss
carry-forward has been fully reserved. The cumulative net operating loss carry-forward is
approximately $13,000,000 at December 31, 2003, and will expire in the years 2019 through
2023. At December 31, 2002, deferred tax assets consisted of the following:

|                       |                     |             | 2003         |  | 
|---------------------- | ------------------- | ----------- | ------------ |  | 
|                       |                     |             |              |  | 
|Deferred tax assets    |                     |             |              | 
|Net operating losses   | $                   | 4,500,000   |             
|Less:                  | valuation allowance |             | (4,500,000 ) | 
|                       |                     |             |              | 
|Net deferred tax asset |                     | $           | 0            | 
|                       |                     | =========== |             

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Verdisys, Inc. Annual Report

VERDISYS,INC.

NOTES
TOFINANCIALSTATEMENTS

NOTE 11 - PREFERRED STOCK

3,436,996 shares of Series A preferred stock were issued in
1999 and 2000 at $1.50 per share, and all were converted prior to 2002 to common stock on
a one-for-one basis.

650,000 and 760,000 shares of Series B preferred stock were
issued in 2001 and 2002, respectively, for $.50 per share. In early 2003, Verdisys
converted all 1,410,000 shares of Series B convertible preferred stock into 1,410,000
shares of common stock.

There are currently no preferred shares issued or
outstanding. Verdisys currently has no authorized preferred stock.

NOTE 12  COMMON STOCK

In the second quarter of 2003, Verdisys sold 1,239,000
shares of common stock in private placements for between $.50 and $.75 per share for total
proceeds of $779,250 before $15,100 costs of fundraising.

In the second quarter of 2003, Verdisys converted
$1,506,190 of notes payable and accrued interest to investors to 2,890,688 shares of
common stock.

In the second quarter of 2003, director and employee
options were exercised at $.10 per share for 2,409,291 shares of common stock. In lieu of
cash, Verdisys agreed to expense the exercise price as compensation of $240,929.

In the second quarter of 2003, 1,580,000 warrants were
exercised for 1,580,000 shares of common stock. $56,500 in cash was received for the
exercise of 430,000 warrants, accounts payable was reduced by $95,000 for the exercise of
950,000 warrants and notes payable to investor was reduced by $20,000 for the exercise of
200,000 warrants.

In April 2003, Verdisys issued 2,000,000 shares of common
stock purportedly to acquire the assets of Quikview, Inc. The shares were valued at
$1,000,000 and have been accounted for as compensation expense. See Note 19 for details.

In June 2003, 100,000 shares valued at $75,000 were issued
to a consultant.

In May 2003, Verdisys issued 33,333 shares of stock for a
$16,666 reduction in accounts payable. On July 18, 2003, Verdisys signed an Agreement and
Plan of Merger with Reconstruction Data Group, Inc. (RDGI), a publicly-reporting inactive
entity. The shareholders of Verdisys received 25,202,539 shares of RDGI in exchange for
all of the 25,202,539 shares of Verdisys then outstanding. RDGI was renamed Verdisys and
the former Verdisys Entity was extinguished. As of that transfer, Verdisys shareholders
owned 94.4% of the outstanding stock and RDGI shareholders owned 1,500,000 shares or 1.6%
of the combined entity.

In July and August 2003, Verdisys sold 609,000 shares of
common stock at $2.00 per share in a private placement for total proceeds of $1,218,000.
Offering costs consisted of 59,400 shares of restricted common stock and 9,501 warrants
exercisable at $2 per share anytime through September 5, 2008.

In the third quarter of 2003, 269,547 warrants were
exercised for 269,547 shares of common stock. $177,751 in cash was received for the
exercise.

In the third quarter of 2003, Verdisys issued 625,000
shares of common stock to the licensor of the lateral drilling license. 125,000 shares
were for a reduction of the note payable by $250,000 and 500,000 were for an amendment to
the royalty agreement. The 500,000 shares were valued at $2,275,000.

In September 2003, 144,903 shares granted in 2001, but
never recorded, were issued to former employees and valued at the 2001 value of $52,160.

Page 37

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Verdisys, Inc. Annual Report

VERDISYS,INC.

NOTES
TOFINANCIALSTATEMENTS

In October 2003, Verdisys sold 833,333 shares of common
stock to Gryphon Master Fund, L.P. at $6.00 per share for $5,000,000 total proceeds.
Offering costs associated with the sale were $420,000 in cash, 83,334 warrants at $6 per
share that expire October 24, 2008, 9,501 warrants at $2 per share that expire in
September 2008 and 20,000 shares of common stock. The warrants are exercisable at any time
prior to October 24, 2008 by paying cash at the exercise price or by electing a cashless
exercise. If a cashless exercise is elected, the holder would receive a percentage of the
shares defined as the market price at the time of exercise less the exercise price
multiplied by the number of warrants exercised. If Verdisys fails to meet certain
milestones related to registration of such shares, Verdisys is required to pay in cash
liquidated damages equal to 1 percent of the purchase price of the shares paid for the
first 30 days the event is not cured and 2 percent of the purchase price paid for each
thirty day period thereafter until cured. In no event shall Verdisys be required to pay
more than aggregate liquidated damages of 8 percent of the purchase price or $400,000. In
addition, if in the ten months subsequent to the agreement, the 30 day average closing
price of Verdisys common stock drops below $6 per share, such drops could result in
the issuance of a maximum of 277,778 additional shares of common stock for no additional
compensation. If this occurs, a total of 1,111,111 common shares will have been issued for
an average price of $4.50 per share. As of April 2, 2004, Verdisys incurred approximately
$283,333 of liquidated damages for failing to file a registration statement timely. In the
fourth quarter of 2003, Verdisys issued 25,000 shares of common stock valued at $256,250
to a consultant for services.

In the fourth quarter 2003, 245,631 warrants and 100,000
options were exercised for $29,564 and $10,000, respectively.

NOTE 13 - STOCK OPTIONS AND WARRANTS

Options

In April 2003, Verdisys issued 1,280,000 ten year $.10
options to employees. 30,000 options vest monthly over three months, 750,000 options vest
quarterly over four years, 300,000 options vest quarterly over one year and 200,000
options vest quarterly over two years. The intrinsic value of these options totals
$512,000 which approximated their fair value.

In August 2003, Verdisys issued an employee 100,000 five
year options with an exercise price of $4.10. There was no intrinsic value associated with
the issuance. The fair value of the options was $321,024.

In December 2003, Verdisys granted 500,000 options to
purchase Verdisys common stock to the chairman and interim CEO. The options expire in 10
years, have an exercise price of $9.55, which equaled the closing price on the date of
grant. 50,000 vest immediately, 50,000 were to vest by December 31, 2003 if Verdisys could
collect all of the Edge disputed accounts receivable by December 31, 2003 and the
remaining 400,000 options vest evenly over 12 months in 2004. Because Verdisys was unable
to collect the accounts receivable from Edge, 50,000 of the 500,000 options were
forfeited. The fair value associated with these options totaled $4,061,703 of which
$507,713 is presented as a pro forma expense. See note 1 for details. $714,524 of
intrinsic value associated with options vesting in 2003 was expensed in 2003.

Page 38

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Verdisys, Inc. Annual Report

VERDISYS,INC.

NOTES
TOFINANCIALSTATEMENTS

In 2002, Verdisys issued 7,155,000 ten year options to
employees and directors with exercise prices of $.10. Intrinsic value associated with
these options totaled $2,862,000 which will be recognized as the options vest from 2002 to
2006.

Warrants

Verdisys issues warrant to non-employees from time to time.
The board of directors has discretion as to the terms under which the warrants are issued.
All warrants vest immediately unless specifically noted in warrant agreements.

In April 2003, Verdisys issued 200,000 $.10 warrants, of
which 100,000 expire in January 2007 and 100,000 expire in January 2008. The warrants have
a fair value of $80,000 which was expensed when the warrants were granted.

During the summer of 2003, Verdisys negotiated settlements
with 9 vendors plus the two original founders for various debts carried on the books. One
of the founders was issued 150,000 warrants exercisable at $.10 and valued at $.40 or
$60,000. The difference resulted in a contribution to capital. See note 18 for details.

During the fall of 2003, Verdisys issued 92,835 warrants,
83,334 at $6 per share that expire October 2008 and 9,501 at $2 per share that expire
September 2008. The warrants were issued in connection with raising the $5,000,000 from
Gryphon (see note 12) and their fair value of $822,738 was treated as a cost of
fundraising. The warrants are exercisable at any time prior to expiration by paying cash
at the exercise price or by electing a cashless exercise. If a cashless exercise is
elected, the holder would receive a percentage of the shares defined as the market price
at the time of exercise less the exercise price multiplied by the number of warrants
exercised.

Verdisys issued 2,644,438 in warrants in 2003 at an
exercise price $.10. The fair value of $1,050,687 has been expensed accordingly in 2003.
83,133 of the warrants were exercised in 2003.

In early 2003, 232,334 previously expired warrants were
extended and exercised. The extension resulted in the granting of 232,334 warrants to
purchase Verdisys stock at $.75 when the stock was selling for $.50 in private placements.
Using the minimum value method, the modification resulted in no additional compensation
expense. The warrants were exercised in the summer of 2003.

During 2002, Verdisys issued 120,000 warrants with an
exercise price of $.10 to investors. 100,000 expire in March 2006 and 20,000 expire in
November 2007. The fair value of $4,800 was recognized as interest expense for the
issuance.

During 2002, Verdisys issued 980,000 warrants with an
exercise price of $.10 to consultants. The fair value of $392,000 was recognized as
compensation cost.

Page 39

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Verdisys, Inc. Annual Report

VERDISYS,INC.

NOTES
TOFINANCIALSTATEMENTS

Summary information regarding options and warrants is as
follows:

|                              |              |  | Weighted    |      |           |              | Weighted   
|----------------------------- | ------------ |  | ----------- | ---- | --------- | ------------ | -----------
|                              |              |  | average     |      |           |              | average    
|                              | Options      |  | Share Price |      | Warrants  |              | Share Price
|                              |              |  |             |      |           |              |            
|Outstanding at                |              |  |             |      |           |              |            
|December 31, 2001             | 5,065,161    |  | $           | .11  |           | 2,668,271    |            
|Year ended December 31, 2002: |              |  |             |      |           |              |            
|Granted                       | 7,155,001    |  |             | .07  |           | 1,100,000    |            
|Forfeited                     | (2,717,973 ) |  |             | .10  |           | (217,362 )   |            
|                              |              |  |             |      |           |              |            
|Outstanding at                |              |  |             |      |           |              |            
|December 31, 2002             | 9,502,189    |  |             | .10  |           | 3,550,909    |            
|                              |              |  |             |      |           |              |            
|Year ended December 31, 2003: |              |  |             |      |           |              |            
|Granted                       | 1,880,000    |  | 2.83        |      | 3,319,607 |              |            
|Exercised                     | (2,509,291 ) |  |             | .10  |           | (2,092,961 ) |            
|Forfeited                     | (4,760,522 ) |  |             | .23  |           | ( 352,840 )  |            
|                              |              |  |             |      |           |              |            
|Outstanding at                |              |  |             |      |           |              |            
|December 31, 2003             | 4,112,376    |  | $           | 1.35 |           | 4,424,715    |            
|                              |              |  |             |      |           |              |            

Options outstanding and exercisable as of December 31,
2003:

|               |      |           | - - Outstanding - - | Exercisable |            
|-------------- | ---- | --------- | ------------------- | ----------- | -----------
|               |      |           | Number              | Remaining   | Number     
|Exercise Price |      | of Shares | life                | of Shares   |            
|               |      |           |                     |             |            
|$              | 4.10 |           | 100,000             | 5 years     | -          
|               | .10  |           | 5,000               | 7 years     | 4,247      
|               | .10  |           | 138,000             | 8 years     | 104,099    
|               | .10  |           | 3,369,376           | 9 years     | 1,040,021  
|               | 9.55 |           | 500,000             | 10 years    | -          
|               |      |           |                     |             |            
|               |      |           | 4,112,376           |             | 1,148,366  
|               |      |           | ==========          |             | ===========

Warrants outstanding and exercisable as of December 31,
2003:

|        |                | - - Outstanding - - | Exercisable |          
|------- | -------------- | ------------------- | ----------- | ---------
|        |                | Number              | Remaining   | Number   
|        | Exercise Price | of Shares           | life        | of Shares
|        |                |                     |             |          
|        | $              | 8,331               | 1 years     | 8,331    
|        | .15-2.00       | 1,763,677           | 2 years     | 1,763,677
|        | .10-1.00       | 494,039             | 3 years     | 494,039  
|        | 2.00-6.00      | 92,835              | 5 years     | 92,835   
|        | .10-.15        | 1,190,833           | 7 years     | 1,190,833
|        |                |                     | .10         | 375,000  
|8 years | 375,000        |                     |             |          
|        |                | 500,000             | 9 years     | 500,000  
|        |                |                     |             |          
|        |                | 4,424,715           |             | 4,424,715
|        |                |                     |             |          

Page 40

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Verdisys, Inc. Annual Report

VERDISYS,INC.

NOTES
TOFINANCIALSTATEMENTS

NOTE 14 - CONCENTRATIONS

One customer accounted for 38% and 87% of total revenues in
2003 and 2002, respectively. Related parties accounted for 52% of total revenue.

Verdisys maintains its cash balance in one financial
institution. The balance is insured by the Federal Deposit Insurance Corporation up to
$100,000. At December 31, 2003, Verdisys uninsured cash balance totaled approximately
$1,485,000.

NOTE 15  COMMITMENTS & CONTINGENCIES

Verdisys current office is in The Woodlands, Texas.
In December 2003, Verdisys renewed the Woodlands lease for 12 months for $6,071 per month.
Future minimum lease payments under the lease as of December 31, 2003 are $66,781 in 2004.
Rent expense was $42,325 and $47,627 in 2003 and 2002, respectively.

Verdisys has a consulting agreement with its current
majority stockholder for $10,000 per month through April 30, 2005, with $120,000 due
during 2004 and $40,000 in 2005. $0 was accrued and unpaid under this agreement as of
December 31, 2003. The advisory agreement was cancelled with two months notice in
February, 2004 effective upon the resignation of the director.

In April 2002, Verdisys entered into a three-year
employment agreement with its then CEO. The base salary under the agreement was $250,000
per year with quarterly performance bonuses and 2,000,000 stock options granted in 2002
and exercisable at $.10 per share and vesting quarterly over a two-year period. $400,000
and $175,000 in expense was incurred in 2002 relating to the vested portion of these
options and unpaid salary, respectively. In November 2002, this CEO resigned. In 2003
Verdisys agreed to pay accrued salary of $204,320 in cash of which $161,306 was paid as of
December 31, 2003 and the balance is accrued as of December 31, 2003. Verdisys is in
negotiations over the unvested options.

Verdisys billed Edge $1,496,000 for drilling services in
the third and fourth quarters of 2003. Edge disputes services were ever performed and
refuses to pay. Verdisys has been unsuccessful to date in substantiating that the work was
performed. Due to these uncertainties, the account receivable and the revenue have been
removed from the books.

In August 2003, Verdisys obtained a 75% net revenue
interest in property located in Monroe, Louisiana from a third party in exchange for
agreeing to perform lateral drilling services on the property. In October 2003, Verdisys
assigned the net revenue interest to Edge for $200,000. Edge paid Verdisys $120,000 and
agreed to pay the balance of $80,000 by March 31, 2004. As of April 2, 2004, Verdisys has
not collected the $80,000. Due to the disputes with Edge, Verdisys has not recorded the
remaining $80,000 receivable. Verdisys agreed to refund the money to Edge if Verdisys did
not deliver a lease between Edge and the original owner within 90 days if Edge desired. As
of April 2, 2004, Verdisys has not delivered the necessary lease and Edge has the right
under the agreement to request a refund of the $120,000. See Note 21.

If Verdisys fails to pay $400,000 to the licensor of
Verdisys lateral drilling license by May 15, 2004, he has the right to revoke the
license.

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Verdisys, Inc. Annual Report

VERDISYS,INC.

NOTES
TOFINANCIALSTATEMENTS

NOTE 16  LITIGATION

In August 2002, Verdisys settled a lawsuit filed against it
in late 2001 for breach of promissory note and breach of security agreement, by agreeing
to pay $228,494 and issued 400,000 warrants with an exercise price of $.10 per share.
Verdisys agreed to pay $15,000 on October 1, 2002 and $5,000 per month from November 2002
through August 2004. Verdisys settled the debt in 2003 by paying $180,000 cash and issuing
200,000 shares of common stock for a cashless exercise of 20,000 warrants at $.10 per
share.

Verdisys initiated a lawsuit against Edge Capital that
requests a declaratory judgment that a purported agreement between Verdisys and Edge is
not enforceable. The lawsuit arises from Edges contention that one of Verdisys
ex-officers committed the company to purchase certain oil and gas properties from Edge.
Although Verdisys contends that the alleged agreement is not binding, if the court does
not grant Verdisys request for declaratory judgment, Edge may seek to enforce the
terms of the agreement. An enforcement action may lead to damages for breach of contract
or specific performance, either of which may have a material adverse effect on
Verdisys financial condition. Edge, however, has not asserted any claim to enforce
the purported agreement.

Verdisys has learned that it is a defendant in two
purported class action lawsuits brought by former shareholders. The lawsuits, which
according to press releases about the lawsuits issued by the plaintiffs lawyers
appear in substance to be practically identical, allege that Verdisys and its former CEO,
Dan Williams, and the Company's former CFO, Andrew Wilson, violated Sections 10(b) and
20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. The
lawsuits allege that defendants made materially misstatements about Verdisys
financial results. More specifically, the lawsuits allege that defendants failed to
disclose and indicate: (1) that Verdisys had materially overstated its net income and
earnings per share; (2) that defendants prematurely recognized revenue from contracts
between Verdisys, Edge Capital and Energy 2000 in violation of GAAP and its own revenue
recognition policy; (3) that Verdisys lacked adequate internal controls and was therefore
unable to ascertain the true financial condition of the company; and (4) that as a result
of recognizing revenue prematurely, Verdisys financial results were inflated at all
relevant times. Verdisys has not yet been served in the lawsuits and continues to evaluate
its defense to these allegations, as well as the potential impact that an adverse judgment
would have on it.

Verdisys has received notice that the Securities and
Exchange Commission has initiated a formal investigation into its reporting practices and
public statements about the Company in 2003. The SEC has requested substantiation and
documentary evidence from the Company concerning the performance of certain lateral
drilling services by subcontractors in the period from May 2003 to September 2003,
supervision of such services by the Companys Executive Management at the time,
revenue recognition related to the performance of such services, the third quarter 2003
earnings restatement, public statements concerning the services performed, and related
matters. The SEC has also requested information and documentary evidence related to
Verdisys acquisition of certain assets of QuikView, Inc., a related party company,
in June, 2003. In its letters to Verdisys requesting documents, the SEC stated that the
staffs inquiry should not be construed as an indication that any violations of
securities laws have occurred or as an adverse reflection on any persons, company or
security.

Since December 2003, Verdisys has taken several steps to
address issues related to the SECs inquiries, including the termination and
replacement of the previous Chief Executive Officer and Chief Operating Officer and the
reassignment of its Chief Financial Officer based upon his desire not to relocate to
Houston. Internal controls have been strengthened overall, particularly with respect to
the public release of Company information and the recognition of revenue. The Company has
also initiated an internal investigation of the matters of concern to the SEC.
Consequently, the Company is restating its second and third quarter financial statements
and has decided to defer all revenue related to the aforementioned period until such time
that it can substantiate whether or not the services were performed. Further, the Company
is evaluating its options for rescinding its purchase of certain assets from QuikView,
Inc. As such, the Companys purchase consideration of two million common shares may
be cancelled.

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Verdisys, Inc. Annual Report

VERDISYS,INC.

NOTES
TOFINANCIALSTATEMENTS

Verdisys is cooperating fully with the investigation,
including the provision of numerous documents and testimony by our current executives.
Verdisys is not aware of any pending or threatened enforcement or other actions that might
be initiated by the SEC. Although the Company is working to bring the matter to a prompt
conclusion, it cannot make any assurance that the investigation will be resolved
positively or that it will not have negative effects on the Companys limited
resources or its ability to raise capital and use its stock as acquisition currency during
the period of the investigation. Verdisys has never been in bankruptcy, receivership or
any similar legal proceeding. Other than described above, Verdisys is not aware of any
other threatened legal proceedings. The foregoing is also true with respect to each
officer, director and control shareholder as well as any entity owned by any officer,
director and control shareholder, over the last five years.

As part of its regular operations, Verdisys may become
party to various pending or threatened claims, lawsuits and administrative proceedings
seeking damages or other remedies concerning its commercial operations, products,
employees and other matters. Although Verdisys can give no assurance about the outcome of
these or any other pending legal and administrative proceedings and the effect such
outcomes may have on the company, except as described above, Verdisys believes that any
ultimate liability resulting from the outcome of such proceedings, to the extent not
otherwise provided for or covered by insurance, will not have a material adverse effect on
Verdisys financial condition or results of operations.

NOTE 17  NON-CASH TRANSACTIONS ON CASH FLOW
STATEMENT

|Non-cash transactions for year ended December 31, 2003:   |   |           | 
|--------------------------------------------------------- | - | --------- | 
|Seller financed purchase of license with
    note         | $ | 2,650,000 | 
|Stock issued for license amendment                        |   | 2,275,000 | 
|Stock issued for reduction of note
    payable on license |   | 250,000   | 
|Contributions to capital by founders for
    debt         |   |           | 
|forgiveness income                                        |   | 488,000   | 
|Conversion of notes payable to investors
    to           |   |           | 
|common
    stock                                          |   | 1,245,000 | 
|Conversion of accrued interest on notes
    payable       |   |           | 
|to
    investors to common stock                          |   | 261,190   | 
|Conversion of Series B preferred stock
    to common      |   | 705,000   | 
|Stock issued for accounts payable                         |   | 16,666    | 
|Warrants exercised with notes payable to
    investors    |   | 20,000    | 

NOTE 18 - DEBT FORGIVENESS INCOME & CONTRIBUTION TO
CAPITAL

During 2003, Verdisys negotiated settlements with 9 vendors
for various debts originally recorded on the books at $520,501 for $43,600 cash and 33,333
shares of stock valued at $.50 or $16,666 resulting in debt forgiveness income of
$460,235. During the same period, Verdisys negotiated settlements with the two original
founders for various debts recorded on the books at $576,000 for $28,000 cash and 150,000
warrants exercisable at $.10 and valued at $.40 or $60,000 resulting in a contribution to
capital of $488,000.

NOTE 19  ALLEGED SOFTWARE PURCHASE

In April 2003, Verdisys issued 2,000,000 shares of common
stock for what management believed was satellite communications management software
pursuant to an asset purchase agreement with a related party. Management in place as of
August 2003 maintained the software was not useful and impaired it as of June 30, 2003. In
early 2004, following an internal investigation, new management determined that the
agreement is likely subject to rescission. Verdisys is evaluating its options to rescind
the agreement and cancel the shares issued. The majority shareholder of Verdisys and
former director, who was also a principal to the counterparty in the transaction, acquired
11.5% of the 2,000,000 shares.

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Verdisys, Inc. Annual Report

VERDISYS,INC.

NOTES
TOFINANCIALSTATEMENTS

NOTE 20 - NATURAL GAS FIELD PURCHASE OPTION

On November 10, 2003, Verdisys paid $500,000 for a sixteen
day option to place an additional $10,500,000 deposit to purchase a large natural gas
field with significant current gas production for a purchase price in excess of $100
million2004. As of December 31, 2003, the $500,000 was forfeited and the option expired..
Verdisys also paid fees to date of $120,000 associated with the transaction. The
additional $10,500,000 would have held the purchase option open until February 2004.

NOTE 21 - GAIN ON SALE OF PROPERTY

In August 2003, Verdisys obtained a 75% net revenue
interest in property located in Monroe, Louisiana from a third party in exchange for
agreeing to perform lateral drilling services on the property. In October 2003, Verdisys
assigned the net revenue interest to Edge for $200,000. Edge paid Verdisys $120,000 and
agreed to pay the balance of $80,000 by March 31, 2004. Verdisys agreed to refund the
money to Edge if Verdisys did not deliver a lease between Edge and the original owner
within 90 days if Edge desired. Verdisys recognized a $120,000 gain for the monies
received due to a $0 cost basis by Verdisys. As of April 2, 2004, Verdisys has not
collected the $80,000. Due to the disputes with Edge, Verdisys has not recorded the
remaining $80,000 receivable.

NOTE 22  RESTATEMENTS OF SECOND AND THIRD INTERIM
QUARTERS

Second Quarter

In April 2003, Verdisys issued 2,000,000 shares of common
stock for what management believed was satellite communications management software
pursuant to an asset purchase agreement with a related party. Management in control as of
August 2003 maintained the software was not useful and impaired it as of June 30, 2003. In
early 2004, following an internal investigation, new management determined that the
agreement is likely subject to rescission. Verdisys is evaluating its options to rescind
the agreement and cancel the shares issued. The majority shareholder of Verdisys and
former director, who was also a principal to the counterparty in the transaction, acquired
11.5% of the 2,000,000 shares. The impairment expense will be reclassified as compensation
expense as of June 30, 2003.

In the quarter ending June 30, 2003, Verdisys recognized
revenue to Energy 2000 of $60,000, accounts receivable from Energy 2000 of $230,000 and
deferred revenue to Energy 2000 of $230,000. Verdisys has been unsuccessful in
substantiating and documenting the work was performed. As of June 30, 2003, Verdisys is
reversing the deferred revenue, accounts receivable and revenue. The $60,000 received from
Energy 2000 will be carried as a customer deposit.

Third Quarter

In 2004, management discovered that accounts receivable and
deferred revenue as of September 30, 2003 were both overstated. In June 2003, Verdisys
signed an agreement to drill wells for Edge. The contracts contained contingencies
disallowing revenue recognition until each contingency was fulfilled. As of September 30,
2003, Verdisys deferred revenues and associated costs of $1,496,000 and $330,000,
respectively under this contract. In 2004 Edge disputed whether services were ever
performed and refuses to pay. Verdisys has been unsuccessful in substantiating the work
was performed. Due to these uncertainties, the account receivable and the deferred revenue
were removed from the books as of September 30, 2003.

In 2004, management discovered that revenue recognized for
monies received in the quarter ending September 30, 2003 was being disputed. In June 2003,
Verdisys signed an agreement to drill wells for Edge. Edge, through a third party
financing source, paid Verdisys $497,000 in 2003. Edge is currently disputing services
were actually performed and is requesting the $497,000 be returned to the third party
financing source. Verdisys has been unsuccessful in substantiating the work was performed.
Due to these uncertainties, the $497,000 was reclassified from revenue to deferred revenue
as of September 30, 2003.

Page 44

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Verdisys, Inc. Annual Report

VERDISYS,INC.

NOTES
TOFINANCIALSTATEMENTS

In the quarter ending September 30, 2003, Verdisys
recognized accounts receivable from Energy 2000 of $337,500 and deferred revenue to Energy
2000 of $337,500. Verdisys has been unsuccessful in substantiating whether the work was
performed. As of September 30, 2003, Verdisys reversed the deferred revenue and accounts
receivable.

NOTE 23  SUBSEQUENT EVENTS

In 2004, 395,022 shares were issued for a cashless exercise
of 400,000 warrants.

409,935 shares were issued for the exercise of 409,935
options for cash of $40,994. 300,000 shares of common stock were issued to the licensor of
the lateral drilling license as part of a workout on the note payable. The 300,000 shares
had a value of $1,920,000 with $975,000 reducing the overall note balance and $945,000
recognized as interest expense.

In March 2004, Verdisys signed an agreement with Maxim
Energy (Maxim), a company run by Verdisys former CEO, Dan Williams. Verdisys
will drill laterals on Maxims wells on an arms length third party basis. Maxim paid
Verdisys $100,000 as an advance on the mobilization and drilling of the first two wells.
Verdisys has stipulated that all services to Maxim will be paid for in advance.

Page 45

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Verdisys, Inc. Annual Report

Changes In / Disagreements with
Accountants on Accounting and Financial Disclosure

The Board of Directors of Verdisys, Inc. approved a change
in accounting firm as of September 25, 2003. Dismissing the prior accounting firm and
engaging the new accounting firm as of that date. Verdisys, Inc. elected to change from
the auditing accountant firm of:

|Cordovano and Harvey, P.C.  
|----------------------------
|201 Steele Street, Suite 300
|Denver, Colorado            

To the auditing accounting firm of:

|Malone & Bailey, PLLC     
|--------------------------
|2925 Briar Park, Suite 930
|Houston, Texas            

The company's management believes the new auditing
accounting firm will provide quality service in a timely manner.

The new accounting firm was not consulted prior to
engagement on any specific accounting matter either completed or proposed.

Verdisys, Inc. has never had nor anticipates having, nor
had during the two most recent fiscal years or any subsequent interim period preceding the
date of change any disagreements with accountants on matters of accounting, financial
disclosure, matter of accounting principles or practices, or auditing scope or procedure;
nor has any principal accountant, currently or in past recent years, resigned or declined
to stand for re-election.

The financial statements audited by the principal
accountant for the past two years do not contain an adverse opinion or disclaimer of
opinion or were modified as to uncertainty, audit scope or accounting principles.

Controls and Procedures

Verdisys, Inc. management, including the Principal
Executive Officer and Principal Financial Officer, have conducted an evaluation of the
effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule
13a-14(c) and 15d-14(c). This evaluation was conducted within 90 days prior to the filing
of this report. Based on that evaluation, the Principal Executive Officer and Principal
Financial Officer concluded that the disclosure controls and procedures are effective in
ensuring that all material information required to be filed in this annual report has been
made known to them in a timely fashion. There have been no significant changes in internal
controls or in other factors that could significantly affect internal controls subsequent
to the date the Principal Executive Officer and Principal Financial Officer completed
their evaluation.

The Audit Committee, along with management, has reinforced
internal controls and has implemented stringent policies regarding business engagements
and activities. These policies and procedures cover the areas of approval and authority
limits, segregation of duties, internal audit procedures, revenue recognition, contractual
commitments, documentation and customer acceptance, and staggered levels of internal
checks and balances. Operating documents, such as the Verdisys Accounting Operations
Manual, Employee Handbook and Approval Authorities have been
revised and adopted to describe such policies and train personnel. Since the earnings
restatement in November 2003, the Committee has increased the frequency of its meetings
and has directly reviewed and approved internal policies and procedures. They have also
been directly involved in recruiting key personnel, namely a new CFO, and meeting with the
Companys auditors.

Page 46

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Verdisys, Inc. Annual Report

Directors, Executive Officers, Promoters and Control
Persons

The names of our directors and executive officers and
certain additional information with respect to each of them are set forth below. The dates
set forth under Year First Became Director below indicate the year in which
our directors first became a director of our predecessor in interest, Verdisys, Inc.,
except for Mr. Landers, who was appointed to our board of directors on October 28, 2003.

|                          |     |                                 | Year First | 
|------------------------- | --- | ------------------------------- | ---------- | 
|                          |     |                                 | Became     | 
|Name                      | Age | Current Position                | Director   | 
|                          |     |                                 |            | 
|Ronald J. Robinson, Ph.D. | 57  | Chairman of the Board           | 2002       | 
|                          |     | Interim Chief Executive Officer |            | 
|John R. Block             | 69  | Director                        | 2000       | 
|Joseph J. Penbera, Ph.D.  | 56  | Director                        | 1999       | 
|Frederick R. Ruiz         | 60  | Director                        | 2000       | 
|O. James Woodward, III    | 68  | Director                        | 2000       | 
|David M. Adams            | 52  | President                       | N/A        | 
|                          |     | Chief Operating Officer         |            | 
|John OKeefe              | 55  | Executive Vice President        | N/A        | 
|                          |     | Chief Financial Officer         |            | 
|Andrew G. Wilson          | 48  | Vice President of Finance       | N/A        | 
|                          |     | Treasurer                       |            | 

Statements below pertaining to the time at which an
individual became one of our directors, executive officers or founders refers to the time
at which the respective individual achieved his respective status with our predecessor in
interest, Verdisys, Inc.

Ronald J. Robinson, Ph.D. was appointed as
our interim President and CEO in December 2003 and has served as Chairman of our Board
since January 2002. With the appointment of David Adams as President, Dr. Robinson now
serves only as Chairman of our Board and interim CEO. From 1996 to 2001, Dr. Robinson
served as president of Texaco Technologies, a subsidiary of Chevron Texaco. From 2001 to
2003, Dr. Robinson was head of the Petroleum Engineering Department at Texas A&M
University. Dr. Robinson currently serves as a director of Ensyn Group Inc. Dr. Robinson
received his Ph.D. in Petroleum Engineering from Texas A&M University, an M.S. in
Physics from Baylor University and a B.S. in Physics and Mathematics from the University
of Southern Colorado.

John R. Block has served as a director on our
Board since May 2000. He currently serves as President of the Food Distributors
International, an organization that represents the wholesale grocery and foodservice
distribution industry. Prior to that, Mr. Block served as Secretary of Agriculture for the
U.S. Department of Agriculture from 1981 to 1986. He currently serves as a director of
John Deere and Co. and Hormel Foods Corp.

Joseph J. Penbera, Ph.D. co-founded our
company and has served as a director on our Board since its inception in April 1999. Since
1985, he has been a Professor of Business at California State University, Fresno, where he
previously served as Dean of the Craig School of Business. Dr. Penbera was Senior
Economist at Westamerica Bank, Regency Bancorp and California Bank from 1999 to 2002. Dr.
Penbera is on the board of directors of Gottschalks, Inc., a publicly traded regional
department store and Rug Doctor, Inc. Dr. Penbera received his Ph.D. from American
University, his M.P.A. from Bernard Baruch School and his B.A. from Rutgers University.

Frederick R. Ruiz has served as a director on
our Board since its inception in April 1999. He co-founded and is Chairman of the Board of
Ruiz Food Products, Inc., a privately held frozen food company. Mr. Ruiz currently serves
as a director of McClatchy Newspapers, Inc. and Gottschalks, Inc., each of which are
publicly traded, the California Chamber of Commerce and the Hispanic College Fund.

Page 47

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Verdisys, Inc. Annual Report

O. James Woodward III has served as a
director on our Board since its inception in April 1999. From 1992 to 1999, Mr. Woodward
was an attorney in private practice in Fresno, California. From 1995 to 2000, he was
Chairman of MJ Construction Co., a Fresno, California based construction company, and from
2001 to 2003, he served as a consultant in Fresno, California. Mr. Woodward has been in
private practice as an attorney since 2003 and is currently Of Counsel with Baker, Manock
and Jensen. He currently serves on the board of directors of Gottschalks, Inc. Mr.
Woodward received his M.B.A. from Stanford Graduate School of Business and his J.D. from
the University of California, Berkeley Law School.

David M. Adams has served as our President
and COO since January 2004. From 1989 to 2001, Mr. Adams served as General Manager of
Baker Hughes, E&P Solutions, and from 2001 to 2004; he served as President and General
Manager of Subsea Mudlift Drilling Co., LLC, a subsidiaryof Hydril Co., LP. Mr.
Adams has a degree in petroleum engineering from the University of Texas and is a
registered Professional Engineer.

John OKeefe has served as our Executive
Vice President and CFO since January 2004. From 1999 to 2000, Mr. OKeefe served as
Vice President of Investor Relations of Santa Fe Snyder, and from 2000 to 2003, he served
as Executive Vice President and CFO of Ivanhoe Energy. Mr. OKeefe has a B.A. in
Business from the University of Portsmouth, is a Chartered Accountant and graduated from
the Program for Management Development (PMD) from the Harvard Graduate School of Business.
Andrew G. Wilson has served as our CFO since March 2003, and with the
appointment of John OKeefe as CFO in January 2004, he currently serves as Vice
President of Finance. From March 1999 to December 2001, Mr. Wilson served as Novare
Software, Inc.s Vice President-Business Development and Chief Operating Officer, and
from January 2002 to March 2003, he served as its Vice President-Consulting and Client
Services. Mr. Wilson received his B.A. in Economics from University of Manchester,
England. He is an English Chartered Accountant and passed the American Institute of
Certified Public Accountants entry examinations.

All Directors will serve in such capacity until the next
annual meeting of our shareholders and until their successors have been elected and
qualified. The officers serve at the discretion of the company's Directors. There are no
familial relationships among the our officers and directors, nor are there any
arrangements or understanding between any of our directors or officers or any other person
pursuant to which any officer or director was or is to be selected as an officer or
director.

Verdisys, Inc. has group life, health, hospitalization,
medical reimbursement or relocation plans in effect. Further, Verdisys, Inc. has a 401K
savings plan in effect and agreements which provide compensation on the event of
termination of employment or change in control of us.

Verdisys does pay members of our board of Directors fees
for attendance at board and other committee meetings in the form of cash compensation or
similar remuneration, and reimburses them for any out-of-pocket expenses incurred by them
in connection with our business.

Currently, each independent director receives compensation
of $1,000 per month with an additional $1,000 per month for chairing a committee with the
exception of the audit committee chair who receives an additional $2,000 per month.
Meeting fees are paid at a rate of $1,000 per day for regularly scheduled Board meetings.
All independent directors receive options to purchase 12,000 shares per year.

The board of directors of Verdisys, Inc. has determined
that for the purpose of and pursuant to the instructions of item 401(e) of regulation S-B
titled Audit Committee Financial Expert,Joseph J. Penbera, Ph.D possesses the
attributes of an Audit committee financial expert. Dr. Penbera is a board member of
Verdisys, Inc. and is the Chairman of the Audit Committee. Dr. Penbera is independent as
defined by item 401(e)(ii) of regulation S-B. He receives compensation for board service
only and is not otherwise an affiliated person.

No non-compete or non-disclosure agreements exist between
the management of Verdisys, Inc. and any prior or current employer.

All key personnel are employees or under contracts with of
Verdisys, Inc.

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Verdisys, Inc. Annual Report

The directors of Verdisys, Inc. are aware of no petitions
or receivership actions having been filed or court appointed as to the business
activities, officers, directors, or key personnel of Verdisys, Inc. Verdisys, Inc. has
not, nor proposes to do so in the future, make loans to any of its officers, directors,
key personnel, 10% stockholders, relatives thereof, or controllable entities. No loans of
any kind are currently contemplated between Verdisys, Inc. and any officer or director.

None of Verdisys, Inc.'s officers, directors, key
personnel, or 10% stockholders has guaranteed or co-signed any bank debt, obligation, or
any other indebtedness pertaining to Verdisys, Inc.

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Securities Exchange Act of 1934
requires the companys directors and officers, and persons who own more than
ten-percent (10%) of the companys common stock, to file with the Securities and
Exchange Commission reports of ownership on Form 3 and reports of change in ownership on
Forms 4 and 5. Such officers, directors and ten-percent stockholders are also required to
furnish the company with copies of all Section 16(a) reports they file. Based solely on
its review of the copies of such forms received by the company and on written
representations from certain reporting persons, the company believes that all Section
16(a) reports applicable to its officers, directors and ten-percent stockholders with
respect to the fiscal year ended December 31, 2003 were filed.

Code of Ethics

Verdisys, Inc. has adopted a code of ethics that applies to
its senior officers such as the principal executive officer, principal financial officer,
principal accounting officer and persons performing similar functions. This code of ethics
is included as an exhibit to this annual report

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Verdisys, Inc. Annual Report

Executive Compensation

Compensation of Executive Officers

Information about two of our executive officers, Dr.
Robinson, Chairman of our Board and interim CEO, and Mr. Wilson, Vice President of Finance
and Treasurer may be found above under the caption entitled Directors, Executive
Officers and Control Persons as those officers remain our executive officers. David
Mauz served as our COO from June 2003 until January 2004, when David Adams became our COO.
Mr. Wilson served as CFO from April 2003 to January 2004 when Mr. OKeefe became CFO.
The information below includes information about Mr. Mauz because he acted as executive
officer during part of 2003.

Compensation Summary

The following table provides certain summary information
concerning compensation paid or accrued during the last year to our Chairman of the Board
and current interim CEO, our former President and CEO, and other officers who had
compensation in excess of $100,000 during the last fiscal year (the Named Executive
Officers):

|                       |      |         |                         |        | SUMMARY
    COMPENSATION TABLE |                 |            |             
|---------------------- | ---- | ------- | ----------------------- | ------ | ------------------------------ | --------------- | ---------- | ------------
|                       |      |         | Annual
    Compensation |        | Award(s)                       | Payouts         |           
|                       |      |         |                         |        |                                |                 |           
|                       |      |         |                         |        |                                |                 | Restricted | Securities  
|                       |      |         |                         |        |                                | Other Annual    | Stock      | Underlying  
|                       |      | Salary  |                         |        | Bonus                          | Compensation(1) | Award(s)   | Options/SARs
|Position               | Year | ($)     |                         |        | ($)                            | ($)             | ($)        | (#)         
|                       |      |         |                         |        |                                |                 |            |             
|Ronald J. Robinson     | 2003 | 70,000  |                         |        |                                |                 | 700,000    |             
|Chairman of the Board  | 2002 |         | 0                       |        |                                |                 |            | 50,000      
|Interim CEO            | 2001 |         | 0                       |        |                                |                 |            | 200,000     
|Andrew G. Wilson       | 2003 | 83,500  |                         | 10,000 |                                |                 | 780,000    |             
|Vice President Finance | 2002 |         | 0                       |        |                                |                 |            |             
|                       | 2001 |         | 0                       |        |                                |                 |            |             
|David M. Mauz          | 2003 | 139,667 |                         | 10,000 |                                |                 |            |             
|Former COO             | 2002 | 40,608  |                         |        |                                |                 | 1,000,000  |             
|                       | 2001 | 50,765  |                         |        |                                |                 | 400,000    |             

(1)During
the periods indicated, perquisites for each individual named in the Summary Compensation
Table aggregated less than 10% of the total annual salary and bonus reported for such
individual in the Summary Compensation Table.

Accordingly, no such amounts are included in the Summary
Compensation Table.

|                   | OPTION GRANTS IN
    2003 |  |            |  |          |     
|------------------ | ------------------------- |  | ---------- |  | -------- | ----
|                   |                           |  | Percent    |  |          |     
|                   | Number of                 |  | of Total   |  |          |     
|                   | Securities                |  | Granted to |  |          |     
|                   | Underlying                |  | Employees  |  |          |     
|                   | Options                   |  | in Fiscal  |  | Exercise |     
|Name               | Granted                   |  | Year       |  | Price    |     
|                   |                           |  |            |  |          |     
|Ronald J. Robinson | 200,000                   |  | 29%        |  | $        | 0.10
|                   | 500,000                   |  | 71%        |  | $        | 9.55
|Andrew G. Wilson   | 780,000                   |  | 100%       |  | $        | 0.10
|David C. Mauz      | 0                         |  | N/A        |  |          | N/A 

The preceding table provides certain information with
respect to options granted to our Named Executive Officers named in the Summary
Compensation Table during the fiscal year ended December 31, 2003 under our stock option
plan:

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Verdisys, Inc. Annual Report

|                   | AGGREGATED
    OPTION EXERCISES IN 2003    |          |                           |             |                      |              
|------------------ | ------------------------------------------ | -------- | ------------------------- | ----------- | -------------------- | -------------
|                   | AND OPTION
    VALUES AT DECEMBER 31, 2003 |          |                           |             |                      |              
|                   |                                            |          | Number of Securities      |             | Value of Unexercised |              
|                   |                                            |          | Underlying Unexercised    |             | In-The-Money         |              
|                   |                                            |          | Options Held at           |             | Options Held at      |              
|                   | Shares                                     |          | December 31, 2003         |             | December 31, 2003    |              
|                   |                                            |          |                           |             |                      |              
|                   | Acquired on                                | Value    |                           |             |                      |              
|Name               | Exercise                                   | Realized | Exercisable Unexercisable | Exercisable |                      | Unexercisable
|                   |                                            |          |                           |             |                      |              
|Ronald J. Robinson | 300,000                                    |          | 150,000 550,000           | $           | 784,000              |              
|Andrew G. Wilson   | 25,208                                     |          | 145,833 598,959           | $           | 1,143,330            |              
|David C. Mauz      | 444,222                                    |          | 203,778 752,000           | $           | 1,597,620            |              

Note:

Value of Unexercised In-The-Money Options Held at December
31, 2003 computed based on the difference between aggregate fair market value and
aggregate exercise price. The fair market value of our common stock on December 31, 2003
was $7.94, based on the closing price on the OTC Bulletin Board on December 31, 2003.

The preceding table sets for the information
concerning option exercises and the value of unexercised options held by our Named
Executive Officers named in the Summary Compensation Table as of the end of the last
fiscal year.

EQUITY COMPENSATION PLAN INFORMATION

The following table provides information as of December 31,
2003 regarding compensation plans (including individual compensation arrangements) under
which equity securities are authorized for issuance:

|                                                                                                                          |                      |  |                      |      |                        | Number of securities | 
|------------------------------------------------------------------------------------------------------------------------- | -------------------- |  | -------------------- | ---- | ---------------------- | -------------------- | 
|                                                                                                                          | Number of securities |  |                      |      |                        | available for future | 
|                                                                                                                          | to be issued         |  | Weighted-average     |      | issuance under equity  |                     
|                                                                                                                          | upon exercise of     |  | exercise price of    |      | compensation plans     |                     
|                                                                                                                          | outstanding options, |  | outstanding options, |      | (excluding securities  |                     
|Plan Category                                                                                                             | warrants and rights  |  | warrants and rights  |      | shown in first column) |                     
|                                                                                                                          |                      |  |                      |      |                        |                     
|Equity compensation plans                                                                                                 |                      |  |                      |      |                        |                      | 
|approved by shareholders(1)                                                                                               |                      |  |                      |      |                        |                      | 
|Equity compensation plans                                                                                                 | 8,000,000            |  | $                    | 0.10 |                        | 3,887,624            | 
|not approved by shareholders                                                                                              |                      |  |                      |      |                        |                      | 
|Total                                                                                                                     | 8,000,000            |  | $                    | 0.10 |                        | 3,887,624            | 
|(1)Consists of shares
    of our common stock issued or remaining available for issuance under our stock option
    plan. |                     

Employments Agreements

Ronald J. Robinson

In July 2003, we entered into an advisory agreement with
Dr. Robinson, and we amended the agreement in December 2003. Pursuant to the agreement, as
amended, Dr. Robinson agreed to serve as our interim President and CEO until a suitable
replacement is found. For his services as interim President and CEO, he received an option
to purchase 500,000 shares of our common stock pursuant to a 12 month vesting schedule
(except with respect to 50,000 shares that were tied to certain revenue milestones for the
fourth quarter of 2003 and which milestones were not met), and he receives monthly
compensation of $20,000 and a monthly office allowance of $2,500. Dr. Robinson also serves
as Chairman of the Board. In January 2004, David Adams was selected to serve as President
thus terminating Dr. Robinsons service as interim President.

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Verdisys, Inc. Annual Report

David M. Adams

In January 2004, we entered into an employment agreement
with David Adams. The term of the agreement is for one year, and it may be renewed at the
pleasure of both parties. Pursuant to the agreement, Mr. Adams serves as our President and
COO in exchange for a base salary of $185,000 per year. Mr. Adams also received an option
to purchase 150,000 shares of common stock to vest quarterly over the initial term of the
employment agreement. Mr. Adams also received a signing bonus in the amount of $50,000 on
the effective date of the employment agreement, and is also entitled to participate in an
annual incentive compensation program of the company with a potential bonus being up to
fifty percent of his base salary.

John OKeefe

In January 2004, we entered into an employment agreement
with John OKeefe. The term of the agreement is for one year, and it may be renewed
at the pleasure of both parties. Pursuant to the agreement, Mr. OKeefe serves in the
position of Executive Vice President and Chief Financial Officer in exchange for a base
annual salary of $175,000 for the first twelve months of his employment. Mr. OKeefe
also received an option to purchase 80,000 shares of common stock to vest quarterly over
the initial term of the employment agreement. Mr., OKeefe received a one time
payment of $40,000 as a sign-on bonus and will be included in the companys Executive
Compensation Program whereby senior management are eligible to receive annual bonuses of
up to 50% of their base compensation.

Andrew G. Wilson

In June 2003, we entered into an employment agreement with
Andrew Wilson, and we amended the agreement in October 2003. The term of the agreement is
for three years, and it may be renewed at the pleasure of both parties. Pursuant to the
agreement, Mr. Wilson served as our CFO in exchange for a base salary of $150,000 per year
for the first 12 months, $180,000 per year for the second 12 months, and $210,000 per year
for the third 12 months. Mr. Wilson also received an option to purchase 500,000 shares of
common stock scheduled to vest over a 60 month period. In January 2004, after electing not
to relocate to Houston, Texas, Mr. Wilson accepted appointment as Vice President of
Finance and Treasurer.

David C. Mauz

In June 2003, we entered into an employment agreement with
David Mauz, and we amended the agreement in October 2003. The term of the agreement is for
three years, and it may be renewed at the pleasure of both parties. Mr. Mauz served as our
COO in exchange for a base salary of $140,000 per year for the first 12 months, $170,000
per year for the second 12 months, and $200,000 per year for the third 12 months. Mr. Mauz
also received an option to purchase 1,000,000 shares of common stock scheduled to vest
over a 60 month period. In January 2004, with the appointment of David Adams as President
and COO, Mr. Mauz service in that capacity was terminated, and he assumed the
position of Manager, Satellite Operations. Mr. Mauz has since left the Company.

Holders

As of March 31, 2004 Verdisys, Inc. had 30,792,036 shares
of common stock issued and outstanding and held by approximately 763 shareholders.

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Verdisys, Inc. Annual Report

Security Ownership of Certain Beneficial Owners and
Management

The following table presents certain information regarding
the beneficial ownership of our common stock as of March 31, 2004 by (i) each person who
is known by us to own beneficially more than 5% of the outstanding shares of our common
stock, (ii) each of our directors, (iii) our Named Executive Officers, and (iv) all
directors and executive officers as a group. Each of the persons listed in the table has
sole voting and investment power with respect to the shares listed.

Common Stock

|                                                  |  | Amount and Nature                             |  |            |  | Percentage   | 
|------------------------------------------------- |  | --------------------------------------------- |  | ---------- |  | ------------ | 
|Name and Address of Beneficial Owner              |  | of Beneficial Owner                           |  | Acquirable |  | of Class (1) | 
|                                                  |  |                                               |  |            |  |              | 
|Berg McAfee Companies                             |  | 8,983,671                                     |  | 808,333    |  | 27.4%        | 
|100600 N. De Anza Blvd., #250                     |  |                                               |  |            |  |              | 
|Cupertino, California 95014                       |  |                                               |  |            |  |              | 
|Ronald J. Robinson                                |  | 300,000                                       |  | 366,667    |  | 2.0%         | 
|Chairman and CEO                                  |  |                                               |  |            |  |              | 
|David Adams                                       |  | 0                                             |  | 37,500     |  | <1.0%        | 
|President and COO                                 |  |                                               |  |            |  |              | 
|John OKeefe                                      |  | 0                                             |  | 20,000     |  | <1.0%        | 
|Exec.VP & CFO                                     |  |                                               |  |            |  |              | 
|Andrew Wilson                                     |  | 25,208                                        |  | 507,396    |  | 1.6%         | 
|V.P. Finance, Treasurer and Secretary             |  |                                               |  |            |  |              | 
|John R. Block                                     |  | 90,000                                        |  | 70,000     |  | <1.0%        | 
|Director                                          |  |                                               |  |            |  |              | 
|Joseph Penbera                                    |  | 863,952                                       |  | 70,000     |  | 2.8%         | 
|Director                                          |  |                                               |  |            |  |              | 
|Fred Ruiz                                         |  | 265,334                                       |  | 70,000     |  | 1.0%         | 
|Director                                          |  |                                               |  |            |  |              | 
|O. James Woodward III                             |  | 122,000                                       |  | 70,000     |  | <1.0%        | 
|Director                                          |  |                                               |  |            |  |              | 
|Total Shares of 5% or more Beneficial Ownership   |  | 8,983,165                                     |  | 808,333    |  | 27.4%        | 
|Total Shares of Officers and Directors as a group |  | 1,666,494                                     |  | 1,211,563  |  | 8.8%         | 
|Total Shares Issued and Outstanding:              |  | 30,792,036, if all exercised per
    note (1) | 
|32,811,932                                        |  |                                               |  |            |  |              | 

Notes:

(1) Each beneficial owners percentage ownership
assumes the exercise or conversion of all options, warrants and other convertible
securities held by such person and that are exercisable or convertible within 60 days
after March 31, 2004.

The following lists such beneficial
owners and the amount of shares of common stock, of the number of shares shown in the
preceding table, to which such beneficial owners have the right to acquire within the
stated 60 day period:

|Name of Beneficial Owner | Number of Shares Acquirable | 
|------------------------ | --------------------------- | 
|                         |                             | 
|Berg McAfee Companies    | 808,333                     | 
|Ronald J. Robinson       | 366,667                     | 
|David M. Adams           | 37,500                      | 
|John OKeefe             | 20,000                      | 
|Andrew G. Wilson         | 507,396                     | 
|John R. Block            | 70,000                      | 
|Joseph Penbera           | 70,000                      | 
|Fred Ruiz                | 70,000                      | 
|O. James Woodward III    | 70,000                      | 

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Verdisys, Inc. Annual Report

Certain Relationships and Related Transactions

Energy 2000 and Natural Gas Systems

In April 2003, Verdisys signed a drilling service contract
with Energy 2000 NGC, Inc. of Louisiana ("Energy 2000"), whereby Energy 2000
would have paid Verdisys a minimum of $1,800,000 for lateral drilling of 45 wells. This
contract was for a fixed amount due to Verdisys, dependent upon the number of wells
serviced and offshoot lateral bores drilled. In addition, Verdisys would receive an 80
percent interest in the net operating income after payback from these properties and also
be reimbursed for 20 percent of its field costs. In September, 2003 Verdisys entered into
another contract with Energy 2000 for an additional 57 wells with terms similar to the
original contract. These contracts have been suspended for lack of payment.

In September 2003, Verdisys signed a drilling service
contract with Natural Gas Systems, Inc. (NGS), whereby NGS would have paid
Verdisys a minimum of $7,800,000 for lateral drilling of 120 wells. This contract was for
a fixed amount with the total price dependent upon the number of wells serviced and
offshoot lateral bores drilled. In addition, Verdisys would receive a 70 percent interest
in the net operating income after payback from these properties. This contract has been
renegotiated in February 2004 for a reduced number of wells but with an initial four well
commitment.

Energy 2000 is a subsidiary of Berg McAfee Energy, LLC,
which is a wholly owned subsidiary of Berg McAfee Companies. Natural Gas Systems is an
independent company with substantial shareholdings owned by Eric McAfee, a 50 per cent
owner of Berg McAfee Companies and former Director of Verdisys, and Berg McAfee Companies.
They are beneficially owned 80% and 23% respectively by Berg McAfee or Eric McAfee
personally.

Verdisys billed $666,250 and $153,960 to Energy 2000 and
NGS, respectively, for services performed in 2003. Verdisys received $397,500 and
$130,000, respectively. However, for Energy 2000 Verdisys has inadequate documentation to
substantiate whether some of the services were performed. For Energy 2000, Verdisys was
able to substantiate $328,750 of revenue leaving $68,750 in deferred revenue. Because of
the uncertainty of collection, all services not collected are deferred. As of December 31,
2003, deferred revenues total $92,710.

Lateral drilling services for these two customers ceased in
December 2003 because of a change in Verdisys management, and are expected to resume for
NGS in the second quarter of 2004.

Software Purchase

In April 2003, Verdisys issued 2,000,000 shares of common
stock for what management believed was satellite communications management software
pursuant to an asset purchase agreement with a related party. Management in place as of
August 2003 maintained the software was not useful and impaired it as of June 30, 2003. In
early 2004, following an internal investigation, new management determined that the
agreement is likely subject to rescission. Verdisys is evaluating its options to rescind
the agreement and cancel the shares issued. The majority shareholder of Verdisys and
former director, who was also a principal to the counterparty in the transaction, acquired
11.5% of the 2,000,000 shares.

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Verdisys, Inc. Annual Report

Additional Transactions

In December 2003, Verdisys granted 500,000 options to
purchase Verdisys common stock to the chairman and interim CEO. The options expire in 10
years, have an exercise price of $9.55 based upon price at date of grant. 50,000 vested
immediately, 50,000 were performance options and did not vest, and the remaining 400,000
options vest evenly over 12 months in 2004.

Verdisys had a consulting agreement with its current
majority stockholder for $10,000 per month through April 30, 2005, with $120,000 due
during 2004 and $40,000 in 2005. $0 was accrued and unpaid under this agreement as of
December 31, 2003. This agreement was cancelled with two months notice in February, 2004
effective upon the resignation of the director.

In April 2002, Verdisys entered into a three-year
employment agreement with its then CEO. The base salary under the agreement was $250,000
per year with quarterly performance bonuses and 2,000,000 stock options granted in 2002
and exercisable at $.10 per share and vesting quarterly over a two-year period. $400,000
and $175,000 in expense was incurred in 2002 relating to the vested portion of these
options and unpaid salary, respectively. In November 2002, this CEO resigned. In 2003
Verdisys agreed to pay accrued salary of $204,320 in cash of which $161,306 was paid as of
December 31, 2003 and the balance is accrued as of December 31, 2003.

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Verdisys, Inc. Annual Report

Exhibits and Reports on Form 8-K

Reports on Form 8-K

During the Fiscal Year ending December 31, 2003 and through
the date of the filing of this Annual Report on Form 10-KSB; Verdisys, Inc. had filed the
following Reports on Form 8-K with the Securities and Exchange Commission on the dates
indicated:

|March 26, 2004     | re: Press Release - New Agreements for Lateral
    Drilling                     
|------------------ | --------------------------------------------------------------------------------
|March 16, 2004     | re: Financial Statements  Expectation
    for the restatement of Second Quarter
|                   | and Third Quarter 2003 Financial Statements of
    Verdisys, Inc.               
|March 15, 2004     | re: Resignation of Registrants Directors
     Carl Landers                    
|March 10, 2004     | re: Resignation of Registrants Directors
     Eric A. McAfee                  
|March 2, 2004      | re: Licensing Agreement, Second Amendment
     Carl Landers                    
|January 6, 2004    | re: Press Release - Revised revenue
    projections                             
|December 12, 2003  | re: Appointment of interim President and CEO
     Dr. Ron Robinson             
|December 4, 2003   | re: Press Release  Announcing results
    for Quarter ending September 2003    
|November 17, 2003  | re: Press Release  Expectation of Record
    Profits and Profitability 3Q2003  
|November 17, 2003  | re: Regulation FD Disclosure  Slide
    Presentation to investors and analysts 
|November 12, 2003  | re: Regulation FD Disclosure  Slide
    Presentation to investors and analysts 
|October 27, 2003   | re: Other Events  Sale of Common Stock                                         
|October 6, 2003    | re: Licensing Agreement, as amended 
    Carl Landers                          
|October 1, 2003    | re: Change in Registrants Certifying
    Accountant                            
|September 29, 2003 | re: Change in Control of Registrant, as
    amended                             
|July 18, 2003      | re: Change in Control of Registrant                                             
|May 1, 2003        | re: Announcement of Definitive Agreement for
    Merger                         

Exhibits

Index of Exhibits

Verdisys, Inc. includes the following exhibits:

|Number | Description                                                               
|------ | --------------------------------------------------------------------------
|       |                                                                           
|3.1    | Restated Articles of Incorporation dated July
    15, 2003                
|3.2    | Bylaws, as amended September 25, 2003                                     
|10.1   | Employment Agreement  John OKeefe,
    dated January 6, 2004            
|10.2   | Employment Agreement  David Adams, dated
    December 31, 2003           
|10.3   | Advisor Agreement  Dr. Ron Robinson,
    amended December 11, 2003       
|10.12  | Services Contract, Esperada Energy Partners,
    L.L.C., dated March 2004 
|10.13  | Services Contract, Maxim Energy, Inc., dated
    March 2004               
|10.14  | Services Contract, Natural Gas Systems, dated
    January 2004            
|10.16  | Services Contract, Amvest Osage, Inc.; dated
    January 2004             
|14.1   | Code of Ethics, dated April 2004                                          
|31.1   | Certification of Principal Executive Officer
    pursuant to Section 302  
|31.2   | Certification of Principal Accounting Officer
    pursuant to Section 302 
|32.1   | Certification of Principal Executive Officer
    pursuant to Section 1350 
|32.2   | Certification of Principal Accounting Officer
    pursuant to Section 1350

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Verdisys, Inc. Annual Report

Verdisys, Inc. includes, by reference, the following
exhibits:

|2.1     | Agreement and Plan of Reorganization, dated
    April 24, 2003, as amended June 30, 2003;  
|------- | -------------------------------------------------------------------------------------------
|        | Filed July 18, 2003 with the SEC, Report on
    Form 8-K                                   
|10.4    | Employment Agreement  Andrew Wilson,
    dated June 2003;                                 
|        | Filed November 20, 2003 with the SEC, Form
    10-QSB, as amended                          
|10.5    | License Agreement  Carl W. Landers,
    dated April 24, 2003;                             
|        | Filed October 6, 2003 with the SEC, Report on
    Form 8-K                                 
|10.5.1  | Amendment to License Agreement  Carl W.
    Landers, dated September 4, 2003;             
|        | Filed October 6, 2003 with the SEC, Report on
    Form 8-K                                 
|10.5.2  | Second Amendment to License Agreement 
    Carl W. Landers, dated February 28, 2004;      
|        | Filed February 28, 2004 with the SEC, Report
    on Form 8-K                               
|10.6    | Technology Report, Landers
    Technology, dated October 13, 2003;                       
|        | Filed November 20, 2003 with the SEC, Form
    10-QSB, as amended                          
|10.7    | Subscription Agreement, Gryphon Master Fund,
    L.P., dated October 23, 2003              
|        | and Registration Rights Agreement dated
    October 24, 2003;                              
|        | Filed October 27, 2003 with the SEC, Report on
    Form 8-K                                
|10.8    | Form of Registration Rights Agreement, re:
    Private Placement Offering July/August 2003;
|        | Filed December 3, 2003 with the SEC, Form
    10-QSB, as amended                           
|10.9    | Alternative Form of Registration Rights
    Agreement, re: Offering July/August 2003;      
|        | Filed December 3, 2003 with the SEC, Form
    10-QSB, as amended                           
|10.10   | Placement Agency Agreement, Stonegate
    Securities, Inc., dated August 26, 2003;         
|        | Filed November 20, 2003 with the SEC, Form
    10-QSB, as amended                          
|10.11   | Independent Contractor Agreement, Terronne
    Petroleum Corporation, dated August 1, 2003;
|        | Filed November 20, 2003 with the SEC, Form
    10-QSB, as amended                          
|10.15   | Contract  Natural Gas Systems,
    Delhi Field, dated September 22, 2003;               
|        | Filed November 20, 2003 with the SEC, Form
    10-QSB, as amended                          
|10.17   | Acknowledge of amounts owed at September 30,
    2003,                                     
|        | re: Edge Capital Group contract dated June 16,
    2003;                                   
|        | Filed November 20, 2003 with the SEC, Form
    10-QSB, as amended                          
|10.18   | Contract  Edge Capital Group,
    Franklin Field, dated September 27, 2003;             
|        | Filed November 20, 2003 with the SEC, Form
    10-QSB, as amended                          
|10.19   | Contract  Edge Capital Group,
    Monroe Field, dated June 16, 2003;                    
|        | Filed August 20, 2003 with the SEC, Form
    10-QSB, as amended                            
|10.19.1 | Addendum to Contract, Edge Capital Group,
    Monroe Field, dated November 19, 2003      
|        | Filed November 20, 2003 with the SEC, Form
    10-QSB, as amended                          
|10.20   | Contract - Noble Energy, re: Satellite
    Services, dated September 17, 2003;             
|        | Filed November 20, 2003 with the SEC, Form
    10-QSB, as amended                          
|10.21   | Contract  Apache Corp., re: Satellite
    Services, dated September 11, 2002;             
|        | Filed November 20, 2003 with the SEC, Form
    10-QSB, as amended                          
|10.22   | Contract  Energy 2000 NGC, Monroe
    Field, dated April 30, 2000;                      
|        | Filed August 20, 2003 with the SEC, Form
    10-QSB, as amended                            
|10.23   | Verdisys, Inc. 2003 Stock Option Plan;                                                     
|        | Filed November 20, 2003 with the SEC, Form
    10-QSB, as amended                          

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Verdisys, Inc. Annual Report

The following lists, by exhibit number, all exhibits
included or included by reference, to this annual report for the fiscal year ending
December 31, 2003:

|Number  | Description                                                                               
|------- | ------------------------------------------------------------------------------------------
|        |                                                                                           
|2.1     | Agreement and Plan of Reorganization, dated
    April 24, 2003, as amended June 30, 2003  
|3.1     | Restated Articles of Incorporation dated July
    15, 2003                                
|3.2     | Bylaws, as amended September 25, 2003                                                     
|10.1    | Employment Agreement  John OKeefe,
    dated January 6, 2004                            
|10.2    | Employment Agreement  David Adams, dated
    December 31, 2003                           
|10.3    | Advisor Agreement  Dr. Ron Robinson,
    amended December 11, 2003                       
|10.4    | Employment Agreement  Andrew Wilson,
    dated June 2003                                 
|10.5    | License Agreement  Carl W. Landers,
    dated April 24, 2003                             
|10.5.1  | Amendment to License Agreement  Carl W.
    Landers, dated September 4, 2003             
|10.5.2  | Second Amendment to License Agreement 
    Carl W. Landers, dated February 28, 2004      
|10.6    | Technology Report, Landers
    Technology, dated October 13, 2003                       
|10.7    | Subscription Agreement, Gryphon Master Fund,
    L.P., dated October 23, 2003             
|        | and Registration Rights Agreement dated
    October 24, 2003                              
|10.8    | Form of Registration Rights Agreement, re:
    Private Placement Offering July/August 2003
|10.9    | Alternative Form of Registration Rights
    Agreement, re: Offering July/August 2003      
|10.10   | Placement Agency Agreement, Stonegate
    Securities, Inc., dated August 26, 2003         
|10.11   | Independent Contractor Agreement, Terronne
    Petroleum Corporation, dated August 1, 2003
|10.12   | Master Services Contract, Esperada Energy
    Partners, L.L.C., dated March 2004          
|10.13   | Services Contract, Maxim Energy, Inc., dated
    March 2004                               
|10.14   | Services Contract, Natural Gas Systems, dated
    January 2004                            
|10.15   | Contract  Natural Gas Systems,
    Delhi Field, dated September 22, 2003               
|10.16   | Services Contract, Amvest Osage, Inc.; dated
    January 2004                             
|10.17   | Acknowledge of amounts owed at September 30,
    2003,                                    
|        | re: Edge Capital Group contract dated June 16,
    2003                                   
|10.18   | Contract  Edge Capital Group,
    Franklin Field, dated September 27, 2003             
|10.19   | Contract  Edge Capital Group,
    Monroe Field, dated June 16, 2003                    
|10.19.1 | Addendum to Contract, Edge Capital Group,
    Monroe Field, dated November 19, 2003     
|10.20   | Contract - Noble Energy, re: Satellite
    Services, dated September 17, 2002             
|10.21   | Contract  Apache Corp., re: Satellite
    Services, dated September 11, 2002             
|10.22   | Contract  Energy 2000 NGC, Monroe
    Field, dated April 30, 2000                      
|10.23   | Verdisys, Inc. 2003 Stock Option Plan                                                     
|14.1    | Code of Ethics, dated April 2004                                                          
|31.1    | Certification of Principal Executive Officer
    pursuant to Section 302                  
|31.2    | Certification of Principal Accounting Officer
    pursuant to Section 302                 
|32.1    | Certification of Principal Executive Officer
    pursuant to Section 1350                 
|32.2    | Certification of Principal Accounting Officer
    pursuant to Section 1350                

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Verdisys, Inc. Annual Report

Principal Accountants Fees and Services

Audit Fees

The aggregate fees billed for each of the last two fiscal
years for professional services rendered by the principal accountant for the audit of the
registrants annual financial statements and for services provided by the accountant
in connection with statutory and regulatory filings or engagements for the last two fiscal
years were: $15,000 for Fiscal Year 2002 and $58,000 for Fiscal Year 2003.

Audit-Related Fees

No aggregate fees were billed in each of the last two
fiscal years for assurance and related services by the principal accountant that are
reasonably related to the performance of the audit or review of the registrants
financial statements, and are not reported under the prior caption Audit Fees.

Tax Fees

No aggregate fees were billed in each of the last two
fiscal years for professional services rendered by the principal accountant for tax
compliance, tax advice, and tax planning.

All Other Fees

No other services were provided, nor aggregate fees billed,
other then such services or fees which have been previously disclosed herein.

The registrants Audit Committee, or officers
performing such functions of the Audit Committee, has approved the principal
accounts performance of services for the audit of the registrants annual
financial statements; and review of financial statements or services that are normally
provided by the accountant in connection with statutory and regulatory filings or
engagements for the fiscal year ending December 31, 2003. Audit-related fees, tax fees,
and all other fees, if any, were approved by the Audit Committee or officers performing
such functions of the Audit Committee.

The percentage of hours expended on the principal
accountants engagement to audit the registrants financial statements for the
most recent fiscal year that were attributed to work preformed by persons other than the
principal accountants full-time, permanent employees was less than 50 percent.

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Verdisys, Inc. Annual Report

Signatures

In accordance with Section 13 or 15(d) of
the Exchange Act, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

|      | Verdisys, Inc.             
|----- | ---------------------------
|      |                            
|      | (Registrant)               
|      |                            
|By:   | /s/ Dr. Ron Robinson, CEO  
|      |                            
|      | Dr. Ron Robinson           
|      | Chief Executive Officer    
|      | Principal Executive Officer
|Date: | April 15, 2004             
|      |                            

In accordance with the Exchange Act, this
report has been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.

|By:   | /s/ Dr. Ron Robinson, CEO    | By:   | /s/ David M. Adams, COO        
|----- | ---------------------------- | ----- | -------------------------------
|      |                              |       |                                
|      | Dr. Ron Robinson             |       | David M. Adams                 
|      | Chief Executive Officer      |       | Chief Operating Officer        
|      | Principal Executive Officer  |       | President                      
|Date: | April 15, 2004               | Date: | April 15, 2004                 
|      |                              |       |                                
|      |                              |       |                                
|By:   | /s/ John OKeefe, CFO        | By:   | /s/ Andrew G. Wilson, Treasurer
|      |                              |       |                                
|      | John OKeefe                 |       | Andrew G. Wilson               
|      | Chief Financial Officer      |       | Vice President of Finance      
|      | Principal Accounting Officer |       | Treasurer and Secretary        
|Date: | April 15, 2004               | Date: | April 15, 2004                 
|      |                              |       |                                
|      |                              |       |                                
|By:   | /s/ John R. Block            | By:   | /s/ Joseph J. Penbera, Ph.D.   
|      |                              |       |                                
|      | John R. Block                |       | Joseph J. Penbera, Ph.D.       
|      | Director                     |       | Director                       
|Date: | April 15, 2004               | Date: | April 15, 2004                 
|      |                              |       |                                
|      |                              |       |                                
|By:   | /s/ Frederick R. Ruiz        | By:   | /s/ O. James Woodward III      
|      |                              |       |                                
|      | Frederick R. Ruiz            |       | O. James Woodward III          
|      | Director                     |       | Director                       
|Date: | April 15, 2004               | Date: | April 15, 2004                 
|      |                              |       |                                

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