**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D. C. 20549**









**Form
        10-KSB/A**









**x**
            **ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934**




**For
      the fiscal year ended December 31, 2004**




** ̈**
            **TRANSITIONAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934**




**For
      the transition period from** **** **to** **** ****




**Commission
      file number: 333-64122**









**V** **ERDISYS** **,
      I** **NC** **.**


**(Name
      of small business issuer in its charter)**







**California**
            **22-3755993****(State
                of incorporation)**
            **(IRS
                Employer**
              **Identification
                Number)**




**14550
      Torrey Chase Blvd, Suite 330**


**Houston,
      Texas 77014**


**(Address
      of principal executive offices)**




**(281)
      453-2888**


**(Telephone
      number)**







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




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







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: $1,453,344




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 February 27, 2005 is $9,050,540.




The
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of December 31, 2004:




Common
      Stock: 33,443,691 shares




1




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







**Explanatory
      Note**





Verdisys,
      Inc. (now known as Blast Energy Services, Inc.) is filing this amended Annual
      Report on Form 10-KSB/A for the year ended December 31, 2004 (“Amended Annual
      Report”) to amend its Annual Report on Form 10-KSB for the year ended December
      31, 2004 (the “Original
      Annual
      Report”),
      which was filed with the Securities and Exchange Commission on March 30,
      2005.





The
        Amended Annual Report amends the disclosure under
        the
        Part I, Item 1 “Financial Statements,” Part I, Item 2 “Management's Discussion
        and Analysis and Plan of Operation - Forward Looking Statements,” and Part II,
        Item 8a “Controls and Procedures.” Except for these items, no other information
        in the original Report is amended hereby.





2





**Tableof
      Contents**




**PART
                I****DESCRIPTION
                OF BUSINESS**
            **3**FORWARD-LOOKINGSTATEMENTS
            3BUSINESSDEVELOPMENT
            3BUSINESSOFISSUER
            3INDUSTRY
            4ABRASIVEJETTINGLATERALDRILLINGSERVICES
            5*Major
                Customers*
            7Market
            8*Competition*
            8SATELLITESERVICES
            9*Major
                Customers*
            10*Market*
            10*Competition*
            10PATENTSANDLICENSES
            11GOVERNMENTALREGULATION
            12**DESCRIPTION
                OF PROPERTY**
            **13****LEGAL
                PROCEEDINGS**
            **13****SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY
                HOLDERS**
            **15****PART
                II****MARKET
                FOR COMMON EQUITY AND RELATED STOCKHOLDER
                MATTERS**
            **16****MANAGEMENT’S
                DISCUSSION AND ANALYSIS OR PLAN OF
                OPERATION**
            **21****FINANCIAL
                STATEMENTS**
            **34****CHANGES
                IN / DISAGREEMENTS WITH
                ACCOUNTANTS**
            **58****CONTROLS
                AND PROCEDURES**
            **58****PART
                III****DIRECTORS
                AND EXECUTIVE
                OFFICERS**
            **59****EXECUTIVE
                COMPENSATION**
            **61****SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                MANAGEMENT**
            **63****CERTAIN
                RELATIONSHIPS AND RELATED
                TRANSACTIONS**
            **64****EXHIBITS
                AND REPORTS ON FORM
                10-KSB**
            **67****PRINCIPAL
                ACCOUNTANTS FEES AND
                SERVICES**
            **69****SIGNATURES**
            **70**




**Item1.
      Description of Business**




**Forward-Looking
      Statements**




Certain
      statements concerning our plans and intentions included herein may constitute
      forward-looking statements, including, but not limited to, statements identified
      by the words “anticipate”, “believe”, “expect” and similar expressions and
      statements regarding our business strategy, plans, beliefs and objectives for
      future operations. Although management believes that the expectations reflected
      in these forward looking statements are reasonable, we can give no assurance
      that such expectations will prove to have been correct. There are a number
      of
      factors that may affect our future results, including, but not limited to,
      (a)
      our ability to obtain additional funding for development and operations, (b)
      the
      continued availability of management to execute the business plan, (c)
      successful deployment and market acceptance of our products and (d) the
      resolution of legal matters that may inhibit the execution of the business
      plan.





3
 *Table
            of Contents*





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, we were 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, we purchased the
      assets and web domain of Accident Reconstruction Communications Network from
      its
      sole proprietor. Following the acquisition, we changed our name from Rocker
      & Spike Entertainment, Inc. to Reconstruction Data Group, Inc. At that time,
      we provided research, communication and marketing exposure to the accident
      reconstruction industry through our website and seminars.




In
      April
      2003, we 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 natural gas (“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.




**Businessof
      Issuer**




Our
      mission is to substantially improve the economics of existing oil and gas
      operations through the application of our licensed and proprietary technologies.
      We have been striving to develop a commercially viable lateral drilling
      technology with the potential to penetrate through well casing and into
      reservoir formations to stimulate oil and gas production. In 2003, with the
      acquisition of exclusive rights to a proprietary horizontal drilling process
      we
      began to deploy lateral drilling services in the field. In mid 2004, it became
      apparent that this process was limited in its application to various types
      of
      oil and gas formations. After redesigning and improving the existing process
      and
      designing and testing some newer technologies, we now believe that we can
      deliver a valuable and cost effective production enhancement service to onshore
      oil and gas producers, particularly operators of marginally producing fields.
      The goal is to make this new service reliably predictable and consistently
      dependable for our customers. Our next step is to build our first new generation
      lateral drilling rig with the capability of abrasive fluid jetting and
      generating much higher hydraulic horsepower. Following favorable results and
      customer acceptance of this initial rig’s capabilities, we intend to order the
      construction of additional rigs and significantly grow the deployment of our
      abrasive jetting service. Funding for developing this abrasive cutting
      capability into a lateral drilling application is expected to come from current
      and future capital commitments as well as from the proceeds of the assignment
      of
      the exclusive rights acquired in 2003. No assurances can be given that the
      capital from these sources will be adequate. If this is the case, we will be
      required to obtain additional capital from equity markets. No assurances can
      be
      given that such capital will be available or that the terms will be acceptable.




Our
      primary segment will be our abrasive jetting lateral drilling business. We
      intend to deploy a commercially viable lateral drilling technology with the
      potential to penetrate though well casing and into reservoir formations to
      stimulate oil and gas production using specially fabricated mobile drilling
      rigs. This service should provide oil and gas producers with an attractive,
      lower cost alternative to existing well stimulation or horizontal drilling
      services.




Our
      secondary business segment is providing satellite services to oil and gas
      companies. This service allows them to remotely monitor and control well head,
      pipeline or drilling operations through low cost broadband data and voice
      services to remote operations where conventional land based communication
      networks do not exist or are too costly to install. Longer term, our vision
      is
      to introduce additional early stage technologies in the energy service sector,
      all of which would fit our mission of helping energy companies economically
      produce more oil and gas.




**Industry**




We
      operate in the oilfield service industry which services the broader energy
      industry, where companies explore, develop and produce oil and gas. This
      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 very large international oil companies, there are also a large
      number of smaller independent companies, who own the vast majority of existing
      wells.





4
 *Table
            of Contents*





As
      a
      smaller firm with a specialized service, we intend to provide lateral drilling
      and satellite services to both small and large operators in the energy industry.
      Initially, the lateral drilling business will be focused toward North American
      onshore-based independent producers while the satellite business already has
      the
      large oil and gas operators as customers. As we grow, we intend to cater to
      all
      segments of the industry in situations where the application of our services
      can
      add value to our customers.




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 they perceive it enhances production. It will also be driven by
      macro-economic 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.




The
      U.S.
      Geological Survey estimates there are 1,400 trillion cubic feet (“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. On
      its
      website, www.naturalgasfacts.org ,
      the
      American Petroleum Institute advocates “A multi-pronged approach is essential
      for meeting future U.S. 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
      gas
      (LNG) imports.” We believe a more immediate impact can be made by exploiting
      existing U.S. supplies. Developing such supplies is dependent on drilling new
      wells in existing fields, or new reserves in expensive less accessible fields.
      We believe our lateral drilling technology can access previously uneconomic
      reserves and bring them to market cost effectively thereby helping to resolve
      this supply/demand imbalance.




The
      Office of Fossil Energy, U.S. Department of Energy, estimates there are nearly
      500,000 oil wells and 230,000 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 Tcf of gas, or about 8 percent of the 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. We believe we have the




ability
      to generate new business by re-entering existing wells rather than being
      dependent on the production companies drilling new wells. With our unique
      abrasive jetting well stimulation and lateral drilling technology, we believe
      we
      can provide potentially improved recovery rates rather than abandoning a field
      because of the depletion of its oil or gas reserves.




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 may 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 abrasive jetting 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.




•
            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 U.S. economic growth.





5
 *Table
            of Contents*




•
            There
                is no substitution threat to oil and gas in the foreseeable future.
                In
                particular, any significant substitution by hydrogen or any other
                potential source is believed by management to be some decades away.




**Abrasive
      Jetting Lateral Drilling Services**




Our
      abrasive jetting service intends to provide casing milling, well stimulation
      and
      lateral drilling services to oil and gas producers. We have signed an exclusive
      worldwide licensing agreement with Alberta Energy Holdings (“Alberta”) for the
      application of their patent pending Abrasive Fluid Jet (“AFJ”) cutting technique
      to cut through well casing and formation rock in oil and gas wells. AFJ is
      being
      added to, and will enhance the existing principles of lateral drilling and
      completion techniques utilized by us and the industry. Applications of such
      abrasive cutting techniques are a proven feature in industries as diverse as
      munitions disposal in the military, offshore platform dismantlement in the
      salvage industry and cutting specialty glass and steel in the machining
      business. We would be among the first to commercially apply the proven abrasive
      fluid techniques to the energy producing business.




We
      have
      commenced the construction of a new generation drilling rig based upon
      modifications using existing coiled tubing technology. The capabilities of
      our
      new rig will include: 1.0 - 1.5 inch coiled tubing with a depth capability
      of
      8,500 feet, a fluid pressure pumping system generating up to 15,000 pounds
      per
      square inch and a flow rate in excess of twenty gallons per minute; an abrasive
      slurry system capable of delivering 150 pounds of abrasive material at thirty
      minute intervals; and a computer-controlled system to guide and control the
      down-hole formation access tool for precise casing milling and jetting services.
      Based upon our current schedule we expect this rig to be completed and
      commercially ready for service during the summer of 2005. After the initial
      rig
      establishes a reliable and commercial oilfield service, we intend to begin
      construction on additional rigs with similar capabilities as the market demands.




Abrasive
      cutting utilizes high-pressure fluid and up to 15% of abrasives, such as fine
      garnet sand, up to 15,000 pounds per square inch. It can cut through surfaces
      as
      tough as four inches of steel as well as granite rock. Abrasive cutting
      represents an off-the-shelf technology requiring application to drilling rather
      than developing a new invention. The successful application of abrasive cutting
      should allow us to provide a range of services to well operators such as
      conventional milling, specially designed completions and well stimulation.




We
      believe that our abrasive jetting lateral drilling will have the ability to
      access previously uneconomic reserves and bring them to market cost effectively,
      due to our unique and environmentally sound drilling process. These services
      have appeal for both small independent operators as well as large integrated
      companies. At our lower comparative costs, we can make it feasible to enhance
      production from a large potential market in North America and worldwide that
      would otherwise be cost prohibitive to recover. The existing oil and gas
      independent producers in North America are leading potential customers of these
      services.




Many
      of
      the nation’s mature oil and gas fields contain new infield reservoir
      compartments and bypassed pockets of productive zones that have not been
      economic to produce. By extending 2” or greater diameter channels extended
      distances in multiple directions from the casing of the well, our lateral
      drilling provides an economic way to enhance production levels of existing
      reservoirs. Our lateral drilling process uses high pressure abrasive fluid
      jetting process, capable of drilling lateral holes from existing wells extended
      distances beyond the near well bore damage in wells as deep as 8,500 feet.





6
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            of Contents*










With
      conventional horizontal drilling, the transition from drilling vertically to
      horizontal drilling may take 200 feet or more and take many days to accomplish.
      With our patented technology, we can make this transition in two feet in a
      rapid
      fashion. This enables us to be extremely precise in targeting and staying within
      specific pay zones for a potentially significant enhancement to the production
      of the well.




We
      are
      developing abrasive jetting lateral drilling technology using specially designed
      deflection shoes, nozzles and hoses to drill 2” and larger diameter well bores
      into the producing formation in multiple directions. By increasing the surface
      area opened to the producing reservoir, oil or gas production should be
      increased, potentially a large value-added application in conventional drilling
      and completion operations. The figure below more precisely illustrates the
      process.









Our
      abrasive jetting lateral drilling process is designed to work on both new and
      existing wells, but may have greater attraction to operators of marginal wells
      who may be otherwise ready to abandon these wells 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.




The
      figure below demonstrates how drilling multiple lateral wells from existing
      vertical well bores can drastically expand the production area within a given
      field. An average vertical well will recover petroleum from an area of up to
      120
      feet from the well bore. However, each lateral can extend in multiple directions
      from the well bore, thus potentially increasing the area of productive capacity
      several fold. With our lateral drilling process we have the ability to drill
      multiple laterals in different directions and at multiple depths within the
      same
      producing intervals in a matter of days. The average price for our service
      will
      range from $25,000 to $40,000 per well depending upon the size of the project.
      Specialized directional drilling companies typically charge $250,000 or more
      to
      drill horizontally in one direction and in only one horizon and may require
      weeks to drill each well.





7
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            of Contents*










Potential
      Benefits of our lateral drilling service:


•
              Increase
                  production rate and recoverable reserves from marginal wells.
  •
              Allows
                  stimulation of wells with acid, steam, CO2, etc.
  •
              Allows
                  multi-layer application in thicker reservoir zones.
  •
              Provides
                  an economic alternative to conventional infield drilling programs.
  •
              Provides
                  a time efficient and cost effective casing milling process.
  •
              Offers
                  an alternative to high cost well stimulation services such as hydraulic
                  fracturing.
  •
              Limits
                  the time the well is out of production due to rapid jetting times.
  Major
      Customers




We
      currently have no active customers as we are in the construction mode. However,
      we have strong indications of interest in using the new AFJ drill rig once
      it is
      placed into service.




*Customer
      Acceptance* **




We
      are
      encouraged by the level of interest from several existing and prospective
      customers in the lateral drilling technology as it relates to conventional
      oil
      and gas production as well as coal bed methane opportunities.




Our
      abrasive jetting lateral drilling service directly competes with the need for
      new wells by laterally drilling from existing wells to extend the pay zone
      resulting in increased production through existing well bores. Our ability
      to
      target new or previously untapped deposits makes our technology potentially
      very
      compelling. By cost effectively extending the accessibility of reserves through
      the existing well bore, our technology can provide an economic alternative
      for a
      customer to add value to an existing field. The field operator’s next best
      economic alternatives are all more expensive than our service. This has the
      potential to be not only compelling economically but also very environmentally
      friendly because it uses previously established well bores rather than building
      new surface locations to drill new wells.




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 gas in the U.S. from over 350,000 U.S. wells.” These independent
      producers are potential customers for our lateral drilling service. In the
      same
      report it estimates 10,000 to 15,000 new 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.





8
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            of Contents*





Recent
      changes in U.S. tax laws provide for incentives to keep smaller oil and gas
      wells pumping even at lower energy prices. Operators of the nation’s 650,000
      marginally producing wells, representing approximately 25% of total U.S.
      production, receive tax credits of up to $9 per well per day. We believe such
      credits will be reinvested by the operators toward services such as lateral
      drilling in an effort to increase production and the value of their oil and
      gas
      fields




*Market* **




It
      has
      become clear in recent years that while the demand of oil and gas in the U.S.
      is
      growing, its ability to meet this demand from existing and new sources is
      declining. This accelerated decline will require producers to seek new
      extraction methods or technologies to exploit oil and gas production from
      existing fields and our abrasive jetting lateral drilling process is expected
      to
      help supply the need for these new technologies. According to the Department
      of
      Energy, there have been 2.25 million wells drilled in the U.S. since 1949.
      Many
      oil reservoirs have only had 35% of their reserves produced, leaving huge
      potential upsides.




*Emphasis
      on Gas* **




The
      United States consumed 22.78 Tcf of gas in 2002 - heating over 60 million
      households and meeting 25% of the country’s energy requirements, according to
      the U.S. Energy Information Administration (EIA). In that same year, U.S.
      production of gas totaled 19.13 Tcf, 84% of the amount consumed. According
      to
      the EIA, this gap between demand and supply is estimated to grow over the next
      decade. Demand will grow because gas is a versatile, clean burning and,
      historically, an economic fuel. At the same time, the new domestic fields being
      found are smaller and have shorter productive lives. So, with legal and
      political barriers to drilling on new lands, producers will seek alternative
      to
      extend the lives from existing fields, such as new energy service technologies.




*Competition* **









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




Our
      lateral drilling business should operate in a niche that lies below the more
      expensive and higher impact conventional 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 service 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.





9
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            of Contents*





However,
      many of our competitors are better financed, equipped and resourced than us.




**Satellite
      Services**




Our
      second business segment provides satellite services to oil and gas producers.
      It
      has been common practice 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. The Verdisys
      Satellite Private Network (VSPN’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, a service we currently offer, production levels can be
      optimized to meet current market conditions and commitments.









At
      present, we are shipping modem hardware from ViaSat, Isotropic Networks and
      Spacenet, space segment services from SES and Loral and hub services from
      Constellation, Spacenet and Immeon.




VSPN
      uses
      satellite communications that are low cost and that ensure worldwide
      availability, even in geographic areas with a poor communications
      infrastructure. VSPN 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. VSPN is provided twenty
      four
      hours a day, seven days a week with 98.2% 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. VSPN is also very flexible and easily accommodates site
      additions, relocations, bandwidth expansion, and network reconfiguration.




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




*MajorCustomers* **




Our
      current satellite services customers include Apache Corporation with 40 remote
      sites, BP America Production Company with 20 remote sites, Noble Energy with
      22
      remote sites and Dynegy Inc. with 11 remote sites. We are also breaking into
      new
      markets in West Africa with ExxonMobil, Kellogg Brown & Root Inc. and
      General Electric Power Company. Contracts are usually for hardware, backhaul,
      and bandwidth. We are 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.





10
 *Table
            of Contents*





*Market* **




There
      are
      more than two million oil and gas wells in existence in the United States alone,
      many of which could benefit from the economics of Verdisys’ high speed
      connectivity services. Our 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 our larger competitors offer services at substantially discounted prices.
      We
      attempt 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. We utilize satellite,
      Wi-Fi
      and other wireless technology for the last mile of wellhead connectivity for
      these customers and focus almost exclusively on the oil and gas market. The
      common denominator throughout is Multiple Protocol Label Switching “MPLS/ATM”
network transport services.




*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 Global, Tachyon, Schlumberger and Caprock. Caprock, Schlumberger and
      Stratus are focused on the top 5% of the market, particularly offshore
      platforms, and Petrocom and Stratus Global are 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.




**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:




•
            personal
                injury or loss of life,




•
            damage
                to or destruction of property, equipment and the environment; and




•
            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.




**Patents
      andLicenses**




In
      November 2004, we signed an exclusive worldwide licensing agreement with Alberta
      for the application of their patent pending AFJ cutting technique to cut through
      well casing in oil and gas wells. The agreement is for a term of ten years
      and
      automatically extends for additional two-year terms unless we give notice at
      least thirty days prior to the expiration of any term. The license is
      automatically renewable provided we pay a minimum royalty payment of $50,000
      per
      year beginning with the 12 month period immediately following commercial
      deployment of the first mobile drilling unit.




Under
      the
      terms of the licensing agreement, as specific phases of the AFJ process are
      successfully applied, Alberta is entitled to receive four tranches of warrants
      for our common stock. Each tranche will entitle Alberta the right to purchase
      250,000 shares of our common stock and each tranche is contingent upon the
      attainment of certain specific milestones as fully described in the agreement.
      The warrants will have a three-year term, with an exercise price of $0.50 per
      share for the first tranche and $0.62 per share for the remaining tranches.
      The
      initial tranche will be fully vested as of the date of the agreement and the
      remaining warrants will vest at 31,250 shares per quarter from the date of
      issuance.





11
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            of Contents*





Under
      the
      terms of the agreement, we have agreed to pay Alberta a $10,000 per month
      consulting fee for six months beginning on November 30, 2004. In addition,
      royalties are payable by us at the rate of $1,000 per well for services billed
      at $40,000 or less and for services above $40,000, a royalty of 2% per well
      is
      payable quarterly. The agreement also provides for the mutual sharing of the
      proceeds from the sale of the technology by us, subject to a maximum of $10
      million.




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 and the related trade secrets in all of the U.S. (except for part
      of
      Colorado West of the Rockies, and Utah) and Canada. Mr. Landers also reserves
      the rights to certain applications in which he has a direct interest but may
      not
      compete with us. Any improvements to the technology remain the sole property
      of
      the licensor but are provided to us without additional licensing fees. 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. 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 issuance of 300,000 shares
      of
      our common stock and the payment of $500,000 in cash.




On
        March
        8, 2005, we entered into an Assignment of License Agreement with Maxim TEP,
        Inc.
        (“Maxim”). The President and Chief Executive Officer of Maxim is Dan Williams,
        our former President and CEO. Under the assignment, we assigned to Maxim
        our
        rights in the license of the Landers Horizontal Drilling Process; all current
        and future negotiations for assignments, sublicenses or territorial royalty
        pertaining to the license and two lateral drilling rigs. As consideration,
        Maxim
        agreed to pay us a total sum of $1.3 million payable in four installments
        (two
        of which were received by March 22, 2005) and release a $270,000 credit
        obligation we owe to Maxim. In connection with the sale, we fully impaired
        the
        asset while creating an account receivable for the sales value. We will retain
        a
        non-exclusive sublicense interest in the Landers license, as long as we pay
        all
        required royalties on which the Landers Horizontal Technology is utilized.




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.




**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 years, 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 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 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.





12
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            of Contents*





Our
      satellite services utilize products that are incorporated into wireless
      communications systems that must comply with various government regulations,
      including those of the Federal Communications Commission (FCC). In addition,
      we
      provide services to customers through the use of several satellite earth hub
      stations, which are licensed by the FCC. Regulatory changes, including changes
      in the allocation of available frequency spectrum and in the military standards
      and specifications that define the current satellite networking environment,
      could materially harm our business by (1) restricting development efforts by
      us
      and our customers, (2) making our current products less attractive or obsolete,
      or (3) increasing the opportunity for additional competition. Changes in, or
      our
      failure to comply with, applicable regulations could materially harm our
      business and impair the value of our common stock. In addition, the increasing
      demand for wireless communications has exerted pressure on regulatory bodies
      worldwide to adopt new standards for these products and services, generally
      following extensive investigation of and deliberation over competing
      technologies. The delays inherent in this government approval process have
      caused and may continue to cause our customers to cancel, postpone or reschedule
      their installation of communications systems. This, in turn, may have a material
      adverse effect on our sales of products to our customers.




**Research
      and Development Activities**




During
      2004 and 2003, we incurred an insignificant amount of research and development
      costs as it relates to our lateral drilling process. We incurred no research
      and
      development costs in our satellite business.




**Employees**




As
      of
      December 31, 2004, we had a total of seven employees, all of which were
      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.




**Item
      2. Descriptionof Property**




*Office
      Facilities* **




We
      lease
      approximately 2,000 square feet of office space in Houston, Texas for our
      principal executive office at a cost of $2,800 per month. Our lease has been
      extended through August of 2006.




*Equipment* **




As
      of
      December 31, 2004, our primary equipment consisted of three mobile lateral
      drilling rigs, 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. We also maintained certain satellite communication and computer
      equipment at our principal executive office.




We
      believe that our facilities and equipment are in good operating condition and
      that they are adequate for their present use. However, the new generation
      drilling rig planned for 2005, will replace our plans to use the existing rigs
      designed under the Landers technology. In fact, under an Assignment of License
      Agreement, dated March 8, 2005, two of the existing lateral drilling rigs were
      sold.




**Item
      3. LegalProceedings**




*Lawsuits
      Involving Edge Capital Group, Inc. (Settled)* **




Effective
      January 19, 2005, Edge Capital Group, Inc. (“Edge”), certain entities affiliated
      with Edge, Eric McAfee (our former Vice Chairman) and us, entered into a
      Settlement Agreement and Mutual Release to fully settle and resolve the disputes
      between Edge and its affiliated entities, Mr. McAfee, our directors and us.
      As
      part of the settlement, we issued an aggregate of 750,000 shares of our common
      stock along with warrants to purchase 750,000 shares of our common stock to
      Edge. In addition, we agreed to provide Edge a drilling rig to provide certain
      lateral drilling services. As part of the drilling services, Edge has agreed
      to
      provide a fee per well, along with a share of the revenues generated from each
      well drilled. Also, as part of the settlement, at closing, we have agreed to
      sublicense our Landers horizontal drilling technology to Edge for certain
      limited purposes. As part of the settlement, the parties to the agreement have
      agreed to a mutual release and have agreed to dismiss all pending claims and
      litigation between them upon performance of the obligations in the settlement
      agreement. If we do not perform our remaining obligations under the settlement
      agreement, this would cause the release to not be effective and could lead
      to
      the underlying lawsuit being reinstituted. An adverse finding in such lawsuit
      against us would have a material adverse effect on our financial condition.





13
 *Table
            of Contents*





We
      had
      initiated a lawsuit against Edge that requested a declaratory judgment that
      a
      purported agreement between us and Edge was not enforceable. It was filed in
      Montgomery County, Texas in February 2004. The lawsuit arose from Edge’s
      contention that one of our ex-officers committed us to purchase certain alleged
      oil and gas properties from Edge. Edge had filed a counterclaim against us
      and
      asserted claims against Dan Williams (our former President and CEO), Eric
      McAfee, Ron Robinson (our former CEO and current Board member), Andrew Wilson
      (our former CFO) and our current Board members Joseph Penbera, Frederick Ruiz,
      James Woodward and John Block. Edge has also made claims against Solarcom,
      L.L.C., DeLage Landen Financial Services, Inc., Andrew Wilson and Allen Voight.
      Edge had sought to enforce the agreement we challenged and alleged several
      causes of action including claims for fraud, breach of contract, negligence
      and
      conspiracy. Edge had asserted actual damages in excess of $85 million and has
      claimed punitive damages as well.




Edge
      and
      one of its apparent owners, Frazier Ltd., had initiated a lawsuit in Summin
      County, Ohio against us, Solarcom, L.L.C., DeLage Landen Financial Services,
      Inc. and Firstmerit Bank, N.A. that sought an injunction against the draw
      against a letter of credit pledged as collateral for a credit advanced to Edge.
      Edge asserted that its transaction with us was the product of fraud and that
      its
      creditor, DeLage Landen as assignee from Solarcom, should not be allowed to
      draw
      against Edge’s letter of credit from Firstmerit. The Ohio state court denied
      Edge’s request for a temporary injunction. The pleadings in the Ohio action did
      not include any claim for damages from us.




*Class
      Action Lawsuits (Settled)* **




In
      March
      2005, we entered into an agreement, subject to court approval, to settle the
      class action lawsuit brought by former shareholders in March 2004 in the U.S.
      District Court for the Southern District. Under terms of the agreement, we
      will
      issue to the class 1,150,000 shares of common stock and pay up to $55,000 in
      legal and administrative fees for the plaintiffs. The lawsuit alleged that
      we
      and our former CEO, Dan Williams, and our 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 alleged that the defendants had made
      material misstatements about our financial results. More specifically, the
      Complaints alleged that the defendants had failed to disclose and indicate:
      (1)
      that we had materially overstated our net income and earnings per share; (2)
      that we prematurely recognized revenue from contracts between us, Edge and
      Energy 2000 NGC, Inc. (“Energy 2000”) in violation of GAAP and our own revenue
      recognition policy; (3) that we 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, our financial results
      were inflated at all relevant times. We had filed a motion to dismiss all
      actions in the litigation against us.




*Securities
      and Exchange Commission Investigation Inquiries*




We
      received notice, in January 2004, that the Securities and Exchange Commission
      (“SEC”) has initiated a formal investigation into our reporting practices and
      our public statements in 2003.




The
      SEC
      has requested substantiation and documentary evidence from us concerning the
      performance of certain lateral drilling services by subcontractors in the period
      from May 2003 to September 2003, supervision of such services by our 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 our acquisition of
      certain assets of QuikView, Inc., a related party company, in June 2003. In
      its
      letters to us 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, we have 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. Two directors have resigned from our board and we have
      appointed a new CFO. Internal controls have been strengthened overall,
      particularly with respect to the public release of information and the
      recognition of revenue. We had also initiated an internal investigation of
      the
      matters of concern to the SEC. Consequently, we restated our second and third
      quarter financial statements for fiscal year 2003 and deferred all revenue
      related to the aforementioned period until such time that we can substantiate
      whether or not the services were performed.




We
      are
      cooperating fully with the SEC, including the provision of numerous documents
      and voluntary testimony by our current executives. In December 2004, the staff
      of the SEC notified us that it was considering recommending that the SEC bring
      a
      civil injunction (including a possible permanent injunction and a civil penalty)
      against us alleging violations of provisions of the Sections 10(b), 13(b)(2)(A),
      13(b)(2)(B) and 15(d) of the Securities Exchange Act of 1934 and rules
      promulgated thereunder in connection with the purchase and sale of our
      securities, recordkeeping, internal controls, certification and disclosure
      obligations. We were notified of our right to make a Wells submission. We have
      provided information to the SEC setting forth the specific steps we have taken
      to upgrade the quality and effectiveness of our board of directors, replace
      the
      previous management team with industry experts, improve our recordkeeping,
      internal and disclosure controls, and revenue recognition procedures. Although
      we are working to bring the matter to a prompt conclusion, we cannot make any
      assurance that the investigation will be resolved positively or that it will
      not
      have negative effects on our limited resources or our ability to raise capital
      and use our stock as acquisition currency during the period of the
      investigation.





14
 *Table
            of Contents*





*Claims
      by Investor (Partially Settled)* **




In
      February 2005, we entered into an Agreed Judgment and Order of Severance with
      Gryphon Master Fund, L.P. (“Gryphon”) as to all breach of contract claims
      related to our delay in registering common stock acquired by Gryphon in October
      2003. Under the terms of the Agreed Judgment, we are obligated to pay liquidated
      damages of $0.5 million to Gryphon on or before September 30, 2005.
      Additionally, Gryphon has agreed to abate their remaining claims and related
      discovery in the lawsuit against us until after September 30, 2005. We agreed
      to
      register the shares issued to Gryphon on or before March 2004 or be subject
      to
      certain liquidated damages. Gryphon had made a claim against us for the maximum
      liquidated damages in an amount of $400,000. Gryphon has also




claimed
      that it has sustained actual damages in excess of $6.2 million. In July 2004,
      Gryphon filed a lawsuit in the state district court in Dallas County, Texas
      against us, alleging, among other things, breach of contract and securities
      fraud by us. In connection with the lawsuit, Gryphon requested liquidated
      damages, actual damages, punitive damages, interest, costs and attorneys’ fees
      among other claims. We intend to vigorously defend ourselves in this matter
      with
      respect to the remaining claims of Gryphon. If Gryphon prevails, it may obtain
      significant damages that may have a material adverse effect on our financial
      condition.




*Claim
      by Former CEO* **




In
      July
      2004, we were informed that one of our former Chief Executive Officers filed
      a
      lawsuit against us for breach of contract and wrongful discharge. The lawsuit
      seeks relief in excess of $0.5 million related to an alleged employment
      agreement and damages related to an excess of 4 million stock options claimed
      due pursuant to the alleged employment agreement. The lawsuit was filed in
      state
      court in San Diego, California. We intend to vigorously defend ourselves in
      this
      matter. If the plaintiff prevails, they may obtain significant damages that
      may
      have a material adverse effect on our financial condition.




*Energy
      2000 (Settled)* **




In
      October 2004, we entered into an agreement with Berg McAfee Companies, Energy
      2000 and Eric McAfee (collectively, “McAfee Group”) to settle several
      outstanding legal issues. Energy 2000 has agreed to settle a finders fee and
      lateral drilling services dispute by delivering 300,000 shares of Natural Gas
      Systems, Inc. (“NGS”) stock into escrow for us. We have plans to monetize those
      shares as soon as practical. Furthermore, to settle the “Lawsuits Involving Edge
      Capital Group, Inc.”, the McAfee Group exchanged 500,000 shares of NGS for
      500,000 shares of our common stock. In January of 2005, the McAfee Group
      replaced the 500,000 shares of NGS stock with $625,000 in cash. We submitted
      that cash and an additional 250,000 shares of our common stock to Edge as part
      of that settlement. We have also agreed to dismiss the QuikView, Inc. lawsuit,
      which we had filed against certain individuals.




*Concluding
      Statement* **




We
      have
      never been in bankruptcy, receivership or any similar legal proceeding. Other
      than the aforementioned legal matters, we are 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 our regular operations, we 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 we 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, we believe 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 our financial condition or results of operations *.*





15
 *Table
            of Contents*





**Item
      4. Submissionof 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.




**PartII**




**Item
      5. Market for Common Equity and Related Stockholder Matters**




After
      the
      consummation of the merger between Reconstruction Data Group, Inc. and Verdisys,
      our common stock commenced trading on the OTC Bulletin Board on July 18, 2003
      under the symbol “VDYS.” Prior to the merger, our common stock had been listed
      for trading on the OTC Bulletin Board under the symbol “RDGI”. The RDGI stock
      was listed on January 13, 2003, but active trading did not begin until May
      2,
      2003. 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**2003Second
                Quarter (from May 2, 2003)
            
            $
            1.72
            
            $
            1.53Third
                Quarter
            
            $
            6.32
            
            $
            5.65Fourth
                Quarter
            
            $
            11.03
            
            $
            10.142004First
                Quarter
            
            $
            9.54
            
            $
            3.35Second
                Quarter
            
            $
            4.75
            
            $
            1.50Third
                Quarter
            
            $
            1.95
            
            $
            0.25Fourth
                Quarter
            
            $
            1.00
            
            $
            0.40




**Holders**




As
      of
      February 28, 2005, we had 34,973,673 shares of common stock issued and
      outstanding and held by approximately 500 shareholders.




**Dividends**




We
      have
      never paid cash dividends. At present, we do not anticipate paying any dividends
      on our common stock in the foreseeable future and intend to devote any earnings
      to the development of the company’s business.




**EQUITY
      COMPENSATION PLAN INFORMATION**




The
      following table provides information as of December 31, 2004 regarding
      compensation plans (including individual compensation arrangements) under which
      equity securities are authorized for issuance:




**Plan
                Category**
            
            **Number of securities**
              **to
                be issued**
              **upon
                exercise of**
              **outstanding
                options,**
              **warrants
                and rights**
            
            **Weighted-average**
              **exercise
                price of**
              **outstanding options,**
              **warrants
                and rights**
            
            **Number of securities**
              **available
                for future**
              **issuance under equity**
              **compensation
                plans**
              **(excluding
                securities**
              **shown in first column)**Equity
                compensation plans approved by shareholdersEquity
                compensation plans not approved by shareholders
            
            
            2,413,680
            
            $
            1.67
            
            
            5,586,320Total
            
            
            2,413,680
            
            $
            1.67
            
            
            5,586,320




**Recent
      Sales of Unregistered Securities**




The
      following table details shares issued under transactions that were 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 us.
      Furthermore, no advertisements were made and the securities are restricted
      pursuant to Rule 144.




16
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          of Contents*




**Date**
            
            **Number of**
              **Shares
                of**
              **Common**
              **Stock**
            
            **Value**
            
            **Offering
                Costs**
            
            **Other
                Terms**January
                and February 2005
            
            
            433,000
            
            $
            216,500
            
            
            15,800
                shares of common stock and warrants to purchase 15,800 shares of
                our
                common stock at $1.00 per share
            
            
            Two
                year warrants to purchase 433,000 shares of our common stock at a
                price of
                $1.00 per share were issued in connection with the private placement.
                The
                proceeds will be allocated between the common stock and the warrants
                based
                on their respective relative fair values.May
                through June 2004
            
            
            179,500
            
            $
            359,000
            
            
            17,950
                shares of common stock and warrants to purchase 7,180 shares of our
                common
                stock at $2.00 per share
            
            
            Two
                year warrants to purchase 71,800 shares of our common stock at a
                price of
                $2.00 per share were issued in connection with the private placement.
                The
                proceeds were allocated between the common stock and the warrants
                based on
                their respective relative fair values.July
                through August 2003
            
            
            609,000
            
            $
            1,218,000
            
            
            59,400
                shares of common stock and warrants to purchase 9,501 shares of our
                common
                stock at $2.00 per share




The
      following table details sales of stock we believe to be exempt from registration
      under Section 4(2) of the Securities Act. Each of the recipients of our stock
      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 access to
      information concerning us and our business prospects. Furthermore, no
      advertisements were made and the securities are restricted pursuant to Rule
      144.




**Date**
            
            **Number of**
              **Shares
                of**
              **Common**
              **Stock**
            
            **Value**
            
            **Comment**Fourth Quarter of 2004
            
            
            104,000
            
            $
            52,000
            
            
            Shares
                issued in payment of consulting services.Fourth
                Quarter of 2004
            
            
            250,000
            
            $
            75,000
            
            
            To
                settle a dispute with a former consultant.Fourth
                Quarter of 2004
            
            
            400,000
            
            $
            200,000
            
            
            Shares
                for cash.Third
                Quarter of 2004
            
            
            30,000
            
            $
            15,000
            
            
            Shares
                issued in payment of a future fundraising effort.Third
                Quarter of 2004
            
            
            300,000
            
            $
            213,000
            
            
            Shares
                issued in lawsuit settlement.February
                2004
            
            
            300,000
            
            $
            1,920,000
            
            
            Shares
                issued in payment of outstanding obligations to Mr. Landers for technology
                fees.September
                2003
            
            
            500,000
            
            $
            2,275,000
            
            
            Shares
                issued in exchange for amendment to Landers licensing
                agreement.July
                2003
            
            
            125,000
            
            $
            250,000
            
            
            Shares
                issued in payment of note payable to Mr. Landers.




*Other
      Sales* **




In
      January 2005, we issued 16,000 shares of our common stock for the payment of
      leasing fees valued at approximately $8,000 and 10,666 shares of our common
      stock to settle unpaid compensation issues with two former AgZone employees.
      We
      also issued 388,502 shares of our common stock under a program to compensate
      our
      directors, employees, contractors and former employees for unpaid wages,
      commissions and director fees incurred in 2004. Additionally, 500,000 shares
      of
      common stock were issued to Edge under the final terms of the lawsuit settlement
      agreement.




In
      October 2004, we issued 750,000 shares of our common stock in a move to settle
      outstanding litigation matters. In a Settlement Agreement and Mutual Release
      (“Agreement”) between Edge, Eric McAfee and us, the parties would release each
      other from any claims upon the completion of the terms of the Agreement. As
      a
      part of this Agreement, 250,000 shares of our common stock were placed in escrow
      for the benefit of Edge. In October 2004, we entered into an agreement with
      Berg
      McAfee Companies, Energy 2000 and Eric McAfee (collectively, “McAfee Group”) to
      settle several outstanding legal issues. Under this agreement, 500,000 shares
      of
      our common stock were placed in escrow for the benefit of the McAfee Group.
      In
      return, the McAfee Group contributed 875,000 shares of NGS. Further detail
      on
      these agreements can be found in the “litigation” section of this Form 10-KSB.
      The shares of stock were issued in transactions 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 had access to
      information concerning us and our business prospects. Furthermore, no
      advertisements were made and the securities are restricted pursuant to Rule
      144.





17
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            of Contents*





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. Since the 30
      day
      average closing price of our common stock dropped below $6.00 per share in
      the
      ten months subsequent to the agreement, we were required to issue 277,778
      additional shares of common stock in the fourth quarter of 2004 for no
      additional compensation. Therefore a total of 1,111,111 common shares were
      issued for an average price of $4.50 per share under this transaction. 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 shares of
      our
      common stock at $6.00 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. 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
      us. Furthermore, no advertisements were made and the securities are restricted
      pursuant to Rule 144.




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 us 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.




*Common
      Stock Issued Upon Exercise of Options* **




**Date**
            
            **Shares Issued**
              **Upon Exercise**
            
            **Value**
            
            **Comment**Second
                Quarter of 2004
            
            
            344,583
            
            $
            34,458First
                Quarter of 2004
            
            
            25,000
            
            $
            2,500Fourth
                Quarter of 2003
            
            
            100,000
            
            $
            10,000Second
                Quarter of 2003
            
            
            2,409,291
            
            $
            240,929
            
            
            In
                lieu of cash, we agreed to expense the exercise price.




*Common
      Stock Issued Upon Exercise of Warrants* **




**Date**
            
            **Shares Issued**
              **Upon Exercise**
            
            **Value**
            
            **Comment**Second Quarter of 2004
            
            
            57,658
            
            $
            5,766First Quarter of 2004
            
            
            779,597
            
            $
            38,494
            
            
            Includes
                cash less exercise of 400,000 warrants for 395,022 shares of common
                stock.Fourth Quarter of 2003
            
            
            245,631
            
            $
            29,564Third Quarter of 2003
            
            
            269,547
            
            $
            177,751Second Quarter of 2003
            
            
            430,000
            
            $
            56,500Second Quarter of 2003
            
            
            950,000
            
            $
            95,000
            
            
            Accounts
                payable reduced in lieu of cash for exercise.Second Quarter of 2003
            
            
            200,000
            
            $
            20,000
            
            
            Note
                payable reduced in lieu of cash for exercise.




18
 *Table
            of Contents*





*Options* **




The
      following table summarizes option grants for the last three years:




**Date**
            
            **Number
                of**
              **Shares**
            
            **Exercise**
              **Price**
            
            **Market**
              **Price**
            
            **Vesting**
            
            **Term**
              **(years)**
            
            **Fair
                Value**
            
            **To
                Whom Issued**July 2004
            
            
            770,000
            
            $
            0.90
            
            $
            0.90
            
            
            Quarterly
                over 3 years
            
            
            10
            
            $
            689,232
            
            
            OfficersMay 2004
            
            
            72,000
            
            $
            2.20
            
            $
            2.20
            
            
            Quarterly
                over 1 year
            
            
            10
            
            $
            156,913
            
            
            Non-employee
                directorsJan 2004
            
            
            230,000
            
            $
            4.28
            
            $
            4.28
            
            
            Quarterly
                over 1 year
            
            
            10
            
            $
            890,785
            
            
            OfficersJan 2004
            
            
            80,000
            
            $
            4.28
            
            $
            4.28
            
            
            Immediate
            
            
            10
            
            $
            309,840
            
            
            Non-employee
                directorsDec 2003
            
            
            500,000
            
            $
            9.55
            
            $
            9.55
            
            
            10%
                immediate, 80% over 12 months, 10% on
                performance
            
            
            10
            
            $
            4,061,703
            
            
            Officer/directorAug 2003
            
            
            100,000
            
            $
            4.10
            
            $
            4.10
            
            
            Quarterly
                over 1 year
            
            
            5
            
            $
            321,024
            
            
            EmployeeApril 2003
            
            
            750,000
            
            $
            0.10
            
            $
            0.50
            
            
            Quarterly
                over 3 years
            
            
            10
            
            
            N/A
            
            
            OfficerApril 2003
            
            
            250,000
            
            $
            0.10
            
            $
            0.50
            
            
            Quarterly
                over 1 year
            
            
            10
            
            
            N/A
            
            
            Non-employee
                directorsApril 2003
            
            
            250,000
            
            $
            0.10
            
            $
            0.50
            
            
            Quarterly
                over 1 year
            
            
            10
            
            
            N/A
            
            
            Officer/directorApril 2003
            
            
            30,000
            
            $
            0.10
            
            $
            0.50
            
            
            Over
                4 months
            
            
            10
            
            
            N/A
            
            
            OfficerDec 2002
            
            
            3,450,000
            
            $
            0.10
            
            $
            0.50
            
            
            Quarterly
                over 4 years
            
            
            10
            
            
            N/A
            
            
            Officers
                and employeesJune 2002
            
            
            350,000
            
            $
            0.10
            
            $
            0.50
            
            
            Quarterly
                over 1 year
            
            
            10
            
            
            N/A
            
            
            Officers
                and directorsApril 2002
            
            
            105,000
            
            $
            0.10
            
            $
            0.50
            
            
            Quarterly
                over 1 year
            
            
            10
            
            
            N/A
            
            
            EmployeesApril 2002
            
            
            2,000,000
            
            $
            0.10
            
            $
            0.50
            
            
            Quarterly
                over 2 years
            
            
            10
            
            
            N/A
            
            
            OfficerApril 2002
            
            
            200,000
            
            $
            0.10
            
            $
            0.50
            
            
            Quarterly
                over 3 years
            
            
            10
            
            
            N/A
            
            
            Employee2002
            
            
            1,050,000
            
            $
            0.10
            
            $
            0.50
            
            
            Over
                12 months
            
            
            10
            
            
            N/A
            
            
            Officers




We
      recorded expense of $245,829 and $714,524 for the intrinsic value associated
      with the options vesting in 2004 and 2003, respectively. The expense is included
      in selling, general & administrative expense on the statement of operations.




*Warrants* **




The
      following table summarizes warrants granted for the last three years:




**Date**
            
            **Number
                of**
              **Shares**
            
            **Exercise**
              **Price**
            
            **Term**
              **(years)**
            
            **Other**Jan & Feb 2005
            
            
            408,000
            
            $
            1.00
            
            
            2
            
            
            Issued
                in connection with Private Placement.Jan & Feb 2005
            
            
            15,800
            
            $
            1.00
            
            
            2
            
            
            Offering
                costs of Private Placement.October 2004
            
            
            100,000
            
            $
            0.001
            
            
            1
            
            
            Issued
                in connection with aggregate convertible notes of $200,000 to Berg
                McAfee
                and Eric McAfee. The notes have been discounted for the relative
                fair
                value of the warrants.October 2004
            
            
            250,000
            
            $
            0.50
            
            
            3
            
            
            Issued
                to Alberta as part of a licensing agreement. The fair value of $199,750
                was expensed in 2004.August 2004
            
            
            140,000
            
            $
            0.80
            
            
            2
            
            
            Issued
                to certain subcontractors and the fair value of $98,000 was expensed
                in
                2004. 20% of the warrants vest immediately and the balance vest 20%
                every
                90 days thereafter.July
                2004
            
            
            100,000
            
            $
            0.001
            
            
            1
            
            
            Issued
                in connection with $200,000 in convertible notes to third party lenders.
                The notes have been discounted for the relative fair value of the
                warrants.





19
 *Table
            of Contents*




July
                2004
            
            
            75,000
            
            $
            0.01
            
            
            2
            
            
            Issued
                in connection with $150,000 in convertible notes to third party lenders.
                The notes have been discounted for the relative fair value of the
                warrants.May & June 2004
            
            
            71,800
            
            $
            2.00
            
            
            2
            
            
            Issued
                in connection with Private Placement.June
                2004
            
            
            7,180
            
            $
            2.00
            
            
            2
            
            
            Offering
                costs of Private Placement.May
                2004
            
            
            37,000
            
            $
            2.00
            
            
            1
            
            
            Issued
                in connection with $185,000 in promissory notes to third party lenders.
                The notes have been discounted for the relative fair value of the
                warrants.Fall
                2003
            
            
            92,835
            
            $
            6.00
            
            
            5
            
            
            Issued
                in connection with raising $5,000,000 from Gryphon and the fair value
                of
                $822,738 has been treated as a cost of fundraising.Fall
                2003
            
            
            9,501
            
            $
            2.00
            
            
            5Summer
                2003
            
            
            150,000
            
            $
            0.10
            
            
            1
            
            
            Part
                of a settlement, along with $28,000 in cash, with the two original
                founders for various debts recorded on the books at $576,000. The
                warrants
                were valued at $0.40 per share or $60,000, resulting in a contribution
                to
                capital of $488,000.May
                2003
            
            
            2,644,438
            
            $
            0.10
            
            
            Var
            
            
            Issued
                to former employees and the fair value of $1,050,687 were expensed
                in
                2003.April
                2003
            
            
            200,000
            
            $
            0.10
            
            
            4
            
            
            Issued
                to consultants and the fair value of $80,000 was expensed in
                2003.April
                2003
            
            
            232,334
            
            $
            0.75
            
            
            1
            
            
            Previously
                expired warrants were extended.2002
            
            
            120,000
            
            $
            0.10
            
            
            4
            
            
            Issued
                to investors and fair value of $4,800 expensed in 2002.2002
            
            
            980,000
            
            $
            0.10
            
            
            5
            
            
            Issued
                to consultants and the fair value of $392,000 was expensed in
                2002.




**Item
      6. Management’sDiscussion 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.




Our
      mission is to substantially improve the economics of existing oil and natural
      gas operations through the application of our licensed and proprietary
      technologies. We have been striving to develop a commercially viable lateral
      drilling technology with the potential to penetrate through well casing and
      into
      reservoir formations to stimulate oil and gas production. In 2003, with the
      acquisition of exclusive rights to a proprietary horizontal drilling process
      we
      began to deploy lateral drilling services in the field. In mid 2004, it became
      apparent that this process was limited in its application to various types
      of
      oil and gas formations. After redesigning and improving the existing process
      and
      designing and testing some newer technologies, we now believe that we can
      deliver a valuable and cost effective production enhancement service to onshore
      oil and gas producers, particularly operators of marginally producing fields.
      The goal is to make this new service reliably predictable and consistently
      dependable for our customers. Our next step is to build our first new generation
      lateral drilling rig with the capability of abrasive fluid jetting and
      generating much higher hydraulic horsepower. Following favorable results and
      customer acceptance of this initial rig’s capabilities, we intend to order the
      construction of additional rigs and significantly grow the deployment of our
      abrasive jetting service. Funding for developing this abrasive cutting
      capability into a lateral drilling application is expected to come from current
      and future capital commitments as well as from the proceeds of the assignment
      of
      the exclusive rights acquired in 2003. No assurances can be given that the
      capital from these sources will be adequate. If this is the case, we will be
      required to obtain additional capital from equity markets. No assurances can
      be
      given that such capital will be available or that the terms will be acceptable.




*Risk
      factors* **




Although
      we believe that our expectations regarding future events are based on reasonable
      assumptions, we cannot assure you that such expectations regarding future
      developments will be realized. Actual results could differ materially from
      those
      discussed in the forward-looking statements as a result of certain factors,
      including the risk factors described below. The risks and uncertainties
      described below are not the only ones we face; there may be additional risks
      and
      uncertainties not presently known to us or those we currently believe are
      immaterial which could also have a negative impact on our business, financial
      condition and operating results.





20
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            of Contents*





**GENERAL
      RISKS RELATING TO OUR COMPANY**




**1.
      We have a limited operating history, which makes it difficult to evaluate our
      business performance.**




We
      have
      been in existence for a few years, but we have been conducting drilling
      operations using the proprietary lateral drilling technology only since June
      2003 and satellite services to the oil and gas industry only since June 2002.
      We
      have commenced the construction of our first rig utilizing the abrasive jetting
      technology to the down-hole milling and lateral jetting techniques. Abrasive
      jetting has been successfully commercialized in several industries but is not
      yet proven in the energy drilling industry. Because we have a limited operating
      history, there is little historical financial data upon which an investor may
      evaluate our business performance. Our revenue and income potential are
      unproven. An investor must consider the risks, uncertainties, expenses and
      difficulties frequently encountered by companies in their early stages of
      development, particularly companies with limited capital in a rapidly evolving
      market. These risks and difficulties include our ability to develop our
      infrastructure, reliability in the milling process in our lateral drilling
      technology, attract and maintain a base of customers, provide customer support,
      personnel, and facilities to support our business, and respond effectively
      to
      competitive and technological developments. Our business strategy may not be
      successful or may not successfully address any of these risks or difficulties.
      While we believe our business model will permit us to generate substantial
      revenues, there is no guarantee that the revenues will be realized. Failure
      to
      realize the revenue may have a material adverse effect on our financial
      condition.




**2.
      We are an investment risk because business and marketing strategies planned
      are
      not proven.**




We
      have
      no established basis to assure investors that business or marketing strategies
      will be successful. We are highly dependent upon the acquisition of subscribers
      for our satellite division; selection of, and productivity from, appropriate
      oil
      and gas wells; as well as the effective application of technologies and services
      within operations. Our business model and marketing strategies anticipate such
      application and productivity, yet are unproven by a significant history of
      business operations. Failure to prove that our business model and strategies
      work through continued operations may have a material adverse effect on our
      business and financial condition.




**3.
      We may require additional capital in the future, which may not be available
      to
      us.**




We
      may
      need to raise additional funds through public or private debt or equity
      financing or other various means. Adequate funds may not be available when
      needed or may not be available on favorable terms. If we raise additional funds
      by issuing equity securities, dilution to existing stockholders will result,
      and
      such equity may have rights, preferences and privileges senior to those of
      our
      common stock. If we raise additional funds by issuing debt securities, we may
      be
      required to agree to covenants that may restrict our ability to expend or raise
      capital in the future. If funding is insufficient at any time in the future,
      we
      may be unable to fund acquisitions, take advantage of business opportunities
      or
      respond to competitive pressures. Failure to raise additional capital in the
      future may have a material adverse effect on our financial condition.




**4.
      Our auditors have expressed doubt as to our ability to continue as a going
      concern.**




As
      noted
      in the Independent Auditors Report (See Financial Note 2), our continued
      substantial operating losses raise substantial doubt as to our ability to
      continue as a going concern. We are in an early stage of development and are
      rapidly depleting our cash resources, therefore we have determined that we
      will
      need to raise additional financing in the short term to continue in operation
      and fund future growth. We incurred liquidated damages claimed by an investor
      of
      $500,000 related to the timing of providing registration rights for the private
      financing that it arranged in November 2003. We also have significant contingent
      liabilities, which may be determined adversely to us. If we are unable to raise
      additional financing to satisfy these obligations this would have a material
      adverse effect on our operations.




We
      currently plan to raise additional financing. The use of stock for currency
      in
      financing or making acquisitions may be heavily curtailed while we are under
      SEC
      investigation. (See Financial Note 17) If we are unable to arrange new financing
      or generate sufficient revenue from new business arrangements, we will be unable
      to continue in our current form and will be forced to restructure or seek
      creditor protection.




**5.
      We experienced operating losses in 2002, 2003 and 2004, and this trend may
      continue.**




We
        suffered net losses of $3,128,782 for the year ended December 31, 2002,
        $7,356,045 for the year ended December 31, 2003, and $8,766,108 for the year
        ended December 31, 2004. The volatility underlying the early stage nature
        of our
        business and our industry prevents us from accurately predicting future
        operating conditions and results, and we could continue to have losses. It
        is
        uncertain when, if ever, we will have significant operating income or cash
        flow
        from operations sufficient to sustain operations. If cash needs exceed available
        resources, there can be no assurances that additional capital will be available
        through public or private equity or debt financings. Sustained losses will
        continue to have a material adverse effect on our business.





21
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            of Contents*





**6.
      Significant amounts of our outstanding common shares are restricted from
      immediate resale but may be available for resale into the market in the near
      future, possibly causing the market price of our common stock to drop
      significantly.**




As
      of
      February 28, 2005, we had 34,973,673 shares of common stock issued, outstanding
      and held by 481 shareholders of record.




As
      restrictions on resale for outstanding shares end, the market price could drop
      significantly if the holders of these restricted shares sell them or are
      perceived by the market as intending to sell them in an excessive amount
      relative to the market demand for our shares. An excessive sale of our shares
      may result in a material adverse effect on the price of our common stock, and
      our ability to raise capital.




**7.
      One principal stockholder can influence the corporate and management policies
      of
      our company.**




Berg
      McAfee Companies, and its affiliates, effectively control approximately 30%
      of
      the outstanding common stock. Therefore, Berg McAfee Companies, and its
      affiliates, may have the ability to substantially influence all decisions made
      by us. Additionally, Berg McAfee Companies, and its affiliates, control could
      have a negative impact on any future takeover attempts or other acquisition
      transactions. Furthermore, certain types of equity offerings require stockholder
      approval depending on the exchange on which shares of a company’s common stock
      is




traded.
      In the event we are required to obtain stockholder approval of a financing,
      Berg
      McAfee Companies, and its affiliates ownership, could block such a financing.
      The control by one principal stockholder results in less control by our board
      of
      directors, management and the remaining stockholders. Please read ‘Certain
      Relationships and Related Transactions.’




**8.
      We may sustain losses resulting from our extension of credit to non-paying
      customers.**




We
      have,
      prior to February 2004, conducted much of our drilling activities for related
      parties, and we did not require collateral in support of our account
      receivables. This resulted, on occasion, in an impediment to us obtaining full
      payment for accounts receivable. Although we are implementing procedures to
      combat this credit risk, there can be no assurance that our efforts will be
      successful. Failure to guard against credit risk may have a material adverse
      effect on our financial condition.




**9.
      Securities and Exchange Investigation Inquiries may continue to draw on our
      limited financial resources and continue to negatively impact our ability to
      raise additional capital.**




We
      received notice that the Securities and Exchange Commission has initiated a
      formal investigation into our reporting practices and public statements about
      the company in 2003.




The
      SEC
      has requested substantiation and documentary evidence from us concerning the
      performance of certain lateral drilling services by subcontractors in the period
      from May 2003 to September 2003, supervision of such services by our 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 our acquisition of
      certain assets of QuikView, Inc., a related party company, in June 2003. In
      its
      letters to us 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, we have 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. Two directors have resigned
      from
      our board and we have appointed a new CFO. Internal controls have been
      strengthened overall, particularly with respect to the public release of
      information and the recognition of revenue. We also initiated an internal
      investigation of the matters of concern to the SEC. Consequently, we restated
      our second and third quarter financial statements for 2003 and decided to defer
      all revenue related to the aforementioned period until such time that we can
      substantiate whether or not the services were performed.




We
      are
      cooperating fully with the SEC, including the provision of numerous documents
      and voluntary testimony by our current executives. In December 2004, the staff
      of the SEC notified us that it was considering recommending that the SEC bring
      a
      civil injunction (including a possible permanent injunction and a civil penalty)
      against us alleging violations of provisions of the Sections 10(b), 13(b)(2)(A),
      13(b)(2)(B) and 15(d) of the Securities Exchange Act of 1934 and rules
      promulgated thereunder in connection with the purchase and sale of our
      securities, recordkeeping, internal controls, certification and disclosure
      obligations. We were notified of our right to make a Wells submission. We have
      provided information to the SEC setting forth the specific steps we have taken
      to upgrade the quality and effectiveness of our board of directors, replace
      the
      previous management team with industry experts, improve our recordkeeping,
      internal and disclosure controls, and revenue recognition procedures. Although
      we are working to bring the matter to a prompt conclusion, we cannot make any
      assurance that the investigation will be resolved positively or that it will
      not
      have negative effects on our limited resources or our ability to raise capital
      and use our stock as acquisition currency during the period of the
      investigation.





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**10.
      We have entered into a settlement agreement relating to the litigation with
      Edge. If we do not perform certain obligations under the settlement agreement,
      the lawsuit could be reinstituted. An adverse finding the in the lawsuit would
      have a material adverse effect on our financial condition.**




We
      initiated a lawsuit against Edge in Montgomery County, Texas in February 2004
      that requested a declaratory judgment that a purported agreement between us
      and
      Edge was not enforceable. The lawsuit arose from Edge’s contention that one of
      our ex-officers committed the company to purchase certain alleged oil and gas
      properties from Edge. Edge filed a counterclaim against us and asserted claims
      against new parties including persons related to Edge’s financing source and
      current and our former officers and directors. Edge sought to enforce the
      agreement we challenge, and alleged several causes of action including claims
      for fraud, breach of contract, negligence, and conspiracy and claimed actual
      and
      punitive damages in excess of $85 million.




Effective
      January 19, 2005, we, Edge, certain entities affiliated with Edge, and Eric
      McAfee (our former Vice-Chairman) entered into a Settlement Agreement and Mutual
      Release to fully settle and resolve the disputes between Edge and its affiliated
      entities, us and our directors, and Mr. McAfee. As part of the settlement,
      we
      issued to Edge Capital an aggregate of 750,000 shares of its common stock,
      along
      with warrants to purchase 750,000 shares of common stock. In addition, we also
      agreed to provide to Edge a drilling rig to provide certain lateral drilling
      services. As part of the drilling services, Edge has agreed to provide a fee
      per
      well, along with a share of the revenues generated from each well drilled.
      Also,
      as part of the settlement, at closing, we agreed to sublicense its Landers
      horizontal drilling technology to Edge on a non-exclusive basis to enable Edge
      to develop fields in which it has an economic interest. Under the sublicense,
      Edge will be prohibited from performing services for others, except that it
      will
      have a limited right of first refusal to perform such services in the event
      we
      elect to not perform such services. The sublicense will have a 5-year term
      and
      be limited to the United States and Canada. As part of the settlement, the
      parties to the agreement have agreed to a mutual release and have agreed to
      dismiss all pending claims and litigation between them upon performance of
      the
      obligations in the settlement agreement. If we do not perform our remaining
      obligations under the settlement agreement, this would cause the release to
      not
      be effective and could lead to the underlying lawsuit being reinstituted. An
      adverse finding in such lawsuit against us would have a material adverse effect
      on our financial condition. See “Legal Proceedings.”




**11.
      We are subject to certain additional lawsuits. If these lawsuits are successful
      and substantial damages are awarded, these damages would have a material adverse
      effect on our financial condition.**




In
      February 2005, we entered into an Agreed Judgment and Order of Severance with
      Gryphon as to all breach of contract claims related to our delay in registering
      common stock acquired by Gryphon in October 2003. Under the terms of the Agreed
      Judgment, we are obligated to pay liquidated damages and attorney fees of
      $500,000 to Gryphon on or before September 30, 2005. Additionally, Gryphon
      has
      agreed to abate their remaining claims and related discovery in the lawsuit
      against us until after September 30, 2005. We agreed to register the shares
      issued to Gryphon on or before March 2004 or be subject to certain liquidated
      damages. Gryphon made a claim against us for the maximum liquidated damages
      in
      an amount of $400,000. Gryphon has also claimed that it has sustained actual
      damages in excess of $6.2 million. In July 2004, Gryphon filed a lawsuit in
      state district court in Dallas, Texas against us, alleging, among other things,
      breach of contract and securities fraud by us. In connection with the lawsuit,
      Gryphon requested liquidated damages, actual damages, punitive damages,
      interest, cost and attorneys’ fees among other claims. We intend to vigorously
      defend ourselves in this matter with respect to the remaining claims of Gryphon.




In
      July,
      2004 we were informed that our former Chief Executive Officer filed a lawsuit
      against us for breach of contract and wrongful discharge. These claims seek
      relief in excess of $500,000 related to an alleged employment agreement and
      damages related to an excess of 4 million stock options claimed due pursuant
      to
      the alleged agreement. The lawsuit was filed in state court in San Diego,
      California. We intend to vigorously defend ourselves.




An
      adverse outcome in any of the above litigation would have a material adverse
      effective on our financial condition and result of operations. Please see the
      section ‘Legal Proceedings.’





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**12.
      Our common stock is currently traded over the counter on the Over-the-Counter
      market and is considered a “penny stock” resulting in potential illiquidity and
      high volatility in the market price of our common stock.**




The
      market price of our common stock is likely to be highly volatile as is the
      stock
      market in general as well as the capital stock of most small cap companies.
      Our
      common stock currently trades over the counter on the OTC Bulletin Board, where
      stocks typically suffer from lower liquidity. This may lead to depressed trading
      prices, greater price volatility and difficulty in buying or selling shares
      in
      large quantities. Currently, there is a limited trading market for our common
      stock, and we cannot predict when, if ever, a fully developed public market
      for
      the common stock will occur.




**13.
      Because our common stock is considered a “penny stock,” certain rules may impede
      the development of increased trading activity and could affect the liquidity
      for
      stockholders.**




Penny
      stocks generally are equity securities with a price of less than $5.00 per
      share
      other than securities registered on certain national securities exchanges or
      quoted on the NASDAQ stock market, subject to certain exceptions for companies
      which exceed certain minimum tangible net worth requirements.




Our
      common stock is subject to the SEC’s “penny stock rules”. The rules impose
      additional sales practice requirements on broker-dealers who sell penny stock
      securities to persons other than established customers and accredited investors.
      For transactions covered by these rules, the broker-dealer must make a special
      suitability determination for the purchase of penny stock securities and have
      received the purchaser’s written consent to the transaction prior to the
      purchase. Additionally, for any transaction involving a penny stock, unless
      exempt, the “penny stock rules” require the delivery, prior to the transaction,
      of a disclosure schedule relating to the penny stock market. The broker-dealer
      also must disclose the commissions payable to both the broker-dealer and the
      registered representative and current quotations for the securities. And,
      monthly statements must be sent disclosing recent price information on the
      limited market in penny stocks. These rules may restrict the ability of
      broker-dealers to sell our securities and may have the effect of reducing the
      level of trading activity of our common stock in the secondary market. In
      addition, the penny-stock rules could have an adverse effect on our ability
      to
      raise capital in the future from offerings of our common stock.




On
      January 12, 2004, the SEC proposed amendments to the penny stock rules to ensure
      that investors continue to receive the protections of those rules. The SEC
      also
      is proposing that broker-dealers be required to enhance their disclosure
      schedule to investors who purchase penny stocks, and that those investors have
      an explicit “cooling-off period” to rescind the transaction. These amendments
      could place further constraints on broker-dealers’ ability to sell our
      securities.




**14.
      Our operations are subject to inherent risks that are beyond our control and
      these risks may not be fully covered under our insurance policies.**




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:




•
            personal
                injury or loss of life;




•
            damage
                to or destruction of property, equipment and the environment; and




•
            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.




**15.
      We are subject to various operational and performance risks related to projects
      that we undertake and services that we provide.**




We
      are
      subject to various operational and performance risks related to projects that
      we
      undertake and services that we provide. These risks include:




•
            changes
                in the price or the availability of commodities that we use;





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•
            non-performance,
                default or bankruptcy of key suppliers or subcontractors;




•
            cost
                over-runs and operating cost inflation resulting from fixed-price
                projects; and




•
            failure
                by one or more parties to perform a complex business arrangement
                for
                technically demanding projects.




Failure
      to guard against operational and performance risks may have a material adverse
      effect on our financial condition.




**16.
      Our markets may be adversely affected by oil and gas industry conditions that
      are beyond our control.**




Oil
      and
      gas industry conditions are influenced by numerous factors over which we have
      no
      control, such as the supply of and demand for oil and gas, domestic and
      worldwide economic conditions, political instability in oil producing countries
      and merger and divestiture activity among oil and gas producers. Those
      conditions could adversely impact the level of drilling and workover activity
      by
      some of our customers. This reduction in activity may cause a decline in the
      demand for our services or adversely affect the price of our services. We cannot
      accurately predict either the future level of demand for our services or future
      conditions of the well service industry. A decline in the demand for our
      services may have a material adverse effect on our business.




**17.
      Our success depends on key members of our management, the loss of whom could
      disrupt our business operations.**




We
      depend
      to a large extent on the services of some of our executive officers and
      directors. The loss of the services of either John O’Keefe, or David Adams could
      disrupt our operations. We have entered into employment agreements with several
      of our key executives that contain non-compete provisions. Notwithstanding
      these
      agreements, we may not be able to retain our executive officers and may not
      be
      able to enforce the non-compete provisions in the employment agreements. Failure
      to retain key members of our management may have a material adverse effect
      on
      our business.




**RISKS
      RELATED TO OUR ABRASIVE JETTING DRILLING BUSINESS**




**1.
      We currently have no active customers and in the past were highly dependent
      on a
      small number of customers, two of whom are related parties.**




We
      have
      no active customers for our abrasive jetting lateral drilling services since
      we
      are in the construction mode. We currently have only indications of interest
      in
      the new AFJ drill rig once it is placed into service. We can give no assurance
      that these indications of interest will turn into actual customers.




In
      the
      past a relatively limited number of customers has accounted for a substantial
      portion of our revenue. One customer accounted for 14%, 38% and 87% of total
      revenues in 2004, 2003 and 2002, respectively. In the second half of 2003,
      53%
      of our revenue was derived from services provided to three customers. Of those
      three customers, two may be considered related parties. In the same period,
      52%
      of our revenue was derived from services provided to the two related parties.
      In
      addition, Edge, our only non-related customer in that period, has refused to
      pay
      for wells drilled in the second half of 2003, resulting in a total of $1,993,000
      being reversed or deferred.




We
      expect
      that a high percentage of our revenue from our AFJ services will be provided
      by
      a limited number of customers for the near term or until we can deploy
      additional AFJ drill rigs.




**2.
      We may not be able to protect our abrasive jetting lateral drilling technology
      which could result in competition with service providers utilizing an infringing
      technology.**




The
      license agreement allocates responsibility in maintaining the status of the
      patents underlying the technology we license with the U.S. Patent and Trademark
      Office to the licensor. Although the licensor has performed this obligation
      in
      the past, there can be no assurance that the licensor will have the ability
      to
      continue to maintain the patents. In the event we had to assume these
      responsibilities additional pressure on our financial resources would result.
      An
      inability to continue operations under the exclusivity granted by the licensing
      agreement may have a material adverse effect on our business.




**3.
      Our customers may not realize the expected benefits from our abrasive jetting
      lateral drilling technology, which may impair market acceptance of our lateral
      drilling services.**




Our
      lateral drilling business is heavily dependent upon our clients achieving
      enhanced production, or lower costs, from certain types of existing oil and
      gas
      wells. Many of the wells for which the abrasive jetting lateral drilling
      technology will be used on have been abandoned for some time due to low
      production volumes or other reasons. In some cases, we have experienced
      difficulty in having the enhanced production reach the market due to the
      gathering field pipeline system’s disrepair resulting from the age of the fields
      and the reliability of the milling process. There can be no assurance that
      our
      abrasive jetting lateral drilling technology will achieve enhanced production
      from every well drilled, or that, if enhanced production is achieved initially,
      it will continue for the duration necessary to achieve payout or that it will
      reach the market on a timely basis. The failure to achieve projected
      enhancements could result in making the application of the technology uneconomic
      for our clients. Please see the section ‘Abrasive Jetting Lateral Drilling
      Services’ for an explanation on how we will attempt to achieve an economic
      benefit for our clients. Failure to achieve an economic benefit for our clients
      in the provision of this service may have a material adverse effect on our
      business.





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**4.
      We may be unable to accurately identify oil and gas wells on which our abrasive
      jetting lateral drilling technology will enhance oil and gas recovery, which
      may
      impair the market acceptance of our lateral drilling services.**




Our
      lateral drilling business is heavily dependent on our ability to correctly
      identify with our clients, the appropriate oil and gas wells that will produce
      the enhanced revenues or lower costs. Certain subsurface conditions are not
      conducive to the use of our high pressure abrasive jetting lateral drilling
      technology, and certain wells may have been severely depleted or otherwise
      negatively impacted in some manner by the operator. While we have added an
      evaluation screening technique and other new technology and improvements
      relating to analysis of depleted fields,




the
      failure to identify the correct types of oil and gas wells could result in
      not
      realizing the expected economic returns which could initially have a material
      adverse effect on our business, financial condition and operating results.




**5.
      Competition within the well service industry may adversely affect our ability
      to
      market our services.**




The
      well
      service industry is highly competitive and includes several large companies,
      such as Halliburton, Baker Hughes, Schlumberger and other independent drilling
      companies that possess substantially greater financial and other resources
      than
      we do. These greater resources could allow those competitors to compete more
      effectively than we can. Additionally, the number of rigs available continues
      to
      exceed demand, resulting in active price competition. Moreover, many contracts
      are awarded on a bid basis, which further increases competition based on price.
      Failure to successfully compete within our industry may have a material adverse
      effect on our business.




**6.
      We may be subject to environmental requirements which may increase our costs
      or
      liabilities related to our lateral drilling operations.**




Given
      the
      manner in which we currently operate our business, we are not regulated to
      the
      extent that an oil and gas company is with respect to environmental laws, rules
      and regulations in the U.S. and other countries, including those covering
      hazardous materials, because we generally do not own the properties we service.
      However, environmental requirements generally are becoming increasingly strict.
      In the future, we may be held liable for certain failures relating to
      environmental regulations. Sanctions for failure to comply with these
      requirements, many of which may be applied retroactively, may include:




•
            administrative,
                civil and criminal penalties;




•
            revocation
                of permits; and




•
            corrective
                action orders, including orders to investigate and/or clean up
                contamination.




Liability
      for damages arising as a result of environmental laws could be substantial
      and
      could have a material adverse effect on our results of operations. The
      liabilities incurred as a result of complying with environmental requirements
      or
      failure on our part to comply with applicable environmental requirements may
      have a material adverse effect on our financial condition. There can be no
      assurance that governmental laws will not broaden in scope in the future to
      cover the types of services that we currently provide. Failure to comply with
      environmental laws could have a material negative impact on our financial
      condition.




**7.
      Changes in environmental laws may decrease demand for our services.**




Changes
      in environmental laws may negatively impact demand for our services. Activity
      by
      oil and gas exploration and production companies may decline if, for example,
      the Environmental Protection Agency promulgates more stringent environmental
      regulations such as land use policies. If oil and gas exploration and production
      activities decline, this could have a material adverse effect on our operating
      results.





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**RISKS
      RELATED TO OUR SATELLITE BUSINESS**




**1.
      We are highly dependent upon a few key providers who furnish satellite
      networking components, hardware, and technological services.**




Our
      satellite business is heavily dependent on agreements with Spacenet, ViaSat
      and
      other equipment and service providers. These strategic relationships provide
      key
      network technology, satellite data transport, hardware and software. Failure
      of
      Spacenet, ViaSat or other key relationships to meet our expectations or
      termination of a relationship with one of our key providers may have a material
      adverse effect on our business.




**2.
      We depend upon our vendors and their affiliates to provide services that we
      require to operate the network we use to provide services to our customers.**




We
      are
      not and do not plan to become a licensee of the Federal Communications
      Commission (“FCC”) and do not hold any authorization to operate satellite
      communications facilities. We depend upon licenses held by Spacenet and ViaSat
      and their subsidiaries for our satellite communications. If the licenses held
      by
      Spacenet and ViaSat are limited or revoked, if the FCC limits the number of
      its
      customer premises earth stations or if Spacenet or ViaSat fails to operate
      the
      earth stations providing service to us and our subscribers in a satisfactory
      manner, our operating results may be materially adversely affected.




**3.
      We rely on third-party independent contractors to install our customer premises
      equipment at new subscribers’ businesses and homes.**




We
      do not
      control the hiring, training, certification and monitoring of the employees
      of
      our third-party independent contractors. If growth of our new subscriber base
      outpaces growth of our installer base or if the installers fail to provide
      the
      quality of service that our customers expect, our operating results may be
      materially adversely affected.




**4.
      The service we provide is entirely dependent on the functionality of satellites
      on which we lease transponders and on our computer and communications hardware
      and software.**




Our
      ability to provide service is entirely dependent on the functionality of
      satellites on which we lease transponders. These satellites may experience
      failure, loss, damage or destruction from a variety of causes, including war,
      anti-satellite devices and collision with space debris. If this occurs, we
      are
      likely to suffer:




•
            permanent
                loss of service;




•
            temporary
                gaps in service availability; or




•
            decreased
                quality of service.




Such
      a
      failure in the service we provide may have a material adverse effect on our
      business, financial condition and operating results.




The
      ability to provide timely information and services depends also on the efficient
      and uninterrupted operation of our computer and communications hardware and
      software systems. These systems and operations are vulnerable to damage or
      interruption from human error, natural disasters, telecommunication failures,
      break-ins, sabotage, computer viruses, intentional acts of vandalism and similar
      events. We are in the process of designing and plan to implement a disaster
      recovery plan. Despite precautions, there is always the danger that human error
      or sabotage could substantially disrupt the system. Any such failure may have
      a
      material adverse effect on our business.




**5.
      We may be unable to attract or retain subscribers.**




If
      we are
      unable to attract or retain subscribers, our telecommunications business will
      be
      harmed. Our success depends upon our ability to rapidly grow our subscriber
      base. Several factors may negatively impact this ability, including:




•
            loss
                of our existing sales employees, resulting in our lack of access
                to
                potential subscribers;




•
            failure
                to establish and maintain the Verdisys brand through advertising
                and
                marketing, or erosion of our brand due to misjudgments in service
                offerings;




•
            failure
                to develop or acquire technology for additional value added services
                that
                appeals to the evolving preferences of our subscribers;




•
            failure
                to meet our expected minimum sales commitments to Spacenet and ViaSat;
                and





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•
            failure
                to provide the minimum transmission speeds and quality of service
                our
                customers expect.




In
      addition, our service may require customers to purchase our satellite system
      equipment and to pay our monthly subscriber fees. The price of the equipment
      and
      the subscription fees may be higher than the price of many dial-up, DSL and
      cable modem internet access services, where available. In some instances, we
      expect to subsidize our subscribers’ customer premises equipment to encourage
      the purchase of our service and to offset our higher relative costs but such
      subsidy may not be possible. Failure to attract or retain subscribers may have
      a
      material adverse effect on our business.




**6.
      We may fail to manage any potential growth or expansion, negatively impacting
      our quality of service or overcapacity impacting profitability.**




If
      we
      fail to manage our potential rapid growth and expansion effectively or expand
      and allocate our resources efficiently, we may not be able to retain or grow
      our
      subscriber base. If our assumptions regarding the usage patterns of our
      subscribers are wrong or if our subscribers’ usage patterns change, we will have
      either too little or too much satellite capacity, both of which could harm
      our
      business.




If
      we
      achieve the substantial subscriber growth that we anticipate, we will need
      to
      procure additional satellite capacity. If we are unable to procure this
      capacity, we may be unable to provide service to our subscribers or the quality
      of service we provide may not meet their expectations. Failure to manage any
      potential growth may have a material adverse effect on our business.




**7.
      Our current services may become obsolete due to the highly competitive and
      continued advancement of the satellite industry. Larger service providers may
      provide services reduced pricing.**




Intense
      competition in the internet services market and inherent limitations in existing
      satellite technology may negatively affect the number of our subscribers.
      Competition in the market for consumer internet access services is intense,
      and
      we expect the level of competition to intensify in the future. We compete with
      providers of various high-speed communications technologies for local access
      connections such as cable modem and DSL. We also may face competition from
      traditional telephone companies, competitive local exchange carriers and
      wireless communication companies. As our competitors expand their operations
      to
      offer high speed internet services, we may no longer be the only high-speed
      service available in certain markets. We also expect additional competitors
      with
      satellite-based networks to begin operations soon. In particular, some satellite
      companies have announced that in the future they may offer high-speed internet
      service at the same price or at a lower price than we currently intend to offer
      and are offering our services. Many of our current and potential competitors
      have longer operating histories, greater brand name recognition, larger
      subscriber bases and substantially greater financial, technical, marketing
      and
      other resources than we have. Therefore, they may be able to respond more
      quickly than we can respond to new or changing opportunities, technologies,
      standards or subscriber requirements. Any such competition may have a material
      adverse effect on our business.




**8.
      We may be mistaken in our belief as to future growth of the satellite broadband
      market.**




While
      we
      believe that the trend toward satellite broadband information services in the
      energy market will continue to develop, our future success is highly dependent
      on increased use of these services within the sector. The number of satellite
      broadband users willing to pay for online services and information may not
      continue to increase. A failure in the market for satellite broadband services
      to develop as expected may have a material adverse effect on our business.




**9.
      We may be subject to significant liability for our products.**




If
      our
      products contain defects, we may be subject to significant liability claims
      from
      subscribers and other users of our products and incur significant unexpected
      expenses or lost revenues. Our telecommunications products are complex and
      may
      contain undetected errors or failures. If this happens, we may experience delay
      in or loss of market acceptance and sales, products returns, diversion of
      research and development resources, injury to our reputation or increased
      service and warranty costs. We also have exposure to significant liability
      claims from our customers because our products are designed to provide critical
      communications services. Although we attempt to limit such exposure through
      product liability insurance and through contractual limitations in our customer
      agreements, such precautions may not cover all potential claims resulting from
      a
      defect in one or more of our products. Failure of our products to perform
      satisfactorily may have a material adverse effect on our operating results.




**Critical
      Accounting Policies**




The
      following is a discussion of our critical accounting policies pertaining to
      accounts receivable, equipment, license, revenue recognition and the use of
      estimates.





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*Accounts
      Receivable*




Trade
      accounts receivable are recorded at the invoiced amount and do not bear
      interest. The allowance for doubtful accounts represents our estimate of the
      amount of probable credit losses existing in our accounts receivable. We
      determine the allowance based on management’s estimate of likely losses based on
      a review of current open receivables and our historical write-off experience.
      We
      review the adequacy of our allowance for doubtful accounts quarterly.
      Significant individual accounts receivable balances and balances which have
      been
      outstanding greater than 90 days are reviewed individually for collectibility.
      Account balances, when determined to be uncollectible, are charged against
      the
      allowance.




*Equipment*




Equipment,
      including betterments which extend the useful life of the asset, are stated
      at
      cost. Maintenance and repairs are charged to expense when incurred. We provided
      for the depreciation of our equipment using the straight-line method over the
      estimated useful lives. Our method of depreciation does not change when
      equipment becomes idle; we continue to depreciate idled equipment on a
      straight-line basis. No provision for salvage value is considered in determining
      depreciation of our equipment. We review our assets for impairment when events
      or changes in circumstances indicate that the carrying values of certain assets
      either exceed their respective fair values or may not be recovered over their
      estimated remaining useful lives. Provisions for asset impairment are charged
      to
      income when estimated future cash flows, on an undiscounted basis, are less
      than
      the asset’s net book value. Impairment charges are recorded based on discounted
      cash flows. There were no impairment charges to equipment during the years
      ended
      December 31, 2004 and 2003.




*License*




In
        March
        2005, we entered into an agreement to sell our lateral drilling license for
        $1.3
        million and have fully impaired the asset while creating an account receivable
        for the sales value. We provide for amortization of our license using the
        straight-line method over the estimated useful lives. We review our carrying
        value of the license for impairment on an annual basis or when events or
        changes
        in circumstances indicate that the carrying values may no longer be appropriate.
        We assess 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. There were no impairment charges to the
        lateral drilling license during the years ended December 31, 2003 but we
        charged
        $3.2 million to impairment expense at December 31, 2004.




*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. We provide no warranty but sell commercially obtained 3 to 12 month
      warranties for satellite hardware. We have 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. In accordance with Emerging Issues Task
      Force Issue No. 00-14, we recognize reimbursements received from third parties
      for out-of-pocket expenses incurred as revenues and account for out-of-pocket
      expenses as direct costs.




*Use
      of Estimates*




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      certain estimates and assumptions that affect the reported amounts of assets
      and
      liabilities and disclosures of contingent assets during the reporting period.
      Actual results could differ from such estimates.




Estimates
      are used by management in the following financial reporting areas:




•
            Allowance
                for doubtful accounts,




•
            Depreciation
                and amortization,




•
            Asset
                impairment,




•
            Income
                taxes and





29
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            of Contents*





•
            Stock
                option disclosures.




For
      additional information on our accounting policies, see Note 1 of Notes to
      Financial Statements included as part of Item 7 of this Report.




**Fiscal
      Year ended December 31, 2004 Compared to the Fiscal Year Ended December 31,
      2003**




*Lateral
      Drilling Services*




Lateral
      Drilling Services’ revenues increased by $273,000 to $739,000 for the year ended
      December 31, 2004 compared to $466,000 for the year ended December 31, 2003.
      The
      operating margin from Lateral Drilling Services improved by $419,000 to a loss
      of $129,000 for the year ended December 31, 2004 compared to a loss of $548,000
      for the year ended December 31, 2003. We have had mixed results using the
      Landers technology and therefore have been unable to generate a profit during
      either year. The 2003 results were also negatively affected by the initial
      start-up costs of the lateral drilling service.




Effective
      as of October 27, 2004, we entered into a licensing agreement to develop a
      new
      generation of lateral drilling technology using the AFJ process. In the short
      term, the development activity will decrease lateral drilling revenues until
      such time as the new technology rigs are deployed into commercial operations.




*Satellite
      Communications Services*




Satellite
      Communication Services’ revenues increased by $296,000 to $715,000 for the year
      ended December 31, 2004 compared to $419,000 for the year ended December 31,
      2003. The operating margin from Satellite Communication Services improved by
      $163,000 to a loss of $6,000 for the year ended December 31, 2004 compared
      to a
      loss of $169,000 for the year ended December 31, 2003. As this segment of our
      business grows it becomes more efficient and realizes economies of scale.




As
      hardware is sold, we recognize the revenue in the period it is delivered to
      the
      customer. We bill some of our bandwidth contracts in advance, but recognize
      revenue over the period benefited. At December 31, 2004, there was $317,615
      reflected in the balance sheet as deferred revenue relating to Satellite
      Communication Services.




*Selling,
      General and Administrative*




Selling,
      general and administrative (“SG&A”) expenses decreased by $1.9 million to
      $4.7 million for the year ended December 31, 2004 compared to $6.6 million
      for
      the year ended December 31, 2003. The following table details the major
      components of SG&A expense over the periods.




**2004**
            
            **2003**
            
            **Increase**
              **(Decrease)**Payroll
                and related costs
            
            $
            773,538
            
            $
            828,117
            
            $
            (54,579
            )Option
                and warrant expense
            
            
            747,480
            
            
            2,392,291
            
            
            (1,644,811
            )License
                fee
            
            
            735,192
            
            
            —
            
            
            735,192Legal
                fees
            
            
            718,678
            
            
            518,077
            
            
            200,601External
                services
            
            
            567,883
            
            
            446,606
            
            
            121,277Insurance
            
            
            447,109
            
            
            157,254
            
            
            289,855Liquidated
                damages
            
            
            500,000
            
            
            —
            
            
            500,000Travel
                & entertainment
            
            
            139,627
            
            
            193,393
            
            
            (53,766
            )Office
                rent
            
            
            66,777
            
            
            42,325
            
            
            24,452Communications
            
            
            55,842
            
            
            60,935
            
            
            (5,093
            )Expired
                purchase option
            
            
            —
            
            
            620,000
            
            
            (620,000
            )Purchase
                guarantee
            
            
            —
            
            
            300,000
            
            
            (300,000
            )Impairment
                on software
            
            
            —
            
            
            1,000,000
            
            
            (1,000,000
            )Miscellaneous
            
            
            265
            
            
            55,541
            
            
            (55,276
            )$
            4,752,391
            
            $
            6,614,539
            
            $
            (1,862,148
            )




The
      decrease in option and warrant expense can be attributed to the fact that in
      2004, we started issuing options at market price and therefore recognized no
      expense under our accounting policy (see Financial Note 14). The license fee
      is
      related to the lateral drilling license and note payable with Carl Landers.
      We
      issued 300,000 shares of our common stock with a value of $1.9 million to reduce
      the then outstanding note balance by $1.2 million and record expense of $0.7
      million. Legal fees continue to increase due to the level of legal activity
      we
      have experienced over the last two years. Our external services have increased
      due to greater reliance on independent contractors instead of employees and
      rising audit fees. The increase in the cost of insurance was primarily
      attributable to the increase in the directors and officers liability policy
      premium due to legal activity. The liquidated damages relate to our delay in
      registering shares that we sold (see Financial Note 13). In 2003, we paid $0.5
      million for a sixteen day option to purchase a large gas field with significant
      gas production. The purchase option expired and we incurred additional fees
      of
      $120,000 related to the transaction. In 2003, we guaranteed Edge’s purchase of
      oil and gas properties from another entity (see Financial Note 17). In 2003,
      we
      issued 2 million shares of common stock for what management believed was
      satellite communications management software pursuant to an asset purchase
      agreement with a related party. Subsequently, management determined that the
      software was impaired by $1.0 million.





30
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            of Contents*





*Depreciation
      and Amortization*




Depreciation
      and amortization expense increased by $293,000 to $0.5 million for the year
      ended December 31, 2004 compared to $220,000 for the year ended December 31,
      2003. This increase can be attributed to the depreciation on the four drilling
      rigs in service for 2004, compared to only two rigs in service for three months
      of 2003 and the amortization on the drilling license acquired in late 2003.




*Debt
      Forgiveness Income*




In
      2003,
      we negotiated settlements with 9 vendors for various debts originally recorded
      on the books at $0.5 million for $44,000 cash and 33,333 shares of stock valued
      at $.50 resulting in debt forgiveness income of $460,000. There was no similar
      event in 2004.




*Gain
      or Loss on Sale of Property*




In
      2004,
      we had a net loss from the sale and or disposition of equipment in the normal
      course of business of $11,000. In 2003, we recognized a gain of $120,000 from
      the assignment of a 75% net revenue interest in property located in Monroe,
      Louisiana. We received the net revenue interest from a third party in exchange
      for agreeing to perform lateral drilling services on the property. In October
      2003, we assigned the net revenue interest to Edge for $200,000. Edge paid
      us
      $120,000 and agreed to pay the balance of $80,000 by March 31, 2004. The $80,000
      was not collected and under terms of the Settlement Agreement and Mutual Release
      entered into with Edge, we have relinquished our right to these funds (See
      Item
      3. Legal Proceedings).




*Asset
      Impairment Expense*


We
      charged $3,175,000 to impairment expense at December 31, 2004 to recognize
      the
      difference in the carrying value and the market price when we entered into
      the
      sale of the Landers license to Maxim for $1.3 million.





*Interest
      Expense*




Interest
      expense decreased by $108,000 to $105,000 for the year ended December 31, 2004
      compared to $213,000 for the year ended December 31, 2003. The decrease in
      expense can be attributed to an average debt outstanding for the year ended
      December 31, 2004 of approximately $0.7 million compared to average debt
      outstanding of approximately $1.9 million for the year ended December 31, 2003.




*Net
      Loss*




The
        net
        loss for the year ended December 31, 2004 increased to $8.8 million from
        $7.4
        million for the year ended December 31, 2003. The increase is attributable
        to
        the major items explained above. The tax benefit associated with our loss
        has
        been fully reserved as we have recurring net losses and it is more likely
        than
        not that tax benefits will not be realized.




**Liquidity
      and Capital Resources**




As
      of
      December 31, 2004 and 2003, our cash balance was $267,000 and $1.4 million,
      respectively. The cash balance at December 31, 2003 was generated by an equity
      offering and was utilized to pay debt and to fund operations. We have $185,000
      of debt that becomes due on May 14, 2005, $350,000 of convertible notes that
      becomes due on December 31, 2005 and a $50,000 note that is due on demand.
      In
      addition, we have $200,000 of convertible notes with related parties that mature
      on May 31, 2006. Both sets of convertible notes are convertible into common
      stock at the rate of one share for each $2.00 of principal and interest
      outstanding.




In
      February 2005, we entered into an Agreed Judgment and Order of Severance with
      Gryphon as to all breach of contract claims related to our delay in registering
      common stock acquired by Gryphon in October 2003. Under the terms of the Agreed
      Judgment, we are obligated to pay liquidated damages of $0.5 million to Gryphon
      on or before September 30, 2005. In March 2005, we agreed to sell our master
      license for the Landers lateral drilling technology and retain a sub-license
      for
      $1.3 million in cash and the release of $270,000 of supplier obligations. The
      1.3 million will be collected over the course of 2005.





31
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            of Contents*





We
      are
      also subject to significant contingent liabilities as more fully described
      in
      the Notes to the Financial Statements (See Financial Note 17).




As
      noted
      in the Independent Auditors Report (See Financial Note 2) due to the continued
      substantial operating losses that we have incurred raises substantial doubt
      as
      to our ability to continue as a going concern. We are in an early stage of
      development and are rapidly depleting our cash resources, therefore we have
      determined that we will need to raise additional financing in the short term
      to
      continue in operation and fund future growth. We currently plan to raise
      additional financing in the quarter ending March 31, 2005. The use of stock
      for
      currency in financing or making acquisitions has been heavily curtailed while
      we
      have been under SEC investigation. (See Financial Note 17) If we are unable
      to
      arrange new financing or generate sufficient revenue from new business
      arrangements, we will be unable to continue in our current form and will be
      forced to restructure or seek creditor protection.




**Capital
      Expenditures**




We
      expect
      to spend approximately one million dollars in 2005 for the building of the
      first
      rig utilizing the AFJ cutting technology. As of December 31, 2004, we had no
      commitments towards this project. The project will be financed either through
      the issuance of stock, debt, project equity or from the proceeds of the license
      sold in March of 2005. Capital expenditures for 2004 were $3,705 as compared
      to
      $799,493 from 2003. Capital expenditures for 2003 include the purchase of four
      drilling rigs for $737,720.




**Research
      and Development, Patents and Licenses**




We
      believe our future success depends on the ability to effectively utilize the
      lateral drilling technology obtained in a license granted by Mr. Landers and
      the
      AFJ technology currently under development. See “Patents and Licenses” in the
      Description of Business section of this Form 10-KSB.




**Item
      7. Financial Statements**




**Index
      to Financial Statements**




**Page**Report
                of Independent Registered Public Accounting Firm
            35Balance
                Sheet at December 31, 2004
            36Statements
                of OperationsYears
                ended December 31, 2004 and 2003
            37Statements
                of Stockholders’ EquityYears
                ended December 31, 2004 and 2003
            38Statements
                of Cash FlowsYears
                ended December 31, 2004 and 2003
            40Notes
                to Financial Statements
            41 -
                57




32
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            of Contents*








**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
      the
      Board of Directors


Verdisys,
      Inc.


Houston,
      Texas




We
      have
      audited the accompanying balance sheet of Verdisys, Inc. as of December 31,
      2004
      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 standards of the Public Company
      Accounting Oversight Board (United States). 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,
      2004 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.




As
        described in Note 23 to the financial statements, the accompanying consolidated
        balance sheet as of December 31, 2004 and consolidated statement of operations
        and cash flows for the year ended have been restated to reflect the impairment
        of the carrying value of the Company's intellectual property as of December
        31,
        2004.




MALONE
      & BAILEY, PC




www.malone-bailey.com




Houston,
      Texas




March
        21,
        2005 (March 29, 2006 as to the effects of the restatement as described in
        Note
        23)




33
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            of Contents*





**V** **ERDISYS** **,
      I** **NC** **.**


BALANCE
      SHEET


December
      31, 2004




**ASSETS**
              
              (Restated)Current
                  AssetsCash
              
              $
              266,917Accounts
                  receivable, net of allowance for doubtful accounts of
                  $30,000
              
              
              58,726Lease
                  receivable
              
              
              125,000License
                  receivable
              
              
              1,300,000Other
                  current assets
              
              
              44,076Total
                  Current Assets
              
              
              1,794,719Equipment,
                  net of accumulated depreciation of $130,467
              
              
              447,401License,
                  net of accumulated amortization of $549,167
              
              
              -Total
                  Assets
              
              $
              2,242,120**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**Current
                  LiabilitiesAccounts
                  payable
              
              $
              738,442Accrued
                  expenses
              
              
              1,270,732Deferred
                  revenue
              
              
              254,726Customer
                  deposit
              
              
              276,850Notes
                  payable - related parties, net of unamortized discount of
                  $7,674
              
              
              102,326Notes
                  payable, net of unamortized discount of $74,148
              
              
              400,852Total
                  Current Liabilities
              
              
              3,043,928Long
                  Term LiabilitiesNotes
                  payable - related parties, net of unamortized discount of
                  $50,622
              
              
              149,378Deferred
                  revenue, less current portion
              
              
              81,878Total
                  Liabilities
              
              
              3,275,184Commitments
                  & ContingenciesStockholders’
                  EquityCommon
                  Stock, $.001 par value, 50,000,000 shares authorized, 33,443,691
                  shares
                  issued and outstanding
              
              
              33,444Additional
                  paid-in capital
              
              
              26,000,119Accumulated
                  deficit
              
              
              (27,066,627
              )Total
                  Stockholders’ Equity
              
              
              (1,033,064
              )Total
                  Liabilities and Stockholders’ Equity
              
              $
              2,242,120




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




34
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            of Contents*





**V** **ERDISYS** **,
      I** **NC** **.**


STATEMENTS
      OF OPERATIONS


Years
      Ended December 31, 2004 and 2003




**2004**
                  
                  **2003****Revenue**
                  
                  (Restated)Satellite
                      Service - third parties
                  
                  $
                  714,634
                  
                  $
                  419,247Drilling
                      ServicesThird
                      parties
                  
                  
                  716,163
                  
                  
                  7,444Related
                      parties
                  
                  
                  22,547
                  
                  
                  458,750Total
                      Revenue
                  
                  
                  1,453,344
                  
                  
                  885,441**Cost
                      of Services Provided**Satellite
                      ServicesThird
                      parties
                  
                  
                  720,912
                  
                  
                  588,498Drilling
                      ServicesThird
                      parties
                  
                  
                  868,160
                  
                  
                  787,560Related
                      parties
                  
                  
                  —
                  
                  
                  226,611Total
                      Cost of Services Provided
                  
                  
                  1,589,072
                  
                  
                  1,602,669**Gross
                      Loss**
                  
                  
                  (135,728
                  )
                  
                  (717,228
                  )**Operating
                      Expenses**Selling,
                      general & administrative
                  
                  
                  4,752,391
                  
                  
                  6,614,539Depreciation
                      and amortization
                  
                  
                  512,706
                  
                  
                  219,692Bad
                      debts
                  
                  
                  73,249
                  
                  
                  172,003Asset
                      Impairment
                  
                  
                  3,175,833**Operating
                      Loss**
                  
                  
                  (8,649,907
                  )
                  
                  (7,723,462
                  )**Other
                      (Income) Expense**Debt
                      forgiveness income
                  
                  
                  —
                  
                  
                  (460,235
                  )Loss
                      (gain) on sale of property
                  
                  
                  11,237
                  
                  
                  (120,000
                  )Interest
                      income
                  
                  
                  (89
                  )
                  
                  (417
                  )Interest
                      expense
                  
                  
                  105,053
                  
                  
                  213,235Total
                      other (income) expense
                  
                  
                  116,201
                  
                  
                  (367,417
                  )**Net
                      Loss**
                  
                  $
                  (8,766,108
                  )
                  $
                  (7,356,045
                  )Basic
                      and diluted net loss per share
                  
                  $
                  (.28
                  )
                  $
                  (.33
                  )Weighted
                      average shares outstanding
                  
                  
                  31,415,041
                  
                  
                  22,180,185




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




35
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            of Contents*





**V** **ERDISYS** **,
      I** **NC** **.**


STATEMENT
      OF STOCKHOLDERS’ EQUITY


Years
      Ended December 31, 2003 and 2004 (Restated)




**Preferred
                Stock**
            
            **Common
                Stock****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**Balances,
                December 31, 2002
            
            
            1,410,000
            
            $
            705,000
            
            
            13,553,139
            
            $
            13,553Series
                B preferred stock exchanged for common stock
            
            
            (1,410,000
            )
            
            (705,000
            )
            
            1,410,000
            
            
            1,410Stock
                issued for:Cash,
                net of fundraising costs
            
            
            
            
            
            
            
            
            2,740,733
            
            
            2,741Services
            
            
            
            
            
            
            
            
            4,679,194
            
            
            4,679Accounts
                payable
            
            
            
            
            
            
            
            
            33,333
            
            
            33Notes
                payable and accrued interest
            
            
            
            
            
            
            
            
            2,890,688
            
            
            2,891Cash
                exercise of warrants and options
            
            
            
            
            
            
            
            
            1,995,178
            
            
            1,995Cashless
                exercise of warrants for note payment
            
            
            
            
            
            
            
            
            200,000
            
            
            200Note
                payment on lease
            
            
            
            
            
            
            
            
            125,000
            
            
            125Reduction
                of royalty
            
            
            
            
            
            
            
            
            500,000
            
            
            500RDGI
                merger
            
            
            
            
            
            
            
            
            1,500,000
            
            
            1,500Fair
                value of options and warrants issued for servicesContribution
                to capitalNet
                lossBalances,
                December 31, 2003
            
            
            —
            
            
            —
            
            
            29,627,265
            
            
            29,627Stock
                issued for:Cash,
                net of fundraising costs
            
            
            
            
            
            
            
            
            829,500
            
            
            830Services
            
            
            
            
            
            
            
            
            47,950
            
            
            48Accounts
                payable
            
            
            
            
            
            
            
            
            104,000
            
            
            104Notes
                payable, accrued interest and licensing fees
            
            
            
            
            
            
            
            
            300,000
            
            
            300Cash
                exercise of warrants and options
            
            
            
            
            
            
            
            
            1,207,198
            
            
            1,207Prior
                fundraising agreement
            
            
            
            
            
            
            
            
            277,778
            
            
            278Lawsuit
                settlements
            
            
            
            
            
            
            
            
            1,050,000
            
            
            1,050Fair
                value of options and warrants issued for servicesNet
                LossBalances,
                December 31, 2004
            
            
            —
            
            $
            —
            
            
            33,443,691
            
            $
            33,444




36
 *Table
            of Contents*





**V** **ERDISYS** **,
      I** **NC** **.**


STATEMENT
      OF STOCKHOLDERS’ EQUITY


Years
      Ended December 31, 2003 and 2004 (Restated)




**Paid-In**
                **Capital**
              
              **Retained**
                **Deficit**
              
              **Totals**Balances,
                  December 31, 2002
              
              $
              6,098,924
              
              $
              (10,944,474
              )
              $
              (4,126,997
              )Series
                  B preferred stock exchanged for common stock
              
              
              703,590Stock
                  issued for:Cash,
                  net of fundraising costs
              
              
              6,559,409
              
              
              
              
              
              6,562,150Services
              
              
              1,619,660
              
              
              
              
              
              1,624,339Accounts
                  payable
              
              
              16,633
              
              
              
              
              
              16,666Notes
                  payable and accrued interest
              
              
              1,503,299
              
              
              
              
              
              1,506,190Cash
                  exercise of warrants and options
              
              
              366,820
              
              
              
              
              
              368,815Cashless
                  exercise of warrants for note payment
              
              
              19,800
              
              
              
              
              
              20,000Note
                  payment on lease
              
              
              249,875
              
              
              
              
              
              250,000Reduction
                  of royalty
              
              
              2,274,500
              
              
              
              
              
              2,275,000RDGI
                  merger
              
              
              (1,500
              )
              
              
              
              
              —Fair
                  value of options and warrants issued for services
              
              
              1,844,311
              
              
              
              
              
              1,844,311Contribution
                  to capital
              
              
              488,000
              
              
              
              
              
              488,000Net
                  loss
              
              
              
              
              
              (7,356,045
              )
              
              (7,356,045
              )Balances,
                  December 31, 2003
              
              
              21,743,321
              
              
              (18,300,519
              )
              
              3,472,429Stock
                  issued for:Cash,
                  net of fundraising costs
              
              
              633,170
              
              
              
              
              
              634,000Services
              
              
              (48
              )
              
              
              
              
              —Accounts
                  payable
              
              
              51,873
              
              
              
              
              
              51,977Notes
                  payable, accrued interest and licensing fees
              
              
              1,919,700
              
              
              
              
              
              1,920,000Cash
                  exercise of warrants and options
              
              
              80,010
              
              
              
              
              
              81,217Prior
                  fundraising agreement
              
              
              (278
              )
              
              
              
              
              —Lawsuit
                  settlements
              
              
              836,950
              
              
              
              
              
              838,000Fair
                  value of options and warrants issued for services
              
              
              735,421
              
              
              
              
              
              735,421Net
                  Loss
              
              
              
              
              
              (8,766,108
              )
              
              (8,766,108
              )Balances,
                  December 31, 2004
              
              $
              26,000,119
              
              $
              (27,066,627
              )
              $
              (1,033,064
              )




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STATEMENT
      OF CASH FLOWS


Years
      Ended December 31, 2004 and 2003




**2004**
              
              **2003****Cash
                  Flows From Operating Activities**
              
              (Restated)Net
                  loss
              
              $
              (8,766,108
              )
              $
              (7,356,045
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Stock
                  issued for services or litigation
              
              
              1,573,192
              
              
              1,624,339Release
                  of deferred revenue from litigation settlement
              
              
              (565,750
              )
              
              —Option
                  and warrant expense
              
              
              544,579
              
              
              1,844,311Amortization
                  of note discount
              
              
              58,398
              
              
              —Depreciation
                  and amortization
              
              
              512,706
              
              
              219,692Debt
                  forgiveness income
              
              
              —
              
              
              (460,235
              )Guarantee
                  of third party debt
              
              
              (300,000
              )
              
              300,000Loss
                  (gain) on sale of property
              
              
              11,237
              
              
              (120,000
              )Asset
                  impairment
              
              
              3,175,833Bad
                  debts
              
              
              73,249
              
              
              172,003Changes
                  in:Accounts
                  receivable
              
              
              32,131
              
              
              (201,747
              )Accounts
                  receivable - related party
              
              
              —
              
              
              (23,960
              )Lease
                  receivable
              
              
              50,000
              
              
              —Employee
                  advances
              
              
              —
              
              
              42,620Accounts
                  payable
              
              
              473,437
              
              
              (277,755
              )Accrued
                  expenses
              
              
              787,767
              
              
              (171,815
              )Deferred
                  revenue
              
              
              15,039
              
              
              724,648Customer
                  deposit
              
              
              208,568
              
              
              68,282Net
                  Cash Used In Operating Activities
              
              
              (2,115,722
              )
              
              (3,615,662
              )**Cash
                  Flows From Investing Activities**Purchase
                  of equipment
              
              
              (3,705
              )
              
              (459,493
              )Cash
                  payments for license
              
              
              —
              
              
              (100,000
              )Proceeds
                  from sale of property
              
              
              12,500
              
              
              120,000Deposit
                  on equipment purchase
              
              
              —
              
              
              (340,000
              )Loan
                  to third party
              
              
              —
              
              
              (100,000
              )Net
                  Cash Provided By (Used In) Investing Activities
              
              
              8,795
              
              
              (879,493
              )**Cash
                  Flows From Financing Activities**Proceeds
                  from sales of common stock
              
              
              634,000
              
              
              6,562,150Proceeds
                  from exercise of options and warrants
              
              
              81,217
              
              
              368,815Proceeds
                  from notes payable, related parties
              
              
              345,000
              
              
              50,000Proceeds
                  from notes payable
              
              
              475,000
              
              
              —Payments
                  on notes payable, related parties
              
              
              (35,000
              )
              
              (363,558
              )Payments
                  on note payable related to license
              
              
              (500,000
              )
              
              (748,760
              )Net
                  Cash Provided By Financing Activities
              
              
              1,000,217
              
              
              5,868,647Net
                  change in cash
              
              
              (1,106,710
              )
              
              1,373,492Cash
                  at beginning of year
              
              
              1,373,627
              
              
              135Cash
                  at end of year
              
              $
              266,917
              
              $
              1,373,627Cash
                  paid during the year for:Interest
              
              $
              —
              
              $
              176,240Income
                  taxes
              
              $
              —
              
              $
              —




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**NOTE
      1 - SUMMARY OF SIGNIFICANT 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.




In
      2004
      and 2003, Verdisys provided lateral drilling services through the utilization
      of
      its drilling rigs by oil and gas operators primarily in Texas and Louisiana.
      Verdisys also provided satellite services to oil and gas companies throughout
      North America and West Africa.




*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.




*Equipment* .
      Equipment is valued at cost. Maintenance and repairs are charged to expense
      as
      incurred. Renewals and betterments which extend the life or improve existing
      equipment are capitalized. Upon disposition or retirement of equipment, the
      cost
      and related accumulated depreciation are removed and any resulting gain or
      loss
      is 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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*Stock
      Options and Warrants.* Verdisys
      accounts for all stock-based employee compensation plans in accordance with
      Statement of Financial Accounting Standard No. 123, *Accounting
      for Stock-Based Compensation* (“SFAS
      No. 123”), which permits the measurement of compensation expense in accordance
      with Accounting Principles Board Opinion 25 *Accounting
      for Stock Issued to Employees* (“APB
      25”). Under APB 25, no stock-based employee compensation cost is reflected in
      net income, as all options granted under those plans had an exercise price
      equal
      to or in excess of the market value of the underlying common stock on the date
      of grant. Verdisys accounts for 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 fair value
      of
      the services received or the fair value of the equity instruments issued
      whichever value is more reliably measurable. The following table illustrates
      the
      effect on net loss and net loss per share if Verdisys had applied the fair
      value
      provisions of SFAS No. 123 to stock-based employee compensation.




**2004**
              
              **2003**Net
                  loss as reported
              
              $
              (8,766,108
              )
              $
              (7,356,045
              )Less:
                  stock based compensation determined under fair value- based
                  method
              
              
              (2,337,230
              )
              
              (828,737
              )Pro
                  forma net loss
              
              $
              (11,103,338
              )
              $
              (8,184,782
              )Basic
                  and diluted net loss per common share: As reported
              
              $
              (.28
              )
              $
              (.33
              )Pro
                  forma
              
              
              (.35
              )
              
              (.37
              )




The
      weighted average fair value of the stock options granted during 2004 and 2003
      was $1.78 and $7.30, 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* .
      Verdisys utilizes the asset and liability method in accounting for income taxes.
      Under this method, deferred tax assets and liabilities are recognized for
      operating loss and tax credit carryforwards and for the future tax consequences
      attributable to differences between the financial statement carrying amounts
      of
      existing assets and liabilities and their respective tax bases. Deferred tax
      assets and liabilities are measured using enacted tax rates expected to apply
      to
      taxable income in the year in which those temporary differences are expected
      to
      be recovered or settled. The effect on deferred tax assets and liabilities
      of a
      change in tax rates is recognized in the results of operations in the period
      that includes the enactment date. A valuation allowance is recorded to reduce
      the carrying amounts of deferred tax assets unless it is more likely than not
      that such assets will be realized.




*Earnings
      Per Share* .
      Basic
      earnings per share equals net earnings divided by weighted average shares
      outstanding during the year. Diluted earnings per share includes the impact
      on
      dilution from all contingently issuable shares, including options, warrants
      and
      convertible securities. The common stock equivalents from contingent shares
      are
      determined by the treasury stock method. Verdisys has incurred net losses for
      the years ended December 31, 2004 and 2003 and has, therefore, excluded certain
      securities from the computation of diluted earnings per share as the effect
      would be anti-dilutive.




*Recently
      Issued Accounting Pronouncements* .
      In
      December 2004, the FASB issued SFAS No. 123R, “Accounting for Stock-Based
      Compensation.” SFAS No. 123R establishes standards for the accounting for
      transactions in which an entity exchanges its equity instruments for goods
      or
      services. This Statement focuses primarily on accounting for transactions in
      which an entity obtains employee services in share-based payment transactions.
      SFAS No. 123R requires that the fair value of such equity instruments be
      recognized as expense in the historical financial statements as services are
      performed. Prior to SFAS No. 123R, only certain pro forma disclosures of fair
      value were required. SFAS No. 123R shall be effective for small business issuers
      as of the beginning of the first interim or annual reporting period that begins
      after December 15, 2005. The impact of the adoption of this new accounting
      pronouncement would be similar to the Company’s calculation of the pro forma
      impact on net income of FAS 123 included in Note 1 above.




*Reclassifications.* Certain
      amounts in the financial statements of the prior year has been reclassified
      to
      conform to the presentation of the current year for comparative purposes.





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**NOTE
      2 - GOING CONCERN**




As
        shown
        in the accompanying financial statements, Verdisys incurred recurring net
        losses
        of $8,766,108 and $7,356,045 in 2004 and 2003, respectively, has an accumulated
        deficit of $27,066,627 and a working capital deficit of $1,249,209 as of
        December 31, 2004. 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.




**NOTE
      3 - LEASE RECEIVABLE**




In
      November of 2004, Verdisys sold one of its lateral drilling rigs to an unrelated
      third party under the terms of a seven month direct financing lease. After
      the
      lease payment for the seventh month is earned and received, the customer has
      the
      right to purchase the unit at a nominal cost of $1 on a “as is, where is” basis.
      The monthly payments are $25,000 resulting in a total purchase price of
      $175,000. The net book value of the equipment sold by Verdisys was $148,879.




At
      December 31, 2004, the receivable consists of five future lease payments. Under
      the terms of the lease a $25,000 security deposit was collected, this deposit
      can be applied to the last lease payment. Unearned income under the lease as
      of
      December 31, 2004 was $18,990.




**NOTE
      4 - EQUIPMENT**




Equipment
      consisted of the following at December 31, 2004:




**Description**
            
            **Life**
            
            **Amount**Lateral
                drilling equipment
            
            
            5
                years
            
            $
            548,480Computer
                equipment
            
            
            3
                years
            
            
            29,388577,868Less:
                accumulated depreciation
            
            
            
            
            
            (130,467
            )$
            447,401




Lateral
      drilling equipment consists of three 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 (see Note 22).




Depreciation
      expense totaled $159,352 and $23,881 in 2004 and 2003, respectively.




**NOTE
      5 - LATERAL DRILLING LICENSE & NOTE PAYABLE ON LICENSE TO RELATED PARTY**




In
      April
      2003, an individual licensed his horizontal 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.




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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. 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 issued the licensor 300,000 shares of common stock
      and $500,000 in cash for the unpaid amounts due under the original note. The
      300,000 shares had a value of $1,920,000 with approximately $1,185,000 reducing
      the overall note balance and approximately $735,000 recognized as compensation
      expense.




**NOTE
      6 - ACCRUED EXPENSES**




Accrued
      expenses at December 31, 2004 consisted of the following:




**Description**
            
            **Amount**Liquidated
                damages (see Note 17)
            
            $
            500,000Accrued
                payroll
            
            
            328,034Litigation
                settlement (see Note 22)
            
            
            240,000Director
                fees
            
            
            78,250Interest
            
            
            49,934Other
            
            
            74,514$
            1,270,732




**NOTE
      7 - DEFERRED REVENUE**




Verdisys
      bills some of its satellite bandwidth contracts in advance over periods ranging
      from 3 months to 36 months. Verdisys recognizes revenue evenly over the
      contract. Deferred revenue related to satellite services totaled $317,615,
      of
      which $235,737 will be recognized in 2005 and $81,878 will be recognized during
      2006.




Deferred
      revenue also includes the unearned income of $18,989 related to the equipment
      financing lease discussed in Note 3.




**NOTE
      8 - NOTES PAYABLE, RELATED PARTIES**




Notes
      payable, related parties at December 31, 2004 consisted of the following:




One
                year unsecured notes with officers and directors, 8%, maturing on
                May 14,
                2005, issued in connection with 40% warrant coverage to purchase
                Verdisys
                common stock at $2.00 per share during the term of the
                note.
            
            $
            110,000Convertible
                promissory notes with related individual and entity, 8%, maturing
                on May
                31, 2006, issued in connection with 100% warrant coverage to purchase
                Verdisys common stock at $.001 per share until October 26, 2005,
                conversion rate of one share of common stock for every $2.00 of
                outstanding principal and unpaid interest.
            
            
            200,000Less:
                discount for warrants
            
            
            58,296251,704Less:
                current maturities
            
            
            102,326Long-term
                debt, related parties
            
            $
            149,378




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**NOTE
      9 - NOTES PAYABLE**




Notes
      payable at December 31, 2004 consisted of the following:




One
                year unsecured notes, 8%, maturing on May 14, 2005, issued in connection
                with 40% warrant coverage to purchase Verdisys common stock at $2.00
                per
                share during the term of the note.
            
            $
            75,000Convertible
                promissory notes, 8%, maturing on December 31, 2005, issued in connection
                with 100% warrant coverage to purchase Verdisys common stock until
                December 31, 2005, conversion rate of one share of common stock for
                every
                $2.00 of outstanding principal and unpaid interest.
            
            
            350,000Note
                payable, individual, 10%, due on demand
            
            
            50,000Less:
                discount for warrants
            
            
            74,148$
            400,852




**NOTE
      10 - RELATED PARTY REVENUES**




Energy
      2000 NGC, Inc. (“Energy 2000”) is a subsidiary of Berg McAfee Energy, LLC, which
      is a wholly owned subsidiary of Berg McAfee Companies. Berg McAfee Companies
      are
      beneficial owners of more than 25% of Verdisys and Eric McAfee is a former
      Vice
      Chairman of the board and Chief Executive Officer of Verdisys. In April 2003,
      Verdisys signed a drilling service contract with 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.




Natural
      Gas Systems, Inc. (“NGS”) is an independent company with substantial
      shareholdings owned by Eric McAfee. In September 2003, Verdisys signed a
      drilling service contract with 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. The contract was subsequently suspended.




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. Verdisys billed $20,547
      and $2,000 to Energy 2000 and NGS, respectively, for expenses incurred in 2004.
      The amount billed to Energy 2000 was deemed uncollectible and the amount billed
      to NGS was collected. As of December 31, 2004, deferred revenues from related
      parties totaled $0. In October 2004, Verdisys entered into an agreement with
      Berg McAfee Companies, Energy 2000 and Eric McAfee to settle several outstanding
      legal issues. Under the agreement, Verdisys is entitled to retain the $68,750
      and Energy 2000 has waived all claims to the funds.





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**NOTE
      11 - INCOME TAXES**




During
      2004 and 2003, Verdisys incurred net losses and, therefore, had 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 $18,000,000 at December 31, 2004, and will expire in the years
      2019 through 2024.




At
      December 31, 2004, deferred tax assets consisted of the following:




Deferred
                tax assetsNet
                operating losses
            
            $
            6,300,000Less:
                valuation allowance
            
            
            (6,300,000
            )Net
                deferred tax asset
            
            $
            0




The
      change in the valuation allowance for the years ended December 31, 2004 and
      2003
      totaled $1,800,000 and $4,383,879, respectively.




**NOTE
      12 - PREFERRED STOCK**




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
      13 - 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, 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 expense.




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 RDGI, a
      publicly-reporting inactive entity. The shareholders of Verdisys received
      25,103,223 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 $2.00 per share anytime through September 5, 2008.




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





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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.




In
      October 2003, Verdisys sold 833,333 shares of common stock to Gryphon Master
      Fund, L.P. (“Gryphon”) 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 $6.00 per share that expire October 24, 2008, 9,501 warrants at $2.00 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. In October 2004, Verdisys
      issued 277,778 additional shares of common stock for no additional compensation
      as the 30 day average closing price of Verdisys’ common stock dropped below
      $6.00 per share in the ten months subsequent to the agreement. After this
      issuance, a total of 1,111,111 common shares were issued for an effective
      average price of $4.50 per share.




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, warrants were exercised for 245,631 shares of common stock
      and options were exercised for 100,000 shares of common stock for $29,564 and
      $10,000, respectively.




In
      February 2004, Verdisys issued 300,000 shares of common stock as part of a
      renegotiation of a note associated with the lateral drilling license and the
      license agreement. The shares had a value of $1,920,000 with $1,184,808 reducing
      the note balance and $735,192 recognized as expense.




In
      the
      first quarter of 2004, warrants were exercised for 779,957 shares of common
      stock and options were exercised for 25,000 shares of common stock for $38,494
      and $2,500, respectively. The exercised warrants included a cashless exercise
      of
      400,000 warrants for 395,022 shares of common stock.




In
      the
      second quarter of 2004, warrants were exercised for 57,658 shares of common
      stock and options were exercised for 344,583 shares of common stock for $5,766
      and $34,458, respectively.




From
      May
      through June 2004, Verdisys sold 179,500 shares of common stock at a price
      of
      $2.00 per share in a private placement for total proceeds of $359,000. Two
      year
      warrants to purchase 71,800 shares of common stock at a price of $2.00 per
      share
      were issued in connection with the private placement. The proceeds were
      allocated between the common stock and the warrants based on their respective
      relative fair values. Offering costs consisted of 17,950 shares of common stock
      and 7,180 warrants exercisable at $2.00 per share until August 23, 2006.




During
      the third quarter of 2004, Verdisys issued 30,000 shares of common stock for
      commissions on a future fundraising effort. Verdisys also issued 300,000 shares
      of common stock for a lawsuit settlement valued at $213,000.




During
      the fourth quarter of 2004, Verdisys issued 104,000 shares of common stock
      in
      payment of consulting services valued at $52,000. Verdisys also sold 250,000
      shares of common stock at a price of $0.30 per share in the fourth quarter
      to
      settle a dispute with a former consultant.




In
      October 2004, Verdisys issued 750,000 shares of common stock in a move to settle
      outstanding litigation matters. In a Settlement Agreement and Mutual Release
      (“Agreement) between Edge Capital Group, Inc. (“Edge”), Eric McAfee and
      Verdisys, the parties would release each other from any claims upon the
      completion of the terms of the Agreement (see Note 17). One of the provisions
      under the Agreement was that 250,000 shares of Verdisys common stock were issued
      to Edge and 500,000 shares of Verdisys common stock were issued to Eric McAfee.




During
      the fourth quarter of 2004, Verdisys sold 400,000 shares of common stock at
      a
      price of $0.50 per share to Berg McAfee. The sale had a provision that allows
      the buyer to re-price the shares to the extent Verdisys offers more favorable
      terms to third parties prior to March 31, 2005. This provision will result
      in
      the issuance of two year warrants to purchase 400,000 shares of Verdisys common
      stock at a price of $1.00 per share.





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**NOTE
      14 - STOCK OPTIONS AND WARRANTS**




*Options*




In
      April
      2003, Verdisys granted options to purchase 780,000 shares of common stock to
      an
      employee, options to purchase 250,000 shares of common stock to non-employee
      directors and options to purchase 250,000 shares of common stock to an employee
      director. The options all have an exercise price of $0.10 per share and a ten
      year term. The market value at time of grant was $0.50 per share resulting
      in an
      intrinsic value of $512,000. 30,000 options vest monthly over four months,
      750,000 options vest quarterly over three years and 500,000 options vest
      quarterly over one year.




In
      August
      2003, Verdisys granted options to purchase 100,000 shares of common stock to
      an
      employee at an exercise price of $4.10 per share, the market price at the date
      of grant. The options vest quarterly over one year and have a five year term.




In
      December 2003, Verdisys granted options to purchase 500,000 shares of common
      stock to an officer/director with an exercise price of $9.55 per share, the
      market price at the date of grant. The options have a ten year term. 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.




Verdisys
      recorded expense of $714,524 for the intrinsic value associated with options
      vesting in 2003. The expense is included in selling, general &
administrative expense on the statement of operations.




In
      January 2004, Verdisys granted options to purchase 230,000 shares of common
      stock to officers and options to purchase 80,000 shares of common stock to
      non-employee directors at an exercise price of $4.28 per share, the market
      price
      at the date of grant. The options have a ten year term. The options granted
      to
      the officers vest quarterly over one year, while the options granted to the
      directors vested immediately.




In
      May
      2004, Verdisys granted options to purchase 72,000 shares of common stock to
      non-employee directors at an exercise price of $2.20 per share, the market
      price
      at the date of grant. The options vest quarterly over one year and have a ten
      year term.




In
      July
      2004, Verdisys granted options to purchase 770,000 shares of common stock to
      officers at an exercise price of $0.90 per share, the market price at the date
      of grant. The options vest quarterly over three years and have a ten year term.




Verdisys
      recorded expense of $245,829 for the intrinsic value associated with options
      vesting in 2004. The expense is included in selling, general &
administrative expense on the statement of operations.




*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 warrants to purchase 200,000 shares of common stock at
      $0.10 per share. Half of the warrants expire in January 2007 and the remainder
      expires 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 the two original founders
      for various debts recorded on the books at $576,000 by paying cash of $28,000
      and issuing warrants to purchase 150,000 shares of common stock at $0.10 per
      share. The warrants were valued at $0.40 or $60,000, resulting in a contribution
      to capital of $488,000 (see Note 19).




During
      the fall of 2003, Verdisys issued warrants to purchase 92,835 shares of common
      stock, 83,334 at $6.00 per share that expire October 2008 and 9,501 at $2.00
      per
      share that expire September 2008. The warrants were issued in connection with
      raising the $5,000,000 from Gryphon (see Note 13) and their fair value of
      $822,738 was treated as a cost of fundraising.




Verdisys
      issued warrants to purchase 2,644,438 shares of common stock in 2003 at an
      exercise price $0.10 per share. The fair value of $1,050,687 has been expensed
      accordingly in 2003.





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In
      2003,
      previously expired warrants to purchase 232,334 shares of common stock were
      extended and exercised. At the time of the extension Verdisys stock was selling
      for $0.50 per share in private placements and the warrant was exercised at
      $0.75
      per share. Using the minimum value method, the modification resulted in no
      additional compensation expense.




In
      May
      2004, Verdisys borrowed $185,000 under one year promissory notes issued to
      certain private investors with interest of 8%. Warrants to purchase 37,000
      shares of our common stock at $2.00 per share were issued in connection with
      the
      notes (see Notes 8 and 9). The warrants have a term of one year. The notes
      have
      been discounted for the relative fair value of the warrants.




From
      May
      to June 2004, Verdisys issued warrants to purchase 71,800 shares of common
      stock
      at $2.00 per share in connection with the private placement that raised $359,000
      (see Note 13). An additional warrant to purchase 7,180 shares of common stock
      at
      $2.00 per share was issued as part of the offering costs of the private
      placement. The warrants have a term of two years.




In
      July
      2004, Verdisys issued $200,000 in convertible notes to third party lenders
      and
      warrants to purchase 100,000 shares of common stock at an exercise price of
      $0.001 per share. The warrants have a term of one year. We also issued $150,000
      in convertible notes to third party lenders and warrants to purchase 75,000
      shares of common stock at an exercise price of $0.01 per share. The warrants
      have a term of two years. The notes have been discounted for the relative fair
      value of the warrants (see Note 9).




In
      August
      2004, Verdisys issued warrants to purchase 140,000 shares of common stock at
      $0.80 per share to certain subcontractors. The warrants vest at the rate of
      20%
      immediately and then 20% every 90 days thereafter until fully vested. The
      warrants have a term of two years. The fair value of $98,000 was expensed in
      2004.




In
      October 2004, Verdisys issued $200,000 in convertible notes to Berg McAfee
      Company and Eric McAfee ($100,000 each) and warrants to purchase 100,000 shares
      of common stock at $0.001 per share (see Note 8). The warrants have a term
      of
      one year. The notes have been discounted for the relative fair value of the
      warrants.




In
      October 2004, Verdisys issued warrants to purchase 250,000 shares of common
      stock at $0.50 per share to Alberta Energy Holdings (“Alberta”) as part of a
      licensing agreement (see Note 17). The warrants have a term of three years.
      The
      fair value of $199,750 was expensed in 2004.




Summary
      information regarding options and warrants is as follows:




**Options**
            
            **Weighted**
              **Average**
              **Share Price**
            
            **Warrants**
            
            **Weighted**
              **Average**
              **Share Price**Outstanding
                at December 31, 2002
            
            
            9,502,189
            
            $
            0.10
            
            
            3,550,909
            
            $
            0.33Year
                ended December 31, 2003:Granted
            
            
            1,880,000
            
            
            2.83
            
            
            3,319,607
            
            
            0.26Exercised
            
            
            (2,509,291
            )
            
            0.10
            
            
            (2,092,961
            )
            
            0.10Forfeited
            
            
            (4,760,522
            )
            
            0.23
            
            
            (352,840
            )
            
            0.31Outstanding
                at December 31, 2003
            
            
            4,112,376
            
            
            1.35
            
            
            4,424,715
            
            
            0.38Year
                ended December 31, 2004:Granted
            
            
            1,152,000
            
            
            1.89
            
            
            780,980
            
            
            0.48Exercised
            
            
            (369,583
            )
            
            0.10
            
            
            (837,605
            )
            
            0.10Forfeited
            
            
            (2,481,113
            )
            
            1.47
            
            
            (573,871
            )
            
            0.18Outstanding
                at December 31, 2004
            
            
            2,413,680
            
            $
            1.67
            
            
            3,794,219
            
            $
            0.49





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Options
      outstanding and exercisable as of December 31, 2004:




**Outstanding**
              
              **Exercisable****Exercise Price**
              
              **Number**
                **of
                  Shares**
              
              **Remaining**
                **life**
              
              **Number**
                **of
                  Shares**$  0.10
              
              
              5,000
              
              
              6
                  years
              
              
              5,0000.10
              
              
              118,556
              
              
              7
                  years
              
              
              118,5560.10
              
              
              954,792
              
              
              8
                  years
              
              
              685,7909.55
              
              
              183,332
              
              
              9
                  years
              
              
              183,3324.28
              
              
              310,000
              
              
              9
                  years
              
              
              252,5002.20
              
              
              72,000
              
              
              9
                  years
              
              
              36,0000.90
              
              
              770,000
              
              
              10
                  years
              
              
              128,3332,413,680
              
              
              
              
              
              1,409,511




Warrants
      outstanding and exercisable as of December 31, 2004:




**Outstanding**
              
              **Exercisable****Exercise Price**
              
              **Number**
                **of
                  Shares**
              
              **Remaining**
                **life**
              
              **Number
                  of**
                **Shares**$  0.00 -
                  0.15
              
              
              1,150,000
              
              
              1
                  years
              
              
              1,150,0002.00
              
              
              378,482
              
              
              1
                  years
              
              
              378,4820.01
                  - 0.50
              
              
              260,889
              
              
              2
                  years
              
              
              218,8891.00
              
              
              85,000
              
              
              2
                  years
              
              
              85,0002.00
              
              
              16,180
              
              
              2
                  years
              
              
              16,1800.10
                  - 0.50
              
              
              1,810,833
              
              
              3
                  years
              
              
              1,810,8332.00
              
              
              9,501
              
              
              4
                  years
              
              
              9,5016.00
              
              
              83,334
              
              
              4
                  years
              
              
              83,3343,794,219
              
              
              
              
              
              3,752,219




**NOTE
      15 - CONCENTRATIONS**




One
      customer accounted for 14% and 38% of total revenues in 2004 and 2003,
      respectively. Related parties accounted for 2% and 52% of total revenues in
      2004
      and 2003, respectively.




Verdisys
      at times has cash in bank in excess of Federal Deposit Insurance Corporation
      (“FDIC”) insurance limits. At December 31, 2004, Verdisys had $160,262 in cash
      in excess of FDIC insurance limits.




Verdisys
      performs ongoing credit evaluations of its customers’ financial condition and
      does not generally require collateral from them.





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**NOTE
      16 - COMMITMENTS & CONTINGENCIES**




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 only paid Verdisys $120,000.
      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
      December 31, 2004, Verdisys had not delivered the necessary lease and Edge
      had
      the right under the agreement to request a refund of the $120,000 (see Note
      20).
      Effective January 19, 2005, Verdisys, Edge and certain other parties entered
      in
      a settlement agreement and mutual release to fully settle and resolve disputes
      among the parties. Under the settlement, Verdisys will retain the $120,000
      already received and both Edge and Verdisys will drop their claims in the
      dispute. See Note 22 for further details.




Under
      the
      terms of the Landers lateral drilling license (see Note 5), Verdisys is
      obligated to pay a royalty of $500 for every well in which that technology
      is
      utilized. The Landers license expires upon the expiration of the underlying
      patents, the earliest date being October 2013.




Under
      the
      terms of an exclusive worldwide licensing agreement for the application of
      Abrasive Fluid Jet (“AFJ”) cutting technique, Verdisys agreed to pay Alberta a
      $10,000 per month consulting fee for six months beginning on November 30, 2004.
      In addition, royalties are payable by Verdisys at the rate of $1,000 per well
      for services billed at $40,000 or less and for services above $40,000, a royalty
      of 2% per well is payable quarterly. As specific phases of the AFJ process
      are
      successfully applied, Alberta is entitled to receive four tranches of warrants
      to purchase 250,000 shares of common stock. The first tranche has already been
      issued (see note 14). The warrants have a three year term, with an exercise
      price of $0.62 per share for the pending tranches. The agreement also provides
      for the mutual sharing of the proceeds from the sale of the technology with
      Verdisys, subject to a maximum of $10 million. The AFJ license is for a term
      of
      ten years and automatically extends for additional two-year terms.




Three
      of
      Verdisys’ employees are under employment agreements. One agreement was entered
      into June 2003 and provides for a base salary of $150,000 in year one, $180,000
      in year two and $210,000 in year three. The other agreements have a one year
      term but provide for one year renewals. One of the agreements is for a minimum
      base salary of $185,000, while the other agreement provides for a $20,000
      escalation for two years from the original base salary of $175,000 in 2004.




**NOTE
      17 - LITIGATION**




*Lawsuits
      involving Edge Capital Group, Inc. (Settled)*




Effective
      January 19, 2005, Edge, certain entities affiliated with Edge, Eric McAfee
      (Verdisys’ former Vice Chairman) and Verdisys, entered into a Settlement
      Agreement and Mutual Release to fully settle and resolve the disputes between
      Edge and its affiliated entities, Mr. McAfee, Verdisys’ directors and Verdisys
      (see Note 22). The settlement removed Verdisys’ liability for a $300,000
      guarantee and deferred revenue of $497,000. 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 due in 2004. Edge defaulted
      on the note and had requested Verdisys to pay the amounts due. In June 2003,
      Verdisys signed an agreement to drill wells for Edge and Edge paid $497,000
      in
      2003. Edged had disputed whether services were actually performed and requested
      the $497,000 to be returned to their third party financing source but did not
      initiate any court action. Verdisys had inadequate documentation to substantiate
      what services were actually performed, so the revenue was deferred in 2003.





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Verdisys
      had initiated a lawsuit against Edge that requested a declaratory judgment
      that
      a purported agreement between Verdisys and Edge was not enforceable. It was
      filed in Montgomery County, Texas in February 2004. The lawsuit arose from
      Edge’s contention that one of Verdisys’ ex-officers committed the company to
      purchase certain oil and gas properties from Edge. Edge had filed a counterclaim
      against Verdisys and asserted claims against Dan Williams (Verdisys’ former
      President and CEO), Eric McAfee, Ron Robinson (Verdisys former CEO and current
      Board member), Andrew Wilson (Verdisys former CFO) and Verdisys current Board
      members Joseph Penbera, Frederick Ruiz, James Woodward and John Block. Edge
      has
      also made claims against Solarcom, L.L.C., DeLage Landen Financial Services,
      Inc., Andrew Wilson and Allen Voight. Edge had sought to enforce the agreement
      Verdisys challenged and alleged several causes of action including claims for
      fraud, breach of contract, negligence and conspiracy. Edge had asserted actual
      damages in excess of $85 million and had claimed punitive damages as well.




Edge
      and
      one of its apparent owners, Frazier Ltd., initiated a lawsuit in Summin County,
      Ohio against Verdisys, Solarcom, L.L.C., DeLage Landen Financial Services,
      Inc.
      and Firstmerit Bank, N.A. that sought an injunction against the draw against
      a
      letter of credit pledged as collateral for a credit advanced to Edge. Edge
      asserted that its transaction with Verdisys was the product of fraud and that
      its creditor, DeLage Landen as assignee from Solarcom, should not be allowed
      to
      draw against Edge’s letter of credit from Firstmerit. The Ohio state court
      denied Edge’s request for a temporary injunction. The pleadings in the Ohio
      action did not include any claim for damages from Verdisys.




*Class
      Action Lawsuit (Settled)*




In
      March
      2005, Verdisys entered into an agreement, subject to court approval, to settle
      the class action lawsuit brought by former shareholders in March 2004 in the
      U.S. District Court for the Southern District. Under terms of the agreement,
      Verdisys will issue to the class 1,150,000 shares of common stock and pay up
      to
      $55,000 in legal and administrative fees for the plaintiffs. The lawsuit alleged
      that Verdisys and its former CEO, Dan Williams, and Verdisys’ 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 lawsuit alleged that defendants
      made material misstatements about Verdisys’ financial results. More
      specifically, the Complaints alleged that defendants failed to disclose and
      indicate: (1) that Verdisys had materially overstated its net income and
      earnings per share; (2) that Verdisys 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 had filed a motion to dismiss all actions in the litigation against
      it.




*Securities
      and Exchange Commission Investigation Inquiries*




Verdisys
      received notice in January 2004 that the Securities and Exchange Commission
      (“SEC”) has initiated a formal investigation into its reporting practices and
      public statements about Verdisys in 2003.




The
      SEC
      has requested substantiation and documentary evidence from Verdisys concerning
      the performance of certain lateral drilling services by subcontractors in the
      period from May 2003 to September 2003, supervision of such services by
      Verdisys’ 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.





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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. Two directors have resigned from the Verdisys’ board and
      Verdisys has appointed a new CFO. Internal controls have been strengthened
      overall, particularly with respect to the public release of Verdisys information
      and the recognition of revenue. Verdisys had also initiated an internal
      investigation of the matters of concern to the SEC. Consequently, Verdisys
      restated its second and third quarter financial statements for fiscal year
      2003
      and deferred all revenue related to the aforementioned period until such time
      that it can substantiate whether or not the services were performed.




Verdisys
      is cooperating fully with the SEC, including the provision of numerous documents
      and voluntary testimony by its current executives. In December 2004, the staff
      of the SEC notified Verdisys that it was considering recommending that the
      SEC
      bring a civil injunction (including a possible permanent injunction and a civil
      penalty) against Verdisys alleging violations of provisions of the Sections
      10(b), 13(b)(2)(A), 13(b)(2)(B) and 15(d) of the Securities Exchange Act of
      1934
      and rules promulgated thereunder in connection with the purchase and sale of
      securities of Verdisys, recordkeeping, internal controls, certification and
      disclosure obligations. Verdisys was notified of its right to make a Wells
      submission. Verdisys has provided information to the SEC setting forth the
      specific steps it has taken to upgrade the quality and effectiveness of its
      board of directors, replace the previous management team with industry experts,
      improve its recordkeeping, internal and disclosure controls, and revenue
      recognition procedures. Although Verdisys 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 Verdisys’
limited resources or its ability to raise capital and use its stock as
      acquisition currency during the period of the investigation.




*Claims
      by Investor (Partially Settled)*




In
      February 2005, Verdisys entered into an Agreed Judgment and Order of Severance
      with Gryphon Master Fund, L.P. (“Gryphon”) as to all breach of contract claims
      related to Verdisys’ delay in registering common stock acquired by Gryphon in
      October 2003 (see Note 22). Under the terms of the Agreed Judgment, Verdisys
      is
      obligated to pay liquidated damages of $500,000 to Gryphon on or before
      September 30, 2005 (see Note 6). Additionally, Gryphon has agreed to abate
      their
      remaining claims and related discovery in the lawsuit against Verdisys until
      after September 30, 2005. Verdisys agreed to register the shares issued to
      Gryphon on or before March 2004 or be subject to certain liquidated damages.
      Gryphon made a claim against Verdisys for the maximum liquidated damages in
      an
      amount of $400,000. Gryphon has also claimed it has sustained actual damages
      in
      excess of $6.2 million. In July 2004, Gryphon filed a lawsuit in the state
      district court in Dallas County, Texas against Verdisys, alleging, among other
      things, breach of contract and securities fraud by Verdisys. In connection
      with
      the lawsuit, Gryphon requested liquidated damages, actual damages, punitive
      damages, interest, costs and attorneys’ fees among other claims Verdisys intends
      to vigorously defend itself in this matter with respect to the remaining claims
      of Gryphon. If Gryphon prevails, it may obtain significant damages that may
      have
      a material adverse effect on Verdisys’ financial condition.




*Claims
      by Former CEO*




In
      July
      2004, Verdisys was informed that a former Chief Executive Officer of Verdisys
      filed a lawsuit against Verdisys for breach of contract and wrongful discharge.
      The lawsuit seeks relief in excess of $500,000 related to an alleged employment
      agreement and also seeks damages related to an excess of 4 million stock options
      claimed due pursuant to the alleged agreement. The lawsuit was filed in state
      court in San Diego, California. Verdisys intends to vigorously defend itself
      in
      this matter. If the plaintiff prevails, it may obtain significant damages that
      may have a material adverse effect on Verdisys’ financial condition.





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**Verdisys,
      Inc.**




**N** **OTES** **** **TO** **F** **INANCIAL** **S** **TATEMENTS** ****




*Energy
      2000 (Settled)*




In
      October 2004, Verdisys entered into an agreement with Berg McAfee Companies,
      Energy 2000 and Eric McAfee (collectively, “McAfee Group”) to settle several
      outstanding legal issues. Energy 2000 has agreed to settle a finders fee and
      lateral drilling services dispute by delivering 300,000 shares of NGS stock
      into
      escrow for Verdisys. Due to uncertainties on the liquidity of the shares,
      Verdisys has assigned no value to them as of December 31, 2004. Furthermore,
      to
      settle the “Lawsuits involving Edge Capital Group, Inc.”, the McAfee Group
      exchanged into escrow 500,000 shares of NGS stock for 500,000 shares of Verdisys
      common stock. In January 2005, the McAfee Group replaced the 500,000 shares
      of
      NGS stock with $625,000 in cash. Verdisys submitted that cash and an additional
      250,000 shares of Verdisys common stock to Edge as part of the settlement.
      Verdisys also has agreed to dismiss the QuikView, Inc. lawsuit, which it had
      filed against certain individuals.




*General* **




Verdisys
      has never been in bankruptcy, receivership or any similar legal proceeding.
      Other than the aforementioned legal matters, 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
      18 - NON-CASH TRANSACTIONS ON CASH FLOW STATEMENT**




**2004**
            
            **2003**Seller
                financed purchase of license with note
            
            $
            1,184,808
            
            $
            2,650,000Stock
                issued for license amendment
            
            
            —
            
            
            2,275,000Stock
                issued for reduction of note payable on license
            
            
            —
            
            
            250,000Contributions
                to capital by founders for debt forgiveness
            
            
            —
            
            
            488,000Conversion
                of notes payable to common stock
            
            
            —
            
            
            1,245,000Conversion
                of accrued interest on notes payable to common stock
            
            
            —
            
            
            261,190Conversion
                of Series B preferred stock to common stock
            
            
            —
            
            
            705,000Stock
                issued for accounts payable
            
            
            51,977
            
            
            16,666Warrants
                exercised with notes payable
            
            
            —
            
            
            20,000Warrants
                issued with notes payable
            
            
            190,842
            
            
            —




**NOTE
      19 - 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.





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**V** **ERDISYS** **,
      I** **NC** **.**




**N** **OTES** **** **TO** **F** **INANCIAL** **S** **TATEMENTS** ****




**NOTE
      20 - 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. The $80,000 was not
      collected and under terms of the Settlement Agreement and Mutual Release entered
      into with Edge effective January 19, 2005, Verdisys has relinquished its right
      to these funds. See Note 22 for further detail.







**NOTE
      21 - BUSINESS SEGMENTS**




Verdisys
      has two reportable segments: (1) lateral drilling and (2) satellite service.
      A
      reportable segment is a business unit that has a distinct type of business
      based
      upon the type and nature of services and products offered.




Verdisys
      evaluates performance and allocates resources based on profit or loss from
      operations before other income or expense and income taxes. The accounting
      policies of the reportable segments are the same as those described in the
      summary of significant accounting policies. The table below reports certain
      financial information by reportable segment:




**For the Years Ended December 31,****2004**
              
              **2003**Revenues
                  from external customers
              
              (Restated)Lateral
                  drilling
              
              $
              738,710
              
              $
              466,194Satellite
                  service
              
              
              714,634
              
              
              419,247$
              1,453,344
              
              $
              885,441Depreciation
                  and amortizationLateral
                  drilling
              
              $
              499,631
              
              $
              215,258Corporate
              
              
              13,075
              
              
              4,434$
              512,706
              
              $
              219,692Operating
                  loss1Lateral
                  drilling
              
              $
              (1,521,185
              )
              $
              (935,238
              )Satellite
                  service
              
              
              (195,521
              )
              
              (169,251
              )Corporate
              
              
              (6,933,201
              )
              
              (6,618,973
              )$
              (8,649,907
              )
              $
              (7,723,462
              )Acquisition
                  of equipmentLateral
                  drilling
              
              $
              —
              
              $
              767,420Corporate
              
              
              3,705
              
              
              32,073$
              3,705
              
              $
              799,493




1
            -
                Operating loss is total operating revenue less operating expenses,
                selling
                general & administrative expenses, depreciation and amortization, bad
                debts and does not include other income and expense or income taxes.




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**V** **ERDISYS** **,
      I** **NC** **.**




**N** **OTES** **** **TO** **F** **INANCIAL** **S** **TATEMENTS** ****




One
      customer of Verdisys lateral drilling, Maxim Energy, represented approximately
      14% of total revenue in 2004. Energy 2000, a customer of Verdisys lateral
      drilling and a related party, represented approximately 38% of total revenue
      in
      2003.




Verdisys
      assets at December 31, 2004 were as follows:




(Restated)Lateral
                  drilling
              
              $
              1,854,643Satellite
                  service
              
              
              73,936Corporate
              
              
              313,541$
              2,242,120




All
      of
      Verdisys’ long-term assets are attributable to North America. The following
      table sets forth financial information with respect to Verdisys’ revenues by
      geographic area:




**2004**
            
            **2003**United
                States
            
            $1,279,053
            
            $885,441Africa
            
            
            174,291
            
            
            —$
            1,453,344
            
            $
            885,441




**NOTE
      22 - SUBSEQUENT EVENTS**




In
      January and February 2005, Verdisys issued 433,000 shares of common stock for
      $216,500 in a private placement for $0.50 per share. Two year warrants to
      purchase 433,000 common shares at $1.00 per share were attached to the common
      stock. Offering costs consisted of 15,800 shares of common stock and warrants
      to
      purchase 15,800 shares of common stock at $1.00 per share.




In
      January 2005, we issued 16,000 shares of common stock for the payment of leasing
      fees valued at approximately $8,000 and 10,666 shares of common stock to settle
      unpaid compensation issues with two former AgZone employees. Verdisys also
      issued 388,502 shares of common stock under a program to compensate our
      directors, employees, contractors and former employees for unpaid wages,
      commissions and director fees accrued in 2004.




Effective
      January 19, 2005, Verdisys, Edge, certain entities affiliated with Edge and
      Eric
      McAfee entered into a settlement agreement and mutual release to fully settle
      and resolve the disputes. As part of the settlement, Verdisys issued an
      aggregate of 750,000 shares of common stock along with warrants to purchase
      750,000 shares of common stock to Edge. 250,000 shares were issued during
      October 2004 and the remaining 500,000 shares were issued in 2005 and were
      valued at $240,000. In addition, Verdisys agreed to provide Edge a drilling
      rig
      to provide certain lateral drilling services in return for a fee per well and
      a
      share of the revenues generated from each well drilled. Upon closing of the
      settlement, Verdisys will sublicense the lateral drilling technology to Edge
      for
      certain limited purposes. As part of the settlement, the parties to the
      agreement have agreed to a mutual release and to dismiss all pending claims
      and
      litigation upon performance of the obligations in the settlement agreement.
      If
      the remaining obligations under the settlement agreement are not performed,
      this
      would cause the release to not be effective and could lead to the underlying
      lawsuit being reinstituted. The settlement agreement has been reflected in
      the
      2004 Statement of Operations, but had less than a $1,000 of impact as the
      settlement costs were offset by the write-off of previously accrued liabilities.




In
      February 2005, Verdisys entered into an Agreed Judgment and Order of Severance
      with Gryphon as to all breach of contract claims related to Verdisys’ delay in
      registering common stock acquired by Gryphon in October 2003. Under the terms
      of
      the Agreed Judgment, Verdisys is obligated to pay liquidated damages of $500,000
      to Gryphon on or before September 30, 2005. Additionally, Gryphon has agreed
      to
      abate their remaining claims and related discovery in the lawsuit against
      Verdisys until after September 30, 2005.





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**V** **ERDISYS** **,
      I** **NC** **.**




**N** **OTES** **** **TO** **F** **INANCIAL** **S** **TATEMENTS** ****




On
      March
      8, 2005, Verdisys entered in an Assignment of License Agreement with Maxim
      TEP,
      Inc. (“Maxim”). The President and Chief Executive Officer of Maxim is Dan
      Williams, a former president and CEO of Verdisys. Verdisys and Carl Landers
      entered into a license agreement on April 23, 2003 for the exclusive use of
      the
      Landers horizontal drilling process (see Note 5). Under the Assignment, Verdisys
      assigned to Maxim its rights in the license; all current and future negotiations
      for assignments, sublicenses or territorial royalty pertaining to the license
      and two lateral drilling rigs. The first rig is to be delivered upon payment
      of
      the first installment by Maxim and the second rig is to be delivered no later
      than June 30, 2005. As consideration, Maxim agreed to pay Verdisys a total
      of
      $1.3 million in cash and release a $270,000 credit obligation owed by Verdisys
      to Maxim. The cash payments will be made in four installments: $300,000 on
      March
      9, 2005; $100,000 on March 18, 2005; $500,000 on June 3, 2005 and $400,000
      on
      September 2, 2005. Verdisys will retain a non-exclusive sublicense interest
      as
      long as Verdisys pays all required royalties on which the Landers horizontal
      technology is utilized.




In
      March
      2005, Verdisys, Inc, entered into an agreement, subject to court approval,
      to
      settle the class action lawsuit brought by former shareholders in March 2004
      in
      the U.S. District Court for the Southern District. Under the terms of the
      agreement, Verdisys would issue to the class 1,150,000 shares of common stock
      and pay up to $55,000 in legal and administrative fees for the plaintiffs.




**NOTE
      23 - RESTATEMENT**


The
        2004 financial statements have been restated to reflect an agreement
        to sell our lateral drilling license for $1.3 million and the non-cash
        impairment of our License asset.





The
        accounts affected by the restatement are:





**As
                  reported**
              
              **Adjustments**
              
              **As
                  restated**License
              
              $
              5,025,000
              
              $
              (5,025,000
              )
              
              -Accumulated
                  amortization
              
              
              (549,167
              )
              
              549,167
              
              
              -Net
                  Book Value
              
              
              4,475,833
              
              
              (4,475,833
              )
              
              -Asset
                  impairment expense
              
              
              -
              
              
              3,175,833
              
              
              3,175,833License
                  receivable
              
              
              -
              
              
              1,300,000
              
              
              1,300,000








**Item
      8. ChangesIn / Disagreements with Accountants on
      Accounting and Financial Disclosure**




None.




**Item
      8a. Controlsand Procedures**




Our
        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-15. This evaluation
        was conducted as of December 31, 2004. Based on that evaluation, the Principal
        Executive Officer and Principal Financial Officer concluded that, relative
        to the valuation of the Company's intellectual property, the
        disclosure controls and procedures were not effective in ensuring that (i)
        information required to be disclosed by Verdisys in the reports that it files
        or
        submits under the Exchange Act is accumulated and communicated to Verdisys
        management, including the Principal Executive Officer and Principal Financial
        Officer, as appropriate to allow timely decisions regarding required disclosure,
        and (ii) information required to be filed in the reports it files or submits
        is
        recorded, processed, summarized and reported, within the time periods specified
        in the SEC’s rules and forms. There have been no changes in internal controls or
        in other factors that occurred during the last fiscal quarter that has
        materially affected, or is reasonably likely to materially affect our internal
        controls over financial reporting. In
        the
        future, the Company and its independent accountants will institute a procedure
        to thoroughly review the carrying value of its intangible assets relative
        to
        indicated market value, including without limitation the net present value
        of
        future cash flows from the intellectual property to indicate whether the
        asset
        should be impaired.




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, a new controller and meeting with
      our auditors.





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            of Contents*





**Audit
      Committee Report**




The
      Audit
      Committee has reviewed and discussed the audited financial statements with
      management. The Audit Committee has discussed with the independent auditors
      the
      matters required to be discussed by SAS 61, as may be modified or supplemented.
      The Audit Committee has received the written disclosures and the letter from
      the
      independent accountants required by Independence Standards Board Standard No.
      1,
      as may be modified or supplemented, and has discussed with the independent
      accountant the independent accountant’s independence. Based on the review and
      discussions conducted by the Audit Committee, the Audit Committee recommended
      to
      the Board of Directors that the audited financial statements be included in
      our
      Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004 for
      filing with the Commission.




Joseph
      J.
      Penbera, PhD - Chairman


John
      R.
      Block


O.
      James
      Woodward III




**Sarbanes-Oxley
      Act**




While
      the
      effective date of Section 404 of the Sarbanes-Oxley Act for non-accelerated
      filers like us has been delayed until fiscal years ending on or after July
      15,
      2006, our Board and management remain committed to implementation. We have
      already completed several steps such as an audit committee charter.




**PartIII**




**Item
      9. Directorsand Executive Officers**




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.




**Name**
            
            **Age**
            
            **Current
                Position**
            
            **Year First**
              **Became**
              **Director**David
                M. Adams
            
            53
            
            PresidentCo-Chief
                Executive Officer
            
            N/AJohn
                O’Keefe
            
            56
            
            Co-Chief
                Executive OfficerChief
                Financial Officer
            
            N/AJohn
                R. Block
            
            70
            
            Director1
            
            2000Joseph
                J. Penbera, Ph.D.
            
            57
            
            Director1
            
            1999Ronald
                J. Robinson, Ph.D.
            
            59
            
            Director
            
            2002Frederick
                R. Ruiz
            
            61
            
            Director
            
            1999O.
                James Woodward, III
            
            69
            
            Chairman
                of the Board1
            
            1999




1  -
      Member
      of Audit Committee




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 us or our predecessor in
      interest, Verdisys, Inc.




***David
      M. Adams*** has
      served as our President and COO since January 2004, and became Co-Chief
      Executive Officer in May 2004. From 1989 to 2000, 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 subsidiary
      of 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 and became
      Co-Chief Executive Officer in May 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 in 1985 under sponsorship of Sun Oil Co.





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***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.




***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 and Co-Chief Executive Officer, John O’Keefe as Co-Chief Executive
      Officer and Jim Woodward as Chairman of the Board, Dr. Robinson now serves
      only
      as Director. 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.




***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. During 2004,
      Mr.
      Ruiz was named to the California University System Board of Regents.




***O.
      James Woodward III*** has
      served as a director on our Board since its inception in April 1999 and was
      elected Chairman of the Board in May 2004. 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.




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 our directors. There are no familial
      relationships among 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.




No
      non-compete or non-disclosure agreements exist between our management and any
      prior or current employer.




Our
      directors are aware of no petitions or receivership actions having been filed
      or
      court appointed as to our business activities, officers, directors, or key
      personnel.




We
      have
      not, nor anticipate, making loans to any of our officers, directors, key
      personnel, 10% stockholders, relatives thereof, or controllable entities. None
      of our officers, directors, key personnel, or 10% stockholders has guaranteed
      or
      co-signed any bank debt, obligation, or any other indebtedness pertaining to
      us.




**Audit
      Committee**




Our
      Board
      of Directors has established an Audit Committee. The Audit Committee meets
      with
      management and our independent auditors to determine the adequacy of internal
      controls and other financial reporting matters. In addition, the committee
      provides an avenue for communication between the independent auditors, financial
      management and the Board. Our Board of Directors have 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, PhD possesses the
      attributes of an audit committee financial expert. Dr. Penbera is one of our
      Board members 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.





57
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            of Contents*





**Code
      of Ethics**




We
      have
      adopted a code of ethics that applies to our senior officers such as the
      principal executive officer, principal financial officer, principal accounting
      officer and persons performing similar functions. A code of ethics relates
      to
      written standards that are reasonably designed to deter wrongdoing and to
      promote;




•
            Honest
                and ethical conduct, including the ethical handling of actual or
                apparent
                conflicts of interest between personal and professional relationships;




•
            Full,
                fair, accurate, timely and understandable disclosure in reports and
                documents that are filed with, or submitted to, the SEC and in other
                public communications made by an issuer;




•
            Compliance
                with applicable governmental laws, rules and regulations;




•
            The
                prompt internal reporting of violations of the code to an appropriate
                person or persons identified in the code; and




•
            Accountability
                for adherence to the code.




Our
      code
      of ethics was filed as Exhibit 14.1 of our 10-KSB for the year ended December
      31, 2003. Our code of ethics is posted on our website at www.verdisys.com .
      We will
      provide to any person without charge, upon written request to our corporate
      secretary at our principal executive office, a copy of our code of ethics.




**Item
      10. Executive Compensation**




Dr.
      Robinson served as interim CEO from January to May 2004 and President for a
      brief period in January 2004 until Messrs. Adams and O’Keefe were elevated to
      Co-CEOs. Other than for Dr. Robinson, Mr. Adams and Mr. O’Keefe, we have no
      other person that is a named executive officer as of December 31, 2004.




**Compensation
      Summary**




The
      following table provides certain summary information concerning compensation
      for
      the last three fiscal years earned by or paid to our Chief Executive Officers
      and each of our other executive officers who had compensation in excess of
      $100,000 during the last fiscal year (collectively, the “Named Executive
      Officers”).




**SUMMARY
      COMPENSATION TABLE**




**Annual
                Compensation**
            
            **Award(s)**
            
            **Payouts****Position**
            
            **Year**
            
            **Salary**
              **($)**
            
            **Bonus**
              **($)**
            
            **Other
                Annual**
              **Compensation****(1)**
              **($)**
            
            **Restricted**
              **Stock**
              **Award
                (s)**
              **($)**
            
            **Securities**
              **Underlying**
              **Options/SARs**
              **(#)**
            
            **LTIP**
              **Payouts**
              **($)**
            
            **All
                Other**
              **Compensation**
              **($)****Ronald
                J. Robinson**
            
            
            2004
            
            
            90,000
            
            
            0
            
            
            10,000
            
            
            0
            
            
            12,000
            
            
            0
            
            
            0Former
            
            
            2003
            
            
            70,000
            
            
            0
            
            
            0
            
            
            0
            
            
            700,000
            
            
            0
            
            
            0Interim
                CEO
            
            
            2002
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            50,000
            
            
            0
            
            
            0**David
                M. Adams**
            
            
            2004
            
            
            181,146
            
            
            50,000
            
            
            0
            
            
            0
            
            
            500,000
            
            
            0
            
            
            0Co-CEO
            
            
            2003
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0COO
            
            
            2002
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0**John
                O’Keefe**
            
            
            2004
            
            
            172,570
            
            
            40,000
            
            
            0
            
            
            0
            
            
            500,000
            
            
            0
            
            
            0Co-CEO
            
            
            2003
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0CFO
            
            
            2002
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0




(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.





58
 *Table
            of Contents*





**Option
      Grants**




The
      following 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, 2004 under our stock option plan:




**OPTION
      GRANTS IN 2004**




**Name**
            
            **Number
                of**
              **Securities**
              **Underlying**
              **Options**
              **Granted**
            
            **Percent**
              **of
                Total**
              **Granted to**
              **Employees**
              **in
                Fiscal**
              **Year**
            
            **Exercise**
              **Price**
            
            **Market**
              **Price**
              **on**
              **Date
                of**
              **Grant**
            
            **Expiration**
              **Date**Ronald
                J. Robinson
            
            
            12,000
            
            
            1
            %
            $
            4.28
            
            $
            4.28
            
            
            1/21/2014David
                M. Adams
            
            
            150,000
            
            
            13
            %
            $
            4.28
            
            $
            4.28
            
            
            1/21/2014350,000
            
            
            30
            %
            $
            0.90
            
            $
            0.90
            
            
            7/29/2014John
                O’Keefe
            
            
            80,000
            
            
            7
            %
            $
            4.28
            
            $
            4.28
            
            
            1/21/2014420,000
            
            
            36
            %
            $
            0.90
            
            $
            0.90
            
            
            7/29/2014




**Option
      Exercises and Values**




The
      following table sets forth 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.




**AGGREGATED
      OPTION EXERCISES IN 2004**


**AND
      OPTION VALUES AT DECEMBER 31, 2004**




**Number
                of Securities**
              **Underlying
                Unexercised**
              **Options
                Held at**
              **December
                31, 2004**
            
            **Value
                of Unexercised**
              **In-The-Money**
              **Options Held at**
              **December
                31, 2004****Name**
            
            **Shares**
              **Acquired on**
              **Exercise**
            
            **Value**
              **Realized**
            
            **Exercisable**
            
            **Unexercisable**
            
            **Exercisable**
            
            **Unexercisable**Ronald
                J. Robinson
            
            
            None
            
            
            None
            
            
            189,332
            
            
            6,000
            
            $
            0
            
            $
            0David
                M. Adams
            
            
            None
            
            
            None
            
            
            170,834
            
            
            329,166
            
            $
            0
            
            $
            0John
                O’Keefe
            
            
            None
            
            
            None
            
            
            130,000
            
            
            370,000
            
            $
            0
            
            $
            0




Note:




Value
      of
      Unexercised In-The-Money Options Held at December 31, 2004 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, 2004 was $0.47, based
      on
      the closing price on the OTC Bulletin Board .




**Compensation
      of Directors**




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




Currently,
      each independent director earns 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 and the
      chairman of the board who receives an additional $3,000 per month. Meeting
      fees
      accrue at a rate of $1,000 per day for regularly scheduled Board meetings.
      Currently, only the chairman of the board is receiving cash payments towards
      fees earned. All independent directors receive options to purchase 12,000 shares
      per year.




**Employment
      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 was 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 served 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.





59
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            of Contents*





*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 entitled to participate in our annual incentive compensation
      program 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,
      $195,000 for the second year of employment and $215,000 for the third year
      of
      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 is entitled to participate in our annual compensation program with a
      potential bonus being up to fifty percent of his base salary.




**Item
      11. SecurityOwnership of Certain Beneficial Owners and
      Management**




The
      following table presents certain information regarding the beneficial ownership
      of our common stock as of February 28, 2005 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**




**Name
                and Address of Beneficial Owner**
            
            **Amount and Nature**
              **of
                Beneficial Owner**
            
            **Percentage**
              **of Class (1)**Berg
                McAfee Companies (2)
            
            
            10,040,752
            (3)
            
            28.0
            %100600
                N. De Anza Blvd., #250Cupertino,
                California 95014Eric
                McAfee
            
            
            1,825,400
            (4)(5)
            
            5.2
            %100600
                N. De Anza Blvd, #250Cupertino,
                California 95014David
                M. Adams
            
            
            333,332
            (6)
            
            *President
                and co-CEOJohn
                O’Keefe
            
            
            283,334
            (7)
            
            *Co-CEO
                & CFOJohn
                R. Block
            
            
            194,000
            (8)
            
            *DirectorJoseph
                J. Penbera
            
            
            1,012,952
            (9)
            
            2.9
            %DirectorRonald
                J. Robinson
            
            
            550,332
            (10)
            
            1.6
            %DirectorFrederick
                R. Ruiz
            
            
            401,366
            (11)
            
            1.1
            %DirectorO.
                James Woodward III
            
            
            240,500
            (12)
            
            *DirectorTotal
                Shares of 5% or more Beneficial Ownership
            
            
            11,866,152
            (13)
            
            32.8
            %Total
                Shares of Officers and Directors as a group
            
            
            3,015,816
            
            
            8.4
            %




***  *Less
      than 1%*





60
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            of Contents*





*Notes:*




*(1)*
            *Each
                beneficial owner’s percentage ownership is based upon 34,973,673 shares of
                common stock outstanding as of February 28, 2005 and 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 February
                28,
                2005.*




*(2)*
            *Berg
                McAfee Companies is controlled by Clyde Berg and Eric McAfee. Mr.
                McAfee
                is our former Vice-Chairman.*




*(3)*
            *Includes
                820,014 shares issuable upon exercise of warrants and 52,067 shares
                issuable upon conversion of convertible debt.*




*(4)*
            *Includes
                250,000 shares issuable upon exercise of warrants and 52,067 shares
                issuable upon conversion of convertible debt.*




*(5)*
            *Does
                not include shares beneficially owned by Berg McAfee.*




*(6)*
            *Includes
                266,666 shares issuable upon exercise of options and 5,000 shares
                issuable
                upon exercise of warrants*




*(7)*
            *Includes
                220,000 shares issuable upon exercise of options and 5,000 shares
                issuable
                upon exercise of warrants.*




*(8)*
            *Includes
                82,000 shares issuable upon exercise of options and 2,000 shares
                issuable
                upon exercise of warrants.*




*(9)*
            *Includes
                82,000 shares issuable upon exercise of options and 5,000 shares
                issuable
                upon exercise of warrants.*




*(10)*
            *Includes
                195,332 shares issuable upon exercise of options.*




*(11)*
            *Includes
                82,000 shares issuable upon exercise of options and 5,000 shares
                issuable
                upon exercise of warrants.*




*(12)*
            *Includes
                94,000 shares issuable upon exercise of options.*




*(13)*
            *Includes
                shares beneficially owned by Berg McAfee and Eric McAfee.*




**Holders**




As
      of
      February 28, 2005 we had 34,973,673 shares of common stock issued and
      outstanding and held by approximately 500 shareholders.




**Item
      12. CertainRelationships and Related Transactions**




*Energy
      2000 NGC, Inc. and Natural Gas Systems, Inc.* **




Energy
      2000 NGC, Inc. (“Energy 2000”) is a subsidiary of Berg McAfee Energy, LLC, which
      is a wholly owned subsidiary of Berg McAfee Companies (“Berg McAfee”). Berg
      McAfee has a more than 25% beneficial interest in us. Natural Gas Systems,
      Inc.
      (“NGS”) is an independent company with substantial shareholdings owned by Eric
      McAfee, a 50% owner of Berg McAfee and one of our former directors. Energy
      2000
      and NGS are beneficially owned 80% and 23% respectively by Berg McAfee or Eric
      McAfee personally.




We
      billed
      $666,250 and $153,960 to Energy 2000 and NGS, respectively, for services
      performed in 2003. We received $397,500 and $130,000, respectively. However,
      for
      Energy 2000 we had inadequate documentation to substantiate whether some of
      the
      services were performed. For Energy 2000, we were able to substantiate $328,750
      of revenue leaving $68,750 in deferred revenue. We billed $20,457 and $2,000
      to
      Energy 2000 and NGS, respectively, for expenses incurred in 2004. The amount
      billed to Energy 2000 was deemed uncollectible and the amount billed to NGS
      was
      collected. At December 31, 2004, we have no receivables or deferred revenues
      from related parties.




In
      September 2003, we signed a drilling service contract with NGS, whereby NGS
      would have paid us a minimum of $7,800,000 for the 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,
      we
      would receive a 70 percent interest in the net operating income after payback
      from these properties.




In
      April
      2003, we signed a drilling service contract with Energy 2000, whereby Energy
      2000 would have paid us a minimum of $1,800,000 for the lateral drilling of
      45
      wells. This contract was for a fixed amount, dependent upon the number of wells
      serviced and offshoot lateral bores drilled. In addition, we 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
      we
      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.





61
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            of Contents*





Lateral
      drilling services for these two customers ceased in December 2003 because of
      a
      change in Verdisys management.




*Berg
      McAfee Companies* **




In
      addition to the transactions involving Energy 2000 and NGS, we had an additional
      transaction with Berg McAfee. In December 2004, Berg McAfee purchased 400,000
      shares of our common stock at a price of $0.50 per share in a private
      transaction. In October 2004, Berg McAfee loaned us $100,000 under the terms
      of
      a convertible promissory note bearing interest at 8% and maturing May 31, 2006.
      In connection with the note, we issued warrants to purchase 50,000 shares of
      common stock at $2.00 per share during the term of the note to Berg McAfee.




*Eric
      McAfee* **




In
      addition to the transactions involving Energy 2000, NGS and Berg McAfee, we
      had
      the additional transactions with Eric McAfee.




On
      January 19, 2005, we entered into a settlement agreement and mutual release
      with
      Eric McAfee, Edge Capital Group, Inc. (“Edge”) and certain entities affiliated
      with Robert Frazier, Sr. As part of the settlement, Mr. McAfee paid us $625,000
      and gave us 300,000 shares of NGS common stock in exchange for 500,000 shares
      of
      our common stock. Mr. McAfee has signed a Funding Agreement to acknowledge
      an
      obligation to Verdisys of $375,000, currently secured by the 300,000 shares
      of
      NGS common stock. The $625,000 in cash was then distributed to Edge along with
      750,000 shares of our common stock. At the closing of the settlement agreement,
      the parties have agreed to a mutual release and have agreed to dismiss all
      pending claims and litigation between them.




In
      October 2004, Mr. McAfee loaned us $100,000 under the terms of a convertible
      promissory note bearing interest at 8% and maturing May 31, 2006. In connection
      with the note, we issued warrants to purchase 50,000 shares of common stock
      at
      $2.00 per share during the term of the note to Mr. McAfee.




We
      had a
      consulting agreement with Mr. McAfee for $10,000 per month through April 30,
      2005, with $120,000 due during 2004 and $40,000 in 2005. This agreement was
      cancelled upon his resignation as a director.




In
      April
      2003, we issued 2,000,000 shares of our 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.
      Eric
      McAfee, a principal to the counterparty in the transaction, acquired 11.5%
      of
      the 2,000,000 shares. In June 2004, we filed a lawsuit against Eric McAfee,
      Mark
      Crone and QuikView Inc. in an attempt to negate the transaction. In November
      2004, we dismissed the lawsuit against all defendants with prejudice.




In
      April
      2003, Mr. McAfee was granted options to purchase 50,000 shares of our common
      stock for his role as a director. The options had an exercise price of $0.10
      per
      share, but where granted when the market value was $0.50 per share. The options
      vested quarterly over one year and have a ten year term. Mr. McAfee’s role as a
      director terminated effective March 2, 2004.




*Directors
      and Officers* **




In
      July
      2004, we granted options to purchase 350,000 shares of our common stock to
      David
      M. Adams and options to purchase 420,000 shares of our common stock to John
      O’Keefe. Mr. Adams is our president and co-CEO, while Mr. O’Keefe is our co-CEO
      and CFO. The options have a ten year term and are exercisable at $0.90 per
      share, the market price at date of grant. The options vest quarterly over three
      years.




In
      May
      2004, we granted options to purchase 12,000 shares of our common stock to the
      following directors; John R. Block, Joseph J. Penbera, Frederick R. Ruiz and
      Ronald J. Robinson. We also granted options to purchase 24,000 shares of our
      common stock to O. James Woodward III, another director. The options have a
      ten
      year term and are exercisable at $2.20 per share, the market price at date
      of
      grant. The options vest quarterly over one year.




In
      May
      2004, Messrs. Adams, O’Keefe, Penbera and Ruiz loaned $25,000 to us, while Mr.
      Block loaned $10,000. The notes bear interest at 8% and mature on May 14, 2005.
      In connection with the notes we issued warrants to purchase 5,000 shares of
      common stock to Messrs. Adams, O’Keefe, Penbera and Ruiz and warrants to
      purchase 2,000 shares of common stock to Mr. Block. The warrants are exercisable
      at $2.00 per share.




62
 *Table
            of Contents*




In
        January 2004, we granted options to purchase 150,000 shares of our common
        stock
        to Mr. Adams and options to purchase 80,000 shares of our common stock to
        Mr.
        O’Keefe. We also granted options to purchase 20,000 shares of our common stock
        to the following directors; Messrs. Block, Penbera, Ruiz and Woodward. The
        options have a ten year term and are exercisable at $4.28 per share, the
        market
        price at date of grant. The options granted to the officers vest quarterly
        over
        one year, while the options granted to the directors vested immediately.


In
      January 2004, we entered into an employment agreement with Mr. O’Keefe to serve
      as CFO. The agreement stipulates compensation of $175,000 in year one, $195,000
      in year two and $215,000 in year three. The agreement renews annually.




In
      December 2003, we entered into an employment agreement with Mr. Adams to serve
      as CEO. The agreement provides for a base salary of not less than $185,000.
      The
      agreement renews annually.




In
      December 2003, we granted options to purchase 500,000 shares of our common
      stock
      to Ronald J. Robinson, our then chairman of the board and interim CEO. The
      options have a ten year term and are exercisable at $9.55 per share, the market
      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.




In
      April
      2003, we granted options to purchase 50,000 shares of our common stock to each
      of our directors. The directors awarded options were Messrs. Block, Penbera,
      Robinson, Ruiz and Woodward. We also granted options to purchase 200,000 shares
      of our common stock to our interim CEO, Mr. Robinson. The options all have
      an
      exercise price of $0.10 per share and were granted at a time when the market
      value was $0.50 per share. The options vest quarterly over one year and have
      a
      ten year term.




**Item
      13. Exhibits and Reports on Form 10-KSB**




***(a)
      Exhibits*** **




Index
      of Exhibits




Verdisys,
      Inc. includes by reference, unless otherwise indicated, the following exhibits:




**Number**
            
            **Description**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-K3.1
            
            Restated
                Articles of Incorporation dated July 15, 2003 Filed June 29, 2004
                with the
                SEC, Form SB-23.2
            
            Bylaws,
                as amended September 25, 2003 Filed June 29, 2004 with the SEC, Form
                SB-24.1
            
            Form
                of Subscription Agreement Filed August 11, 2004 with the SEC, Form
                10-QSB4.2
            
            Form
                of Warrant Agreement Filed August 11, 2004 with the SEC, Form
                10-QSB4.3
            
            Form
                of Promissory Note Filed August 11, 2004 with the SEC, Form
                10-QSB4.4
            
            Form
                of Convertible Promissory Note Filed August 11, 2004 with the SEC,
                Form
                10-QSB4.5
            
            Form
                of Registration Rights Agreement Filed August 11, 2004 with the SEC,
                Form
                10-QSB10.1
            
            Employment
                Agreement - John O’Keefe, dated January 6, 2004 Filed April 15, 2004 with
                the SEC, Form 10-KSB10.2
            
            Employment
                Agreement - David Adams, dated December 31, 2003 Filed April 15,
                2004 with
                the SEC, Form 10-KSB10.3
            
            Advisor
                Agreement - Dr. Ron Robinson, amended December 11, 2003 Filed April
                15,
                2004 with the SEC, Form 10-KSB10.4
            
            Employment
                Agreement - Andrew Wilson, dated June 2003 Filed November 20, 2003
                with
                the SEC, Form 10-QSB, as amended10.5
            
            License
                Agreement - Carl W. Landers, dated April 24, 2003; Filed October
                6, 2003
                with the SEC, Report on Form 8-K10.6
            
            Amendment
                to License Agreement - Carl W. Landers, dated September 4, 2003;
                Filed
                October 6, 2003 with the SEC, Report on Form
                8-K





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            of Contents*





10.7
            
            Second
                Amendment to License Agreement - Carl W. Landers, dated February
                28, 2004;
                Filed February 28, 2004 with the SEC, Report on Form
                8-K10.8
            
            Technology
                Report, “Landers Technology”, dated October 13, 2003 Filed November 20,
                2003 with the SEC, Form 10-QSB, as amended10.9
            
            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




**Number**
            
            **Description**10.10
            
            Form
                of Registration Rights Agreement, re: Private Placement Offering
                July/August 2003 Filed December 3, 2003 with the SEC, Form 10-QSB,
                as
                amended10.11
            
            Alternative
                Form of Registration Rights Agreement, re: Offering July/August 2003
                Filed
                December 3, 2003 with the SEC, Form 10-QSB, as amended10.12
            
            Placement
                Agency Agreement, Stonegate Securities, Inc., dated August 26, 2003
                Filed
                November 20, 2003 with the SEC, Form 10-QSB, as amended10.13
            
            Independent
                Contractor Agreement, Terronne Petroleum Corporation, dated August
                1, 2003
                Filed November 20, 2003 with the SEC, Form 10-QSB, as
                amended10.14
            
            Master
                Services Contract, Esperada Energy Partners, L.L.C., dated March
                2004
                Filed April 15, 2004 with the SEC, Form 10-KSB10.15
            
            Services
                Contract, Maxim Energy, Inc., dated March 2004 Filed April 15, 2004
                with
                the SEC, Form 10-KSB10.16
            
            Services
                Contract, Natural Gas Systems, dated January 2004 Filed April 15,
                2004
                with the SEC, Form 10-KSB10.17
            
            Contract
                - Natural Gas Systems, “Delhi Field”, dated September 22, 2003; Filed
                November 20, 2003 with the SEC, Form 10-QSB, as amended10.18
            
            Services
                Contract, Amvest Osage, Inc.; dated January 2004 Filed April 15,
                2004 with
                the SEC, Form 10-KSB10.19
            
            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
                amended10.20
            
            Contract
                - Edge Capital Group, “Franklin Field”, dated September 27, 2003 Filed
                November 20, 2003 with the SEC, Form 10-QSB, as amended10.21
            
            Contract
                - Edge Capital Group, “Monroe Field”, dated June 16, 2003 Filed August 20,
                2003 with the SEC, Form 10-QSB, as amended10.22
            
            Addendum
                to Contract, Edge Capital Group, “Monroe Field”, dated November 19, 2003
                Filed November 20, 2003 with the SEC, Form 10-QSB, as
                amended10.23
            
            Contract
                - Noble Energy, re: Satellite Services, dated September 17, 2003
                Filed
                November 20, 2003 with the SEC, Form 10-QSB, as amended10.24
            
            Contract
                - Apache Corp., re: Satellite Services, dated September 11, 2002
                Filed
                November 20, 2003 with the SEC, Form 10-QSB, as amended10.25
            
            Contract
                - Energy 2000 NGC, “Monroe Field”, dated April 30, 2000 Filed August 20,
                2003 with the SEC, Form 10-QSB, as amended10.26
            
            Verdisys,
                Inc. 2003 Stock Option Plan; Filed November 20, 2003 with the SEC,
                Form
                10-QSB, as amended10.27
            
            Master
                Service Contract - BlueRidge Gas Partners, LLC - June 23, 2004 Filed
                August 11, 2004 with the SEC, Form 10-QSB10.28
            
            Master
                Service Contract - VJI Natural Resources, LLC - July 20, 2004 Filed
                August
                11, 2004 with the SEC, Form 10-QSB




64
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            of Contents*




**Number**
            
            **Description**10.29
            
            Contract/Order
                - U. S. Department of Energy - June 4, 2004 and Letter of Intent,
                Radial
                Drilling Optimization Services - April 14, 2004 Filed August 11,
                2004 with
                the SEC, Form 10-QSB10.30
            
            Contract
                - License Agreement between Alberta Energy Holdings, Inc. and Verdisys,
                Inc. for Abrasive Fluid Jet Technology, dated October 27, 2004 Filed
                November 15, 2004 with the SEC, Form 10-QSB10.31
            
            Contract
                - Agreement among Verdisys, Berg McAfee Companies, Energy 2000 NGC,
                and
                Eric McAfee Filed November 15, 2004 with the SEC, Form
                10-QSB10.32
            
            Settlement
                Agreement and Mutual Release dated as of January 19, 2005 by and
                among
                Verdisys, Inc., Eric McAfee, Edge Capital Group, Inc. and certain
                entities
                affiliated with Robert Frazier, Sr. Filed February 4, 2005 with the
                SEC,
                Form 8-K10.33
            
            Assignment
                of License Agreement dated March 8, 2005 by and among Verdisys, Inc.
                and
                Maxim TEP, Inc. Filed March 14, 2004 with the SEC, Form
                8-K*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




*  Filed
      herewith




***(b)
      Reports on Form 8-K***




During
      the quarter ending December 31, 2004, we had no filings on Form 8-K with the
      Securities and Exchange Commission.




**Item
      14.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 our 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: $95,970 in Fiscal Year 2004 and $58,000 in 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 our 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.




Our
      Audit
      Committee has approved all of the services performed by our principal accountant
      for the fiscal year ending December 31, 2004.





65
 *Table
            of Contents*





**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/
                  David M. AdamsDavid
                  M. AdamsCo-Chief
                  Executive OfficerPrincipal
                  Executive OfficerDate:
                March
                29, 2005




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/
                David M. Adams
            By:
            /s/
                John O’KeefeDavid
                M. Adams
            
            John
                O’KeefePresident
            
            Co-Chief
                Executive OfficerCo-Chief Executive
              Officer
            
            Chief Financial
              OfficerPrincipal
              Executive Officer
            
            Principal
              Accounting OfficerDate:
                March 29, 2005
            Date:
                March 29, 2005By:
            /s/
                John R. Block
            By:
            /s/
                Joseph J. Penbera, Ph.D.John
                R. Block
            
            Joseph
                J. Penbera, Ph.D.Director
            
            DirectorDate:
                March 29, 2005
            Date:
                March 29, 2005By:
            /s/
                Ronald J. Robinson, Ph.D.
            By:
            /s/
                Frederick R. RuizRonald
                J. Robinson, Ph.D.
            
            Frederick
                R. RuizDirector
            
            DirectorDate:
                March 29, 2005
            Date:
                March 29, 2005By:
            /s/
                O. James Woodward IIIO.
                James Woodward IIIDirectorDate:
                March 29, 2005






66