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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-QSB/A

(Amendment No. 1)



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(Mark One)

|x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------



For the quarterly period ended September 30, 2004



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
|- | ---------------------------------------------------------------



For the transition period from  to



333-64122

(Commission file number)



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VERDISYS, INC.

(Exact name of small business
issuer as specified in its charter)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|California                                                     |  | 22-3755993                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)



14550 Torrey Chase
Blvd.,

Houston, Texas 77014

(Address of principal executive offices)



(281) 453-2888

(Issuers telephone number)





(Former name, former address and former
fiscal year, if changed since last report)



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|x | Check whether the 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.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The number of shares outstanding of each of the issuers classes of common equity as of November 8, 2004: 32,999,505 shares of common stock.



The common stock of Verdisys, Inc. is traded over-the-counter on the OTC Bulletin Board under
the symbol VDYS.OB.



Transitional Small Business Disclosure
Format (check one):     Yes ̈No  x



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Explanatory Note



Verdisys, Inc. is filing this amended Quarterly Report on Form 10-QSB/A for the period ended September 30, 2004 (the
Amended Quarterly Report), to amend its Quarterly Report on Form 10-QSB for the period ended September 30, 2004 (the Original Quarterly Report), which was filed with the Securities and Exchange Commission (the
SEC) on November 15, 2004.



The Amended Quarterly
Report amends the disclosure under the Part I, Item 2 Managements Discussions and Analysis of Financial Condition and Plan of Operation, Part I, Item 3 Controls and Procedures, and Part II, Item 6 Exhibits and
Reports of Form 8-K. Except for these items, no other information in the Original Quarterly Report is amended herby. The revised disclosures do not affect the financial results.



Verdisys, Inc.



Index



|           |  |                                                                                    |  |           
|---------- |  | ---------------------------------------------------------------------------------- |  | ----------
|           |  |                                                                                    |  | PageNumber
|PART I.    |  | FINANCIAL INFORMATION                                                              |  |           
|           |  |                                                                                   
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Plan of Operations |  | 3         
|           |  |                                                                                   
|Item 3.    |  | Controls and Procedures                                                            |  | 6         
|           |  |                                                                                   
|Part II.   |  | OTHER INFORMATION                                                                  |  |           
|           |  |                                                                                   
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                   |  | 6         
|           | 
|SIGNATURES |  | 7                                                                                 

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|* | This Form 10-QSB/A amends only items identified in the Index, and no other information included in the Companys Original Quarterly Report is amended hereby.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------



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PART I. FINANCIAL INFORMATION



Item 2. Managements Discussion and Analysis of Financial Condition and Plan of Operations



Forward-Looking Statements



All statements that are included in this Quarterly Report, other than statements of historical fact, are forward looking statements. You can identify forward-looking
statements by words such as anticipate, believe, and similar expressions and statements regarding our business strategy, plans and objectives for future operations. Although management believes that the expectations reflected
in these forward looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. The forward looking statements in this filing involve known and unknown risks and uncertainties, which may cause
Verdisys actual results in future periods to be materially different from any future performance that may be suggested in this release. Such factors may include risk factors including but not limited to: changes in technology, reservoir or
sub-surface conditions, the introduction of new services, commercial acceptance and viability of new services, fluctuations in customer demand and commitments, pricing and competition, reliance upon subcontractors, the ability of Verdisys
customers to pay for our services, together with such other risk factors as may be included in the Companys periodic filings on Form 10-KSB, 10-QSB, and other current reports.



Financial Summary



Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2003



Verdisys incurred $582,425 in revenues and a net loss of $976,378 for the quarter ended September 30, 2004 as compared to revenues of
$27,824 and net loss of $1,653,560 for the quarter ended September 30, 2003. Revenues increased as a result of an increase in lateral drilling and satellite services activity for the quarter. There were no comparable lateral drilling revenues in
2003. The Net Loss decreased as a result of higher gross margins associated with the increased revenues, which were partially offset by higher selling, general and administration expenses (SG&A) associated with an increase in
non-cash stock, and warrant expense associated with the issuance of debt and settlement of a certain lawsuit.



Revenues



Lateral Drilling Services



Lateral Drilling Services revenues were $427,519 and $0 for the three months ended September 30, 2004 and three months ended September 30, 2003, respectively. The
increase in revenues for the quarter was primarily associated with revenues from the commencement of a contract with the Department of Energy, work performed for Maxim Energy and the rental of a rig to Advanced Hydraulics. The Company did not have a
Lateral Drilling business in the quarter ended September 30, 2003.



As noted in
the Subsequent Events section, effective as of October 27, 2004, Verdisys has entered into a Licensing Agreement to develop a new generation of lateral drilling technology. In the short term, the development activity will decrease lateral drilling
revenues until such time as the Landers equipment is retrofitted and the new technology rigs are commissioned.



Satellite Communications Services



Satellite Communication Services revenues for the quarter ended September 30, 2004 were $154,906 compared to the quarter ended September 30, 2003 of $27,824.
Revenue increased in the quarter due to higher hardware sales of satellite equipment to Exxon/Mobil and Kellog, Brown and Root and increased satellite bandwidth associated with the services to Noble Energy, Texas A&M, Dynegy and Kellog, Brown
and Root which were not in service in the prior year. As hardware is sold, Verdisys recognizes the revenue in the period it is delivered to the customer. The associated bandwidth revenue is amortized over the period benefited. Cash collected for
bandwidth is recorded as deferred revenue. At September 30, 2004 there was $368,351 reflected on the balance sheet as deferred revenue relating to Satellite Communications.



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Net Loss



The Net Loss decreased as a result of higher gross margins associated with the increased revenues, which was partially offset by higher
SG&A expense associated with an increase in non-cash stock, and warrant expense associated with the issuance of debt and settlement of a certain lawsuit.



Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003



Net Loss



The Net Loss for the nine months ended September 30, 2004 decreased primarily as a result of higher revenues and greater margin contribution compared to the prior year,
offset by liquidated damages resulting from the failure to file a timely registration statement and non-cash compensation expense associated with the renegotiation of the Landers note payable partially offset by the absence of debt forgiveness
income in 2004.



Liquidity and Capital
Resources



Capital Expenditures



For the three and nine month periods ended September 30, 2004, capital expenditures
excluding capitalized interest, were $3,705 and $3,705, respectively, as compared to $369,701 and $369,701 for the comparable periods in 2003.



Liquidity



As of September 30, 2004 the Companys cash balance was $122,764. As noted in the Independent Auditors Report (See Financial Note 2 to the December 31, 2003
Financial Statements) due to the continued substantial operating losses that the Company has incurred raises substantial doubt as to the Companys ability to continue as a going concern. The Company is in an early stage of development and is
rapidly depleting its cash resources, therefore it has determined that it will need to raise additional financing in the short term to continue in operation and fund future growth. The Company has also incurred liquidated damages up to a cap of
$400,000 related to the timing of providing registration rights for the private financing that it arranged in November 2003. If we are unable to finance the liquidated damages, this would have a material adverse effect on the Company. The Company is
also subject to significant contingent liabilities as more fully described in the Notes to the Financial Statements. See Note 8, Litigation.



The Company currently plans to raise additional financing in the quarter ending December 31, 2004. The use of stock for currency in financing or making acquisitions may
be heavily curtailed while the Company is under SEC investigation. (See Financial Note 16 to the December 31, 2003 Financial Statements) If we are unable to arrange new financing or generate sufficient revenue from new business arrangements, the
Company will be unable to continue in its current form and will be forced to restructure or seek creditor protection.



As noted in the Subsequent Events section, Verdisys has entered into an agreement to accept 300,000 shares of common stock of Natural Gas Systems, Inc. (the NGS
Shares) to settle certain disputes with a related party, Energy 2000 NGC. As part of the settlement, the related party has agreed to sell the NGS Shares for gross proceeds of at least $1.25 per share, with the net proceeds after commissions,
to be distributed to Verdisys. In addition, as part of the settlement, the Berg McAfee Companies and Eric McAfee have agreed to make an investment of $200,000 in Verdisys, to be evidenced by convertible promissory notes bearing interest at the rate
of 8% per annum with a maturity date of May 31, 2006. The notes would be convertible into common stock at the rate of one (1) share of common stock for each $2.00 dollars



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of principal and interest outstanding. Verdisys believes the proceeds from sale of the NGS Shares and the amount received from the convertible promissory
note investment will improve the companys cash outlook.



During the third
quarter of 2004, Verdisys issued $350,000 in Convertible Notes to third party lenders, carrying an 8% interest rate and 175,000 shares in warrants at an exercise price of $0.001. The Convertible Notes mature December 31, 2005. Verdisys has an option
to convert the shares at $2 per share when they have traded above that level for more than 20 trading days.



During the second and third quarter of 2004, officers and directors of Verdisys loaned Verdisys $185,000. The notes mature in 12 months, carry interest of 8% and have one year warrants attached with an exercise price
of $2.00.



Subsequent Events



Energy 2000



In October, 2004 Verdisys entered into an agreement with Berg McAfee Companies, Energy 2000 NGC, Inc. (Energy 2000), and Eric McAfee 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 stock into escrow for Verdisys. The Company plans to have these shares
monetized as soon as practical. Furthermore, to settle a contemplated third party legal dispute, Verdisys and the parties have exchanged into escrow 500,000 shares of Natural Gas Systems stock for 500,000 of Verdisys shares and Verdisys has
delivered an additional 250,000 shares. Verdisys also has agreed to dismiss the Quikview, Inc. lawsuit, which it had filed against certain individuals.



Lastly, Berg McAfee Companies and Eric McAfee have loaned $200,000 to Verdisys, to be evidenced by convertible promissory notes bearing interest at the rate of 8% per
annum with a maturity date of May 31, 2006. The notes would be convertible into common stock at a conversion rate of one share of common stock for each $2.00 of principal and interest outstanding.



New Licensing Agreement



Verdisys has signed an exclusive worldwide licensing agreement with Alberta Energy Holdings for the application of their Abrasive Fluid Jet
(AFJ) cutting technique to cut through well casing in oil and gas wells. Applications of such 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 industry. Verdisys would be among the first to apply the proven techniques to the energy service business.



Abrasive cutting utilizes high-pressure fluid and a small amount of abrasives, such as garnet sand, up to 20,000 pounds per square inch. It
can cut through surfaces as tough as four inches of steel as well as granite. 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 Verdisys the ability to add a new service to its product line, such as milling holes and jetting laterals down to 10,000 feet or more instead of the current limitation of 6,000 feet. It may also facilitate cutting slots in well
casings - potentially a large value-added application in conventional drilling and completion operations, especially offshore.



During the past few months, Verdisys has been enhancing its lateral drilling down-hole equipment in an effort to achieve a more consistent milling process with a
higher degree of reliability for their customers. After a series of iterative above and below ground tests, these have significantly improved the reliability of the milling process. The Company is now applying similar iterative steps in an effort to
improve the reliability of the lateral jetting process, which has a direct impact on potentially improving oil and gas production for the customer. In parallel to these ongoing operations, Verdisys plans to develop and employ abrasive cutting
techniques into their future lateral drilling operations. Funding for developing this abrasive cutting into a lateral drilling application is expected to come from ongoing rig revenues, current and future capital commitments. This agreement is
subject to approval by the board of directors for Verdisys.



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Under the terms of the licensing agreement, Alberta Energy Holdings will earn warrants for Verdisys common stock as
specific phases of the AFJ process are successfully applied, a consulting fee during development as well as a royalty fee for each well where AFJ technology is used. Under the terms of the agreement, Alberta is entitled to receive four tranches of
warrants. Each tranche will entitled Alberta the right to purchase 250,000 shares of Verdisys common stock, and each award is contingent upon the attainment of certain specific milestones as fully described in the agreement. The warrants will have a
three-year term, with a strike 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.



Verdisys has 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.



The agreement also provides for the
mutual sharing of the proceeds from the sale of the technology by Verdisys, subject to a cap of $10 million.



Item 3. Controls and Procedures



The
Companys Principal Executive Officer and Principal Financial Officer have undertaken an evaluation of the Companys disclosure controls and procedures as of September 30, 2004. The Companys Principal Executive Officer and Principal
Financial Officer have concluded that the existing disclosure controls and procedures are effective to provide reasonable assurances that (i) information required to be disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934 is accumulated and communicated to the Companys management, including the Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure, and
(ii) the information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SECs rules and
forms.



There have been no changes in Verdisys internal control over
financial reporting during the quarter ended September 30, 2004 that have materially affected, or are reasonably likely to materially affect, Verdisys internal control over financial reporting.



Part II. OTHER INFORMATION



Item 6. Exhibits and Reports on Form 8-K



Reports on Form 8-K



None



|         |   |  |                                                                                                                                     
|-------- | - |  | ------------------------------------------------------------------------------------------------------------------------------------
|Exhibits |   |  |                                                                                                                                     
|10.1     | * |  | License Agreement between Alberta Energy Holdings, Inc. and Verdisys, Inc. for Abrasive Fluid Jet Technology, dated October 27, 2004
|         |  
|10.2     | * |  | Agreement between Verdisys, Berg McAfee Companies, Energy 2000 NGC, and Eric McAfee                                                 
|         |  
|31.1     |   |  | Certification of Principal Executive Officer pursuant to Section 302                                                                
|         |  
|31.2     |   |  | Certification of Principal Accounting Officer pursuant to Section 302                                                               
|         |  
|32.1     | * |  | Certification of Principal Executive Officer Pursuant to Section 1350                                                               
|         |  
|32.2     | * |  | Certification of Principal Accounting Officer Pursuant to Section 1350                                                              

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|* | Filed with Verdisys, Inc.s Quarterly Report on Form 10-QSB filed on November 15, 2004.
|- | ---------------------------------------------------------------------------------------



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SIGNATURES



In accordance with the
requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                       |  |                |  |                             
|---------------------- |  | -------------- |  | ----------------------------
|                       |  | Verdisys, Inc.
|                       |  |               
|                       |  | By:            |  | /s/ David M. Adams, COO     
|                       |  |                |  | David M. Adams              
|                       |  |                |  | Co-Chief Executive Officer  
|                       |  |                |  | Chief Operating Officer     
|                       |  |                |  | Principal Executive Officer 
|                       |  |               
|Date: January 27, 2005 |  |                |  |                             
|                       |  |               
|                       |  | By:            |  | /s/ John OKeefe, CFO       
|                       |  |                |  | John OKeefe                
|                       |  |                |  | Co-Chief Executive Officer  
|                       |  |                |  | Chief Financial Officer     
|                       |  |                |  | Principal Accounting Officer
|                       |  |               
|Date: January 27, 2005 |  |                |  |                             



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