SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-QSB /Amendment No. 1
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended:   DECEMBER 31, 2007
 
Commission File No. 000-19566
 
EARTH SEARCH SCIENCES, INC.
(Exact Name of Registrant as Specified in its Charter)
 
 
Nevada
87-0437723
(State or other Jurisdiction of Incorporation or Organization)
(IRS Employer Identification Number)
 
 
306 Stoner Loop Road, Lakeside, MT 59922
(Address of Principal Executive Offices, Including Zip Code)
 
Registrant's telephone number, including area code:   (406) 751-5200

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes x   No o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o   No x
 
The number of shares outstanding of each of the registrant's classes of common stock, as of February 8, 2007, covered by this report: 102,711,346 shares.  The registrant has only one class of common stock.
 
Transitional Small Business Disclosure Format (check one):    Yes  o   No x
 

EXPLANATORY NOTE

This Amendment No.1 to Form 10QSB (“Amendment”) is filed to clarify certain disclosures regarding the capital lease obligation with Accuprobe pursuant to which the Registrant continues to accrue liabilities.  These revised disclosures may be found on page 7 under the heading “Note 3 – Litigation” and on page 14 under the heading “Litigation.
 

EARTH SEARCH SCIENCES, INC.
 
TABLE OF CONTENTS
 
FORM 10-QSB
 
QUARTER ENDED DECEMBER 31, 2007
 
PART I
 
FINANCIAL INFORMATION
 
Item 1. Consolidated Financial Statements (Unaudited)
Page
Consolidated Balance Sheets as of December 31, 2007 and March 31, 2007
3
 
 
Consolidated Statements of Operations for the three and nine months ended December 31, 2007 and 2006
4
   
Consolidated Statements of Cash Flows for the nine months ended December 31, 2007 and 2006
5
   
Consolidated Statement of Changes in Stockholders’ Deficit for the nine months ended December 31, 2007
6
   
Selected notes to consolidated financial statements
7-8
   
Item 2. Management's Discussion and Analysis of  Financial Condition and Results of Operations
9-14
   
Item 3. Controls and Procedures
14
 
 
PART II
 
OTHER INFORMATION REQUIRED
 
Item 1. Legal Proceedings
16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
16
Item 3. Defaults Upon Senior Securities
16
Item 4. Submission of Matters of a Vote of Security Holders
16
Item 5. Other information
16
Item 6. Exhibits
16

2
 
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 

 
 
December 31,
 2007
 
 
March 31,
2007
 
ASSETS
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash
 
$
84,855
 
 
$
23,182
 
Accounts receivable
 
 
22,882
 
 
 
132
 
Loan costs, net of accumulated amortization of $222,983 and $199,998, respectively
 
 
52,587
 
 
 
28,225
 
Total current assets
 
 
160,324
 
 
 
51,539
 
 
 
 
 
 
 
 
 
 
Property and equipment, net accumulated depreciation  of $910,094 and $832,208, respectively
 
 
232,058
 
 
 
309,944
 
TOTAL ASSETS
 
$
392,382
 
 
$
361,483
 
 
 
 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
Accounts payable
 
$
1,209,891
 
 
$
1,151,437
 
Accrued expenses
 
 
670,308
 
 
 
733,917
 
Accrued officers’ compensation
 
 
1,327,986
 
 
 
1,147,986
 
Notes payable - current portion
 
 
747,656
 
 
 
836,618
 
Settlement obligation
 
 
8,686,824
 
 
 
5,434,259
 
Short-term debt – related parties
 
 
2,885,182
 
 
 
2,698,954
 
Total current liabilities
 
 
15,527,847
 
 
 
12,003,171
 
 
 
 
 
 
 
 
 
 
Notes payable less current portion
 
 
344,469
 
 
 
369,820
 
Total liabilities
 
 
15,872,316
 
 
 
12,372,991
 
 
 
 
 
 
 
 
 
 
Commitments and contingencies
 
 
-
 
 
 
-
 
 
 
 
 
 
 
 
 
 
STOCKHOLDERS’ DEFICIT
 
 
 
 
 
 
 
 
Preferred stock, 300,000,000 shares authorized, none issued and outstanding
 
 
-
 
 
 
-
 
Common stock, $.001 par value; 300,000,000 shares authorized; 102,711,346 and 96,327,474 shares issued and outstanding, respectively
 
 
102,712
 
 
 
96,328
 
Additional paid-in capital
 
 
47,237,282
 
 
 
46,577,053
 
Treasury stock
 
 
(200,000
)
 
 
(200,000
)
Subscription receivable
 
 
-
 
 
 
(250,000
)
Accumulated deficit
 
 
(62,619,928
)
 
 
(58,234,889
)
Total stockholders’ deficit
 
 
(15,479,934
)
 
 
(12,011,508
)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
$
392,382
 
 
$
361,483
 

See accompanying notes to consolidated financial statements.

3

EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
 
   
Three months ended
December 31,
   
Nine months ended
December 31,
 
   
2007
   
2006
   
2007
   
2006
 
                         
Revenues
  $ -     $ -     $ 22,750     $ 91,429  
                                 
Operating expenses
                               
Late fees related to settlement agreement
    1,176,390       658,748       3,043,098       1,833,353  
Depreciation and amortization
    25,962       27,048       77,886       78,973  
General and administrative
    242,509       189,377       883,044       1,131,227  
                                 
Total expenses
    1,444,861       875,173       4,004,028       3,043,553  
                                 
Loss from operations
    (1,444,861 )     (875,173 )     (3,981,278 )     (2,952,124 )
                                 
Other income (expense)
                               
Gain on settlement of debt
    -       -       15,049       --  
Interest expense
    (180,173 )     (46,477 )     (418,810 )     (470,923 )
                                 
Net loss
  $ (1,625,034 )   $ (921,650 )   $ (4,385,039 )   $ (3,423,047 )
                                 
Basic and diluted:
                               
Loss per share
  $ (0.02 )   $ (0.01 )   $ (0.05 )   $ (0.04 )
Weighted average common shares outstanding
    98,444,611       81,281,201       97,361,464       80,574,567  
 
See accompanying notes to consolidated financial statements.
 
4
 
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
   
Nine Months Ended
 
   
December 31,
 
   
2007
   
2006
 
 
 
 
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net loss
 
$
(4,385,039
)
 
$
(3,423,047
)
Adjustments to reconcile net loss to cash used in operating activities:
               
Depreciation and amortization
   
77,886
     
78,973
 
        Amortization of deferred finance costs     22,985        137,258   
Imputed interest
   
33,854
     
- 
 
Common stock issued for services
   
246,759
     
753,833
 
Gain on settlement of debt
   
(15,049
)
   
-
 
 
 
 
 
 
 
 
 
 
Changes in assets and liabilities:
               
Accounts receivable
   
(22,750
) 
   
16,839
 
Accrued interest – related party
   
162,083
     
-
 
Accounts payable and accrued expenses
   
35,894
     
70,012
 
Accounts payable – related party
   
-
     
416,427
 
Accrued officers compensation
   
180,000
     
178,917
 
Accrued settlement liability
   
3,252,565
     
1,810,082
 
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
   
(410,812
)
   
39,294
 
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from stockholder loans
   
341,500
     
-
 
Payment on stockholder loans
   
(317,355
)
   
-
 
Proceeds from subscription receivable
   
250,000
     
-
 
Financing costs
   
(47,347
)
   
-
 
Proceeds from issuance of common stock
   
360,000
     
-
 
Payment on long-term debt
   
(114,313
)
   
(49,007)
 
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
   
472,485
     
(49,007
)
                 
NET DECREASE IN CASH
   
61,673
     
(9,713
) 
CASH AT BEGINNING OF PERIOD
   
23,182
     
40,900
 
CASH AT END OF PERIOD
 
$
84,855
   
$
31,187
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Interest paid
 
$
92,407
   
$
-
 
Taxes paid
   
-
     
-
 
 
 
 
 
 
 
 
 
 
Non-cash financing and investing activities:
               
Common stock issued for debt repayment
 
$
26,000
   
$
72,000
 
Equity issued for loan extension
   
-
     
75,000
 
 
See accompanying notes to consolidated financial statements.

5

EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
Nine months ended December 31, 2007
(Unaudited)
 
 
 
Common
Shares
 
 
Stock
Amount
 
 
Additional
Paid-in
Capital
 
 
Treasury
Stock
 
 
Subscription
Receivable
 
 
Accumulated
Deficit
 
 
Total
 
Balances at March 31, 2007
 
 
96,327,474
 
 
$
96,328
 
 
$
46,577,053
 
 
$
(200,000
)
 
$
(250,000
)
 
$
(58,234,889
)
 
$
(12,011,508
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Payment of subscription receivable
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
250,000
 
 
 
 
 
 
 
250,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common stock for debt
 
 
65,000
 
 
 
65
 
 
 
25,935
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
26,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common stock for services rendered
 
 
976,016
 
 
 
977
 
 
 
245,782
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
246,759
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common stock for cash
   
5,342,856
     
5,342
     
354,658
                             
360,000
 
                                                         
Imputed interest
                   
33,854
                             
33,854
 
                                                         
Net loss
 
                                 
-
     
(4,385,039
)
   
(4,385,039
)
                                                         
Balances at June 30, 2007
   
102,711,346
   
$
102,712
   
$
47,237,282
   
$
(200,000
)
 
$
-
   
$
(62,619,928
)
 
$
(15,479,934
)
 
See accompanying notes to consolidated financial statements.

6

EARTH SEARCH SCIENCES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1 - BASIS OF PRESENTATION
 
The accompanying unaudited interim consolidated financial statements of Earth Search Sciences, Inc. ("ESSI") have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission ("SEC"), and should be read in conjunction with the audited financial statements and notes thereto contained in ESSI's Annual Report filed with the SEC on Form 10-KSB.  In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein.  The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.  Notes to the financial statements which would substantially duplicate the disclosure contained in the audited consolidated financial statements for 2007 as reported in the 10-KSB have been omitted.
 
Certain prior period amounts have been reclassified to conform with the current period presentation.
 
NOTE 2 - EQUITY
 
During the nine months ended December 31, 2007 we issued:

·   
976,016 shares of stock valued at $246,759 to various individuals for consulting services. The value of the stock was based on the quoted market price on the date of grant.
 
·   
65,000 shares of stock valued at $26,000 for debt pursuant to a settlement agreement between ESSI and the third-party debtor. The value of the stock was based on the quoted market price on the date of grant. The $15,049 difference between the liability settled and the value of the stock was recognized as a gain on settlement of debt in accordance with SFAS No. 140.
 
·   
5,342,857 shares of stock valued at $360,000 to various individuals for cash.
 
NOTE 3 - LITIGATION
 
We were in dispute with another party over a leaseback purchase agreement for a Hyperspectral Probe.  On March 23, 2005, ESSI entered into a settlement agreement (2005 Settlement Agreement) with Accuprobe to return the airborne hyperspectral sensor (Probe) and to settle the outstanding debt obligations under the related capital lease. Under this agreement, ESSI was required to return the Probe on or before August 31, 2005.  As the Probe was not returned by the August 2005 due date, ESSI was subject to a shipping, handling and disposition fee of $250,000.  Interest related to the $250,000 began accruing on September 2, 2005 at an annual rate of prime plus 4%.  In addition, rent began accruing at $250,000 per year beginning April 10, 2000 with interest on any unpaid rent accruing at a rate of prime plus 2% through August 31, 2005. After August 31, 2005, interest related to the unpaid rent ceased and was replaced with a 5% late fee calculated on the entire balance due at the end of each month.
 
We have been unsuccessful in our attempts to contact Accuprobe for return of the probe. As a result, in January 2007, we shipped the probe to an acquaintance of Accuprobe with instructions to hold the probe until Accuprobe provides further instructions. Because we have been unable to reach Accuprobe regarding our return of the probe, we have continued to accrue rents, interest and late fees. Under the 2005 Settlement Agreement, we had accrued $8,686,824 in rents, interest and late fees as of December 31, 2007. The estimated settlement obligation increased $3,252,565 as of December, 31, 2007, compared to the March 31, 2007 balance. This increase is related to interest expense of $21,967, rent expense of $187,500 and late fees of $3,043,098. Rent and interest expense are reflected in general and administrative expense for the three and nine months ended December 31, 2007 and 2006.

7
 
NOTE 4 - GOING CONCERN
 
As shown in the accompanying financial statements, we incurred a net loss of $4,385,039 for the nine months ended December 31, 2007 and had an accumulated deficit of $62,619,928 and a working capital deficit of $15,367,523 as of the same period.  These conditions raise substantial doubt as to ESSI's ability to continue as a going concern.  Management is trying to raise additional capital through sales of stock and or loans to the Company.  The financial statements do not include any adjustments that might be necessary if ESSI is unable to continue as a going concern.
 
NOTE 5 – NEW ACCOUNTING PRONOUNCEMENTS
 
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48). This Interpretation provides guidance on recognition, classification and disclosure concerning uncertain tax liabilities. The evaluation of a tax position requires recognition of a tax benefit if it is more likely than not it will be sustained upon examination. We adopted this Interpretation effective January 1, 2007. The adoption did not have a material impact on our consolidated financial statements.
 

8

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
CORPORATE FOCUS
 
In December, 1985 we acquired all of the outstanding shares of common stock of a privately held company known as Earth Search Sciences, Inc. (ESSI), a Utah corporation formed on August 29, 1985.  We issued 13,639,600 shares of its common stock in exchange for ESSI's outstanding shares.  This merger was a reverse acquisition and accounted for as a pooling of interests.  Accordingly, the assets and liabilities of the two companies were combined at their recorded net book values.  ESSI's principal assets were unpatented mining claims in Alaska that were acquired from ESSI's incorporators at a cost of $126,715.  ESSI's operations were the continuing operations of the Company, and ESSI was the entity which had substance and control both before and after the merger.
 
We have four wholly-owned subsidiaries: Skywatch Exploration, Inc., Polyspectrum Imaging, Inc., Geoprobe, Inc., and STDC, Inc. In addition, there are five majority-owned consolidated subsidiaries: Earth Search Resources, Inc., Eco Probe, Inc., ESSI Probe 1 LC, Petro Probe, Inc. and Terranet, Inc. All subsidiaries except Petro Probe were inactive during fiscal 2006 and 2007.
 
The Company utilizes an aircraft mounted hyperspectral remote sensing instrument to gather precise geological data from the surface of the Earth. Solar energy is reflected from surface materials and the instrument, called "Probe-1", captures the data in digital form. The Probe-1 is a "whiskbroom style" instrument that collects data in a cross-track direction by mechanical scanning and in an along-track direction by movement of the airborne platform. The instrument acts as an imaging spectrometer in the reflected solar region of the electromagnetic spectrum (0.4 to 2.5 nm). In the VNIR and SWIR, the at-sensor radiance is dispersed by four spectrographs onto four detector arrays. Spectral coverage is nearly continuous in these regions with small gaps in the middle of the 1.4 and 1.9 nm atmospheric water bands. In order to avoid geometric distortions in the recorded imagery, the Probe-1 is mounted on a 3 axis, gyro-stabilized mount. Geolocation of nadir pixels is assisted by the recording of aircraft GPS positional data and tagging each scan line with a time that is referenced to the UTC time interrupts from the GPS receiver.
 
The spectral data is processed to identify unique spectra in the image. The captured and processed spectra are compared to a library of known material spectra called "digital fingerprints" and the output allows the identification of mineral, compounds and organic matter and the determination of vegetative conditions.
 
In the fiscal years from 2004 to 2006 the Company's sensors were operated in the United States and abroad.  Contracts to operate the sensors in the United States as an ecological, mining, agricultural, and hydrocarbon target identification tool produced revenues of $302,901, $192,297 and $258,843, in fiscal 2006, 2005, and 2004, respectively.
 
In 1997 we began a two-year contract with Noranda Minerals Inc. to provide hyperspectral remote sensing data over multi-continents The agreements called for a series of flights for Noranda Mining and Exploration Inc. and its affiliates including Falconbridge Limited (collectively, the "Noranda Group"). The agreements provided the Noranda Group with an exclusive license to use the instruments for commercial mining exploration, as long as the Noranda Group continued to purchase remote sensing services from the Company in certain specified quantities.  The Company was entitled to receive fees for services and net smelter royalties or net profit interest royalties from certain discoveries by the Noranda Group. The licensing agreement with the Noranda Group provided a $1,000,000 equity investment in ESSI by way of 200,000 preferred shares, convertible into 1,000,000 shares of common stock and an option to purchase 1,000,000 shares of ESSI common stock at a price of $2.00 per share. Targets were flown in Chile , Peru and the North West   Territories in Canada .
 
Since 1997, the Company has also collected and holds a substantial archive of Probe 1 imagery from Kazakhstan , Australia , British Columbia , Ontario , Quebec , Chile , Mexico , California , Nevada , Arizona , Idaho , Montana , and Utah .  At the present time the value of this data archive has not been independently appraised nor is the value of this archive reflected in the financial statements.
 
9
 
The Company concluded a memorandum of agreement with Boeing that included the use of a unique Boeing aircraft possessing exceptional slow flight characteristics to be used in a variety of applications, the first being the flight over Yellowstone National Park as part of a NASA/Yellowstone Ecosystems Studies (Y.E.S.) project utilizing ESSI's Probe 1 hyperspectral imaging technology to collect one meter data to be utilized in addressing riparian issues.  Several test flights were performed during the period using the Probe 1 technology onboard a Boeing heliocourier aircraft.
 
The Company collected hyperspectral data for the Geosat Committee. The Geosat committee was funded from contribution by major U.S. resource companies.  The Committee was operated by the University of Texas at El Paso under Director, Dr. Rebecca Dodge.  The project completed for the Geosat's "Hyperspectal Group Shoot" provided Probe 1 hyperspectral imagery to the oil and minerals exploration, environmental assessment, and agriculture end-user community, for an evaluation by these communities of its application potential.
 
The Company teamed with the University of Idaho in a joint proposal to the Farm Bureau and won a contract to overfly the Snake   River Basin (Hell's Canyon).  The Company also collected hyperspectral data for the control and eradication of noxious weed intrusion.  The test results were published and initial results proved that airborne hyperspectral imagery is a useful tool for control of weeds, as well as providing information regarding economic indicators pertaining to forecasting crop yield.
 
The Company collected hyperspectral data for Desert Research Institute ("DRI") in the Kelso Dunes area in southeastern California .  The project completed for DRI was to detect change in arid vegetation cover using Hyperspectral data in the region known as the Providence   Mountains .  Detection of disturbance in these regions would aid in assessment of ecosystem status and global climate change. The remote sensing data combined with ground measurements examined spectral changes occurring concurrently with observed changes in percent green cover.
 
The Company co-operated with the Dian Fossey Gorilla Fund International organization to utilize hyperspectral remote sensing in a unique project to examine the detail of vegetation in the gorillas' habitat in the jungles of Rwanda .  Hyperspectral imagery revealed the abundance and distribution of the gorillas' principal foods in the Virungas. This information was used to determine the number of gorillas the habitat can support. National Geographic Explorer chronicled the mission in a television documentary that was subsequently played on numerous following dates.
 
In 1999 the company was approached by the US Navy to participate in a joint venture to acquire ownership of a proposed remote sensing satellite. Under the direction of Office of Naval Research's Naval Space Science and Technology Program Office, the Naval EarthMap Observer (NEMO) satellite would be capable of meeting the hyperspectral and panchromatic needs of many end users with timeliness and spatial resolution improved over existing commercial systems. The Navy's environmental models supporting operations in the littoral would be considerably enhanced by hyperspectral imagery and data products provided by NEMO to improve knowledge of the littoral environment with information on bathymetry, water clarity and trafficability.
 
The ONR signed an Other Transaction with the Space Technology Development Corporation (STDC) of Arlington , VA to develop NEMO in conjunction with the Defense Advanced Research Projects Agency (DARPA) Dual Use Applications Program (DUAP). DUAP is a joint program of the Army, Navy, Air Force, DARPA, Director Defense Research and Engineering (DDR&E), and the Deputy Under Secretary of Defense for International and Commercial Programs.  Earth Search Sciences Inc. subsequently acquired STDC and its prime contractor partner position with the ONR. The project was to have a cost of approximately $150 million with the private sector portion approximately one-half of that amount. Earth Search Sciences Inc. undertook to meet the key funding milestone payments necessary to ensure progress of the project.
 
10
 
The Hyperspectral Imager (HSI) would sample over a 30 km swath width with a 60 m ground sample distance (GSD) with the option to go to 30 m GSD by utilizing the systems attitude control system to 'nod' (i.e. use a satellite pitch maneuver to slow down the ground track of the field of view). A 5m panchromatic imager will provide simultaneous high spatial resolution imagery (black & white photography). A sun-synchronous circular orbit of 600 km will allow continuous repeat coverage of the whole earth in 7 days providing hyperspectral data over a 1,000,000 sq. km area each day.
 
The combined HSI and panchromatic images would satisfy a number of requirements of the commercial and science communities for moderate spatial and high spectral resolution remote sensing data over land and water such as agriculture, forestry, environmental monitoring , geology/mineralogy, hydrology and land use. Specific areas of interest for the Navy included bathymetry, water clarity, currents, oil slicks, bottom type, atmospheric visibility, tides, bioluminescence, beach characterization, underwater hazards, total column atmospheric water vapor, and detection and mapping of subvisible cirrus.
 
It was anticipated that NEMO would be launched in early 2002. Its subsequent data flow would be in the order of 56 gigabytes per day. Much of the commercial information was to be marketed through Earth Search Sciences Inc. Under the original agreement with the ONR, STDC needed to raise private industry funds of approximately $125,000,000 in order to complete, launch and operate the hyperspectral imaging satellite and instrument. Subsequent to March 31, 2002, STDC received notification from the ONR that it would not be giving STDC an extension to the agreement.
 
These examples and others indicated the world-wide interest in the technology and a bright future for the industry and Company. Unfortunately the advent of the September 11, 2001 tragedy changed the approach of individual countries to the acceptance of data collection over their borders and an industry-wide slow down occurred as a result. The commercial interest in developing satellite technology also changed as investors decided the risk level had dramatically increased due to international tensions.
 
CURRENT BUSINESS
 
As a result of the changes in the market for geological remote sensing data, the Company changed its strategy from operating as a service provider to establishing a group of subsidiary companies focused on specific market applications. Petro Probe, Inc. was a new subsidiary company formed for the oil & gas industry while Geo Probe, Inc. was formed for mineral exploration.
 
The resurgence of the mining industry and the emphasis for new sources of supply for oil and gas in recent years created a greater interest in using exploration tools that were faster and more accurate. The new subsidiary companies would seek joint ventures with partners who could provide technologies, human and capital resources to synergize with the Company's assets. This strategy will lead to the creation of more demand for ESSI's hyperspectral remote sensing services while providing the company with prospects for more diversified revenue generation.
 
Typically, the highest  demand for collection services like the Company’s  are from April through October in the Northern Hemisphere and October through April in the  Southern  Hemisphere.  Contracts are being sought in the following market segments: mining, hydrocarbon, agriculture, ecological and environmental monitoring. With the advent of the world-wide recognition for control of global-warming issues the Company will commence the development of an environmentally focused marketing plan to portray the advantages of airborne hyperspectral remote sensing to these market segments.
 
SUBSIDIARY COMPANIES
 
Petro Probe, Inc.'s goal is to develop the competitive advantages of its resource mapping capability, combine that with conventional hydrocarbon exploration tools and then apply newer value-added technologies to identify good oil and gas properties.
 
ESSI has performed important hyperspectral surveys and research in aquatic and vegetation-related projects. The environmental markets are vast, however the Company's current lack of resources dictates continued priority be assigned to mineral and hydrocarbon exploration.
 
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The other ESSI wholly-owned subsidiaries: Skywatch Exploration, Inc., Polyspectrum Imaging, Inc., Geo Probe, Eco Probe and Space Technology Development Corp. are inactive. Of the other majority-owned consolidated subsidiaries: Earth Search Resources, Inc. and ESSI Probe 1 LC are inactive.
 
Historically ESSI's core business has been focused on collecting and processing airborne hyperspectral data for the production of detailed surface maps. These maps indicate the exact chemical and physical characteristics of all the materials exposed on the surface of the Earth. The Company was one of the early pioneers in developing the technology globally and has now served a number of clients in various countries.
 
The company realizes that opportunity exists in using the technology to discover properties for mineral and hydrocarbon exploitation. It was a natural growth step to create a strategy of developing subsidiary companies in key natural resource markets wherein exploration discoveries could be maximized by "in-house" development. The company is currently pursuing these avenues in the mineral and oil and gas industries.
 
RESULTS OF OPERATIONS
 
Our data collection aircraft was grounded for repairs for FAA required maintenance in 2006 and has not been operational during the first three fiscal quarters of 2008.  However, we generated a small amount of revenue from the sale of certain prove-data previously gathered.  As a result, our revenues for the three and nine months ended December 31, 2007 was $0 and $22,750, respectively, compared to revenues of $0 and $91,429 for the same periods of 2006.
 
Late fees related to a settlement agreement were $1,176,390 and $3,043,098 for the three and nine month periods ended December 31, 2007, compared to $658,748 and $1,833,353 for the same periods in 2006. The late fee is based on a 5% cumulative fee, which increases each quarter due to the compounding effect.
 
Depreciation and amortization expense was $32,966 and $100,871 for the three and nine month periods ended December 31, 2007, compared to $27,048 and $78,973 for the same periods of 2006.
 
General and administrative expenses were $242,509 and $883,044 for the three and nine month periods ended December 31, 2007, compared to $189,377 and $1,131,227 for the corresponding periods of 2006.
 
Interest expense for the three and nine month periods ended December 31, 2007 was $173,169 and $395,825, compared to interest expense of $46,477 and $470,923 for the corresponding period in 2006.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Net cash used in operating activities was $410,812 for the nine months ended December 31, 2007 compared to net cash provided by operating activities of $39,294 for the nine months ended December 31, 2006 resulting primarily from a net loss of $4,385,039 during the nine months ended December 31, 2007, net of certain non-cash expenses.
 
Net cash provided by financing activities was $472,485 for the nine months ended December 31, 2007 compared to cash used of $49,007 for the same period of 2006.
 
During the nine months ended December 31, 2007, two stockholders, who are also the primary management of the Company, provided us with loans for net proceeds of $24,145. In addition, we received $250,000 of cash from a subscription receivable and received $360,000 in a private placement all of which accounted for the cash provided by financing activities.
 
We are experiencing working capital deficiencies because of operating losses. We have operated with funds received from the sale of common stock, the issuance of notes and limited operating revenue. Our ability to continue as a going concern is dependent upon continued debt or equity financings until or unless we are able to generate cash flows to sustain ongoing operations. We plan to increase the number of revenue producing services through the use of additional hyperspectral instruments and thereby continue as a going concern.  There can be no assurance that we can generate sufficient operating cash flows or raise the necessary funds to continue as a going concern.
 
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FUTURE OPERATIONS
 
The Company is actively researching new exploration and exploitation technologies to complement and integrate with its hyperspectral capabilities.
 
General Synfuels International, Inc., (GSI) a Nevada private company, owns the world-wide proprietary rights, patent, technology, construction plans and materials and operational capability for a gasification process recover the oil and gas from oil shale. Petro Probe, Inc. signed a non-exclusive license agreement with GSI to obtain the use of these rights in a world-wide territory. PPI will pay a license fee in the amount of Five Hundred Thousand United States Dollars ($500,000) and shall issue to GSI 500,000 fully paid and non-assessable shares of PPI Common Stock, $.001 par value per share.  PPI also agreed to assign to GSI an overriding net revenue interest of five and one-half percent (5 %) of the hydrocarbonaceous products produced by PPI, payable quarterly.
 
PPI is examining various oil shale sites in Colorado and Utah for a test plant. Five acres of premium oil shale land is sought. The test plant is budgeted for approximately $1.5 million as a first stage development cost. This will prove the technology. The second and third stages will cost approximately $8 million more at which time the plant could operate at full capacity. The time line for completion of all stages is one year.
 
In its search for new complementing technologies, PPI encouraged the creation of an alliance with two other companies in oil shale R&D. Independent Energy Partners, Inc. (IEP) and Phoenix Wyoming Inc., (PWI) both Colorado private companies, have their own non-competitive interests in oil shale. IEP owns the exclusive rights to a broad, patented Geothermic Fuel CellTM (GFC) method, (US Patent No. 6,684,948 B1-Apparatus and Method For Heating Subterranean Formations Using Fuel Cells), to economically produce oil and natural gas from unconventional resources such as oil shale, while producing electricity as a byproduct.  IEP also has acquired the mineral rights on property in Rio Blanco County , Colorado on some of the richest "Mahogany Zone" oil shale property in the world, holding an estimated 1.4-2.4 billion barrels of oil. PWI owns certain proprietary intellectual property and methods designed to bring the advantages of microwave technology to an oil shale borehole. This alliance effort is being examined by the parties. Continuing its interest to maintain an industry leadership positioning hyperspectral work ESSI is developing a joint venture with Intellisense Corporation to design and construct a third generation hyperspectral instrument design. This design is proposed in patent pending application #0050046822 which the Company is negotiating an LOI position for purchase. The new instrumentation would allow for faster, less expensive and more precise data collection.
 
The capability to design and maintain new technologies is key to the Company's success in future operations. It will be a vital component to allow continuing exploration and exploitation of the Earth's natural resources.
 
The Company has the knowledge and experience to build on the opportunities being presented at this time.
 
Each subsidiary will focus on a specific sector of commercial remote sensing and have a management team with relevant skills and expertise.  The Company will provide a license to use the Company's hyperspectral instruments and processing support. This strategy creates a ready market for the Company, as well as positioning the Company to receive a royalty from any resource development that occurs as a result of the subsidiaries' use of the Company's instruments and technology. Additional capital will be raised for each subsidiary by means of private placements or public offerings.
 
The Company's intent is to create partnerships, strategic alliances, mergers or acquisitions for the subsidiaries as the most expeditious and cost-effective way to grow the commercial hyperspectral remote sensing market.
 
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The Company's near-term plans are to continue pursuing:
 
      1.       contracts that produce revenues from the application of remote sensing;
 
      2.       the development of additional miniaturized remote sensing instruments and newer generation airborne instruments to replace the current PROBE-1 model;
 
      3.       the integration of other advanced technology exploration instruments with hyperspectral technology to offer clients a "one-stop" convenience;
 
      4.       the development of promising mineral, oil and gas properties;
 
      5.       the acquisition of licenses or options to new technologies for minerals or oil and gas production that can assist the company to become a resource developer and producer as well as an exploration oriented business.
 
The company will continue to develop a market for its securities under the new trading symbol ESSE.
 
LITIGATION
 
We entered into a civil law suit in the United States District Court for the Eastern District of Virginia as a plaintiff along with our subsidiary company, Space Technology Development Corporation. The Company charged that The Boeing Company caused the plaintiffs substantial damages as a direct result of their breach of the covenant of good faith and fair dealing.
 
We were in dispute with another party over a leaseback purchase agreement for a Hyperspectral Probe.  On March 23, 2005, ESSI entered into a settlement agreement (2005 Settlement Agreement) with Accuprobe to return the airborne hyperspectral sensor (Probe) and to settle the outstanding debt obligations under the related capital lease. Under this agreement, ESSI was required to return the Probe on or before August 31, 2005.  As the Probe was not returned by the August 2005 due date, ESSI was subject to a shipping, handling and disposition fee of $250,000.  Interest related to the $250,000 began accruing on September 2, 2005 at an annual rate of prime plus 4%.  In addition, rent began accruing at $250,000 per year beginning April 10, 2000 with interest on any unpaid rent accruing at a rate of prime plus 2% through August 31, 2005. After August 31, 2005, interest related to the unpaid rent ceased and was replaced with a 5% late fee calculated on the entire balance due at the end of each month.
 
We have been unsuccessful in our attempts to contact Accuprobe for return of the probe. As a result, in January 2007, we shipped the probe to an acquaintance of Accuprobe with instructions to hold the probe until Accuprobe provides further instructions. Because we have been unable to reach Accuprobe regarding our return of the probe, we have continued to accrue rents, interest and late fees.  Under the 2005 Settlement Agreement, we had accrued $8,686,824 in rents, interest and late fees as of December 31, 2007. The estimated settlement obligation increased $3,252,565 as of December, 31, 2007, compared to the March 31, 2007 balance. This increase is related to interest expense of $21,967, rent expense of $187,500 and late fees of $3,043,098. Rent and interest expense are reflected in general and administrative expense for the three and nine months ended December 31, 2007 and 2006.
 

ITEM 3.  CONTROLS AND PROCEDU RES
 
We carried out an evaluation, under the supervision and with the participation of the our management, including the Chairman and Chief Executive Officer of the Company and Chief Financial Officer of the Company, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) as of the end of the period covered by this report. Based upon that evaluation, the Chairman and Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective. Specifically, our auditors identified adjustments relating to accounts payable, accrued interest unrecorded debt, stock issued for services, imputed interest, debt commissions and recognition of liabilities from legal settlement.
 
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We undertook measures to remedy this situation by working with the auditors and engaged an outside advisor to provide accounting advice and assistance with implementing internal procedures to ensure that controls and procedures are adequate and effective. These deficiencies were reported to our Board of Directors with the intent to improve and strengthen our controls and procedures.  As a result of the engagement of the outside advisor and the assistance provided to us, there were no major adjustments made by our independent auditors for the quarter ended December 31, 2007.
 
In the second quarter of 2007, we engaged an outside advisor to provide accounting and reporting advice and oversight. This advisor reviewed the accounting entries and disclosures included in this Form 10-QSB.  There have been no other changes in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or that is reasonably likely to materially affect our internal control over financial reporting.
 
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PART II
OTHER INFORMATION REQUIRED
 
Item 1.
 Legal proceedings
 
None
 
Item 2.
Unregistered sales of equity securities and use of proceeds
 
None
 
Item 3.
Defaults upon senior securities
 
None
 
Item 4.
Submission of matters to a vote of security holders
 
None
 
Item 5. 
Other information
 
Not applicable.
 
Item 6. 
Exhibits
 
Exhibit Number
Description
   
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith)
   
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith)
   
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith)
   
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith)

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SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned.
 
 
 
EARTH SEARCH SCIENCES, INC.
   
   
Date:   April 21 , 2008
/s/  Larry F. Vance
 
Larry F. Vance
 
Principal Executive Officer
 
 
 
   
Date:   April 21 , 2008
/s/  Tami J. Story
 
Tami J. Story
 
Principal Accounting Officer
 
 
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