UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
 WASHINGTON, D.C.
20549
 FORM
10-KSB/ Amendment No.1
 þ
              
              ANNUAL REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For the Fiscal Year Ended
March 31, 2007
 OR
 o
              
              TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF
      1934
 for the transaction period
from  to
 Commission File Number
000-19566
 EARTH SEARCH SCIENCES,
INC,
 (Name of
Small Business Issuer in its charter)
 Nevada
              
              870437723(State
      or other jurisdictionof
      incorporation)
              
              (I.R.S.
      EmployerIdentification
      No.)306
      Stoner Loop Road, #6, Lakeside, Montana
              
              59922(Address
      of principal executive offices)
              
              (Zip
      code)
 
 Issuer’s
telephone number (406) 751-5200
 Securities
registered under Section 12(b) of the Exchange Act: None
 Title
      of each class
              
              Name
      of each exchange on which
                Registered
 Securities
registered under Section 12(g) of the Exchange Act:
 Common
Stock
 (Title of
class)
  (Title of
class)
 Check
whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act.þ
 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. Yesþ  Noo
 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 registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.þ
 Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yeso Noþ
 State
issuer’s revenues for its most recent fiscal year. $91,429.
 State the
aggregate market value of the voting and nonvoting common equity held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date within
the past 60 days. At the closing price of the stock as of May 31, 2007
of $0.24, the approximate aggregate market value of voting stock held by
non-affiliates is $6,911,308.
 As of
June 29, 2007 96,327,473 shares of Common Stock, $.001 par value, of the
registrant were issued and outstanding.
  
 
    This Amendment No.1
to Form 10KSB (“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 6 under the heading “Item 3 – Litigation”, page 9 under the
heading “Management’s Discussion and Analysis – Results of Operations” and page
F-13 under the heading  “Note 10 – Forgiveness of
Debt”.  Further, this Amendment revises disclosures found on page 6
under the heading  “Item 2 – Properties” and   page
F-4  under “
  
  TABLE OF CONTENTS
 
 PART I
              
              1Item 1 -
              Business
              1Item 2 -
              Properties
              6Item 3 -
              Legal Proceedings
              6Item 4 -
              Submission of Matters to a
      Vote of Security Holders
              7PART II
              
              7Item 5 -
              Market for the Registrant's
      Common Stock Equity and Related
      Shareholder Matters
              7Item 6 -
              Management's Discussion and
      Analysis
              8Item 7 -
              Financial Statements
              F-1Item 8 -
              Changes in and Disagreements
      with Accountants on
      Accounting and Financial Disclosure
              13Item 8A-
              Controls and Procedures
              13Item 8B -
              Other Information
              13PART III
              
              14Item 9 -
              Directors, Executive Officers,
      Promoters, Control Persons and Corporate Governance; Compliance With
      Section 16(a) of the Exchange Act
              14Item 10 -
              Executive Compensation
              15Item 11 -
              Security Ownership of Certain
      Beneficial Owners and Management
      and Related Stockholder Matters
              16Item 12 -
              Certain Relationships and
      Related Transactions, and Director Independence
              16Item 13 -
              Exhibits
              18Item 14 -
              Principal Accountants Fee and
      Services
              17SIGNATURES
              20
 
  PART I
 
 ITEM
1.  BUSINESS
 
 Earth
Search Sciences, Inc. (the Company) was incorporated in 1984 under the laws of
the state of Utah.
 
 Earth
Search Sciences, Inc. has 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. The
50% owned subsidiary ESSI Probe 1 LC was formed as a joint venture to own and
operate hyperspectral instruments. All subsidiaries, excepting Petro Probe, were
inactive during the fiscal years ended March 31, 2007 and 2006.
 
 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 sensor is an imaging spectrometer,
specifically a "whiskbroom style" opto-mechanical scanner system that collects
data in a cross-track direction by mechanical scanning and in an along-track
direction by movement of the airborne platform.  The sensor uses a
diffraction grating to direct reflected sunlight onto four detector arrays
covering the 400 to 2500 nanometer range of the electromagnetic spectrum. ). 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. Incoming photons build up in the detectors to register as an
electronic signal. These correlate to digital counts that indicate the amount of
signal coming from the Earth’s surface. The visible wavelength detector array
includes a Si detector array operated at ambient temperature, and the
near-infrared, and two short wavelength IR arrays incorporate InSb arrays cooled
by liquid nitrogen to 77K. Each spectrographic module provides 32 spectral
channels. Data are recorded on Exabyte Mammoth tape drives, two of which
are installed to provide an on-line storage capacity of up to 80 GB. The Probe 1
sensors currently generate data at approximately 2.5 MB per second.
 
 Each
data set includes what can be described as 128 images, each collected at a
different wavelength.  When the data are converted to reflectance,
materials on the Earth’s surface can be identified based upon diagnostic
absorption features.  This holds true whether the target is rocks and
minerals, vegetation, or man-made materials. The detail in hyperspectral
reflectance data allows identification – not just detection – of materials.
Minerals that are associated with various natural resources can be identified.
Vegetation health can be monitored, amounts of woody plant material available
for wildfires can be assessed, noxious weeds can be mapped, and detailed post
fire burn severity maps can be generated. Conditions concerning water quality –
turbidity, etc. can also be mapped. As data processing costs come down, more and
more scientists working in different applications are using hyperspectral data
as so much more information can be derived about materials on the Earth’s
surface.  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.
   Minerals
identified with the Probe 1 include alunite, kaolinite, dickite, smectite,
pyrophyllite, buddingtonite, gypsum, calcite, dolomite, Fe chlorite, Mg
chlorite, tremolite, muscovite, illite, goethite, hematite,
tourmaline.  Many more are
possible.  Detection  may be limited  if there is
not  enough of the mineral filling a pixel (perhaps < 5%). The
minerals need to be exposed at the surface, so 90-100% vegetation cover
precludes identification. Also, minerals exposed but in shadows are difficult to
detect. Some mixtures of minerals may be difficult to identify, but skilled
interpreters can often do it.  And field checks are helpful in these
cases.
 
 Hyperspectral
imaging technology has been used for over 20 years for a variety of
applications.  More and more companies are realizing the
benefits.  Most recently, the Probe was used to identify mineral
anomalies in vegetated terrain in New Mexico. These new targets were field
checked and high values of gold and platinum were found.  The field
geologist, who had never worked with hyperspectral data before was impressed
with the accuracy.  He recommended drilling targets that were
discovered using Probe data. An article describing this will be published in an
upcoming Special Publication of Economic Geology.
 
 Minerals
identified with the Probe 1 include alunite, kaolinite, dickite, smectite,
pyrophyllite, buddingtonite, gypsum, calcite, dolomite, Fe chlorite, Mg
chlorite, tremolite, muscovite, illite, goethite, hematite,
tourmaline.  Many more are possible.
   1
   What may
limit detection is not enough of the mineral filling a pixel (perhaps < 5%).
The minerals need to be exposed at the surface, so 90-100% vegetation cover
precludes identification. Also, minerals exposed but in shadows are difficult to
detect. Some mixtures of minerals may be difficult to identify, but skilled
interpreters can often do it.  And field checks are helpful in these
cases.
   Hyperspectral
imaging technology has been used for over 20 years for a variety of
applications.  More and more companies are realizing the
benefits.  Most recently, the Probe was used to identify mineral
anomalies in vegetated terrain in New Mexico. These new targets were field
checked and high values of gold and platinum were found.  The field
geologist, who had never worked with hyperspectral data before was impressed
with the accuracy.  He recommended drilling targets that were
discovered using Probe data. An article describing this will be published in an
upcoming Special Publication of Economic Geology.
 
 Data
collected at different times should not hinder identification of materials as
long as the sensor is calibrated regularly and the solar signal is strong (we
recommend collections with the sun angle being at least 30 degrees). Regarding
environmental applications, suitable ones include mapping fuel or oil spills,
noxious weeds or other invasive plant species, suspended sediments in water
bodies, algae blooms in lakes, etc.  Landsat TM satellite data has
been used for decades to map various land cover
materials.  Hyperspectral data can identify many more materials than
multispectral satellite data so land-use management is optimimized.
 
 Minerals can be identified in the time
it takes to collect and analyze the data – perhaps as little as a day or
two.  Analysis of reflectance data from instruments such as the Probe
have been used to identify minerals remotely, that are impossible to identify in
hand sample.  Previously field geologists would send samples that were
difficult to absolutely identify to the lab to do chemical or x-ray diffraction
analysis. This process takes several days or weeks. Probe reflectance data can
identify quickly any mineral with distinctive absorption features. And it has
been shown that mineral maps produced from hyperspectral data are more accurate
than some produced by geologists in the field, particularly where access is
difficult and geologist can’t walk all the ground.  Oil and gas, not
being typically exposed at the surface, is typically keyed in on using specific
alteration minerals developed by hydrocarbon microseepage or the presence of
stressed vegetation.
 
 The Company initially developed the
exploration capability of the hyperspectral technology with Noranda Mining
Company and its affiliates, all major mineral explorers and producers. Under
license the Company provided hyperspectral data to Noranda which processed the
raw hyperspectral data and used the resulting product for both its own internal
mining exploration purposes as well as to resell (profitably) to other firms. As
a result of the license the Company received fees and is due to receive net
smelter royalties from new mines established from the
program.  Targets were flown in Chile, Peru and the North
West Territories in Canada. The results of this contract were featured by
Noranda representatives at the 2004 Prospectors & Developers
Association of Canadaconference. The strategy of participating in this
type of license arrangement led to the development of a joint venture approach
to marketing the hyperspectral technology.
 
 In mining and hydrocarbon exploration,
Probe data has proven useful for mapping minerals related to potentially
economic deposits of natural resources.  In particular, it has been
used for gold, silver, platinum and copper exploration. Hyperspectral data has
been useful for detecting vegetation stress, identifying crops, and mapping
noxious weeds. One interesting ecological application is mapping degrees of burn
severity after wild fires.  Hyperspectral data allows researchers to
provide more detailed burn severity maps to the Forest Service and
others.  This important in that information is needed on how
effectively areas will recover.  The American Geophysical Conference
in December this year will have some papers on this topic.
 
 In its search for joint venture
partners who have rights to adequate mineral claims the Company has encouraged
the creation of an alliance with two other companies. Phoenix Wyoming Inc., a
Colorado private company under the direction
of  William Pelton PhD, and Geotechnical Business Solutions,
a private Canadian company under the direction of
John Gingerich P. Geo. From 1996 to 2002 John Gingerich held the
position of Director, Research and Technical Innovation Noranda Inc.,
Exploration Group. Other positions held in Noranda: 1992 to 1996 Senior
Geophysicist Latin America; 1990 to 1992 Senior Geophysicist (Regional) Western
Canada and 1987 to 1990 Division Geophysicist. Dr. Pelton has also indicated
strong interest for involvement in the oil shale recovery program. Both parties
are in position to complete negotiations based on the Company confirming the
availability of the data collection aircraft.
 
 Since 1997, the Company has also
collected and holds a substantial archive of Probe 1 imagery from Kazakhstan,
Australia, British Columbia, Ontario, Quebec, Peru, 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. With approximately
200,000 sq. km. of mineral oriented data the Company believes there is a market
for the information. This year the company has begun to market the
archive.
 
 In the
fiscal years 2007 and 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 $91,429 and $302,901 in fiscal years
2007 and 2006, respectively.  During fiscal year 2006, we also had
revenues of $96,841 related to oil and gas activities, which ceased during that
same fiscal year.
 History
 
 In
December, 1985 the Company 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.  The Company 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.  In
August, 1987 the Company changed its name to Earth Search Sciences, Inc. and in
November, 1987 ESSI was dissolved. The Company has since re-incorporated in
Nevada.
 
 Since
1997, the Company has 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. However
the Company has undertaken a marketing campaign to sell the data to mineral
exploration companies and is currently reviewing initial inquiries.
  2
  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 (ONR) 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 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.
 
 Subsequent
to March 31, 2002,  STDC received notification from the ONR that it
would not extend the agreement further.
 
 The
Company believes that the statute of limitations has run with respect to
liabilities incurred with sub contractors and vendors on the NEMO program and
these amounts are no longer enforceable. The Company recorded  a gain
on debt retirement in the amount of $10,132,522 in fiscal 2007.
 
 Corporate
Focus
 
 The
Company’s mission is to continue to use remote sensing in a variety
of exploration, monitoring and exploitation industries around the
globe.  Remote sensing includes acquiring, processing and interpreting
imagery of the Earth captured from instruments deployed on aircraft or
satellites. The advantages of airborne and satellite remote sensing over other
methods of gathering visual information are that data can be collected better,
faster and cheaper over larger areas including sites inaccessible from the
ground.    By collecting data at different times, changes
can be detected that may be due to significant natural or man-made
processes.  Detection of such changes can assist in environmental/land
use management.
 
 With the
recent resurgence of the mining industry and the demand for new sources of
supply for oil and gas, there is a greater interest in using exploration tools
that are faster and more accurate. With its hyperspectral technology the Company
plans to take an aggressive role in establishing itself as an active participant
in the discovery of new natural resources by creating wholly owned subsidiary
companies in key industries, initially mining and oil and gas. These companies
will seek joint ventures with partners who can provide  technologies,
human and capital resources to synergize with the Company’s assets in order to
build active exploration and development programs.
 
 This
strategy is intended to produce two valuable results
for the Company's shareholders:
 
 1. More
demand for the Company's hyperspectral remote sensing services, hence
more revenue generation, and
 2. Equity
positions with fast growth potential in multiple key industries from discoveries
of rare natural resources.
 
 Evidence
of the interest in this strategy is seen in the Company’s first joint venture in
the mining industry (with subsidiary company Geo Probe, Inc.). Another 
joint venture is underway in the oil and gas industry (with subsidiary company
Petro Probe, Inc). Other joint ventures that are in early stage discussions
focus on technology research and development centers, and advanced modular,
hyperspectral instrumentation utilizing nanotechnology.
  3
  Business
 
 As a
result of changes in the market for geological remote sensing data, the Company
changed its strategy from a service provider to a developer of exploration and
exploitation companies focused in the mineral and hydrocarbon sectors.  We
will primarily seek  joint venture opportunities with established oil and
gas, and other precious mineral mining companies to locate, develop and exlpoit
natural reserves throughout the world. Petro Probe, Inc. was formed in November
1993 for the oil & gas industry while Geo Probe, Inc. was formed in October
1993 for mineral exploration.
 
 With its
established hyperspectral technology the Company sought joint ventures with
partners who could provide technologies, human and capital resources to
synergize with the Company's technology. This strategy is intended to lead to
the creation of more demand for the Company's hyperspectral remote sensing
services.
 
 The  Company  experiences  the  highest  demand
for its collection services
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. Because of the advent of the world-wide
recognition for control of global-warming issues, the Company plans to develop
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 identify good oil and gas properties through a two part
strategy: develop the competitive advantages of
its  resource  mapping  capability, with
hyperspectral imagery, and combine that mapping capability with conventional
hydrocarbon exploration  tools.   Petro Probe’s
activity during fiscal 2007 has been to develop the business plans and
managerial structure to begin work on the oil shale technology under license.
Funding sources have been identified and recognition of the technology by the
Department of  Energy (DOE) was obtained. See report published by
Office of Petroleum Reserves, U.S. Department of Energy, June 2007, “Profiles of
Companies Investing Today to Secure America’s Energy Future”.
 
 Geo
Probe, Inc. plans to use the hyperspectral mapping technology to find new
mineral  deposits and monitor the environmental impact of active
and  past-producing  mines,  mills, smelters,
refineries and
pipelines.  The  Company's  mapping  agreement  with
Noranda Minerals, concluded in 2005, provided  the  ability
to develop and prove these new approaches to mineral exploration.  Geo
Probe, Inc. has been evaluating joint venture proposals received from a Canadian
corporation, a letter of intent for a joint venture from a Chinese and HongKong
company, and a joint venture proposal from a to-be-formed Nevada limited
liability company.
 
 Eco
Probe, Inc. was formed to pursue hyperspectral remote sensing applications in
the environmental industry.  The Company has sought to position itself
with
U.S.  government  agencies  such  as  the
Environmental Protection Agency, the Bureau of Land Management and the Office of
Surface  Mining  on  setting  up  applications  for  commercial  monitoring  of
mineral industries,  forest  inventory and health issues,
slope stability assessment and
the  spread  of  noxious  weeds.
 
 The
Company and Eco Probe, Inc. have performed hyperspectral surveys and
research  in  aquatic and vegetation-related projects
..  Eco Probe, Inc made three collection between 2000 and 2001 The
environmental markets
are  vast,  however  the  Company's
current lack of resources dictates
priority  be  assigned  to  mineral  and  hydrocarbon  exploration.  The
subsidiary was inactive during the fiscal year ended June 30, 2007.
 
 The  Company
formed Terranet, Inc. to act as a imagery product distribution
conduit  and  perform  as  the  Company's  e-commerce
content provider. Recognizing  that
imagery  collected  today  and yesterday
could  be  sold  repeatedly  to  multiple  end
users the Company’s subsidiary company, Terranet, completed the copyright design
and testing
of  a  database  and  internet  centered  marketing  system.  Terranet
anticipates new joint venture partners to be available when the hyperspectral
industry begins to grow again. The subsidiary was inactive during the fiscal
year ended June 30, 2007.
  4
 
 The other
wholly-owned subsidiaries of the Company, Skywatch Exploration, Inc.,
Polyspectrum Imaging, Inc., and Space Technology Development Corp.are inactive.
The other majority-owned consolidated subsidiaries, Earth Search Resources, Inc.
and ESSI Probe 1 LC are inactive.
 
 Fiscal 2007 Significant
Projects – Update
 
 To date,
terrabyte quantities of imagery have been collected by the
Company.  Selected portions of these data tapes are being processed
and the imagery is being examined for the presence of mineral properties. The
Company is currently working to outsource the processing and interpretation of
its archived data in order to quickly expand its commercial
offering.
 
 We plan
to seek joint venture opportunties with private industry, universities and
state and federal agencies to develop, package and deliver competitive advanced
technology processed data and airborne mapping products and
services.  These include both unsolicited proposals and responses to
Requests for Proposals and will be addressed on a prioritized basis. The
Company will continue to respond to requests for quotations that it
receives.  We believe that these requests for proposals and quotations
demonstrate the demand for hyperspectral services and gives reason for the
Company to have a positive outlook for the near future.
 
 Competition
 
 The
Company has numerous competitors in the remote sensing services (airborne
hyperspectral services) and natural resource development
industries.  Competition in the remote sensing industry comes from
several primary sources, including HyMap, CASI and GER, whose hyperspectral
instruments operate within the USA and Ekwan, a new entry from
Canada.  Our principal competitors in the natural resource development
industry include traditional exploration companies using a variety of other
technologies.  Some of our competitors in both remote sensing and
natural resource development have substantially greater financial and other
resources than the Company.
 Employees
 
 As of
September 13, 2007 the Company had 4 full-time employees.
 
 Regulation
 
 The sale
of our imagery is regulated by the Department of Commerce.  Although
the Company (through its acquisition of STDC) has acquired a Department of
Commerce (DOC) Remote Sensing License that permits the Company to market
globally hyperspectral and panchromatic imagery, there is no guarantee that the
government will not impose restrictions on sales if the quality of our imagery
increases with new technology that, for example, allows increased
resolution.  Because our license was the first issued DOC Remote
Sensing License, the Company cannot anticipate how the DOC specifically will
treat our license or how the airborne remote sensing industry will be regulated
in the future.  In addition, the Department of State regulates the
export of advanced technologies to certain nations.  Our services fall
within those regulations and we cannot offer our services in those nations
without obtaining a license from the Department of State.
 5
  Available
Information
 
 The
Securities and Exchange Commission maintains an internet site at http://www.sec.gov
that contains reports and financial information filed by the
Company.  The Company maintains an internet site at http://www.earthsearch.com
that contains information about the Company’s business, markets and
technology.  Information on the Company’s internet site is not
incorporated by reference in this report.
 
 Seasonal Nature of
Business
 
 The Company experiences the highest
demand for its collection services April through October in the Northern
Hemisphere and October through April in the Southern Hemisphere.
 
 Customers and Geographic
Areas of Business
 
 In fiscal
2007, the Company operated its airborne hyperspectral sensors under contracts
with third parties in several areas around the United States.  In
fiscal 2006 and 2005, 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, hydrocarbon, and target identification
contributed $91,429
and $302,901, to revenue in fiscal 2007 and 2006 respectively.
 
 ITEM
2.  PROPERTIES
 
 The
Company headquarters consist of approximately 1,500 square feet of office space
in Lakeside, Montana.
 
 As a 50% member of ESSI Probe I LC,
an Idaho limited liability company (“Probe I LC”), the Company owns 50% of the
hyper-spectral instrument owned by Probe I LC. The Company shares its ownership
with the two other members of ESSI Probe I LC, Arthur W. McClain Trust and
Francisco Elmudesi (the “Woodstock members”).  Pursuant to an
agreement dated June 3, 1997 (the “Equipment Usage Agreement”), the Company had
the right to purchase the hyper-spectral instrument until June 3, 2007 for the
purchase price of $2,250,000.  The Company is in the process of
negotiating an extension to the renewal period.
   The Company’s data collection
aircraft, a 1978 turbo prop Aero Commander, was grounded for maintenance and
repairs in the summer of 2006. Both engines needed complete overhauls as well as
other FAA required servicing. This interruption in the ability to service
hyperspectral clients was detrimental to the Company’s revenues in 2006. The
aircraft was expected to be ready for the 2007 season.  The aircraft
is currently located in Toledo, Ohio at an aero commander facility, National
Flight Services.
 ITEM 3.  LEGAL
PROCEEDINGS
 
 The
Company was in dispute with another party over a leaseback purchase agreement
for a Hyperspectral Probe.  During the fourth quarter of fiscal 2005,
both parties signed a settlement We have
been unsuccessful in our attempts to contact Accuprobe for return of the probe.
As a result, in the first quarter of the calendar year 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.   In
October of 2002, Terranet, Inc. a subsidiary company, received notice of a
judgment issued by the Supreme Court of British Columbia in regards to monies
owed resulting from a contract with plaintiff Cal Data Ltd., of Vancouver, B.C.
The plaintiff alleged that seventy-five thousand dollars was overdue from
invoices for services dating from January of 2002 to October, 2002. Management
is examining its position and has accrued a $74,603 liability associated with
this demand in its financial statements.
 6
  ITEM 4.
              SUBMISSION OF MATTERS TO A VOTE
      OF SECURITY HOLDERS
 
 None.
 
 PART
II
 
 ITEM 5.
              MARKET FOR THE REGISTRANT’S
      COMMON STOCK EQUITY AND RELATED STOCKHOLDER
  MATTERS
 
 (a)
              Principal
      Market or Markets.  The Company's common stock trades in the
      over-the-counter market.  The range of reported high and low bid
      quotations for the Company’s common stock, as set forth below, reflect
      interdealer bid prices, without retail markups, markdowns, commissions, or
      adjustments as reported in on the OTCBB and do not represent actual
      transactions.
 
 Quarter
      Ended
              High
              LowJune
      30, 2005
              .16
              .12September
      30, 2005
              .07
              .06December
      31, 2005
              .11
              .10March
      31, 2006
              .20
              .20June
      30, 2006
              .36
              .32September
      30, 2006
              .17
              .12December
      31, 2006
              .16
              .10March
      31, 2007
              .30
              .26
  (b)
              Approximate
      Number of Holders of Common Stock. The number of record owners of the
      Company's  $.001 par value common stock at March 31, 2007 was
      approximately 1218.  This does not include shareholders that
      hold stock in their accounts at
brokers/dealers.
 
 (c)
              Dividends.  Holders
      of the Company’s common stock are entitled to receive such dividends as
      may be declared by the Company's Board of Directors.  No
      dividends have been paid with respect to the Company's common stock and no
      dividends are anticipated to be paid in the foreseeable
      future.
 (d)
                In
      the last three years, the Company has made the following sales of
      unregistered securities, all of which sales were exempt from the
      registration requirements of the Securities Act of 1933, as amended,
      pursuant to Section 4(2) or as otherwise
  indicated:
  Recent Sales of Unregistered
      SecuritiesDate
              
              Amount of Securities
      Sold
              
              Price per Share
      ($)
              
              Total Cash Proceeds
      ($)
              
              
              
              Date
              
              Amount of Securities
      Sold
              
              Price per Share
      ($)
              
              Total Cash Proceeds
      ($)4/7/2006
              
              26,029
              
              $0.19
              
              $4,425
              
              (1)
              
              5/3/2006
              
              1,500,000
              
              $0.22
              
              $330,000
              
              (1)5/16/2006
              
              400,000
              
              $0.18
              
              $72,000
              
              (2)
              
              5/17/2006
              
              13,719
              
              $0.35
              
              $4,390
              
              (1)6/14/2006
              
              13,813
              
              $0.44
              
              $5,525
              
              (1)
              
              7/6/2006
              
              21,861
              
              $0.36
              
              $7,870
              
              (1)7/6/2006
              
              375,000
              
              $0.20
              
              $75,000
              
              (2)
              
              8/8/2006
              
              19,643
              
              $0.21
              
              $4,125
              
              (1)9/1/2006
              
              410,000
              
              $0.21
              
              $123,117
              
              (1)
              
              9/8/2006
              
              33,829
              
              $0.17
              
              $5,751
              
              (1)10/25/2006
              
              45,682
              
              $0.11
              
              $5,025
              
              (1)
              
              3/13/2007
              
              11,400,000
              
              $0.10
              
              $1,140,000
              
              (1)3/31/2007
              
              800,000
              
              
              
              
              
              (3)
              
              3/15/2007
              
              250,000
              
              $0.10
              
              $25,000
              
              (1)3/16/2007
              
              90,750
              
              $.0.10
              
              $9,075
              
              (1)
              
              3/28/2007
              
              2,500,000
              
              $0.10
              
              $250,000
              
              (2)(1)Consideration paid for the shares
      was employee and/or consulting services.(2)Shares issued for
      debt consideration.(3)  Consideration
      paid for Directorship.
 
 7
 Securities authorized for
issuance under Equity Compensation Plans
 
 The
following table sets forth certain information on the Company’s Equity
Compensation Plans.  See Note 10 to the Notes to Consolidated
Financial Statements for additional information on equity compensation including
material terms of options granted that have not been approved by security
holders.
  Plan
      category
              
              (a)
                Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
              
              (b)
                Weighted-average
      exercise price of outstanding options, warrants and rights
              
              (c)
                Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a)Equity
      compensation plans approved by security holders (1)
              
              -
              
              -
              
              -Equity
      compensation plans not approved by security holders (2)
              
              54,593
              
              $442
              
              -Total
              
              54,593
              
              $442
              
              -
 
 (1)
              The
      Company's stock options and warrants have not been approved by security
      holders
 (2)
              Excludes
      options for 4,000,000 shares issued as part of the acquisition of
      STDC
 
 ITEM 6.
              MANAGEMENT'S DISCUSSION AND ANALYSIS
 
 Results of
Operations
 
 The
Company recognized revenue of $91,429 in 2007 compared with $399,742 in 2006.
Revenue in 2007 was substantially lower due to the loss or completion
and several contracts related to our sensor activities. The Company’s data
collection aircraft was grounded in the summer of 2006 due to FAA required
maintenance and did not achieve operational status in 2007. Oil and gas revenues
during fiscal 2007 and 2006 were $0 and $96,841, respectively. In addition, oil
& gas production ceased in fiscal 2006 and all properties
impaired.
 
 Provision
for loss on impairment of fixed assets was $0 and $27,318 in 2007 and
2006.  General and administrative costs were $5,714,411 in 2007
compared with $1,474,602 in 2006. The increase in general and administrative
costs was due primarily to costs associated with capital raising efforts. 
In 2007 the Company recognized interest expense of $594,550 compared to
$2,297,210 in 2006. The Company recognized net loss from operations of
$5,889,080 in fiscal 2007 compared with a net loss from operations of
$1,461,954 in fiscal 2006.  The company recognized a net income of
$3,648,892 in fiscal 2007 compared with a net loss of $2,189,247 in fiscal
2006.  The increase in income was due to the gain on debt retirement,
discussed in Liquidity and Capital Resources, offset by the increase in general
and administrative expenses.  The gain (loss) on a per share basis was
$0.04 and $(0.03) in fiscal 2007 and 2006.
 
 8
  The
Company indirectly owns interests in seven oil and gas projects through its
subsidiary company, Petro Probe, Inc. In 2006, these projects were shut
down and fully impaired. No subsequent activity is expected.
  On March
23, 2005, we entered into a settlement agreement
  
  At March
31, 2006, we had accrued $4,390,016 in debt and interest related to the capital
lease of the Probe. Under the settlement agreement, the new liability using the
calculations outlined above was $2,820,099 at March 31, 2006. Consequently, we
recorded a $1,569,917 gain on debt forgiveness.
  Liquidity and Capital
Resources
 At March
31, 2007, we had $23,182 of cash and cash equivalents and a working capital
deficit of $11,951,632. Net cash used in operating activities was $274,632 in
2007.  Net cash used in operating activities was $137,076 in 2006,
resulting primarily from payments for salaries and services and changes in
current assets and liabilities.
  In March
2007, we recorded a $10,132,522 net gain on the settlement of certain debt
incurred in connection with a U.S. Government project called Naval Earth Map
Observer (NEMO). This agreement was originated on January 21, 1999, however, the
NEMO project was subsequently cancelled and all work on the project ceased. At
that time, the Company, through its subsidiary Space Technology Development
Corporation (STDC), recorded liabilities associated with the subcontract
agreements totaling $10,132,522. There is no settlement agreement in place with
regards to the subsequent recorded gain and the Company has never paid any of
the amounts due. As of March 31, 2007, no significant claims had been filed
against the Company, STDC or any the Company subsidiaries related to the NEMO
contract. STDC ceased performance in November 2000, so any breach of contract
would have occurred over six years ago. The Company believes that action against
the Company, STDC or any of its subsidiaries would be barred by the applicable
statute of limitations under federal law and the laws of California, Virginia,
Maryland and Delaware. Accordingly, we recorded the gain pursuant to SFAS
140.
 The
Company does not intend to pay cash dividends to the holders of its common stock
and intends to retain future earnings to finance the expansion and development
of its business.
  As shown
in the accompanying financial statements, the Company incurred loss from
operations of $5,889,080 and $1,461,954 for fiscal 2007 and 2006, respectively,
and had an accumulated deficit of $58,234,889 and a working capital deficit of
$11,951,632 as of March 31, 2007. These conditions raise substantial doubt as to
the Company’s ability to continue as a going concern. Management is trying to
raise additional capital through sales of stock. The financial statements do not
include any adjustments that might be necessary if the Company is unable to
continue as a going concern.
  There can
be no assurance that additional capital beyond the amounts currently forecasted
by the Company will be required or that any such required additional capital
will be available on reasonable terms, at such time or times as required by the
Company. The Board of Directors has appointed a management committee to examine
the option of re-organizing and re-structuring the company to ensure that a
viable avenue is available for the attraction of capital. The management
committee will also recommend priority new management appointments.
  In
February 2007, two officers of the Company agreed to loan the Company $500,000,
which is evidenced by a promissory note. $170,000 of the net loan proceeds were
received in March 2007 and the remaining balance was received in April 2007. The
note, along with accrued interest, is due in February 28, 2008 and carries a 15%
per annum interest rate, compounded monthly. The note is secured by 10,000,000
share of the Company’s common stock, which becomes payable upon default. In
addition, the Company received a $250,000 loan from another shareholder, which
was received in April 2007.
 Significant Accounting
Policies
 
 Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable.  The Company evaluates long-lived assets to determine
potential impairment by comparing the carrying amount to the undiscounted
estimated future cash flows of the related assets.
 
 The
Company issues stock as compensation to employees and outside consultants
for services rendered.  These shares are recorded at the fair value of
the stock as measured on the date or dates the services were
rendered.
 
 Future
Operations
 
 The
Company is actively researching new exploration and exploitation technologies to
complement and integrate with its hyperspectral capabilities.
 
 9
 Off
Balance Sheet Arrangements
  None.
 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 Utah,
Wymoing and Colorado. PPI will pay a license fee in the amount of $500,000 and
will issue to GSI 500,000 shares of PPI Common Stock, $.001 par value per
share.  Such fee will be paid in such amounts and at such times as are
agreed to in the future by PPI and GSI.  PPI also assigned to GSI an
overriding net revenue interest of five and one-half percent (51⁄2%) 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 $2.75 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.  All
development costs will be paid for by PPI.
  In its
search for new complementing technologies, PPI is pursuing 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-competing technologies for application in oil shale recovery processes. One
is based on micro-wave technology while the other is an adaptation of fuel cell
energy.  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
Healing 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 property in
Rio Blanco County, Colorado on some of the riches "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.
  The
company believes that this alliance may be beneficial to the Company
because:
  1)
                The
      risk of successful commercial development will be
  shared.
  2)
                Investment
      funds should be easier to attract.
  3)
                Permitting,
      licensing, insurance and lease costs can be
  shared.
  4)
                Infrastructure
      and equipment for processing the oil shale products can be
      shared.
   5)
                The
      marketing and sale of the oil shale products can be
  shared.
   6)
                Innovative
      ideas, market intelligence and competitor intelligence can be
      shared.
   7)
                Oil
      shale test sites can be shared, and additional oil shale land can more
      readily be obtained by the alliance, because an alliance of three
      technology companies is more likely to successfully develop the oil shale
      land than a single company working
alone.
 Discussions
with IEP and PWI continue.  The Company cannot assure you that it will
be able to enter any alliance with either or both of IEP and PWI or that if it
is able to enter such an alliance, it will be on terms acceptable to the
Company.
  The
Company has a development agreement  with Intellisense Corporation
LLC,  to design and construct a third generation hyperspectral
instrument design. The new instrumentation would allow for faster, less
expensive and more precise data collection. The instrument will be based on
US Patent No. 7,239,378, Platform based imaging system, granted on July 3, 2007
to the Company's CEO, Larry Vance. 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
 
 Risk Factors That Could
Affect Liquidity, Operating Results And Market Price Of
Stock
 
 Risks Related to Our
Industry
 
 10
  Competitive
pressures may adversely affect our operating revenues.The Company has
numerous competitors in the remote sensing services (airborne hyperspectral
services) and natural resource development industries.  Competition in
the remote sensing industry comes from several primary sources, including HyMap,
CASI and GER, whose hyperspectral instruments operate within the USA and Ekwan,
a new entry from Canada.  Our principal competitors in the natural
resource development industry include traditional exploration companies using a
variety of other technologies.  Some of our competitors in both remote
sensing and natural resource development have substantially greater financial
and other resources than the Company.  Competitive pressures in either
industry may materially adversely affect our operating revenues and in turn, our
business and financial condition.
 
 The
Company may need to expend significant capital to keep pace with technological
developments in our industry.  The remote sensing industry, as well as
the computing industry’s processing of the raw data, is constantly undergoing
development and change and it is likely that new technology, whether embodied in
new equipment or techniques, will be introduced in the future.  In
order to keep pace with any new developments, the Company is planning to expend
significant capital to develop or acquire the next level of developments in new
remote sensing equipment and to train our employees in the new
techniques.  The Company is pursuing financing to develop additional
remote sensing instruments; however, we may not be able to raise sufficient
funds, and if the Company does so, there is no guaranty that the new instruments
will out perform instruments used by our competitors.  In addition,
the Company’s ability to raise needed capital may be influenced by general
economic conditions and the strength of capital markets. To ensure its ability
to continue operations the Company will undergo a re-organization to include a
stock re-structuring.
 
 The
Company may incur significant expenses to comply with new or more stringent
governmental regulation.  The sale of our imagery is regulated by the
Department of Commerce.  Although the Company (through its acquisition
of STDC) has acquired a Department of Commerce (DOC) Remote Sensing License that
permits the Company to market globally hyperspectral and panchromatic imagery,
there is no guarantee that the government will not impose restrictions on sales
if the quality of our imagery increases with new technology that, for example,
allows increased resolution.  Because our license was the first issued
DOC Remote Sensing License, the Company cannot anticipate how the DOC
specifically will treat our license or how the airborne remote sensing industry
will be regulated in the future.
 
 Risks Related to Our
Business
 
 The
Company may not realize our anticipated return on capital commitments made to
expand our capabilities.  The Company purchased an aircraft,
additional satellite and an airborne hyperspectral instrument, as well as oil
and gas property rights.  The aircraft and airborne hyperspectral
instrument were purchased to increase our capacity to conduct airborne
surveys.  If the Company does not experience continued demand for our
remote sensing services, the Company may incur significant expense without
generating corresponding revenues.  The oil and gas property rights
were acquired in order to exploit suspected natural resources located within
certain properties.  If these properties do not contain sufficient
natural resources to warrant exploitation, the Company may incur significant
expenses without generating corresponding revenues.  There are were no
prospects for new oil and gas contracts from existing properties in
fiscal 2007.
 
 In
addition, from time to time, the Company expects to make significant capital
expenditures to implement new processes and to increase both efficiency and
capacity.  Some of these projects may require additional training for
our employees and not all projects may be implemented as
anticipated.  If any of these projects do not achieve the anticipated
increase in efficiency or capacity, our returns on these capital expenditures
may not be as expected.
 
 Our
ability to grow is dependent upon, and may be limited by, among other things,
our capital structure, the price of our stock and our existing financing
arrangements.  If additional funding sources are needed, the Company
may not be able to obtain the additional capital necessary to pursue our
internal growth and acquisition strategy or, if the Company can obtain
additional financing, the additional financing may not be on financial terms
that are satisfactory to us.
 
 11
  The
Company’s database of spectral information may not be marketable or may not
garner a price, which makes processing or analyzing the data economically
reasonable.  The Company has a substantial archive of Probe 1
hyperspectral imagery that was not gathered under contract with a
client.  From time to time, the Company continues to gather
hyperspectral imagery without having sold the rights to that
data.  The collection process requires variable as well as fixed
expenditures that must be recouped though marketing the collected
data.  Although we do not carry the value of our existing Probe 1
hyperspectral archives as an asset on our balance sheet, the future success of
the Company depends to some extent upon our ability to market this archived
data.
 
 Cancellations,
reductions or delays in customer orders may adversely affect our results of
operations.  Our overall operating results are affected by many
factors, including the timing of survey contracts from large clients, the timing
of capital expenditures to increase our capacity for gathering data in
anticipation of future sales of products and services, and the weather which can
affect whether or not a customers target of interest can be collected at a
certain stage of vegetal growth.  Although a large portion of our
expenses are fixed; a significant portion of our operational expenses vary with
the number of airborne surveys.  Because several of our subsidiaries
are new businesses and have not obtained long-term commitments from our clients,
we must anticipate the future demand for our services based upon our discussions
with clients.  Cancellations, reductions or delays in orders by a
client or group of clients could have a material adverse effect on our business,
financial condition and results of operations.
 
 The
unavailability of skilled personnel may have an adverse effect on our
operations.  From time to time, the Company or some of our
subsidiaries may experience difficulties in attracting and retaining skilled
personnel to process and interpret the substantial volume of imagery data that
is already collected or is expected to be collected in the
future.  The Company’s ability to operate successfully could be
jeopardized if we are unable to attract and retain a sufficient number of
skilled personnel to conduct our business.
 
 Outlook
 
 This
Report on Form 10-KSB, including the foregoing discussion in "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
other reports hereafter filed by the Company with the Securities and Exchange
Commission may contain “forward looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995.    All
statements other than statements of historical fact the Company makes in this
Report on Form 10-KSB and such other reports filed with the Securities and
Exchange Commission are forward-looking.  In particular, statements
regarding industry prospects, future sales by, or revenues of the Company, and
the Company’s future results of operations or financial position are
forward-looking statements.  Words such as “anticipates”, “expects”,
“intends”, “plans”, “believes”, “seeks”, “estimates” and similar expressions
identify forward-looking statements.  The Company may not meet the
expectations disclosed in our forward-looking statements and investors should
not place undue reliance on those statements. Actual results may differ
materially from those indicated by such forward-looking statements as a result
of various factors, including those set forth above under the heading “Risk
Factors that could Affect Liquidity, Operating Results and Market Price of
Stock” and elsewhere in this Report.  The Company disclaims any
obligation to update any forward-looking statements.
 
 ITEM 7.
              FINANCIAL STATEMENTS AND
      SUPPLEMENTARY DATA
 
 The
financial statements and supplementary data required by this Item are included
on pages F-1 to F-21 of this Report.
  12
 ITEM 8.
              CHANGES IN AND DISAGREEMENTS
      WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
    DISCLOSURE
 
 On June
10, 2003, the Board of Directors of the Company dismissed the Company's
accountants, Grant Thornton, LLP.  Grant Thornton LLP served as the
Company's auditor beginning with the fiscal year ended March 31, 2001. The Board
of Directors has appointed Malone & Bailey, PC as the Company’s auditor for
the year ended March 31, 2003. They remain as the Company’s current auditors.
Malone & Bailey’s office is located at 2925 Briarpark, Suite 930 Houston, TX
77042.
 
 During
the fiscal year ended March 31, 2007, and through June 30, 2007, there have been
no reportable events (as defined in Regulation S-K Item
304(a)(1)(v)).
 
 ITEM 8A.
              CONTROLS AND
      PROCEDURES
  As of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as defined in
Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934.  Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
were not effective to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the Securities Exchange
Act is recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commission's rules and forms or to
ensure that information required to be disclosed by the Company in the reports
that it files or submits under the Securities Exchange Act is accumulated and
communicated to the Company's management, including its principal executive and
principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure.  
Specifically, our auditors identified adjustments related to several accounting
entries concerning cutoff in accounts payable in the amount of $27,927, to
adjust the fair value calculations related to stock issued for services in the
amount of $673,078, to record imputed interest on related party debt in the
amount of $93,155, to correct errors related to interest expense on certain of
our outstanding debt in the amount of $19,167, and to correct the entries
related to our settlement obligation due to our failure to return the
Hyperspectral Probe in the amount of $803,770. These errors, and corresponding
adjustments, resulted from error due to lack of experience of the Company’s
Chief Financial Officer, acting as the Company’s bookkeeper. To strengthen our
controls, we have retained the services of an outside consultant to assist with
quarterly and annual reviews of our accounting data. All adjustments identified
above were recorded in our consolidated financial statements as of  March
31, 2007 and for each interim period reported on Form 10-QSB.  These
deficiencies have been reported to our Board of Directors and we intend to
improve and strengthen our controls and procedures.
 No change
in the Company's internal control over financial reporting occurred during the
Company's fourth fiscal quarter of fiscal 2007 that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
 
 ITEM 8B.
              OTHER
      INFORMATION
 
 None.
  13
  PART
III
 
 ITEM 9.
              DIRECTORS, EXECUTIVE OFFICERS,
      PROMOTERS, CONTROL PERSON AND CORPORATE GOVERNANCE; COMPLIANCE WITH
      SECTION 16(a) OF THE EXCHANGE
ACT
 
 COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
 
 Section
16(a) of the Securities Exchange Act of 1934 requires our officers, directors
and persons who own more than 10% of a registered class of our equity securities
to file reports of ownership and changes in ownership with the SEC and
Nasdaq.  Officers, directors, and greater than 10% beneficial owners
are required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.  Based solely on our review of copies of the
Section 16(a) reports filed for the fiscal year ended March 31, 2007, we believe
that all filing requirements applicable to its officers, directors, and greater
than 10% beneficial owners were complied with.
 
 DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
 
 The
following table sets forth certain information with respect to the executive
officers of the Company for fiscal 2007 to the present.
 
 Name
              Age
              PositionLarry
      F. Vance
              72
              Chairman
      and Chief Executive OfficerTami
      J Story
              44
              Director
      Secretary/Treasurer/Director
 
 (1)
              Effective
      April, 1985, Mr. Vance was appointed as Chief Executive Officer of the
      Company.
 (2)
              Effective
      April, 1993, Ms. Story was appointed as Secretary and Treasurer of the
      Company.
 
 Certain
additional information concerning the individuals named above is set forth
below.  This information is based on information furnished to us by
each individual noted.
 
 Larry F.
Vance served as Chief Executive Officer of the Company from April
1985.  Since April 8, 1995, Mr. Vance has served as Chairman of the
Company.  Mr. Vance is also a director of the Company and has been a
full-time employee of the Company since 1985.  Mr. Vance’s training is
in business and marketing. He served in a management capacity for the 3M
companies, IBM, and Computer Usage Corporation prior to founding the
Company.
 
 Tami J.
Story, Secretary, Treasurer and Director
 
 Tami J.
Story served in an administrative support capacity for the Company from 1991
until April 1993.  Since April 1993, Ms. Story has served as Secretary
and Treasurer of the Company.  Ms. Story also serves as a director of
the Company.  Ms. Story holds a degree with a major in Nursing and a
minor in Business Administration.
 14
 FAMILY
RELATIONSHIPS.
 
 There are no family relationships
between or among the directors, executive officers or persons nominated or
charged by us to become directors or executive officers.
 
 INVOLVEMENT
IN LEGAL PROCEEDINGS.
 
 To the best of our knowledge, during
the past five years, none of the following occurred with respect to a present or
former director or executive officer of the Company: (1) any bankruptcy petition
filed by or against any business of which such person was a general partner or
executive officer either at the time of the bankruptcy or within two years prior
to that time; (2) any conviction in a criminal proceeding or being subject to a
pending criminal proceeding (excluding traffic violations and other minor
offenses); (3) being subject to any order, judgment or decree, not subsequently
reversed, suspended or vacated, of any court of any competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting
his involvement in any type of business, securities or banking activities; and
(4) being found by a court of competent jurisdiction (in a civil action), the
SEC or the Commodities Futures Trading Commission to have violated a federal or
state securities or commodities law, and the judgment has not been reversed,
suspended or vacated.
 
 CODE OF
ETHICS.
 
 The
Company has adopted a code of ethics.  The Company will provide to any
person without charge, upon request, a copy of its code of ethics upon written
request to our corporate headquarters or request emailed to
earthsrch@aol.com.
 
 AUDIT
COMMITTEE.
 
 The
regulations of the SEC and OTC Bulletin Board do not mandate that the Company
establish of any particular committees, and the Company does not have an Audit
Committee.  Our Board of Directors has the responsibility for
establishing broad corporate policies and for overseeing our overall
performance. Members of the Board are kept informed of our business activities
through discussions with the Chief Executive Officer and other officers, by
reviewing analyses and reports sent to them, and by participating in Board and
committee meetings. Our bylaws provide that each of the directors serves for a
term that extends to the next Annual Meeting of Shareholders of the
Company.
 
 ITEM 10.  EXECUTIVE
COMPENSATION
 
 The
following executive compensation disclosure reflects all compensation awarded
to, earned by or paid to the executive offices below for the fiscal years ended
March 31, 2007, 2006 and 2005.  The following table summarizes all
compensation for fiscal year 2007 received by our Chief Executive Officer and
Secretary and Treasurer.  Salary was the only compsnation paid to the
Company's executive officers duing the last three fiscal years.
  Name
      and Principal Position
                Fiscal
      Year
                Salary
      ($)
                Total
      ($)Larry
      Vance/Chairman (1)
                2007
                160,000
                160,0002006
                160,000
                160,0002005
                160,000
                160,000Tami
      J. Story/Secretary and
                2007
                80,000
                80,000Treasurer
      (1)
                2006
                80,000
                80,0002005
                80,000
                80,000
 
 (1)  Salary
      was deferred unless cash flow allowed payment.
  15
 AGGREGATED
      OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END
                OPTION/SAR
      VALUESNumber
      of securities underlying unexercised options at FY-End
              
              Value
      of Unexercised In-the Money Options at
                FY-End
      ($)Name
              
              Shares
      Acquired on Exercise
              
              Value
      Realized ($)
              
              Exercisable/Unexercisable
              
              Exercisable/UnexercisableLarry
      Vance
              
              -
              
              -
              
              2,500,000/0
              (1)
              %1,000,000/0
              (2)
              %1,000,000/0
              (3)
              %0/1,000,000
              (4)
              %0/1,000,000
              (5)
              %0/1,000,000
              (6)
              %Tami
      Story
              
              -
              
              -
              
              750,000/0
              (1)
              %0/1,000,000
              (4)
              %0/1,000,000
              (5)
              %0/1,000,000
              (6)
              Exercisable
  (1)
Exercise prices $0.21 per share.
 (2)
Exercise prices $0.50 per share.
 (3)
Exercise prices $1.00 per share.
 (4)
Exercise prices $1.50 per share.
 (5)
Exercise prices $2.00 per share.
 (6)
Exercise prices $2.50 per share.
  Employment
Contracts
 In
October 28, 2000, the Company entered into an employment agreement with Mr.
Larry Vance.  Pursuant to the agreement, the Company will pay Mr.
Vance an annual salary of $160,000.  In the event of termination of
Mr. Vance without cause or due to a change in control, the Company will pay Mr.
Vance two years of annual salary.  Mr. Vance’s options and vesting
criteria are described above and in Note 8 to the attached consolidated
financial statements.
 
 On
October 28, 2000, the Company entered into an employment agreement with Ms. Tami
Story.  Pursuant to the agreement, the Company will pay Ms. Story an
annual salary of $80,000.  In the event of termination of Ms. Story
without cause or due to a change in control, the Company will pay Ms. Story two
years of annual salary.  Ms. Story ’s options and vesting criteria are
described above and in Note 8 to the attached consolidated financial
statements.
 ITEM 11.
              SECURITY OWNERSHIP OF CERTAIN
      BENEFICIAL OWNERS AND
MANAGEMENT
 
 The following table sets forth certain
information regarding ownership of the Company’s Common Stock as of March 31,
2007 by each person known by the Company to own beneficially more than five
percent of the Common Stock and by all directors and officers and as a
group:
  Name
      and address of beneficial owner
                
                Amount
      and nature of beneficial ownership (1)
                
                Percent
      of classLarry
      Vance
                
                55,060,644
      (2)
                
                74
      %P.O.
      Box 763Lakeside,
      MT  59922Tami
      Story
                
                12,469,714
                
                16%P.O.
      Box 763Lakeside,
      MT  59901All
      directors and officers
                
                67,530,358
                
                90%
 ___________________________
 (1)  All
shares are held directly with sole voting and investment power unless otherwise
indicated.
 (2)  Includes
4,439 shares held by Universal Search Technology, a private company owned by Mr.
Vance.
 
   In
February 2007, Larry Vance and Tami Story, officers of the Company, agreed to
loan the Company $500,000. $170,000 of the net loan proceeds were received in
March 2007 and the balance was received April 2007. The loan, along with accrued
interest, is due February 26, 2008 and carries a 15% annual interest rate,
compounded monthly. The loan is secured by 10,000,000 shares of the Company's
common stock.
 None of
our directors are independent, as determined under the rules of the NASDAQ Stock
Market.
  16
 
 ITEM
13.  EXHIBITS
  2.1
                Agreement
      and Plan of Merger by and among Earth Search Sciences, Inc., ESS
      Acquisition Corp., Space Technology Development Corporation and the
      shareholders of Space Technology Development Corporation, dated December
      21, 1999 (Incorporated by reference to Exhibit 2.1 to the Registrant's
      Form 10-K for fiscal year ended March 31,
2000).
 
 3.1
                Articles
      of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 to
      the Registrant's Forms 10-K for the fiscal years ended March 31, 1995 and
      March 31, 1996).
 
 3.2
                Bylaws
      (Incorporated by reference to Exhibit 3.2 to the Registrants’ Form 10-K
      for the fiscal year ended March 31,
1995).
 
 4.1
                See
      exhibits 3.1 and 3.2.
 
 10.1
                Memorandum
      of Understanding between the Registrant and Applied Signal and Imaging
      Technology, Inc. dated May 27, 1996 (Incorporated by reference to Exhibit
      10.1 to the Registrant's Form 10-K for fiscal year ended March 31,
      1996).
 
 10.2
                Contract
      of Sale and Leaseback dated June 10, 1997 between Registrant and
      Accuprobe, Inc. (Incorporated by reference to Exhibit 10.2 to the
      Registrant's Form 10-K for fiscal year ended March 31,
    2000).
 
 10.3
                Operating
      Agreement of ESSI Probe1 LC, dated June 3, 1997 (Incorporated by reference
      to Exhibit 10.3 to the Registrant's Form 10-K for fiscal year ended March
      31, 2000).
 
 10.4
                Hyperspectral
      Technology License Agreement between Earth Search Sciences, Inc. and
      Noranda Mining and Exploration, Inc. made as of December 16,
      1997  (Incorporated by reference to the Registrant’s for 8-K
      filed on February 6, 1998).
 
 17
 10.5
                Agreement
      between the Office of Naval Research and Space Technology Development
      Corporation Agreement for NAVY EARTHMAP OBSERVER (NEMO) dated December 10,
      1997 (Incorporated by reference to Exhibit 10.5 to the Registrant's Form
      10-K for fiscal year ended March 31,
2000).
 
 10.6
                Sales
      Contract between Science Applications International Corp. and Space
      Technology Development Corp. Dated: 30 March 1998, Contract No.:
      STDC-98-NEMO-0003 (Incorporated by reference to Exhibit 10.6 to the
      Registrant's Form 10-K for fiscal year ended March 31,
    2000).
 
 10.7
                Sales
      Contract between Science Applications International Corp. and Space
      Technology Development Corp. Dated: 30 March 1998, Contract No.:
      STDC-98-NEMO-004 (Incorporated by reference to Exhibit 10.7 to the
      Registrant's Form 10-K for fiscal year ended March 31,
    2000).
 
 10.8
                Sales
      Contract between Space Systems/Loral (SS/L) and Space Technology
      Development Corporation (STDC). Dated 21 January 1999, Contract Number:
      STDC-98-NEMO-0001 (Incorporated by reference to Exhibit 10.8 to the
      Registrant's Form 10-K for fiscal year ended March 31,
    2000).
 
 10.9
                Sales
      Contract between Litton Systems, Inc., Amecom Division (Litton Amecom) and
      Space Technology Development Corp. (STDC). Date 29 October 1998, Contract
      Number: STDC-98-NEMO-0009 (Incorporated by reference to Exhibit 10.9 to
      the Registrant's Form 10-K for fiscal year ended March 31,
      2000).
 
 10.10
                Common
      Stock Purchase Agreement between Alpha Venture Capital, Inc. and Earth
      Search Sciences, Inc. Dated May 23, 2001. (Incorporated by reference to
      Exhibit 10.10 to the Registrant's Form 10-K for fiscal year ended March
      31, 2001).
 
 10.11
                Registration
      Rights Agreement between Alpha Venture Capital, Inc. and Earth Search
      Sciences, Inc. Dated May 23, 2001. (Incorporated by reference to Exhibit
      10.11 to the Registrant's Form 10-K for fiscal year ended March 31,
      2001).
 
 10.12
                Common
      Stock Purchase Warrant A between Alpha Venture Capital, Inc. and Earth
      Search Sciences, Inc. Dated May 23, 2001.  (Incorporated by
      reference to Exhibit 10.12 to the Registrant's Form 10-K for fiscal year
      ended March 31, 2001).
 
 10.13
                Common
      Stock Purchase Warrant B between Alpha Venture Capital, Inc. and Earth
      Search Sciences, Inc. Dated May 23, 2001.  (Incorporated by
      reference to Exhibit 10.13 to the Registrant's Form 10-K for fiscal year
      ended March 31, 2001).
 
 10.14
                Larry
      F. Vance employment agreement (Incorporated by reference to Exhibit 10.1
      to the Registrant's Form 10-Q for fiscal quarter ended December 31,
      2000).
 
 10.15
                John
      W. Peel employment agreement (Incorporated by reference to Exhibit 10.2 to
      the Registrant's Form 10-Q for fiscal quarter ended December 31,
      2000).
 
 10.16
                Rory
      J. Stevens employment agreement (Incorporated by reference to Exhibit 10.3
      to the Registrant's Form 10-Q for fiscal quarter ended December 31,
      2000).
 
 18
 10.17
                Tami
      J. Story employment agreement (Incorporated by reference to Exhibit 10.4
      to the Registrant's Form 10-Q for fiscal quarter ended December 31,
      2000).
 
 10.18
                John
      J. Sciuto employment agreement (Incorporated by reference to Exhibit 10.18
      to the Registrant's Form 10-K for fiscal year ended March 31,
      2001).
 
 10.19
                Unrestricted
      License Agreement for Recovery of Products from Oil Shale bgetween GENERAL
      SYNSFUELS INTERNATIONAL and PETRO PROBE, INC. (Incorporated by reference
      to Exhibit 10.19 to the Registrant’s Form 10KSB for the fiscal year ended
      March 31, 2007).
  10.20
                Multi-platform
      HyperSpectral imaging "Micro Sectrometer" Development Proposal Number
      05080901.  (Incorporated by reference to Exhibit 10.19 to the
      Registrant’s Form 10KSB for the fiscal year ended March 31,
      2007).
  10.21
                Promissory
      Note due February 2008, dated February 2007. (Incorporated by
      reference to Exhibit 10.19 to the Registrant’s Form 10KSB for the fiscal
      year ended March 31, 2007).
  10.22
                    Equipment
      Usage Agreement dated June 3, 1997, filed
  herewith.
 16.1
                Consent
      of Independent accountants re Registration Statement on Form No. S-1 (No.
      333-66100). (Incorporated by reference to Exhibit 16.1 to the Registrant’s
      form 10-K for fiscal year ended March 31,
2004).
 
 16.2
                Statement
      under oath of Principal Executive Officer and Principal Financial Officer
      regarding facts and circumstances relating to exchange act
      filings.  Incorporated by reference to Exhibit 16.2 to the
      Registrant’s form 10-K for fiscal year ended March 31,
  2004
  21.1.1
                List
      of Subsidiaries (Incorporated by reference to Exhibit 21.1.1 to the
      Registrant's Form 10-K for fiscal year ended March 31,
    2000)
 23.1
                  Consent
      of Malone & Bailey, filed
herewith
 
 31.1
                  Certification
      of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities
      Exchange Act of 1934,
      filed herewith
 
 31.2
                  Certification
      of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities
      Exchange Act of 1934,
      filed herewith
 32.1
                    Certification
      of Chief Executive Officer Pursuant to 18 U.S.C Section 1350,
      filed herewith
 32.2
                  Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,
      filed
herewith
 ITEM 14.  PRINCIPAL
ACCOUNTANT FEES AND SERVICES
 
 The
following table presents fees, including reimbursements for expenses, for
professional audit services rendered by Malone & Bailey for the audits of
our annual financial statements and interim reviews of our quarterly financial
statements for the years ended March 31, 2007 and March 31, 2006 and fees billed
for other services rendered by Malone & Bailey during those
periods.
  Fiscal
    2007
              
              
              Fiscal
    2006Audit
      Fees (1)
              
              $
              50,000
              
              
              $
              44,000Audit
      Related Fees (2)
              
              $
              0
              
              
              $
              0Tax
      Fees (3)
              
              $
              0
              
              
              $
              0All
      Other Fees (4)
              
              $
              0
              
              
              $
              0Total
              
              $
              50,000
              
              
              $
              44,000
  19
 
 SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
 
 EARTH
      SEARCH SCIENCES, INC.By
      /s/ Larry F. VanceLarry
      F. VanceChief
      Executive OfficerDate:
      April 23 , 2008
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
 
 
 Signature
              Title/s/
      Larry F. Vance
              Chairman,
      Chief Executive Officer and DirectorLarry
      F. VanceDate:
      April 23 , 2008/s/
      Tami J. Story
              Corporate
      Secretary, Treasurer and DirectorTami
      J. StoryDate:
      April 23 , 2008
  20
  REPORT OF
REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM
 
 
 To the
Board of Directors
 Earth
Search Sciences, Inc.
 Lakeside,
Montana
 
 
 We have
audited the accompanying consolidated balance sheet of Earth Search Sciences,
Inc. as of March 31, 2007, and the related consolidated statements of
operations, stockholders' deficit, and cash flows for each of the two years then
ended. These financial statements are the responsibility of Earth Search's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
 
 We
conducted our audit 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 Earth Search Sciences Inc., as of
March 31, 2007, and the results of its operations and its 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 Earth Search
will continue as a going concern. Earth Search incurred losses
from operations of $5,889,080 and $1,461,954 for fiscal 2007 and 2006,
respectively and has an accumulated deficit of $58,234,889 and a working capital
deficit of $11,951,632 as of March 31, 2007. These factors, among others, as
discussed in Note 2 to the financial statements; raise substantial doubt about
Earth Search's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
 
 
 
 Malone
& Bailey, PC
 Houston,
Texas
 www.malone-bailey.com
 July 16, 2007, except for Note 10, as to which the date
is
  F-1
  EARTH
SEARCH SCIENCES, INC.
 CONSOLIDATED
BALANCE SHEET
 March 31,
2007
 
 ASSETSCurrent
      assets:Cash
              
              $
              23,182Accounts
      receivable
              
              
              132Loan
      costs, net of $199,998 accumulated amortization
              
              
              28,225Total
      current assets
              
              
              51,539Property
      and equipment, net of $832,208 accumulated depreciation
              
              
              309,944TOTAL
      ASSETS
              
              $
              361,483LIABILITIESCurrent
      liabilities:Accounts
      payable
              
              $
              1,151,437Accrued
      expenses
              
              
              733,917Accrued
      officers’ compensation
              
              
              1,082,317Notes
      payable - current portion
              
              
              902,287Settlement
      obligation
              
              
              5,434,259Stockholder
      loans
              
              
              2,698,954Total
      current liabilities
              
              
              12,003,171Notes
      payable less current portion
              
              
              369,820Total
      liabilities
              
              
              12,372,991Commitments
      and contingencies
              
              
              -STOCKHOLDERS’
      DEFICITSeries
      A preferred stock; 200,000 shares authorized, noneissued
      and outstanding; liquidation preference $1,000,000
              
              
              -Common
      stock, $.001 par value; 200,000,000 sharesauthorized;
      96,327,473 shares issued and outstanding
              
              
              96,328Additional
      paid-in capital
              
              
              46,577,053Treasury
      stock
              
              
              (200,000
              )Subscription
      receivable
              
              
              (250,000
              )Accumulated
      deficit
              
              
              (58,234,889
              )Total
      stockholders’ deficit
              
              
              (12,011,508
              )TOTAL
      LIABILITIES AND STOCKHOLDERS’ DEFICIT
              
              $
              361,483
 
 See
accompanying summary of accounting policies
 and notes
to financial statements.
 F-2
 
 EARTH
SEARCH SCIENCES, INC.
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 Years
Ended March 31, 2007 and 2006
 2007
                
                
                2006Revenues
                
                $
                91,429
                
                
                $
                399,742Operating
      expensesGeneral and administrative
                
                
                5,714,411
                
                
                
                1,474,602Bad
      debt expense
                
                
                22,819
                
                
                
                20,130Depreciation,
      amortization and depletion
                
                
                243,279
                
                
                
                339,646Impairment
                
                
                -
                
                
                
                27,318Total
      expenses
                
                
                5,980,509
                
                
                
                1,861,696Loss
      from operations
                
                
                (5,889,080
                )
                
                
                (1,461,954
                )Other
      income (expense)Gain
      on debt retirement
                
                
                10,132,522
                
                
                
                1,569,917Interest
      expense
                
                
                (594,550
                )
                
                
                (2,297,210
                )Net
      income (loss)
                
                $
                3,648,892
                
                
                $
                (2,189,247
                )Basic
      and diluted:Income
      (loss) per share
                
                $
                0.04
                
                
                $
                (0.03
                )Weighted
      average common shares outstanding
                
                
                81,385,420
                
                
                
                76,280,791
  See
accompanying summary of accounting policies
 and notes
to financial statements.
 
 F-3
 
 EARTH SEARCH SCIENCES, INC.
 CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
 Years
Ended March 31, 2007 and 2006
  AdditionalCommon
              
              
              Stock
              
              
              Paid-in
              
              
              Treasury
              
              
              Subscription
              
              
              AccumulatedShares
              
              
              Amount
              
              
              Capital
              
              
              Stock
              
              
              Receivable
              
              
              Deficit
              
              
              TotalBalances at March 31, 2005
              
              
              72,762,836
              
              
              $
              72,762
              
              
              $
              42,518,196
              
              
              $
              (200,000
              )
              
              
              -
              
              
              $
              (59,694,534
              )
              
              $
              (17,303,576
              )Issuance of common stock for
      cash
              
              
              250,000
              
              
              
              250
              
              
              
              62,250
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              62,500Issuance of common stock for
      debt
              
              
              106,667
              
              
              
              107
              
              
              
              9,493
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              9,600Issuance of common stock for
      services rendered
              
              
              4,224,639
              
              
              
              4,225
              
              
              
              672,854
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              677,079Issuance of common stock for
      loan extension
              
              
              353,500
              
              
              
              354
              
              
              
              123,372
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              123,726Warrants for loan extension
              
              
              -
              
              
              
              -
              
              
              
              92,494
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              92,494Warrants for services
              
              
              -
              
              
              
              -
              
              
              
              17,182
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              17,182Net loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,189,247
              )
              
              
              (2,189,247
              )Balances at March 31, 2006
              
              
              77,697,642
              
              
              $
              77,698
              
              
              $
              43,495,841
              
              
              $
              (200,000
              )
              
              
              -
              
              
              $
              (61,883,781
              )
              
              $
              (18,510,242
              )Issuance of common stock for
      loan and interest conversion
              
              
              375,000
              
              
              
              375
              
              
              
              74,625
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              75,000Shares
      issues under subscription receivable
              
              
              2,500,000
              
              
              
              2,500
              
              
              
              247,500
              
              
              
              
              
              
              
              (250,000
              )
              
              
              
              
              
              
              -Issuance of common stock for
      services rendered
              
              
              14,554,831
              
              
              
              14,555
              
              
              
              2,475,132
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,489,687Issuance of common stock for loan extension
              
              
              400,000
              
              
              
              400
              
              
              
              71,600
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              72,000Issuance of common stock for
      Directorship
              
              
              800,000
              
              
              
              800
              
              
              
              119,200
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              120,000Imputed interest
              
              
              -
              
              
              
              -
              
              
              
              93,155
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              93,155Net loss
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,648,892
              
              
              
              3,648,892Balances at March 31, 2007
              
              
              96,327,473
              
              
              $
              96,328
              
              
              $
              46,577,053
              
              
              $
              (200,000
              )
              
              $
              (250,000
              )
              
              $
              (58,234,889
              )
              
              $
              (12,011,508
              )
 
 See
accompanying summary of accounting policies
 and notes
to financial statements.
  F-4
 
 EARTH SEARCH SCIENCES, INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 Years
Ended March 31, 2007 and 2006
 
 2007
              
              
              2006CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income (loss)
              
              $
              3,648,892
              
              
              $
              (2,189,247
              )Adjustments
      to reconcile net loss tocash
      used in operating activities:Common
      stock issued for servicesand
      interest expense
              
              
              2,681,687
              
              
              
              677,079Warrants
      issued for services
              
              
              -
              
              
              
              17,182Common
      stock issued for debt
              
              
              -
              
              
              
              9,600Depreciation,
      amortization and depletion
              
              
              243,279
              
              
              
              339,645Asset
      impairment
              
              
              -
              
              
              
              27,318Gain
      on debt retirement
              
              
              (10,132,522
              )
              
              
              (1,569,917
              )Imputed
      interest
              
              
              93,155
              
              
              
              -Bad
      debt
              
              
              22,819
              
              
              
              20,130Changes
      in assets and liabilities:Accounts
      receivable
              
              
              (5,980
              )
              
              
              27,801Accounts
      payable –related party
              
              
              147,445
              
              
              
              -Accounts
      payable and accrued expenses
              
              
              2,786,593
              
              
              
              2,263,333Accrued
      officers compensation
              
              
              240,000
              
              
              
              240,000NET
      CASH USED IN OPERATING ACTIVITIES
              
              
              (274,632
              )
              
              
              (137,076
              )CASH
      FLOWS FROM INVESTING ACTIVITIESCapital
      expenditures
              
              
              (1,086
              )
              
              
              (5,246
              )NET
      CASH USED IN INVESTING ACTIVITIES
              
              
              (1,086
              )
              
              
              (5,246
              )CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from stockholder loans, net
              
              
              258,000
              
              
              
              370,745Proceeds
      for the sale of common stock
              
              
              -
              
              
              
              62,500Payment
      for loan extension
              
              
              -
              
              
              
              (62,000
              )Repayments
      on notes payable
              
              
              -
              
              
              
              (197,200
              )NET
      CASH PROVIDED BY FINANCING ACTIVITIES
              
              
              258,000
              
              
              
              174,045NET
      CHANGE IN CASH
              
              
              (17,718
              )
              
              
              31,723CASH
      AT BEGINNING OF PERIOD
              
              
              40,900
              
              
              
              9,177CASH
      AT END OF PERIOD
              
              $
              23,182
              
              
              $
              40,900SUPPLEMENTAL
      CASH FLOW INFORMATION:Interest
      paid
              
              $
              -
              
              
              $
              -Taxes
      paid
              
              
              -
              
              
              
              -Non-cash
      financing and investing activities:Common
      Stock issued for loan extension
              
              $
              72,000
              
              
              $
              123,726Common
      Stock issued for debt repayment
              
              
              75,000
              
              
              
              -Warrants
      for loan extension
              
              
              -
              
              
              
              92,494
 
 See
accompanying summary of accounting policies
 and notes
to financial statements.
  F-5
  EARTH
SEARCH SCIENCES, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 
 NOTE 1 -
SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
 
 Earth
Search Sciences, Inc. (referred to herein as the "Company" or 'ESSP") collects
high value hyperspectral imagery of the Earth's surface utilizing its
proprietary hyperspectral imaging sensor, principally in North
America.  This imagery is either sold to end users via contracts to
collect the information or collected for ESSI's own exploration purposes. ESSI
also performs a range of imagery processing services. Information collected by
the sensor has applications in natural resources development, environmental
monitoring and remediation, wildlife habitat monitoring, hydrocarbon exploration
and development, agricultural assessment and planning, including weed species
identification, land use planning, forestry monitoring and planning, homeland
security and target identification for defense surveillance.
 
 ESSI has
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 of
these subsidiaries are inactive except Petro Probe, which has minimal operating
activity.
 
 The
majority-owned Petro Probe, Inc. was formed to identify and develop hydrocarbon
properties by utilizing ESSI's hyperspectral instruments, hydrocarbon
geologists, and imagery processors.
 
 In
fiscal 2007 and 2006, ESSI operated its airborne hyperspectral sensors
under contracts with third parties in several areas around the United States.
Contracts to operate the sensors in the United States as an ecological,
agricultural, hydrocarbon, and target identification contributed approximately
$91,429 and $302,901 to revenue in fiscal 2007 and 2006,
respectively.
  In
previous years, ESSI engaged in several different business activites including
our airborne hyperspectral services, satellite development and oil and gas
production business lines. However, our current operations are centered around
our airborne hyperspectral business for which we had limited operations during
fiscal year 2006.
  PRINCIPLES OF
CONSOLIDATION
 
 The
consolidated financial statements include the accounts of ESSI and its
subsidiaries. All significant intercompany transactions have been
eliminated.
 
 USE OF ESTIMATES IN THE
PREPARATION OF FINANCIAL STATEMENTS
 
 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 and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.  Actual results could differ from those
estimates.
 
 CASH AND CASH
EQUIVALENTS
 
 ESSI
considers all highly liquid investments with a maturity of three months or less
at the time of purchase to be cash equivalents.
 
 ACCOUNTS
RECEIVABLE
 
 ESSI uses
the allowance method of accounting for doubtful accounts. The year-end balance
is based on historical collections and management’s review of the current status
of existing receivables and estimate as to their collectibility.  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.
  F-6
  As of
March 31, 2007, the amounts carried in accounts receivable were considered by
management to be collectible in full.  As a result, there was no
allowance for doubtful accounts for the year ended March 31, 2007.
 
 FAIR MARKET VALUE OF
FINANCIAL INSTRUMENTS
 
 The
estimated fair value of cash and cash equivalents, accounts receivable, accounts
payable, accrued expenses and other liabilities approximate their carrying
amounts in the financial statements.
 
 PROPERTY AND
EQUIPMENT
 
 Property
and equipment are stated at cost, less accumulated depreciation. ESSI recognizes
depreciation on its property and equipment using the straight-line method over
estimated useful lives ranging from five years for computers and software,
vehicles and equipment to ten years for the two hyperspectral
sensors.
 
 Major
repairs or replacements of property and equipment are capitalized. Maintenance
repairs and minor replacements are charged to operations as incurred. Property
and equipment retirements are removed from the records at their cost and related
accumulated depreciation and any resulting gain or loss is included in
operations.
 
 OIL AND GAS
PROPERTIES
 
 ESSI uses
the successful efforts method to account for its oil and gas
properties.  Costs incurred for property acquisition, exploration, and
drilling related to its oil and gas properties are capitalized. Once the project
is completed, and, if oil or gas is located, costs capitalized to date on the
specific project are amortized under the unit-of-production method as revenue is
recognized.  Capitalized costs for unsuccessful projects are expensed
when that determination is made.
  Based on
the agreements for the working interests in oil and gas properties, ESSI will
proportionately share in future revenues as well as future operating and
drilling costs.  Unproved oil and gas properties that are individually
significant are periodically assessed for impairment of value, and a loss is
recognized at the time of impairment by providing an impairment
allowance.
  Capitalized
costs of producing oil and gas properties, after considering estimated
dismantlement and abandonment costs and estimated salvage values, are
depreciated and depleted by the unit-of-production method.
  We
account for asset retirement obligations in accordance with the provisions of
SFAS No. 143 “Accounting for Asset Retirement Obligations.” SFAS No. 143
requires ESSI to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs the legal obligation associated with
the retirement of tangible long-lived assets that results from the acquisition,
construction development, and/or normal use of the assets. At March 31, 2007,
the fair value of the oil and gas properties’ site restoration costs are
insignificant. Consequently, there is no accrual at March 31, 2007.
  During
fiscal years 2006 and 2007, oil and gas activity was minimal and all producing
wells were closed and fully imaired as of March 31, 2006.  In addition, the
amount retirement obligation related to related to their properties is
minimal.
  REVENUE
RECOGNITION
 
 ESSI
recognizes revenue when persuasive evidence of an arrangement exists, services
have been rendered, the sales price is fixed or determinable, and collectibility
is reasonably assured.  This typically happens when services are
rendered under contracts for airborne hyperspectral services and imaging
processing services.
 
 IMPAIRMENT OF LONG-LIVED
ASSETS
 
 Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. ESSI
evaluates long-lived assets to determine potential impairment by comparing the
carrying amount to the undiscounted estimated future cash flows of the related
assets. In Fiscal 2006 ESSI incurred unsuccessful oil and gas properties
write-offs of $27,318. Due to the uneconomical nature of the well at
March 31, 2006, it was not feasible to estimate future cash flows to
be provided by ESSI’s long-lived assets, therefore the assets were fully
impaired.
  F-7
  INCOME
TAXES
 
 ESSI
recognizes deferred tax assets and liabilities based on differences between the
financial reporting and tax bases of assets and liabilities using the enacted
tax rates and laws that are expected to be in effect when the differences are
expected to be recovered.  ESSI provides a valuation allowance for
deferred tax assets for which it does not consider realization of such assets to
be more likely than not.
 
 MINORITY
INTEREST
 
 Losses
from subsidiaries with minority interest are allocated to the minority interest
liability account based on the percentage of minority interest
ownership.  Once losses applicable to the minority interest in the
subsidiary exceed the minority interest in the equity capital of the subsidiary,
then no additional losses will be allocated to the minority interest liability
account.
 
 NET LOSS PER COMMON
SHARE
 
 Net loss
per common share has been computed based on the weighted average number of
ESSI's common shares outstanding.  Common stock equivalents have not
been considered in the diluted net loss per share calculation because their
effect on net loss per share is anti-dilutive.
 
 STOCK-BASED
COMPENSATION
 
 ESSI
issues stock as compensation to employees and outside consultants for services
provided to the company.  These shares are recorded at the fair value of
the stock as measured on the date or dates the service was
provided.
 
 For the
years ended March 31, 2007 and 2006, ESSI had no stock option
issuances.
 
 RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS
 
 ESSI does
not expect the adoption of any recently issued accounting pronouncements to have
a significant impact on its financial position, results of operations or cash
flows.
 F-8
  NOTE 2 - GOING
CONCERN
 
 As shown
in the accompanying financial statements, ESSI incurred losses from
operations of $5,889,080 and $1,461,954for fiscal 2007 and 2006,
respectively and has an accumulated deficit of $58,234,889 and a working capital
deficit of $11,951,632 as of March 31, 2007. 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. The financial statements do
not include any adjustments that might be necessary if ESSI is unable to
continue as a going concern.
  NOTE 3 - PROPERTY AND
EQUIPMENT
 
 Property
and equipment consists of the following at March 31, 2007:
 
 Life
              
              
              AmountAircraft
              
              
              10
              
              
              $
              925,795Equipment
              
              
              5
              
              
              
              216,3571,142,152Less:
      accumulated depreciation
              
              
              
              
              
              
              (832,208
              )Property
      and equipment, net
              
              
              
              
              
              $
              309,944
 
 Depreciation
expense totaled $104,935 and $104,223 in fiscal 2007 and 2006,
respectively.
  NOTE 4 - NOTES
PAYABLE
 
 Notes
payable consists of the following at March 31, 2007:
 
 Installment
      note payable with a balloon due
      September 15, 2006, secured by ESSI’s assets,
      with interest at 15%, due in monthly installments
      of $18,042
              
              $
              836,618Installment
      note payable secured by producing
      oil and gas property, with interest
      at 15%, due in monthly installments
      of $6,929
              
              
              367,824Other
              
              
              67,665Less:
      current portion
              
              
              (902,287
              )Total
              
              $
              369,820
 F-9
  NOTE 5 - STOCKHOLDER
LOANS
 
 ESSI has
financed its operations in part by funds received from advances by shareholders.
These advances are in the form of unsecured promissory notes and bear interest
at rates ranging from 8% to 10%. As of March 31, 2007, stockholder loans totaled
$2,698,954 including interest accrued on such advances of $935,060.
  NOTE 6 - ACCRUED OFFICERS'
COMPENSATION
 
 Accrued
compensation consists of the cumulative unpaid compensation due to corporate
officers (Chairman, Chief Executive Officer, Chief Financial Officer and
Secretary). ESSI recorded officer compensation, accrued payroll taxes and
accrued interest of $321,852 and $385,991 during fiscal 2007 and 2006, and
included these amounts in general and administrative expenses. ESSI is accruing
interest on the accrued compensation balances at a rate of 8.5%, compounded
quarterly. ESSI is making full salary payments to these officers as cash flow
allows.
  On March
7, 2005, two officers signed releases of deferred compensation and accrued
interest totaling $1,657,507. This transaction was considered a contribution to
capital.
 
 NOTE 7 - INCOME
TAXES
 
 ESSI
recorded no provision for income taxes in fiscal 2007 and 2006 due to the
operating losses incurred from inception to date.
 
 The tax
effect of temporary differences between financial reporting and the tax bases of
assets and liabilities relate to the following:
 
 At March
31, 2007, deferred tax assets consisted of the following:
 
 Deferred
      tax assetsNet
      operating losses
              
              $
              5,200,000Less:
      valuation allowance
              
              
              (5,200,000
              )Net
      deferred tax asset
              
              $
              -
 
 The
cumulative net operating loss carry-forward is approximately $14,850,000 at
March 31, 2007, and will expire in the years 2015 through 2027. The deferred tax
asset has been fully reserved because ESSI is unable to anticipate future
taxable income to realize the potential benefits of the gross deferred tax
asset.
 
 The
annual amount of tax loss carryforward, which can be utilized, may be limited
due to the substantial changes in the company's ownership as defined by section
382 of the Internal Revenue Code, which may occur in the future.  Such
limitations could result in the expiration of a part or all of the loss
carryforwards before their utilization.
  NOTE 8 - OFFICER AND DIRECTOR STOCK
OPTIONS
 
 In August
1997, the Board of Directors granted performance based options to ESSI's
Chairman, President and Chief Executive Officer to each purchase 12,500 shares
of ESSI's stock at exercise prices ranging from $200 per share to $1,000 per
share and to ESSI's Secretary to purchase 2,500 shares of ESSI's stock at an
exercise price of $200 per share. All of these performance based stock options
are exercisable for a period of 24 months from the date of
vesting.  The options will be deemed vested for each individual if
that individual is employed by ESSI on the first date on which the closing
market price of ESSI's common stock equals or exceeds the price per share
performance targets for 30 consecutive days. The specific vesting criteria for
these options are described below:
  F-10
  When and
if the closing market price of common stock equals or exceeds each of the
following prices $0.50, $1.00, $1.50, $2.00 and $2.50 per share for 30
consecutive days, each of the three individuals shall become fully vested with
an option to purchase 1,000,000 shares of common stock for each milestone at a
price equal to the milestone price of $0.50, $1.00, $1.50, $2.00 and $2.50 per
share, exercisable for a period of 24 months from the date of
vesting.
 
 During
fiscal 2001, the Board of Directors approved performance based bonuses in the
form of options to ESSI’s officers.  The specific vesting criteria for
these options are described below:
 
 10% of
options shall be considered vested and bonused as paid in full shares for past
services to ESSI; 15% of all options shall become vested and paid in full when
ESSI is successful in obtaining a commitment from a strategic partner, financial
institution, reputable investment banker or other source in raising capital
sufficient to fund the NEMO program (shut down in 2002 - see Note 5); 20% vested
and paid in full when successful in raising gross capital of at least
$6,000,000; 20% vested and paid in full when successful in raising gross capital
of at least $30,000,000; 20% vested and paid in full when successful in raising
gross capital of at least $100,000,000; and 15% vested and paid in full in the
event the NEMO program is successfully funded.
 
 For the
years ended March 31, 2007 and 2006, there were no option granted.
 
 The
following table summarizes the employee stock option transactions described
above.
 
 Sharesunder
              
              
              Weighted-averageoption
              
              
              exercise
      priceBalance,
      March 31, 2005
              
              
              54,593
              
              
              $
              442Options
      granted
              
              
              --
              
              
              
              --Options
      cancelled
              
              
              --
              
              
              
              --Options
      exercised
              
              
              --
              
              
              
              --Balance,
      March 31, 2006
              
              
              54,593
              
              
              $
              442Options
      granted
              
              
              --
              
              
              
              --Options
      cancelled
              
              
              --
              
              
              
              --Options
      exercised
              
              
              --
              
              
              
              --Balance,
      March 31, 2007
              
              
              54,593
              
              
              $
              442
 
 Options
outstanding and exercisable as of March 31, 2007:
  - -
      Outstanding - -
              ExercisableNumber
              Remaining
              NumberExercise
      Price
              of
      Shares
              Life
              of
      Shares$20
              625
              1
      year
              62528
              375
              1
      year
              37556
              906
              .5
      year
              90656
              312
              1
      year
              31260
              875
              .5
      year
              87584
              12,500
              1
      year
              12,500140
              875
              .5
      year
              875200
              8,750
              1
      years
              8,750400
              6,875
              1
      years
              6,875600
              7,500
              1
      years
              7,500800
              7,500
              1
      years
              7,5001,000
              7,500
              1
      years
              7,50054,593
              
              54,593
  F-11
  NOTE 9 – STOCK
TRANSACTIONS
 COMMON STOCK:
 
 During
fiscal 2006, ESSI issued:
 
 ·
              250,000
      shares of stock for $62,500 in
cash.
 
 ·
              4,224,639
      shares of stock valued at $677,079 to various individuals for services
      rendered.
 
 ·
              106,667
      shares of stock valued at $9,600 for
debt.
 
 ·
              353,500
      shares of stock valued at $123,726 for a six-month loan extension to
      December 31, 2005.
 
 ·
              350,000
      warrants valued at $92,494. The warrants are immediately exercisable at
      $0.50 at the holder's option for one year from the grant date, April 5,
      2005. The warrants were valued using the Black Scholes model with
      volatility of 209% and a discount rate of
2%.
 
 ·
              100,000
      warrants valued at $17,182. The warrants were issued to consultants for
      services. 50,000 warrants are exercisable at $0.50 and 50,000 are
      exercisable at $0.25. The warrants are immediately exercisable at the
      holder's option for one year from the grant date, June 22, 2005. The
      warrants were valued using the Black Scholes model with volatility of 209%
      and a discount rate of 2%.
 
 During fiscal 2007, ESSI
issued:
 
 ·
              14,954,831
      shares of stock valued at $2,561,687 to various individuals for services
      rendered.
  ·
              375,000
      shares of stock valued at $75,000 for loan and interest
      conversion.
 
 ·
              800,000
      shares of stock valued at $120,000 for directors
    compensation.
 F-12
 NOTE 10 –FORGIVENESS OF
DEBT
 
 On March
23, 2005, we entered into a settlement agreement with Accuprobe to return an
airborne hyperspectral sensor (Probe) and to settle the outstanding obligations
under the related capital lease. Under this agreement, we were required to
return the Probe on or before August 31, 2005. In the event that the Probe is
not returned, we would be charged a shipping, handling and disposition fee of
$250,000, plus rents, interest and late fees. Interest related to the $250,000
begins accruing on September 2, 2005 at an annual rate of prime plus 4%. In
addition, rent is to be accrued at $250,000 per year beginning April 10, 2000.
Interest on unpaid rent accrues at a rate of prime plus 2% through August 31,
2005 and is due quarterly. After August 31, 2005, interest related to the unpaid
rent ceases and is replaced with a 5% late fee calculated on the entire balance
due at the end of each month.
  
 At March
31, 2006, we had accrued $4,390,016 in debt and interest related to the capital
lease of the Probe. Under the settlement agreement, the new liability using the
calculations outlined above was $2,820,099 at March 31, 2006. Consequently, we
recorded a $1,569,917 gain on debt forgiveness.
 
 In March
2007, we recorded a $10,132,522 net gain on the settlement of certain debt
incurred in connection with a U.S. Government project called Naval Earth Map
Observer (NEMO). This agreement was originated on January 21, 1999, however, the
NEMO project was subsequently cancelled and all work on the project ceased. At
that time, ESSI, through its subsidiary Space Technology Development Corporation
(STDC), recorded liabilities associated with the subcontract agreements totaling
$10,132,522. As of March 31, 2007, no significant claims had been filed against
ESSI, STDC or any ESSI subsidiaries related to the NEMO contract. STDC ceased
performance in November 2000, so any breach of contract would have occurred over
six years ago.  Action against ESSI, STDC or any ESSI subsidiary would
be barred by the applicable statute of limitations under federal law and the
laws of California, Virginia, Maryland and Delaware. Accordingly, we
recognized  the gain pursuant to SFAS 140.
 NOTE 11 - COMMITMENT AND
CONTINGENCIES
 
 ESSI was
in dispute with another party over a leaseback purchase agreement for a
Hyperspectral Probe. During the fourth quarter of fiscal 2005, both parties
signed a mutual release in which ESSI was to return the Probe and ESSI would be
released of amounts owed to the other party as of the date the Probe is
returned. ESSI agreed to return the Probe at the end of August 2005; however, as
of the end of fiscal 2006, ESSI has not returned the Probe. As a result, ESSI is
in default, and based on the terms of the settlement agreement, ESSI is
obligated to pay significant late fees. Based on the terms of the settlement
agreement, as of March 31, 2007, management estimates the settlement obligation
to be $5,434,259 which reflects a 5% late fee imputed each month on the
outstanding balance due. As of March 31, 2007, management has recognized an
accrual for the estimated obligation.
 
 In
October of 2002, Terranet, Inc. a subsidiary of ESSI, received notice of a
judgment issued by the Supreme Court of British Columbia in regards to monies
owed resulting from a contract with plaintiff Cal Data Ltd., of Vancouver, B.C.
The plaintiff alleged that seventy-five thousand dollars was overdue from
invoices for services dating from January of 2002 to October, 2002. Management
is examining its position and has accrued a $74,603 liability associated with
this demand in its financial statements.
  NOTE 12 - SUBSEQUENT
EVENTS
 
 In
February 2007, two officers of the Company agreed to loan ESSI $500,000, which
is evidenced by a promissory note.  $170,000 of the net loan proceeds
were received in March 2007 and the remaining balance was received in April
2007.  The note, along with accrued interest, is due in February 28, 2008
and carries a 15% per annum interest rate, compounded monthly.  The note is
secured by 10,000,000 share of ESSI common stock, which becomes payable upon
default.  In addition, ESSI received a $250,000 loan from another
shareholder, which was received in April 2007.
   F-13