UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549


FORM
10-KSB/Amendment No. 1





T
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934 FOR THE FISCAL YEAR ENDED MARCH 31,
2006





OR





£
            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)





Utah
            870437723(State
      or other jurisdiction of incorporation)
            (I.R.S.
      Employer Identification 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)





Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act.  T





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.  Yes  T   No  £





Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of 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.  T





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes  £   No  T


State
issuer's revenues for its most recent fiscal year. $399,742.
 
 State the
aggregate market value of the voting stock 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 March 31, 2006 of $0.20, the approximate
aggregate market value of voting stock held by non-affiliates is
$2,194,000.
 As of
March 31, 2006, 77,697,642 shares of Common Stock, $.001 par value, of the
registrant were issued and outstanding.








TABLE OF CONTENTS





PART I
            
            
            1Item 1
            -
            Business
            4Item 2
            -
            Properties
            5Item 3
            -
            Legal Proceedings
            5Item 4
            -
            Submission of Matters to a Vote of Security
      Holders
            7PART II
            
            
            5Item 5
            -
            Market for the Registrant's Common Stock Equity and Related
      Shareholder Matters
            5Item 6
            -
            Management's Discussion and Analysis of Financial Condition
      and Results of Operations
            7Item 7
            -
            Financial Statements and Supplementary
    Data
            F-1Item 8
            -
            Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
            12Item 8A
            -
            Controls and Procedures
            12Item 8B
            -
            Other Information
            12PART III
            
            
            12Item 9
            -
            Directors and Executive Officers of the
      Registrant
            12Item 10
            -
            Executive Compensation
            13Item 11
            -
            Security Ownership of Certain Beneficial Owners and
      Management
            14Item 12
            -
            Certain Relationships and Related
      Transactions
            14Item 13
            -
            Exhibits, Financial Statement Schedules
            14Item 14
            -
            Principle Accountants Fee and Services
            15SIGNATURES
            16Financial Statements
            F-1





Table of Contents





PART
I





ITEM
      1.
            BUSINESS


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 year ended March 31, 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.


1
 Table of Contents
 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.  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.
 
 2
 Table of Contents


In the
fiscal year 2006, the Company’s sensors were operated in the United States and
abroad.  Contracts to operate the sensors in the United States as an
ecological, mining, agricultural, and hydrocarbon target identification tool
produced revenues of $302,901 in fiscal year 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.
 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.
 
 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.
  3
 Table of Contents


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.


Business  Segment  Information





Included  in  the  attached  financial  statements  is  business  segment
information  and  financial  information about
geographic areas for the Company.





Employees





As  of  March
31,  2006  the  Company  had  4  full-time  employees.





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.





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
2006, the Company operated its airborne hyperspectral sensors under contracts
with third parties in several areas around the United States. In fiscal 2005 and
2004, 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 approximately
$302,901, $192,297 and $258,843, to revenue in fiscal 2006, 2005, and 2004,
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.


ITEM
      2.
            PROPERTIES





The Company headquarters consist of approximately
1,500 square feet of office space in Lakeside, Montana.  All
other office obligations have been cancelled.





4
 Table of Contents





In  addition,  the  Company  owns  working  interests  in
seven oil and gas
properties.  (See  Note  4  to  the
Notes to Consolidated Financial Statements).





ITEM
      3.
            LEGAL  PROCEEDINGS





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.  The mutual release also requires the other party to return
a computer and related software belonging to ESSI in exchange for the
Probe.  ESSI agreed to return the Probe at the end of August 2005;
however, as of the end of fiscal 2006, ESSI had not returned the Probe because
the other party has not delivered the computer and related software belonging to
ESSI.  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,
2006, management estimates the settlement obligation to be $2,820,099 which
reflects a 5% late fee imputed each month on the outstanding balance
due.  As of March 31, 2006, management has recognized an accrual for
the estimated obligation.


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.





Except as
described above, to the knowledge of our executive officers and directors,
neither we nor our subsidiaries are party to any legal proceeding or litigation
and none of our property is the subject of a pending legal proceeding and our
executive officers and directors know of no other threatened or contemplated
legal proceedings or litigation.





ITEM
      4.
            SUBMISSION OF
      MATTERS  TO  A  VOTE  OF
      SECURITY  HOLDERS




Not applicable




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 the NASDAQ "pink sheets"
      and  do  not  represent  actual  transactions.








Quarter
      Ended
            
            High
            
            
            LowJune
      30, 2004
            
            
            .01
            
            
            
            .01September
      30, 2004
            
            
            .01
            
            
            
            .01December
      31, 2004
            
            
            .01
            
            
            
            .01March
      31, 2005
            
            
            .40
            
            
            
            .30June
      30, 2005
            
            
            .16
            
            
            
            .12September
      30, 2005
            
            
            .07
            
            
            
            .06December
      31, 2005
            
            
            .11
            
            
            
            .10March
      31, 2006
            
            
            .20
            
            
            
            .20





5
 Table of Contents





(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,  2006  was approximately
      1,212. 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 SECURITIES (1)





DATE
            
            AMOUNT
              OF
              SECURITIES
              SOLD
            
            PRICE
              PER
              SHARE
              ($)
            
            TOTAL
              CASH
              PROCEEDS
              ($)
            
            DATE
            
            AMOUNT
              OF
              SECURITIES
              SOLD
            
            
            PRICE
              PER
              SHARE
              ($)
            
            
            TOTAL
              CASH
              PROCEEDS
              ($)4/6/05
            
            
            353,500
            
            
            
            
            
            (2)
            4/7/05
            
            
            75,000
            
            
            
            
            
            
            
            (2)4/8/05
            
            
            85,210
            
            
            
            
            
            (2)
            4/29/05
            
            
            250,000
            
            
            $
            0.25
            
            
            $
            62,5005/19/05
            
            
            100,000
            
            
            
            
            
            (2)
            5/25/05
            
            
            800,000
            
            
            
            
            
            
            
            
            (3)6/23/05
            
            
            47,102
            
            
            
            
            
            (1)
            7/22/05
            
            
            75,000
            
            
            
            
            
            
            
            
            (1)9/20/05
            
            
            484,125
            
            
            
            
            
            (1)
            9/27/05
            
            
            87,500
            
            
            
            
            
            
            
            
            (1)11/9/05
            
            
            337,083
            
            
            
            
            
            (1)
            12/7/05
            
            
            281,667
            
            
            
            
            
            
            
            
            (1)1/30/06
            
            
            1,600,000
            
            
            
            
            
            (1)
            3/3/06
            
            
            130,048
            
            
            
            
            
            
            
            
            (1)3/6/06
            
            
            28,571
            
            
            
            
            
            (1)


(1)
            Consideration
      paid for the shares was employee and/or consulting
    services.


(2)
            Shares
      issued for debt consideration.


(3)
            Consideration
      paid for Directorship.




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)
              
              
              (b)
              
              
              (c)Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
              
              
              Weighted-average
      exercise price of outstanding options, warrants and rights
              
              
              Number
      of securities 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
              
              
              
              -





6
 Table of Contents




(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





Securities authorized for
private placement issuance under subsidiary companies





The
subsidiary companies of Terranet, Inc. Petro Probe, Inc. and Eco Probe, Inc have
issued shares of common stock to private placement investors, all of which were
accredited investors as that term is defined under Regulation D. The investors
executed subscription agreements and acknowledged that the securities to be
issued have not been registered under the 1933 Securities Act, that the
investors understood the economic risk of an investment in the securities, and
that the investors had the opportunity to ask questions of and receive answers
from the Company's management concerning any and all matters related to
acquisition of the securities. No underwriter was involved in the transaction,
and no commissions or other remuneration were paid in connection with the offer
and sale of the securities.





ITEM
      6.
            MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
      RESULTS OF OPERATIONS





The
following table sets forth certain selected financial data for each of the last
five fiscal years with respect to the Company and is qualified in its entirety
by reference to the Company's audited financial statements and notes
thereto.


As of or for
      the fiscal year ended2006
            
            
            2005
            
            
            2004
            
            
            2003
            
            
            2002Operating
      revenue
            
            $
            399,742
            
            
            $
            415,702
            
            
            $
            516,490
            
            
            $
            786,208
            
            
            $
            5,044,498Net
      loss
            
            
            (2,189,247
            )
            
            
            (5,185,527
            )
            
            
            (4,188,650
            )
            
            
            (5,354,184
            )
            
            
            (16,797,081
            )Net
      loss per common share
            
            
            (0.03
            )
            
            
            (0.94
            )
            
            
            (0.02
            )
            
            
            (0.03
            )
            
            
            (0.11
            )Total
      assets
            
            
            638,233
            
            
            
            665,940
            
            
            
            1,233,573
            
            
            
            4,091,566
            
            
            
            7,096,591Long-term
      obligations
            
            
            349,303
            
            
            
            367,373
            
            
            
            4,286,233
            
            
            
            4,700,365
            
            
            
            4,687,895Stockholders'
      (deficit) equity
            
            
            (18,510,242
            )
            
            
            (17,303,576
            )
            
            
            (18,690,393
            )
            
            
            (14,879,965
            )
            
            
            (11,310,331
            )Cash
      dividends declared
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -




Financial
comparisons will be made between the fiscal years ended March 31,
2006  and  2005.





Results  of  Operations





The  Company  recognized
revenue of $399,742 in 2006 compared with $415,702
in  2005.





Provision
for loss on impairment of fixed assets was $27,318 and $386,628 in 2006 and
2005. General and administrative costs were $1,474,602 in 2006 compared with
$4,443,170 in 2005.
 
 Interest
income in 2006 was $0 compared to $0 in 2005. In 2006 the Company recognized
interest expense of $2,297,210 compared to $659,180 in 2005.
 
 In 2006,
the Company recorded minority interest in losses of consolidated subsidiaries of
$0 compared to $0 in 2005. ESSI Probe 1 LC minority interest loss for a full
year of operations was $0 in 2006 and 2005.
 
 The
Company recognized a net loss of $2,189,247 in fiscal 2006 compared with a net
lose of $5,185,527 in 2005. The loss on a per share basis was $0.03 and $0.94 in
fiscal 2006 and 2005.





On March
23, 2005, the Company 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,
the Company is required to return the Probe on or before August 31,
2005.  In the event that the Probe is not returned, the Company is
charged a shipping, handling and disposition fee of
$250,000.  Interest related to the $250,000 began accruing on
September 2, 2005 at an annual rate of prime plus 4%.  In addition,
rent 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.





7
 Table of Contents





At March
31, 2006, the Company has accrued $4,390,016 in debt interest related to the
capital lease of the Probe.  Under the settlement agreement, the new
liability using calculations outlined above was $2,820,099 at March 31,
2006.  Consequently, the Company recorded a $1,569,917 gain on debt
forgiveness.





Liquidity  and  Capital  Resources





Net  cash
used in operating activities was $137,076 in 2006.  Net cash used
in  operating  activities was $38,872 in 2005, resulting
primarily from payments
for  salaries  and  services  and  changes  in  current  assets
and liabilities.





At  March
31, 2006, the Company had cash of $40,900 and
a  working  deficit  of  $18,574,732.





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.
 
 The
Company, through its subsidiary Space Technology Development Corporation
(“STDC”)  incurred $8,216,424 in liabilities due to vendors and
subcontractors related to the Navy Earthmap Observer (“NEMO”) project with the
Office of Naval Research, US Navy (“ONR”), which was terminated in 2003. Based
on the Company’s liquidity, the Company has been unable to settle these
liabilities. However, the Company has not received any claims or notifications
related to these liabilities. The Company and outside legal counsel are
reviewing the statutes of limitation to assess the enforceability of these
liabilities.
 
 The
Company believes that funds generated from its operations, together with future
borrowings and the equity line will allow the Company to meet current cash
requirements, the failure of which would require ceasing
operations.
 
 Our
current cash on hand at March 31, 2006, would not be adequate to fund our
operations for more than a short period of time if we were to continue to use
cash in operating activities at the same rate as in prior months. There can be
no assurance that any 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 restructuring 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. The Company cannot provide any
assurance that additional financing will be available on acceptable terms, or at
all. If adequate funds are not available or not available on acceptable terms,
the Company’s business and results of operations may suffer. The Company cannot
provide any assurance that we can continue operations unless we raise the
additional financing we require.


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.


The  total  number  of  employees  employed
by the Company now numbers four people.





Off Balance Sheet
Arrangement





None.





8
 Table of Contents





Significant  Accounting  Policies


The
Company uses the successful efforts method to account for its oil and gas
properties. Under this method, it capitalizes costs incurred for property
acquisition, exploration, and drilling related to its oil and gas properties.
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
will be expensed when that determination is made.
 
 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. Other unproved properties are
amortized based on the Company's experience of successful drilling and average
holding period. 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.
 
 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. In fiscal 2002, based on such review, the Company
established a provision for loss on the NEMO program of
$13,010,364.
 
 In fiscal
2002, the Company changed its method of accounting for the sales of stock by its
subsidiaries to account for these sales as increases in additional paid-in
capital instead of as an increase to minority interest in the accompanying
consolidated financial statements. Management believes that because of the
developing nature of operations of the subsidiaries with minority interest, the
new method of accounting will provide more meaningful information concerning
sales of stock by its subsidiaries and, correspondingly, the minority interest
liability account. The Company recognized an increase in additional paid-in
capital of $1,707,868, as a cumulative effect on prior years of this change in
account principles.




Future
Operations





We expect
limited or no material revenue in fiscal 2007 due to: (i) of the loss of use of
the aircraft platform for the Probe-1 hyperspectral instrument for new data
collection contracts; (ii) the sole contract for our satellite development
business segment was disbanded; (iii) we determined that it was uneconomic to
continue production from our oil and gas property; and (iv) we have not yet
entered into any new arrangements from which we expect to derive
revenue.
 
 We are
currently preparing to market new hyperspectral services, such as the sale of
our archived hyperspectral data from various collections over recognized mineral
regions of the Earth. We have hyperspectral data covering over 200,000 square
kilometers available for sale. We are preparing to market those data collections
by engaging consultants to assist in identifying potential purchasers and
negotiating contracts.
 
 The gas
property that produced revenue for the Company was shut down due to a
catastrophic failure of the drill casing. It is unlikely that the Company will
pursue further operation of this property due to significant costs. If we are
able to obtain funding on acceptable terms, the Company may seek to develop
other oil and gas properties to which it has it has mineral
rights.
 The
Company concluded a re-organization of its stock structure to ensure it could
continue operations and provide for the ability to continue its business model
and business strategy. New capital investment in the Company is being sought. In
order to achieve maximum results, the Board of Directors also approved Board and
Senior Management changes.
 
 The
Company will continue to operate in the mineral and hydrocarbon resource
exploration areas where the Company will operate its remote sensing instruments
for its own use and secure equity interests in promising properties identified
from the remote sensing imagery.
  9
 Table of Contents


Research  and  Development
of next generation hyperspectral instrumentation
is  continuing.  The Company is pursuing the approval of
nano-technology patents
for  hyperspectral  remote  sensing
instrumentation and processing in order to secure its market position for the
next decade of industry developments.





The Board
of Directors will continue to seek outside directors to ensure that its
commitment to corporate governance improvements is implemented.





Additional  Risk  Factors  That  Could  Affect  Liquidity,
Operating Results And
Market  Price  Of  Stock





Risks Related to Our
Industry




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 instruments, as well as oil and gas property
rights. The aircraft and airborne hyperspectral instruments 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.





10
 Table of Contents




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.





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. 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 Phase 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 relatively
fixed; a significant portion of our operational expenses vary with the number of
airborne surveys. Because several of our operating divisions and 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 operating divisions
and 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. The Act provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about themselves so long as they identify these
statements as forward-looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. 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 OEM sales by the Company, the
adequacy of existing manufacturing resources, the Company's continued expansion
in foreign markets 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. But the absence of these words does not
mean the statement is not forward-looking. The Company cannot guarantee any of
the forward-looking statements, which are subject to risks, uncertainties and
assumptions that are difficult to predict. Actual results may differ materially
from those the Company forecasts in forward-looking statements due to a variety
of factors, including those set forth above under the heading "Additional Risk
Factors that could Affect Operating Results and Market Price of Stock" and
elsewhere in this Report. The Company does not intend to update any
forward-looking statements due to new information, future events or
otherwise.





11
 Table of Contents





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-16  of  this  Report.





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, 2006, and through July 5, 2006, 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 principal accounting 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 Principal Financial Officer
concluded that our disclosure controls and procedures were not effective to
enable us to record, process, summarize and report information required to be
included in our periodic filings with the Securities and Exchange Commission
within the required time period and in that some of the accounting entries
relating to debt and equity instruments required adjustment upon review by our
independent auditors. We intend to take measures to remedy this situation by
engaging independent auditors to provide us with accounting advice and
implementing internal procedures including the distribution of documents. These
deficiencies have been reported to our Board of Directors and we intend to
improve and strengthen our controls and procedures.


There has
been no change in our internal control over financial reporting that occurred
during our last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.





ITEM
      8B.
            OTHER
      INFORMATION





None.








PART III





ITEM
      9.
            DIRECTORS
      AND EXECUTIVE OFFICERS OF THE
  REGISTRANT





The
following table sets forth certain information with respect to the executive
officers of the Company for fiscal 2005 to the present.








NAME
            
            AGE
            
            POSITIONLarry
      F. Vance
            
            71
            
            Chairman
      and Chief Executive OfficerTami
      J Story
            
            43
            
            Director
      Secretary/Treasurer/Director





12
 Table of Contents


Larry F.
Vance served as Chief Executive Officer of the Company from 1985 until April 8,
1995. 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 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.
 
 Information
with respect to directors of the Company will be included under "Election of
Directors" in the Company's definitive proxy statement for its 2006 annual
meeting of shareholders, to be filed not later than 120 days after the end of
the fiscal year covered by this Report, and is incorporated herein by reference.
Information with respect to executive officers of the Company is included under
Item 4(a) of Part I of this Report.
 
 Based
solely on a review of copies of reports received by the Company from persons
required to file reports of ownership and changes on ownership pursuant to
Section 16(a) of the Securities Exchange Act of 1934, the Company believes that
all of its executive officers and directors complied with applicable filing
requirements for the fiscal year ended March 31, 2006.


ITEM  10.
            EXECUTIVE  COMPENSATION





Table
below summarizes information on Executives and Directors
compensation





SUMMARY COMPENSATION
TABLE


Annual
      Compensation
              
              
              
              
              
              Awards
              
              
              Long-Term
      Compensation
                PayoutsSecuritiesOther
    Annual
              
              
              Restricted
              
              
              Stock
              
              
              underlyingName and
      Principal
              
              Fiscal
              
              
              Salary
              
              
              Bonus
              
              
              Compensation
              
              
              Stock
              
              
              Option
              
              
              options/SARS
              
              
              LTIP
pay-Position
              
              Year
              
              
              ($)
              
              
              ($)
              
              
              ($)
              
              
              Award(s)
    ($)
              
              
              Grants
              
              
              
              (#
              )
              
              ($)Larry Vance/Chairman
      (1)
              
              2006
              
              
              
              160,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -2005
              
              
              
              160,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -2004
              
              
              
              160,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Tami J. Story/Secretary
              
              2006
              
              
              
              80,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -and Treasurer
      (1)
              
              2005
              
              
              
              80,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -2004
              
              
              
              80,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Name and
      Principal
                Position
              
              All other
                Compensation
                ($)Larry Vance/Chairman
      (1)
              
              
              ---Tami J. Story/Secretary
              
              
              -and Treasurer
      (1)
              
              
              --


(1)
            Salary
      was deferred unless cash flow allowed
payment.






AGGREGATED
OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END


OPTION/SAR
VALUES





Name
            
            Shares
              Acquired
      on
              Exercise
            
            
            Value
              Realized
      ($)
            
            
            Number
      of securities
                Underlying
      unexercised
                Options
      at Fy-EndExercisable/Unexercisable
            
            
            Value
      of Unexercised In-the
                Money
      Options at FY-End ($)Exercisable/UnexercisableLarry
      Vance
            
            
            -
            
            
            
            -
            
            
            
            4,500,000/3,000,000
            (1)
            
            
            0/0John
      Peel
            
            
            -
            
            
            
            -
            
            
            
            4,500,000/3,000,000
            (1)
            
            
            0/0Rory
      J. Stevens
            
            
            -
            
            
            
            -
            
            
            
            375,000/1,500,000
            (1)
            
            
            0/0Tami
      Story
            
            
            -
            
            
            
            -
            
            
            
            750,000/3,000,000
            (1)
            
            
            0/0


(1)
Exercise prices range from $0.21 - $2.50 per share.





13
 Table of Contents




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
11 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 11 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, 2006 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
            
            
            54,660,644
            (2)
            
            
            74
            %P.O.
      Box 763Lakeside,
      MT  59922Tami
      Story
            
            
            12,069,714
            
            
            
            16
            %P.O.
      Box 763Lakeside,
      MT  59901All
      directors and officers
            
            
            66,730,358
            
            
            
            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.





ITEM  12.
            CERTAIN  RELATIONSHIPS  AND  RELATED  TRANSACTIONS




None.





14
 Table of Contents






PART IV














(a)(1)
            Financial
      Statements filed as part of this Report
            Page
      in this ReportReport
      of Independent Accountants
            F-1Consolidated
      Balance Sheet at March 31, 2004 and 2003
            F-2Consolidated
      Statement of Loss for the Years Ended March 31, 2004, 2003 and
      2002
            F-4Consolidated
      Statement of Redeemable Common Stock And Nonredeemable Shareholders'
      Equity (Deficit) for the Years Ended March 31, 2004, 2003 and
      2002
            F-5Consolidated
      Statement of Cash Flows for the Years Ended March 31, 2004, 2003 and
      2002
            F-6Notes
      to Consolidated Financial Statements
            F-7
      - F-16(a)(2)
            Financial
      Statement Schedules
            None(a)(3)
            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).
 
 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 Probe 1 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).
 
 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).
 15
 Table of Contents
 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. (ESSI). 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. (ESSI). 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. (ESSI). 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. (ESSI). 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).
 
 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).
 
 16
 Table of Contents
 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
                  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)
 
 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, 2006 and March 31, 2005 and fees billed
for other services rendered by Malone & Bailey. during those
periods.








FISCAL
      2005
            
            
            FISCAL
      2004Audit
      Fees (1)
            
            $
            45,000
            
            
            $
            44,000Audit
      Related Fees (2)
            
            $
            0
            
            
            $
            0Tax
      Fees (3)
            
            $
            0
            
            
            $
            0All
      Other Fees (4)
            
            $
            0
            
            
            $
            0Total
            
            $
            45,000
            
            
            $
            44,000








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. VanceChairmanDate:
      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
      and DirectorLarry
      F. VanceDate:
      April 23, 2008








/s/
      Tami J. Story
            
            Corporate
      Secretary and Treasurer and DirectorTami
      J. StoryDate:
      April 23, 2008




17
 Table of Contents





REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING
FIRM





To the
Board of Directors


Earth
Search Sciences, Inc.


Kalispell,
Montana








We have
audited the accompanying consolidated balance sheet of Earth Search Sciences,
Inc. ("Earth Search") as of March 31, 2006, 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 audits.
 
 We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Earth Search Sciences Inc., as of
March 31, 2006, 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 recurring net losses
of$2,189,247 and $5,185,527 for fiscal 2006 and 2005, respectively and has an
accumulated deficit of $61,883,781 ad a working capital deficit of $18,574,732
as of March 31, 2006. 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










F-1
 Table of Contents





EARTH
SEARCH SCIENCES, INC.


CONSOLIDATED
BALANCE SHEET


March 31,
2006








ASSETSCurrent
      assets:Cash
            
            $
            40,900Accounts
      receivable
            
            
            16,971Loan
      costs, net of $62,740 accumulated amortization
            
            
            166,569Total
      current assets
            
            
            224,440Property
      and equipment, net of $735,635 accumulated depreciation
            
            
            413,793TOTAL
      ASSETS
            
            $
            638,233LIABILITIESCurrent
      liabilities:Notes
      payable current portion
            
            $
            880,934Settlement
      obligation
            
            
            2,820,099Accrued
      officers' compensation
            
            
            907,983Accounts
      payable
            
            
            11,641,757Accrued
      expenses
            
            
            179,890Stockholder
      loans
            
            
            2,368,509Total
      current liabilities
            
            
            18,799,172Notes
      payable less current portion
            
            
            349,303Total
      liabilities
            
            
            19,148,475Commitments
      and contingencies
            
            
            -STOCKHOLDERS'
      DEFICITSeries
      A preferred stock; 200,000 shares authorized, none issued and outstanding;
      liquidation preference $1,000,000
            
            
            -Common
      stock, $.001 par value; 200,000,000 shares authorized; 77,697,642 shares,
      issued and outstanding
            
            
            77,698Additional
      paid-in capital
            
            
            43,495,841Treasury
      stock
            
            
            (200,000
            )Accumulated
      deficit
            
            
            (61,883,781
            )Total
      stockholders' deficit
            
            
            (18,510,242
            )TOTAL
      LIABILITIES AND STOCKHOLDERS' DEFICIT
            
            $
            638,233








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





F-2
 Table of Contents





EARTH
SEARCH SCIENCES, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


Years
Ended March 31, 2006 and 2005








2006
            
            
            2005Revenues
            
            $
            399,742
            
            
            $
            415,702ExpensesBad
      debt
            
            
            20,130
            
            
            
            -General
      and administrative
            
            
            1,474,602
            
            
            
            4,443,170Depreciation,
      amortization and depletion
            
            
            339,646
            
            
            
            151,039Impairment
            
            
            27,318
            
            
            
            386,628Total
      Expenses
            
            
            1,861,696
            
            
            
            4,980,837Loss
      from operations
            
            
            (1,461,954
            )
            
            
            (4,565,135
            )Other
      income (expense)Debt
      forgiveness
            
            
            1,569,917
            
            
            
            38,788Interest
      expense
            
            
            (2,297,210
            )
            
            
            (659,180
            )Net
      loss
            
            $
            (2,189,247
            )
            
            $
            (5,185,527
            )Basic
      and diluted loss per share
            
            $
            (0.03
            )
            
            $
            (0.94
            )Weighted
      average common shares outstanding
            
            
            76,280,791
            
            
            
            5,545,079








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





F-3
 Table of Contents






EARTH
SEARCH SCIENCES, INC.


CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT


Years
Ended March 31, 2006 and 2005








Preferred
      Stock
            
            
            Common
      StockShares
            
            
            Amount
            
            
            Shares
            
            
            AmountBalance
      at March 31, 2004 (restated)
            
            
            -
            
            
            $
            -
            
            
            
            485,764
            
            
            $
            486Issuance
      of common stock for debt  to related parties
            
            
            
            
            
            
            
            
            
            
            39,216
            
            
            
            39Issuance
      of common stock for debt
            
            
            -
            
            
            
            -
            
            
            
            80,313
            
            
            
            80Issuance
      of common stock for  services rendered
            
            
            
            
            
            
            
            
            
            
            2,604,907
            
            
            
            2,605Issuance
      of common stock for  accrued compensation
            
            
            -
            
            
            
            -
            
            
            
            214,922
            
            
            
            215Issuance
      of preferred stock for  accrued compensation
            
            
            2,761,928
            
            
            
            2,762
            
            
            
            -
            
            
            
            -Issuance
      of common stock for  loan and interest
conversion
            
            
            
            
            
            
            -
            
            
            
            4,191
            
            
            
            4Conversion
      of preferred stock to  common stock
            
            
            (2,761,928
            )
            
            
            (2,762
            )
            
            
            69,048,200
            
            
            
            69,048Issuance
      of common stock for accrued  legal settlement
            
            
            -
            
            
            
            -
            
            
            
            285,323
            
            
            
            285Related
      party release of debt
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Balance
      at March 31, 2005
            
            
            -
            
            
            
            -
            
            
            
            72,762,836
            
            
            
            72,762Issuance
      of common stock for cash
            
            
            -
            
            
            
            -
            
            
            
            250,000
            
            
            
            250Issuance
      of common stock for debt
            
            
            -
            
            
            
            -
            
            
            
            106,667
            
            
            
            107Issuance
      of common stock for  services rendered
            
            
            -
            
            
            
            -
            
            
            
            4,224,639
            
            
            
            4,225Issuance
      of common stock for  loan extension
            
            
            -
            
            
            
            -
            
            
            
            353,500
            
            
            
            354Warrants
      for loan extension
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Warrants
      for services
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Balance
      at March 31, 2006
            
            
            -
            
            
            $
            -
            
            
            
            77,697,642
            
            
            $
            77,698








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





F-4
 Table of Contents





EARTH
SEARCH SCIENCES, INC.


CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT


Years
Ended March 31, 2006 and 2005








AdditionalPaid-in
            
            
            Accumulated
            
            
            TreasuryCapital
            
            
            Deficit
            
            
            Stock
            
            
            TotalBalance
      at March 31, 2004 (restated)
            
            $
            35,690,008
            
            
            $
            (54,509,007
            )
            
            $
            (200,000
            )
            
            $
            (19,018,513
            )Issuance
      of common stock for debt to related parties
            
            
            19,961
            
            
            
            -
            
            
            
            -
            
            
            
            20,000Issuance
      of common stock for debt
            
            
            64,927
            
            
            
            -
            
            
            
            -
            
            
            
            65,007Issuance
      of common stock for services rendered
            
            
            3,648,756
            
            
            
            -
            
            
            
            -
            
            
            
            3,651,361Issuance
      of common stock for accrued compensation
            
            
            140,225
            
            
            
            -
            
            
            
            -
            
            
            
            140,440Issuance
      of preferred stock for accrued compensation
            
            
            1,032,961
            
            
            
            -
            
            
            
            -
            
            
            
            1,035,723Issuance
      of common stock for loan and interest conversion
            
            
            2,301
            
            
            
            -
            
            
            
            -
            
            
            
            2,305Conversion
      of preferred stock to common stock
            
            
            (66,286
            )
            
            
            -
            
            
            
            -
            
            
            
            -Issuance
      of common stock for accrued legal settlement
            
            
            327,836
            
            
            
            -
            
            
            
            -
            
            
            
            328,121Related
      party release of debt
            
            
            1,657,507
            
            
            
            
            
            
            
            
            
            
            
            1,657,507Net
      loss
            
            
            -
            
            
            
            (5,185,527
            )
            
            
            -
            
            
            
            (5,185,527
            )Balance
      at March 31, 2005
            
            
            42,518,196
            
            
            
            (59,694,524
            )
            
            
            (200,000
            )
            
            
            (17,303,576
            )Issuance
      of common stock for cash
            
            
            62,250
            
            
            
            -
            
            
            
            -
            
            
            
            62,500Issuance
      of common stock for debt
            
            
            9,493
            
            
            
            -
            
            
            
            -
            
            
            
            9,600Issuance
      of common stock for services rendered
            
            
            672,854
            
            
            
            -
            
            
            
            -
            
            
            
            677,079Issuance
      of common stock for loan extension
            
            
            123,372
            
            
            
            -
            
            
            
            -
            
            
            
            123,726Warrants
      for loan extension
            
            
            92,494
            
            
            
            -
            
            
            
            -
            
            
            
            92,494Warrant
      for services
            
            
            17,182
            
            
            
            -
            
            
            
            -
            
            
            
            17,182Net
      loss
            
            
            -
            
            
            
            (2,189,247
            )
            
            
            -
            
            
            
            (2,189,247
            )Balance
      at March 31, 2006
            
            $
            43,495,841
            
            
            $
            (61,883,781
            )
            
            $
            (200,000
            )
            
            $
            (18,510,242
            )








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





F-5
 Table of Contents





EARTH
SEARCH SCIENCES, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


Years
Ended March 31, 2006 and 2005








2006
            
            
            2005CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
            
            $
            (2,189,247
            )
            
            $
            (5,185,527
            )Adjustments
      to reconcile net loss to cash used in operating
activities:Common
      stock issued for services and interest expense
            
            
            677,079
            
            
            
            3,653,666Warrants
      issued for services
            
            
            17,182
            
            
            
            -Common
      stock issued for debt
            
            
            9,600
            
            
            
            -Common
      stock issued for legal settlement
            
            
            -
            
            
            
            328,121Depreciation,
      amortization and depletion
            
            
            339,645
            
            
            
            151,038Asset
      impairment
            
            
            27,318
            
            
            
            386,628Forgiveness
      of debt
            
            
            (1,569,917
            )
            
            
            38,788Bad
      debt
            
            
            20,130
            
            
            
            -Changes
      in assets and liabilities:Accounts
      receivable
            
            
            27,802
            
            
            
            44,337Other
      current assets
            
            
            -
            
            
            
            39,007Accounts
      payable and accrued expenses
            
            
            2,198,386
            
            
            
            (13,459
            )Accrued
      interest
            
            
            64,947
            
            
            
            181,857Accrued
      officers compensation
            
            
            240,000
            
            
            
            336,672NET
      CASH USED IN OPERATING ACTIVITIES
            
            
            (137,076
            )
            
            
            (38,872
            )CASH
      FLOWS FROM INVESTING ACTIVITIESCapital
      expenditures
            
            
            (5,246
            )
            
            
            (55,958
            )NET
      CASH USED IN INVESTING ACTIVITIES
            
            
            (5,246
            )
            
            
            (55,958
            )CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from stockholder loans, net
            
            
            370,745
            
            
            
            171,591Proceeds
      for the sale of common stock
            
            
            62,500
            
            
            
            -Payment
      for loan extension
            
            
            (62,000
            )
            
            
            -Repayments
      on notes payable
            
            
            (197,200
            )
            
            
            (79.339NET
      CASH PROVIDED BY FINANCING ACTIVITIES
            
            
            174,045
            
            
            
            92,252NET
      CHANGE IN CASH
            
            
            31,723
            
            
            
            (2,578
            )CASH
      AT BEGINNING OF PERIOD
            
            
            9,175
            
            
            
            11,753CASH
      AT END OF PERIOD
            
            $
            40,900
            
            
            $
            9,175SUPPLEMENTAL
      CASH FLOW INFORMATIONSupplemental
      Cash flow information:Interest
      paid
            
            $
            -
            
            
            $
            -Taxes
      paid
            
            
            -
            
            
            
            -Non-cash
      financing and investing activities:Common
      Stock issued for loan extension
            
            
            123,726
            
            
            
            -Warrants
      for loan extension
            
            
            92,494
            
            
            
            -Common
      Stock issued for accounts payable
            
            
            -
            
            
            
            65,007Preferred
      stock issued for accrued payroll
            
            
            -
            
            
            
            41,219Preferred
      stock issued for deferred officer's compensation
            
            
            -
            
            
            
            994,504Common
      stock issued for accrued payroll
            
            
            -
            
            
            
            140,440Contribution
      to capital from related party    release of
      debt
            
            
            -
            
            
            
            1,657,507Shares
      issued for payment of related party loans
            
            
            -
            
            
            
            20,000








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





F-6
 Table of Contents




EARTH
SEARCH SCIENCES, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE 1 -
SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES





Earth
Search Sciences, Inc. ("ESSI") collects high value hyperspectral imagery of the
Earth's surface utilizing their 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. 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 became inactive during fiscal
2003.





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. At March 31, 2006, Petro Probe, Inc. holds
interests in seven oil and gas projects.  As of March 31, 2006, all
Oil & gas interests held by Petro Probe were fully impaired.





In fiscal
2006 and 2005, 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 $302,901 and
$192,000 to revenue in fiscal 2006 and 2005, 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.





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-7
 Table of Contents





As of
March 31, 2006, 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, 2006.





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.





ASSET
RETIREMENT OBLIGATION





ESSI
accounts for asset retirement obligations in accordance with the provision of
SFAS No. 143 “Accounting for Asset Retirement Obligations.”  SFAS No.
143 requires ESSI to record the fair value of 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, 2006, the fair value of the oil and gas properties’ site restoration costs
are insignificant.  Consequently, there is no accrual at March 31,
2006.





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 and 2005 ESSI
incurred unsuccessful oil and gas properties write-offs of $27,318 and $386,628
respectively. 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. See note
4.




F-8
 Table of Contents




EARNINGS
PER SHARE





Basic net
loss per share is computed by dividing net loss to common stockholders
(numerator) by the weighted average number of common shares outstanding during
the year (denominator).  Diluted net loss per share is computed using
the weighted average number of common shares and dilutive potential common
shares outstanding during the year. For the years ended March 31, 2006 and 2005,
ESSI had no dilutive potential common shares.





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
OPTIONS AND WARRANTS





ESSI
accounts for non-cash stock-based compensation issued to non-employees in
accordance with the provisions of SFAS No. 123 and EITF No. 96-18, Accounting
for Equity Investments That Are Issued to Non-Employees for Acquiring, or in
Conjunction with Selling Goods or Services.  Common stock issued to
non-employees and consultants is based upon the value of the services received
or the quoted market price, whichever value is more readily
determinable.





On
January 1, 2006, ESSI adopted SFAS No. 123(R), "Share-Based Payment" ("SFAS
123(R)"). SFAS 123(R) replaced SFAS No. 123 and supersedes APB Opinion No. 25.
SFAS 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values. The pro forma disclosures previously permitted under SFAS 123
are no longer an alternative to financial statement recognition. ESSI adopted
SFAS 123(R) using the modified prospective method which allows the application
of SFAS 123(R) on a going-forward basis rather than restating prior periods and
requires the application of the accounting standard as of January 1,
2006.




F-9
 Table of Contents





For the
years ended March 31, 2006 and 2005, ESSI had no stock option
issuances.





NOTE 2 -
GOING CONCERN





As shown
in the accompanying financial statements, ESSI incurred recurring net losses of
$2,189,247 and $5,185,527 for fiscal 2006 and 2005, respectively and has an
accumulated deficit of $61,883,781 and a working capital deficit of $18,574,732
as of March 31, 2006.  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:





March
      31,Life
            
            
            2006Aircraft
            
            
            10
            
            
            $
            925,795Equipment
            
            
            5
            
            
            
            223,6331,149,428Less:
      accumulated depreciation
            
            
            
            
            
            
            (735,635
            )$
            413,793





Depreciation
expense totaled $104,223 and $112,658 in fiscal 2006 and 2005,
respectively.





NOTE 4 -
OIL AND GAS INTERESTS





In fiscal
2005, ESSI paid $101,849 for drilling on two existing properties and sold a
portion of its interests to others on those two properties for $15,947. ESSI
recognized approximately $97,000 and $223,000 in revenue from the producing
property in fiscal 2006 and 2005 respectively.  Depletion was $14,863
and $38,025 in fiscal 2006 and 2005 respectively.





In fiscal
2006 and 2005 ESSI wrote-off $27,218 and $386,628 of previously capitalized
costs on properties that were determined to be uneconomical wells. During fiscal
2006 all the wells of ESSI were deemed to provide uneconomical future cash
flows, therefore each well was fully impaired.





F-10
 Table of Contents





Supplemental
information (unaudited)


Successful
              EffortsCapitalized
      costs relating to oil and gas producing activities at March 31,
      2006Proved
      oil and gas properties
            
            $
            -Unproved
      oil and gas properties
            
            
            -Less
      accumulated depletion
            
            
            -Net
      capitalized costs
            
            $
            -








Costs
incurred in oil and gas producing activities for the years ended March 31, 2006
and 2005


2006
            
            
            2005Property
      acquisition costsProved
            
            $
            -
            
            
            $
            -Unproved
            
            
            -
            
            
            
            55,958Results
      of operations for oil and gas producing activities for the years ended
      March 31, 2006 and 2005Oil
      and gas sales
            
            $
            96,841
            
            
            $
            223,405Development
      Costs
            
            
            4,807
            
            
            
            -Depletion
            
            
            (14,863
            )
            
            
            (38,025
            )Impairment
            
            
            (27,318
            )
            
            
            (386,628
            )Results
      of operations for oil and gas producing activities (excluding corporate
      overhead and financing costs)
            
            $
            59,467
            
            
            $
            (201,248
            )





The
following estimates of proved and proved developed reserve quantities and
related standardized measure of discounted net cash flow are estimates only, and
do not purport to reflect realizable values or fair market values of ESSI's
reserves. ESSI emphasizes that reserve estimates are inherently imprecise and
that estimates of new discoveries are more imprecise than those producing oil
and gas properties. Accordingly, these estimates are expected to change as
future information becomes available. All of ESSI's reserves are located in the
United States.





Proved
reserves are estimated reserves of crude oil (including condensate and natural
gas liquids) and natural gas that geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions. Proved developed
reserves are those expected to be recovered through existing wells, equipment
and operating methods.





The
standardized measure of discounted future net cash flows is computed by applying
year end prices of oil and gas (with consideration of price changes only to the
extent provided by contractual arrangements) to the estimated future production
of proved oil and gas reserves, less estimated future expenditures (based on
year-end costs) to be incurred in developing and producing the proved reserves,
less estimated future income tax expenses (based on year-end statutory tax
rates, with consideration of future tax rates already legislated) to be incurred
on pretax net cash flows less tax basis of the properties and available credits,
and assuming continuation of existing economic conditions. The estimated future
net cash flows are then discounted using a rate of 10 percent a year to reflect
the estimated timing of the future cash flows.





F-11
 Table of Contents





2006
            
            
            2005Oil
              (Bbls)
            
            
            Gas
              (Mcf)
            
            
            Oil
              (Bbls)
            
            
            Gas
              (Mcf)Proved
      developed and undevelopedReservesBeginning
      of year
            
            
            -
            
            
            
            47,000
            
            
            
            13,356
            
            
            
            5,271,000Revisions
      of previous estimates
            
            
            -
            
            
            
            (32,590
            )
            
            
            (13,343
            )
            
            
            (5,181,709
            )Production
            
            
            -
            
            
            
            (14,410
            )
            
            
            (13
            )
            
            
            (42,291
            )End
      of Year
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            47,000Proved
      developed reservesBeginning
      of year
            
            
            -
            
            
            
            47,000
            
            
            
            13,356
            
            
            
            5,271,000End
      of year
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            47,000








Standardized
      measure of  discounted future net cash flows at March 31, 2006
      and 2005
            
            2006
            
            
            2005Future
      cash inflows
            
            $
            -
            
            
            $
            421,663Future
      production costs
            
            
            -
            
            
            
            (13,414
            )Future
      development costs
            
            
            -
            
            
            
            (27,824
            )10%
      annual discount for estimated timing of cash flows
            
            
            -
            
            
            
            (117,787
            )Standardized
      measure of discounted future net cash flows relating to proved oil and gas
      reserves
            
            $
            -
            
            
            $
            202,638




The
following reconciles the change in the standardized measure of discounted future
net cash flows for fiscal 2006 and 2005




2006
            
            
            2005Beginning
      of the year
            
            $
            202,638
            
            
            $
            421,663Sales
      of oil and gas, net of production costs
            
            
            (96,841
            )
            
            
            (223,405
            )Net
      changes in prices and production costs
            
            
            -
            
            
            
            9,683Development
      costs incurred during the year which were previously
    estimated
            
            
            -
            
            
            
            -Revisions
      of previous quantity estimates
            
            
            (133,621
            )
            
            
            (9,761
            )Net
      change in future estimated development costs
            
            
            27,824
            
            
            
            (4,458
            )End
      of year
            
            $
            -
            
            
            $
            202,638





F-12
 Table of Contents





NOTE 5 -
NOTES PAYABLE





Notes
payable consists of the following:


2006Installment
      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
            
            $
            850,616Installment
      note payable secured by producing oil and gas property, with interest at
      15%, due in monthly installments of $6,929
            
            
            374,585Other
            
            
            5,036Less:  current
      portion
            
            
            (880,934
            )$
            349,303




NOTE 6 -
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, 2006, stockholder loans totaled $2,368,509 including interest accrued on
such advances of $821,654.





NOTE 7 –
FORGIVENESS OF DEBT





On March
23, 2005, the Company 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,
the Company is required to return the Probe on or before August 31,
2005.  In the event that the Probe is not returned, the Company is
charged a shipping, handling and disposition fee of
$250,000.  Interest related to the $250,000 began accruing on
September 2, 2005 at an annual rate of prime plus 4%.  In addition,
rent 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, the Company has accrued $4,390,016 in debt interest related to the
capital lease of the Probe.  Under the settlement agreement, the new
liability using calculations outlined above was $2,820,099 at March 31,
2006.  Consequently, the Company recorded a $1,569,917 gain on debt
forgiveness.





NOTE 8 -
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 $385,991 and $336,850 during fiscal 2006 and 2005, 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 June
8, 2004, ESSI issued 2,652,011 shares of preferred stock for payment of $994,504
of deferred compensation. Additionally, 109,917 shares of preferred stock were
issued for payment of $41,219 in accrued compensation to other
employees.  During the same year, the preferred stock was converted
into 69,048,200 shares of common stock.





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 9 -
BUSINESS SEGMENT INFORMATION





ESSI's
major activities are broken down into an Airborne Hyperspectral Services
business segment, a Satellite Development business segment, an Oil and Gas
property business segment and an Other Industries business segment. The Airborne
Hyperspectral Services segment and Satellite Development segment utilized remote
sensing instruments to earn revenue from the sale of hyperspectral imagery. The
current Satellite Development business segment revenue is from a cost
reimbursement contract with the U.S. Navy for the construction of the NEMO
project, which has been disbanded. Transactions between the business segments
are loans, interest, and management fees based on an allocation of incurred
costs for general and administrative expenses. As the consolidated group is
operating at a net loss position, no income tax expense or benefit is
provided.





F-13
 Table of Contents


Business
Segment Information for Fiscal Year 2006





AirborneHyperspectral
            
            
            Satellite
            
            
            Oil
      and Gas
            
            
            OtherServices
            
            
            Development
            
            
            Properties
            
            
            Industries
            
            
            CombinedRevenues
            
            $
            302,901
            
            
            $
            -
            
            
            $
            96,841
            
            
            $
            -
            
            
            $
            399,742Income
      (loss) from operations
            
            $
            (1,479,489
            )
            
            $
            (311
            )
            
            $
            22,346
            
            
            $
            (4,500
            )
            
            $
            (1,461,954
            )Debt
      forgiveness
            
            
            1,569,917
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,569,917Interest
      expense
            
            
            (403,201
            )
            
            
            (1,894,009
            )
            
            
            -
            
            
            
            -
            
            
            
            (2,297,210
            )Net
      income (loss)
            
            
            (312,773
            )
            
            
            (1,894,320
            )
            
            
            22,346
            
            
            
            (4,500
            )
            
            
            (2,189,247
            )Total
      assets at 3/31/06
            
            $
            631,277
            
            
            $
            452
            
            
            $
            3,019
            
            
            $
            3,485
            
            
            $
            638,233Depreciation,
      amortization and depletion for the period ended 3/31/06
            
            $
            324,783
            
            
            $
            -
            
            
            $
            14,863
            
            
            $
            -
            
            
            $
            339,646Capital
      expenditures for the period ended 3/31/06
            
            $
            5,246
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            5,246




Business
Segment Information for Fiscal Year 2005





AirborneHyperspectral
            
            
            Satellite
            
            
            Oil
      and Gas
            
            
            OtherServices
            
            
            Development
            
            
            Properties
            
            
            Industries
            
            
            CombinedRevenues
            
            $
            192,297
            
            
            $
            -
            
            
            $
            223,406
            
            
            $
            -
            
            
            $
            415,702Income
      (loss) from operations
            
            $
            (4,747,844
            )
            
            $
            (24,183
            )
            
            $
            208,357
            
            
            $
            (1,465
            )
            
            $
            (4,565,135
            )Debt
      forgiveness
            
            
            38,788
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            38,788Interest
      expense
            
            
            (659,180
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (659,180
            )Net
      income (loss)
            
            
            (5,368,236
            )
            
            
            (24,183
            )
            
            
            208,357
            
            
            
            (1,465
            )
            
            
            (5,185,527
            )Total
      Assets at 3/31/05
            
            $
            578,082
            
            
            $
            762
            
            
            $
            84,488
            
            
            
            2,608
            
            
            $
            665,940Depreciation,
      amortization and depletion for the period ended 3/31/05
            
            $
            113,014
            
            
            $
            -
            
            
            $
            38,025
            
            
            
            -
            
            
            $
            151,039Capital
      expenditures for the period ended 3/31/05
            
            $
            -
            
            
            $
            -
            
            
            $
            55,958
            
            
            
            -
            
            
            $
            55,958




NOTE 10 -
INCOME TAXES





ESSI
recorded no provision for income taxes in fiscal 2006 and 2005 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:





F-14
 Table of Contents





At March
31, 2006, deferred tax assets consisted of the following:




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





The
cumulative net operating loss carry-forward is approximately $18,500,000 at
March 31, 2006, and will expire in the years 2015 through 2026. 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 11 -
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:





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, 2006 and 2005, there were no options issued.





F-15
 Table of Contents





The
following table summarizes the employee stock option transactions described
above.




Shares
              under
              option
            
            
            Weighted-average
              exercise priceBalance,
      March 31,2003
            
            $
            57,845
            
            
            $
            428Options
      granted
            
            
            --
            
            
            
            --Options
      cancelled
            
            
            (2,313
            )
            
            
            (228
            )Options
      exercised
            
            
            --
            
            
            
            --Balance,
      March 31, 2004
            
            
            55,532
            
            
            
            436Options
      granted
            
            
            --
            
            
            
            --Options
      cancelled
            
            
            (939
            )
            
            
            (84
            )Options
      exercised
            
            
            --
            
            
            
            --Balance,
      March 31, 2005
            
            
            54,593
            
            
            $
            442Options
      granted
            
            
            --
            
            
            
            --Options
      cancelled
            
            
            --
            
            
            
            --Options
      exercised
            
            
            --
            
            
            
            --Balance,
      March 31, 2006
            
            $
            54,593
            
            
            $
            442





Options
outstanding and exercisable as of March 31, 2006:





- -
      Outstanding - -
            
            ExercisableNumber
            
            Remaining
            
            NumberExercise
      Price
            
            
            of
      Shares
            
            life
            
            of
      Shares20
            
            
            
            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





NOTE 12 -
STOCK ISSUANCES





PREFERRED
STOCK


On June
8, 2004, ESSI issued 2,761,928 shares of preferred stock for payment of
$1,035,723 deferred compensation.  Each share of preferred stock was
convertible into 25 shares of common stock and maintained voting rights on a
fully diluted basis.





During
the fourth quarter of fiscal 2005, all shares of preferred stock were converted
into 69,048,200 shares of common stock.





COMMON
STOCK


On June
2, 2004, ESSI authorized a 400:1 reverse split.  The split did not
affect the par value of the common stock, and reduced the number of shares
outstanding to 476,135.





F-16
 Table of Contents





During
fiscal 2005, ESSI issued:





-
            2,609,098
      shares of stock valued at $3,653,666 to various individuals for services
      rendered.





-
            80,313
      shares of stock valued at $65,007 to various individuals for
      debt.





-
            39,216
      shares of stock valued at $20,000 to a majority shareholder for partial
      payment of stockholder loans.





-
            214,922
      shares of stock valued at $140,440 to employees for accrued
      compensation.





-
            285,323
      shares of stock valued at $328,121 for an accrued legal settlement. See
      note 13 for details.





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 $123,725 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%.





NOTE 13 -
LITIGATION





As
discussed in Note 7, 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.  The mutual release also
requires the other party to return a computer and related software belonging to
ESSI in exchange for the Probe.  ESSI agreed to return the Probe at
the end of August 2005; however, as of the end of fiscal 2006, ESSI had not
returned the Probe because the other party has not delivered the computer and
related software belonging to ESSI.  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, 2006, management estimates the settlement obligation
to be $2,820,099 which reflects a 5% late fee imputed each month on the
outstanding balance due.  As of March 31, 2006, management has
recognized an accrual for the estimated obligation.





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 Cai 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.


F-17