U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1997

                         Commission File Number: 0-6088

                              Earth Sciences, Inc.
                  --------------------------------------------
                 (Name of small business issuer in its charter)

          Colorado                                       84-0503749
  ----------------------                      -------------------------------
 (State of incorporation)                    (IRS Employer Identification No.)

                    910 12th Street, Golden, Colorado 80401
                    ---------------------------------------
                    (Address of principal executive offices,
                               including Zip Code)

(Registrant's telephone number, including area code):   (303) 279-7641

         Securities registered under Section 12(g) of the Exchange Act:
                        Common Stock, one cent par value
                        --------------------------------
                                 Title of class

Check  whether  the issuer  (1) has 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.
                                                                  [X] Yes [ ] 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. [ ]

State issuer's revenues for its most recent fiscal year.  $ 1,578,000

State the  aggregate  market  value of the voting  stock  held by  nonaffiliates
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. As of March 6, 1998 was $22,263,000.


Number of shares outstanding of registrant's Common Stock, one cent par value as
of March 6, 1998 - 16,264,716.


DOCUMENTS INCORPORATED BY REFERENCE :
None

Transitional Small Business Disclosure Format:  Yes     No   X
                                                    ---     ---


<PAGE>


                                     PART I

Item 1.  Description of Business
This Annual Report may contain forward-looking  statements within the meaning of
Section 27A of the Securities Act of 1933. Such  forward-looking  statements may
be found in this section under  "Description  of Business," and below in Item 6.
under  "Management's  Discussion and Analysis of Financial Condition and Results
of  Operations."  Actual  events or results could differ  materially  from those
discussed  in the  forward-looking  statements  as a result of  various  factors
including  those set forth below or under the heading  "Management's  Discussion
and Analysis of Financial Condition and Results of Operations." .

     (a) Business Development.
Earth  Sciences,   Inc.  ("ESI"  or   "Registrant",   which  term  includes  its
wholly-owned  subsidiaries unless otherwise  indicated) is a diversified mineral
exploration and development  company  specializing in chemical  processing,  air
pollution  control and mineral  exploration.  Production  of purified  phosphate
products in Calgary commenced in June 1997. ESI was incorporated  under the name
of Colorado Central Mines, Inc. in Colorado in 1957. Current major activities of
the Company include the operation of its recently  modified  solvent  extraction
facility in Calgary, Alberta for production of purified phosphate products; flue
gas  conditioning  technology  for  coal-fired  boilers  and other  applications
provided  through ADA  Environmental  Solutions  LLC ("ADA"),  a  majority-owned
subsidiary;  and continued exploration activities for diamond and gold resources
in Venezuela.

During 1997,  ESI (1) acquired a majority  equity  interest in ADA, which signed
contracts to provide three flue gas conditioning units to utilities in Wisconsin
and Mississippi;  (2) commenced production of purified phosphate products at its
solvent  extraction  facility in Calgary,  Alberta,  Canada;  (3)  exercised its
option  to  settle  the $9.4  million  liability  associated  with  the  Calgary
facility, recognizing an extraordinary gain of approximately $2.2 million in the
fourth  quarter;  (4) continued  exploration  activities  for gold  resources in
Venezuela  including its land contract  covering  approximately  1200 acres; (5)
performed limited  exploration work on the Cerro Gordo  gold/silver  property in
Inyo County, California; (6) issued $8,785,000 in convertible debentures to fund
its activities; and (7) maintained its position in several mineral resources and
prospects in the Western US.

Thus far in 1998, ESI has (a) acquired  exclusive rights to explore and mine the
CODSA 14  concession in  Venezuela;  (b) given  written  notice of its intent to
terminate  funding of  activities  at the Cerro Gordo  property;  and (c) issued
approximately  $3.1 million in  convertible  debentures.  In  addition,  ADA has
commenced  operation of its unit at Wisconsin Power and Light's  Columbia Energy
Center,  one of two units in  Mississippi,  the second of which is  expected  to
start up in April,  and was  awarded a contract  to  install a unit at  Portland
General  Electric's  Boardman plant. These activities and those in the preceding
paragraph are described in the succeeding paragraphs of this Item 1(a) and below
in Item 1(b).

On April 30, 1997, ESI acquired a majority equity position in ADA by payments to
ADA of $900,000 in cash and a promissory  note in the amount of $1,600,000.  ESI
also acquired an option to purchase the remaining  equity in ADA by the issuance
of 1,716,000 shares of its common stock  exerciseable  during a six month period
commencing  May 1,  1998.  In  December  1997,  ADA  delivered  its first  three
commercial  units;  one to Wisconsin  Power and Light Company ("WPL") and two to
Mississippi Power Co. ("MPC"),  in accordance with contract terms.  Injection of
chemical at the WPL  installation  commenced in January,  1998 and was suspended
after concerns arose from the results of  co-injection of other  chemicals.  The
WPL unit  went  back on line in the  first  half of  February  1998 and has been
operating satisfactorily since that time. One unit at MPC commenced injection in
the first half of March 1998,  while the second unit is awaiting  completion  by
MPC of  necessary  electrical  and  piping  connections.  Based  on the  current
schedule for  completion of these items,  the  remaining  unit is expected to be
placed in operation in April.  Although tests over several months were performed
satisfactorily at other utility  companies,  there can be no assurances that any
of the units will perform as anticipated.

ESI's solvent extraction  facility in Calgary,  Alberta,  recovered uranium from
phosphoric  acid  during  the  period  from 1983  through  1987.  Uranium  oxide
production was suspended in the fall of 1987 when the adjacent  fertilizer plant
from which the  facility  received  its feed  stock  suspended  operations.  The
contract  under  which  the  uranium  was  sold  was  modified  in 1990 to allow
unrestricted  alternative  use of the facility.  Revamp of the facility to allow
production of purified  phosphate  products was  completed in 1997.  The Calgary
facility is routinely  producing  technical grade  phosphoric acid and steps are
underway for production of food grade product targeted for completion by the end
of the  second  quarter  in 1998.  Production  and sales of  products  have been
increasing  monthly as ESI  establishes  and  expands its market  position.  ESI
intends to pursue the recovery of other valuable elements in the feed stock once
routine  production and cash flow are achieved.  Initial  investigation  of such

                                       1

<PAGE>



recovery potential is estimated to cost between  $20,000-$50,000 and is expected
to be funded out of internally  generated cash flow.  There can be no assurances
that Registrant will be able to achieve its anticipated goals.

In January 1997, ESI finalized  agreements with Yankee Atomic  Electric  Company
and Vermont  Yankee  Nuclear  Power  Corporation  (the "Yankee  Companies")  and
acquired an option for $100,000 to  terminate  their  liability  position in the
Calgary  facility   recorded  in  the  consolidated   financial   statements  at
$9,382,000.  The liability  arose from  prepayments by the Yankee  Companies for
uranium.  In  October  1997,  ESI  exercised  the  option by paying  the  Yankee
Companies  $1,150,000  and granting them a 10 year non-cost  bearing net profits
royalty on activities  at the Calgary  facility.  Future  payments to the Yankee
Companies under the royalty are capped at a total of $4.85 million,  and ESI can
purchase  the royalty  interest  for $3 million  plus $50,000 per year after the
exercise date to a total of not more than $3,250,000.

During 1997,  through ESI's  Venezuelan  company,  VENESI,  ESI  continued  gold
exploration  and  development  activities  in  Venezuela.  ESI also  owns 83% of
another company, Minera Antabari C.A. ("Antabari"), which received a contract on
a 1200 acre site on the Guyana Shield in March 1992. To date,  geologic mapping,
geochemistry of drainages,  soils and old workings,  and detailed  trenching and
pitting of several  mineralized  zones has been performed.  VENESI is discussing
further  exploration work at this contract area with third parties.  Three other
contracts  were  filed  for in 1994 and  refiled  in 1995  with  the  Venezuelan
Ministry of Energy and Mines  ("MEM").  VENESI is awaiting  response from MEM on
these  filings.  Several  other sites with  existing MEM  concessions  are being
evaluated,  and VENESI is  negotiating  with the current  concession  holders to
obtain rights to further  explore these areas. In 1998 VENESI expects to conduct
surface  exploration  on the  concessions,  currently  filed for,  when they are
granted, and other areas, if any, obtained from ongoing negotiations.

In January 1998, ESI and VENESI signed a letter  agreement with CODSA 14 S.A. to
acquire exclusive rights to explore and mine its diamond concession.  Located in
southeastern Venezuela near the Brazil border, the concession covers 6,177 acres
(2,500  hectares).  Exploratory  mining of the  alluvium on the  concession  has
recently  produced  diamonds in the two to five carat range in addition to minor
gold production. ESI is obligated to make payments of cash and stock valued at a
total of $50,000 during the 6- 8 month exploration  period,  after which it will
have earned the exclusive  right to lease the  concession.  The lease terms call
for a sliding  scale  royalty that ranges from 5-20% based on the size and grade
of the  diamonds  mined.  ESI expects to continue  exploration  and  exploration
mining of the concession while it evaluates other potential in the area.

In 1996, ESI entered into an agreement with Martin Trost Associates  ("MTA"),  a
Colorado joint venture,  which will allow it to earn up to an 80 percent working
interest in the Cerro  Gordo  property in Inyo  County,  California.  In January
1998, after receiving the evaluation and analysis of trench samples taken on the
property,  ESI gave the required 30 day notice of its intent to cease funding of
the joint  venture  activities  at the  property.  The  trench  results  did not
demonstrate  sufficient  continuity  in  gold-bearing  mineralization  in  ESI's
evaluation to warrant  further  exploration  efforts given  currently  weak gold
prices.

During 1997, ESI issued $8,785,000 of convertible  debentures (the "Debentures")
for which ESI received net proceeds of approximately  $7.9 million.  Interest on
the Debentures is payable  quarterly.  Of the total Debentures,  $7,785,000 bear
interest at 4%, are convertible at any time following 45 days after the issuance
thereof,  and mature on March 31, 1998 with regard to $550,000,  August 31, 1998
with regard to $1,990,000, October 31, 1998 with regard to $2,100,000, and March
31,  1999  with  regard  to the  balance  of  $3,145,000.  The $7.8  million  of
Debentures are  convertible  into shares of common stock based on a 25% discount
from the market price of the common stock at the time of conversion,  but not in
excess of $3.25 per share. The remaining  $1,000,000 in Debentures bear interest
at 10%,  are secured by certain  assets of ESI,  are  convertible  at a weighted
average rate of $3.12 per share and mature on March 31, 2000. ESI is required to
register the shares  underlying  the  Debentures,  and may  repurchase  the $7.8
million in Debentures at a 25% premium under certain circumstances.  As of March
19, 1998, $7,744,000 of the Debentures had been converted to common stock.

In January and February 1998, ESI issued $3,080,845 of 4% convertible debentures
(the "1998  Debentures")  for which ESI received  net proceeds of  approximately
$2,830,000.  Interest is payable quarterly.  The 1998 Debentures are convertible
at any time  following 45 days after the issuance  thereof and mature on January
31, 1999. The Debentures are convertible  into shares of common stock based on a
25%  discount  from  the  market  price  of the  common  stock  at the  time  of
conversion,  but not in excess of $2.00 per share.  ESI is  required to register
the shares underlying the Debentures, and may repurchase the Debentures at a 25%
premium under certain circumstances.

                                       2

<PAGE>


     (b) Business of Issuer.
Registrant is a diversified  mineral  exploration and  development  company with
production of purified phosphate  products in Calgary,  and through ADA provides
proprietary  flue  gas  conditioning  technology  for air  pollution  abatement.
Registrant  owns  a  processing  facility  in  Calgary,  Alberta,  Canada  which
recovered  uranium oxide from  phosphoric  acid and for which the  production of
purified  phosphate products commenced in June 1997; a majority interest in ADA;
alunite  properties  which contain  alumina,  sulfur and potash;  other domestic
properties  containing  gold,  vanadium and  phosphate;  and controls  prospects
containing copper, molybdenum, silver, lead and zinc.

Registrant,  through  its 100%  ownership  of  Recursos  Minerales  VENESI  C.A.
("VENESI"),  83%  ownership in Minera  Antabari  C.A.  ("Antabari")  and its 67%
ownership in Recursos Minerales ESIGEO C.A. ("ESIGEO") is exploring, evaluating,
acquiring and plans to develop diamond and gold resources in Venezuela.

                      Calgary Solvent Extraction Facility
In  1997,  ESI  commenced  production  of  purified  phosphate  products  at the
facility.  The facility  currently  produces purified  phosphoric acid (PPA) and
by-products. Earth Sciences Extraction Company ("ESEC"), a wholly-owned Canadian
limited partnership of ESI, operates the solvent extraction facility in Calgary,
Alberta.

ESEC's Facility
The phosphoric  acid treatment  facility was maintained on a standby basis since
its  uranium  recovery  operations  were  suspended  in 1987  when the  adjacent
fertilizer plant, which had supplied feedstock,  suspended  operations.  Certain
contractual  restraints  and lower  uranium  prices  have  made the  stand-alone
recovery of uranium from other feedstock sources  uneconomic.  ESEC modified the
facility to purify  superphosphoric  acid  ("SPA") to a technical  grade PPA and
manufacture  by-products.  ESI has negotiated a renewable annual supply contract
with Farmland Industries  ("Farmland") and a supply arrangement with Agrium U.S.
Inc.  ("Agrium") to supply the estimated  requirement  of SPA. The contract with
Farmland contains  provisions that allow extension of the contract in the future
or termination upon a 90 day written notice. There can be no assurances that the
Company  will be able to extend  this  contract  and supply  arrangement  in the
future and/or obtain sufficient  quantities of SPA at reasonable  prices. In the
future,  it is anticipated that phosphate rock from an open pit deposit owned by
ESI may be processed  under a tolling  arrangement to provide  feedstock for the
Calgary plant. (See Item 2(a) below).

Market for Purified Phosphoric Acid
Phosphorus  in the form of purified  phosphoric  acid,  H3PO4 (PPA),  is a basic
commercial  chemical  essential to a broad  variety of  industrial  and consumer
applications.  PPA is an important inorganic acid used in foods, cola beverages,
cleaning  solutions,  fertilizers,  fire retardants and metal treatments,  among
other  uses.  ESEC  competes  with four  North  American  PPA  producers  in the
estimated  700,000 tons P2O5 industrial  market where an estimated  200,000 tons
P2O5 of direct  consumption PPA is sold. ESEC is the sole producer in Canada and
the only producer in western North  America.  ESEC's  targeted  market  segments
include those where growth is 10% or more per year, where the predominate  users
are in ESEC's freight  advantage  area, and the large  Minneapolis/Chicago  area
market.  ESEC is marketing PPA by attempting to match other  producers'  quality
but with lower  prices  and  improved  service.  If and when  routine  levels of
production are achieved, it is anticipated that cost advantages will be realized
from the use of less expensive purification through solvent extraction and lower
freight costs.  By-products are being sold in local fertilizer  markets.  All of
the facility's  production is being marketed  through an agreement dated January
1, 1997 with Twin-Kem International,  Inc., a Colorado corporation ("TKI") whose
principals  have  over 60 years of  combined  experience  in the  marketing  and
distribution of industrial and agricultural  chemicals.  The agreement is for an
automatically  renewing one-year term where TKI receives a commission of between
$2.00-$5.00  per ton of product  sold.  A  prepayment  of  $100,000  toward such
commission was made in 1997,  consisting of 50% cash and 50% stock. There can be
no assurances  that actual sales  recognized by ESEC will equal the  anticipated
volumes.

The growth and  profitability  of operations at the ESEC facility in Calgary are
dependent upon, among other things,  the sale of purified  phosphate products to
chemical  distributors  and  customers.  Registrant  has limited  experience  in
marketing  industrial  chemicals  and is  relying on  consultants  and others to
initiate and maintain sales contacts.  PPA is not typically sold under long-term
contracts,  and Registrant  does not have any long-term  commitments to purchase
its  planned  products.  There  can be no  assurances  that  Registrant  will be
successful in its future sales efforts.

                                       3

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Solvent Extraction Process
The facility  produces PPA using an  environmentally  clean  solvent  extraction
process employing tributyl phosphate with a kerosene diluent.  The basic process
is well  established  in the  industry and believed by ESEC to be free of patent
conflicts.  The ESEC  process was verified  for several  feedstocks  by numerous
laboratory bench tests and continuous recycle pilot plant runs. The studies show
that a competitive PPA can be produced from any fertilizer grade phosphoric acid
feedstock with extraction  efficiencies of 70 to 90%. The remaining  material is
being sold in local markets for its contained  phosphate  values.  ESEC believes
that no significant waste will be generated at the ESEC facility.  However,  the
ESEC process has not been proven on a long-term  commercial basis at the Calgary
plant.  Although ESI has performed numerous  bench-scale and pilot plant test of
the process, there can be no assurances that the process will yield satisfactory
results when employed on a continuing commercial scale.

Geographic Expansion
The growth and profitability of operations at the solvent extraction facility in
Calgary will be dependent  upon,  among other things,  the ability to become the
predominate  supplier of PPA in the geographic region surrounding Calgary and on
the US West Coast, and to sell on an increasing basis to the Minneapolis/Chicago
area.  There can be no  assurance  that  ESEC's  efforts to expand  sales can be
accomplished on a profitable basis.

Competition
ESEC's  purified  phosphate  products  will be sold in  markets  that are highly
competitive.  The principal  competitive factors include product quality,  price
and distribution capabilities. There can be no assurances that ESEC will be able
to compete  successfully  against current and future  competitors based on these
factors.  ESEC will compete with several domestic and  international  producers,
many of whom have substantially greater financial, production,  distribution and
marketing  resources  than ESEC.  Increased  competition  could  result in price
reductions,  reduced margins and loss of market share, all of which could have a
material adverse affect on the ESEC business, financial condition and results of
operations.

If there is no demand, or the demand is less than projected,  for ADA's services
for flue gas conditioning,  Registrant will not recognize the synergies expected
from its  acquisition,  because  ADA will  not be able to  utilize  Registrant's
purified phosphate products.

                          ADA Environmental Solutions
In 1997, ESI acquired a majority equity position in ADA Environmental  Solutions
LLC ("ADA") through a combination of stock and cash. The acquisition  agreement,
signed April 30, 1997 provided for (i) an immediate cash payment of $400,000 for
a 4.8% equity interest,  (ii) a combination of $500,000 in cash and $1.6 million
in  notes  to be paid  at the  scheduled  closing,  for  the  acquisition  of an
additional  46.2%  interest in ADA, and (iii) an option to acquire the remaining
equity interests (49%) in ADA  exerciseable  during the six months following May
1, 1998 by issuance of 1,716,000  shares of stock.  Although at the current time
ESI intends to  exercise  its option,  the  principals  of ADA have an option to
require  ESI to sell  its 51%  interest  in ADA for the  price  paid by ESI plus
interest in the event ESI does not exercise its option.

The acquisition  was prompted by synergism  involving  products  produced by the
solvent  extraction  facility in Calgary.  ADA utilizes product from the Calgary
facility and other sources in a new  proprietary  technology  designed to reduce
particulate emissions from plants burning low-sulfur coal.

ADA's Technology and Services
ADA has developed a technology for conditioning flue gas streams from combustion
sources  that allows  existing  air  pollution  control  devices to operate more
efficiently.  ADA,  through  various  suppliers  and  contractors,  manufactures
engineered  skids  for each  individual  application.  The skids  mix,  pump and
monitor the feed of a proprietary  chemical blend. The chemical blend is applied
to the flue gas stream by a pressurized  system of specially designed lances and
nozzles. Such treatment of the flue gas stream alters the physical properties of
the fly ash particles contained therein by decreasing  particle  resistivity and
increasing particle cohesion. These alterations allow the existing electrostatic
precipitator  (ESP)  or  baghouse  to  more  effectively  collect  such  fly ash
particles  that would  otherwise  escape  into the  atmosphere.  ADA also offers
consulting services to assist utilities in planning and implementing  strategies
to meet new government  emission standards  requiring  reductions in both sulfur
dioxide and nitrogen  dioxide.  ADA's  technology  also has  application  in the
cement and petroleum industries where particulate emissions are being or need to
be controlled.


                                       4

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Market for ADA Services
It is expected that the 1990 Clean Air Act Amendments  will result in as many as
600 coal-fired  utility boilers switching to low-sulfur coal by the year 2000 to
meet the more stringent sulfur dioxide emission standards. Utilities that switch
to low-sulfur  coals will generally  require flue gas  conditioning  to meet the
federal  standards  unless they make costly equipment  changes.  ADA has entered
this market with its proprietary  non-toxic chemical  conditioner,  which offers
both technical and economic  advantages over the hazardous  chemicals  currently
being used.  ADA's own sales staff markets its  technology  through trade shows,
mailings and direct contact with potential customers.

Competition
ADA's primary  competition is the conventional flue gas conditioning  technology
using either sulfur  trioxide or a combination  of sulfur  trioxide and ammonia.
This  technology  has been  available  commercially  since the 1970's and can be
obtained from a variety of suppliers and in a variety of forms.  Conditioning of
fly ash by injecting  small  amounts of sulfur  trioxide  into the flue gas is a
well proven technique for improving performance of the ESP. Such sulfur trioxide
conditioning  loses its  effectiveness in application with temperatures over 350
degrees F. The competitive  advantages of ADA's conditioning  technology include
an  effective  temperature  range of 375  degrees F to 900  degrees  F; a simple
injection  system;  a  non-toxic  conditioner  that will not become a  secondary
pollutant; and chemicals that are safer and easier to handle on site.

Patents Pending
ADA has filed for three patents related to different  aspects of its technology.
The patent  applications are in various stages of review.  ADA does not consider
the  granting  of any  patents on such  applications  as critical to the ongoing
conduct of its business.

                           Venezuelan Gold Activities
ESI commenced initial  exploration  activities in Venezuela in the fall of 1988.
No proven  commercially  viable  reserves have been discovered on the properties
discussed.

The decree which empowered the Corporacion Venezolana de Guyana ("CVG") to issue
land  contracts in the Guyana  Shield has been  determined  to be illegal by the
Venezuelan courts. The Ministry of Energy and Mines ("MEM") is expected to issue
concessions  to  replace  the  over 450  existing  CVG  contracts  after a study
commissioned  to evaluate the existing  contracts'  status is complete and final
legislative  action  annuls the rights  granted CVG.  The SAMI land  contract is
included in this category and it is  anticipated  that its terms will improve as
the new concession terms will be more favorable.  The three applications for new
land  contracts  discussed  below are included with some 300 other  unacted-upon
requests  that have  accumulated  with CVG since  March  1994,  when CVG stopped
signing contracts.  New applications to MEM have been made for these three areas
and assurances have been obtained that they will receive  priority when they are
ultimately  considered.  Due to political  complexities of coordinating land use
between MEM and  designated  regions and states,  it is uncertain when these new
applications will be acted upon.

SAMI Area Contract
Antabari  was formed in 1991,  a  Venezuelan  company of which ESI owns 83%.  In
November  1991,  Antabari  filed for a contract  with CVG for 488 hectares to be
explored  and  exploited  for gold.  The area,  called SAMI for San  Miguel,  is
located  southeast of the town of Upata,  Bolivar  state,  Venezuela in the open
country of the savannas,  and is readily  accessible from established roads. The
contract,  which was  issued  in March  1992,  provides  a two year  period  for
exploration work and to prepare a plan for  exploitation.  An extension has been
granted to complete  further  exploration  work. The contract  requires  certain
financial  guarantees with regard to exploration and  reclamation,  and requires
that the area be reduced by one-half at the end of the exploration period.

Antabari has performed  geologic mapping,  geochemistry of drainages,  soils and
old workings,  and trenching of several  mineralized  zones. One such zone has a
continuity of over 600 feet with a width of 40 feet and has yielded values of up
to 1.6 ounces per ton of gold.  Additional  sampling and analysis from extensive
pitting show a large (8 acre) anomalous gold area, clearly open to the north and
east. Drilling and further sampling will be necessary to determine the potential
of the area. ESI is evaluating this next phase and/or a sale to third parties at
this time.

Pending Applications
In 1994,  formal  applications were made to CVG, which in 1995 have been renewed
in applications to MEM, to acquire exclusive mineral exploration rights on three
new land areas located in the Bolivar state in southeastern  Venezuela.  ESI has
been  advised that the filings  establish  priority  for the areas  sought.  The

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<PAGE>


Company is very optimistic about the potential these areas hold for further gold
exploration  and  exploitation.  The areas were first  identified  as  potential
targets through regional geochemistry that defined anomalous occurrences of gold
and associated  minerals,  and legends of past  production by primitive  methods
which have  historically  been key to  exploration  in remote areas.  Queries of
natives and  sampling of stream  sediments  has  allowed  selection  of the best
targets from a 130 square km area that was investigated.

Each of the three application areas cover 500 hectares (approx. 1200 acres). The
first concession area is known as Apicharai,  located about 165 km from the town
of La  Paragua  on a small  tributary  to the  Antabari  river with a history of
panning and small scale hydraulic  mining.  The second concession area, known as
Man-cai,  is located in a remote area near the  Brazilian  border  accessible by
boat from the La Paragua river. The third concession area, known as Manaima,  is
located 50 Km from the town of La Paragua.

Specific work programs are being formalized for initial detailed  exploration of
the above mentioned  areas. The plans provide for the building of an airstrip to
facilitate access and  transportation  of equipment into Apicharai,  Man-cai and
other prospects. Access is now being accomplished via river routes.

The primary objectives of the 1998 plans are to determine as quickly as possible
the  nature  and  extent  of  diamond  and gold  mineralization  on the CODSA 14
concession and the anticipated new land  concessions,  and to continue to define
those additional areas where future filings will be made. Activities may include
pitting, surface geochemistry, geologic mapping and trenching.


                 Mineral Properties and Other Business Matters
During 1997 Registrant  maintained its ownership position in the several mineral
interests it holds.  The mineral  interests  maintained  by  Registrant  include
significant resource interests in alumina,  gold,  vanadium,  potash and sulfur,
and prospects for copper/molybdenum and silver (see Item 2 below).

Raw Materials.  Raw materials,  as the term is generally used, are not essential
to Registrant's mineral acquisition and development activities performed for its
own  account.  However,  Registrant's  commercialization  of its  properties  is
dependent  upon  securing  adequate  supplies  of energy  and  water.  Continued
production of PPA at the Calgary facility will require adequate  supplies of SPA
feedstock.  Adequate  supplies of this material are  currently  available in the
required  quantities  and at reasonable  prices.  There can be no assurance that
such availability will continue in the future.

Patents,  Licenses  and  Franchises  Registrant  holds  no  patents,   licenses,
franchises  or land contract  which it considers  material in light of its other
assets.  However,  Registrant holds for itself,  and in association with others,
Federal Potassium Prospecting Permits,  State Potash and Alunite Leases, Federal
Potassium   Preference  Right  Leases  and   Applications,   Federal   Phosphate
Prospecting  Permits,  Federal  Phosphate Leases,  State Phosphate  Leases,  fee
mineral rights and other  exploration and mineral  interests which are the basis
for Registrant to explore and develop the properties subject thereto. In certain
instances such mineral interests give preferential  leasing rights to Registrant
upon  location  and  demonstration  to the  US  Geological  Survey  Conservation
Division  that the  deposit  is a  "valuable,  workable  deposit  in  commercial
quantities".

Competition  and Scarcity of Mineral Lands.  Many companies and  individuals are
engaged in mineral  exploration and development,  including  large,  established
mining companies with substantial  capabilities and long earnings records. There
is a limited  amount of desirable  mineral lands  available  for claim  staking,
lease or other  acquisition  in the United  States  ("US"),  Venezuela and other
areas where ESI contemplates conducting exploration activities.  ESI may be at a
competitive  disadvantage in acquiring mineral  properties since it must compete
with these  individuals  and  companies,  many of which have  greater  financial
resources  and larger  technical  staffs than ESI.  From time to time,  specific
properties or areas,  which would otherwise be attractive to ESI for exploration
or  acquisition,  are  unavailable  due to their  previous  acquisition by other
companies.

Fluctuation in the Price of Minerals.  The market price of minerals is extremely
volatile and beyond the control of ESI. Gold prices are generally  influenced by
basic  supply/demand  fundamentals.  The market dynamics of supply/demand can be
heavily  influenced by economic  policy,  i.e.,  central banks  sales/purchases,
political  unrest,  conflicts  between nations,  and general  perceptions  about
inflation.  Fluctuating  metal  prices  may have a  significant  impact on ESI's
results of operations  and operating cash flow.  Furthermore,  if the price of a
mineral should drop dramatically,  the value of ESI's properties which are being
explored or developed  for that mineral  could also drop  dramatically,  and ESI
might not be able to recover its investment in those properties. The decision to

                                       6

<PAGE>


put a mine into  production,  and the commitment of the funds necessary for that
purpose,  must be made long before the first  revenues from  production  will be
received.  During the last five years,  the average  annual market price of gold
has  fluctuated  between $300 per ounce and $384 per ounce.  Price  fluctuations
between the time that such a decision is made and the commencement of production
can change  completely  the  economics  of the mine.  Although it is possible to
protect  against price  fluctuations  by hedging in certain  circumstances,  the
volatility  of  mineral  prices  represents  a  substantial  risk in the  mining
industry  generally  which no amount of  planning  or  technical  expertise  can
eliminate.  ESI is not involved in, nor does it expect to enter into any hedging
activities

Environmental  Controls.  Compliance with environmental quality requirements and
reclamation laws imposed by federal, state,  provincial,  and local governmental
authorities may necessitate  significant capital outlays,  may materially affect
the economics of a given  property,  or may cause material  changes or delays in
ESI's intended activities. The Secretary of the Interior has directed the BLM to
propose amendments to surface management  regulations that impose more stringent
reclamation and environmental protection requirements on mining operations.  The
extent of the  changes,  if any,  which may be made by the BLM is not  presently
known, and the potential impact on ESI as a result of future  regulatory  action
is difficult to predict. New or different environmental standards imposed by any
governmental authority in the future may adversely affect the ESI's activities.

United States Federal and state  environmental laws and regulations  potentially
applicable  to mining  exploration,  development  and  operations  of Registrant
include:  (a) the assessment of  environmental  impacts pursuant to the National
Environmental Policy Act and its state counterparts;  (b) the Endangered Species
Act and any comparable state laws; (c) water quality laws and regulations  which
address  impacts  on waters of the  United  States or a state;  (d)  solid,  and
possibly  hazardous,  waste laws and  regulations  to the  extent  that waste is
generated as a result of activities  on the  property;  (e) air quality laws and
regulations  if air emissions  result from site  operations;  and (f) mined land
operational  and  reclamation  requirements.  In addition to the  imposition  of
requirements which may impact operations,  a number of these  environmental laws
and regulations impose permitting requirements related both to the initiation of
certain  mining  activities  as well as to the  ongoing  operation  once  mining
commences.  Local regulations in the U.S.  typically are land use related rather
than environmental.  Although  environmental  regulatory costs to date and those
expected in 1997 are not significant, they may become substantial in the future.
Such costs are considered a part of the ordinary costs of Registrant's business.

Uncertainty of Title.  Several of the ESI's mining  properties  which are in the
United  States are  unpatented  mining claims to which ESI, or those under which
ESI holds its rights,  has only  possessory  title.  Because title to unpatented
mining claims is subject to inherent uncertainties, it is difficult to determine
conclusively  ownership  of such  claims.  Since a  substantial  portion  of all
mineral  exploration,  development and mining in the United States now occurs on
unpatented  mining claims,  this uncertainty is inherent in the mining industry.
In addition,  in order to retain title to an unpatented  mining  claim,  a claim
holder  must have met  annual  assessment  work  requirements  ($100 per  claim)
through  September  1,  1992 and must have  complied  with  stringent  state and
federal  regulations  pertaining  to the filing of assessment  work  affidavits.
Moreover,  after  September  1,  1992,  the right to locate or  maintain a claim
generally is  conditional  upon payment to the United  States of a rental fee of
$100 per  claim  per  year  for  each  assessment  year  instead  of  performing
assessment work. State law may, in some instances,  still require performance of
assessment work.

The present status of the ESI's  properties as unpatented  mining claims located
on public lands of the U.S.  allows the claimant the exclusive right to mine and
remove  valuable  minerals,  such as  precious  and base  metals and  industrial
minerals,  found  therein,  and also to use the  surface of the land  solely for
purposes  related to mining and processing the  mineral-bearing  ores.  However,
legal  ownership  of the  land  remains  with  the  U.S.  Accordingly,  with  an
unpatented  claim,  the U.S. retains many of the incidents of ownership of land,
the U.S.  regulates use of the surface,  and ESI remains at risk that the claims
may be forfeited either to the U.S. or to rival private claimants due to failure
to comply with  statutory  requirements  as to locations and  maintenance of the
claims.  If there exists a valuable deposit of locatable  minerals (which is the
requirement  for the  unpatented  claim  to be valid in the  first  place),  and
provided  certain  levels of work and  improvements  have been  performed  on an
unpatented  mining claim,  the Mining Law of 1872  authorizes  claimants to then
seek to  purchase  the full title to the  claim,  thereby  causing  the claim to
become the private  property of the claimant.  Such full  ownership  expands the
claimant's  permissible  uses of the property (to any use authorized for private
property)  and  eliminates  the need to comply with  maintenance  and  reporting
requirements  necessary to protect  rights in an  unpatented  claim.  At present
there is a statutory moratorium in effect prohibiting the Department of Interior
from  accepting and  processing  new  applications  for purchase of fee title to
mining claims.  The moratorium is likely to continue  indefinitely  but does not
affect the ability to hold and develop valuable  deposits by means of unpatented
mining claims.


                                       7

<PAGE>


Proposed  Legislation  Affecting  the  Mining  Industry.  For the  last  several
Congressional  sessions,  bills  have  been  repeatedly  introduced  in the U.S.
Congress,  which would supplant or radically  alter the provisions of the Mining
Law of 1872.  As of December  31, 1997,  no such bills have  passed,  although a
number of differing and sometimes conflicting bills are now pending. If enacted,
such legislation  could  substantially  increase the cost of holding  unpatented
mining  claims and could  impair the  ability of  companies  to develop  mineral
resources  on  unpatented  mining  claims.  Under the terms of certain  proposed
legislation,  the ability of companies to obtain a patent on  unpatented  mining
claims would be nullified or substantially impaired.  Moreover, certain forms of
such proposed legislation contain provisions for the payment of royalties to the
federal government in respect of production from unpatented mining claims, which
could  adversely  affect the  potential for  development  of such claims and the
economics of operating existing mines on federal unpatented mining claims. ESI's
financial  performance could therefore be affected  adversely by passage of such
legislation.  It is  impossible  to predict  at this  point what any  legislated
royalties  might  be,  but a  potential  three to four  percent  gross  royalty,
assuming a gold price of $300 per ounce,  would have an  approximated  $9 to $12
per ounce impact on ESI's costs of any production from unpatented mining claims.

Uncertainty of Funding for  Exploration.  ESI has funded much of its exploration
and acquisition  activities through joint venture  arrangements,  which minimize
the cost of such activities to ESI and allow it to explore and acquire a greater
number of  properties  than it would  otherwise be able to explore or acquire on
its own.  ESI has also funded a portion of its  exploration  activities  without
joint venture  participation,  resulting in increased costs to ESI. ESI has been
successful  in raising  such funds for its  exploration  activities.  Additional
funding from existing  partners or third parties,  however,  may be necessary to
conduct detailed and thorough evaluations of, and to develop certain properties.
ESI's ability to obtain this financing will depend upon, among other things, the
price of gold and the  industry's  perception  of its future  price.  Therefore,
availability  of funding is  dependent  largely  upon  factors  outside of ESI's
control, and cannot be accurately predicted. ESI does not know from what sources
it will  derive any  required  funding.  If ESI is not able to raise  additional
funds  (as to  which  there  can be no  assurance),  it will not be able to fund
certain exploration activities on its own.

Uncertainty of Development  and Operating  Property  Economics and Ore Grades at
Development  Properties.  Decisions as to whether any of the mineral development
properties  which ESI now holds or which it may  acquire in the  future  contain
commercially  minable deposits,  and whether such properties should therefore be
sold or brought into production, depend upon the results of exploration programs
and/or feasibility  analyses and the recommendations of duly qualified engineers
or geologists.  Such decisions  involve  consideration and evaluation of several
significant factors,  including, but not limited to, the (a) costs of bringing a
property  into   production,   including   exploration  and  development   work,
preparation of production  feasibility  studies and  construction  of production
facilities,  (b)  availability  and costs of  financing,  (c)  ongoing  costs of
production, (d) market prices for the mineral to be produced, and (e) the amount
and grades of reserves or mineralized  material.  There can be no assurance that
any of the  development  properties now held by ESI, or which may be acquired by
ESI, contains a commercially minable mineral deposit, and therefore no assurance
that ESI will ever  generate a positive cash flow from the sale of or production
operations  on such  properties.  In  addition,  once a property  is sold with a
retained  royalty or placed into  production,  risks still exist that the amount
and grade of its reserves will not actually be as predicted.  To the extent that
lower amounts and/or grades of reserves are experienced, costs per unit produced
and profitability can be adversely  affected.  Depending upon the extent of such
an  effect  in any of ESI's  properties,  ESI  could  incur a  writedown  on its
investment in any such property.

Seasonality  of Activities.  The activities of Registrant  performed for its own
account are not seasonal, although winter weather may limit certain activities.

Dependence on Major  Customers.  Registrant's  mineral  exploration and property
acquisition activities are not dependent upon one or a few major customers.  The
search  for  and  commercialization  of  economic  mineral  deposits  is  highly
competitive.  Large companies having greater financial resources than Registrant
and many  small  mining  companies  are  active  in  acquiring,  evaluating  and
developing   mineral  resource  prospects  in  the  western  United  States  and
Venezuela.

Research and Development Activities.  Registrant spent approximately $98,000 and
$109,000  on  research  and  development   activities  related  to  the  Calgary
extraction facility during 1997 and 1996, respectively.  ADA spent approximately
$127,000 on research and development  activities related to further  development
of its technology during 1997.

Employees.  As of December  31,  1997  Registrant  employed 5  personnel  at its
Golden, Colorado,  offices and 25 full-time at the Calgary facility. ADA employs
12 people at its offices in  Littleton,  Colorado  and 2 others at  locations in
Alabama and New  Hampshire.  In addition,  other  personnel  were  employed on a
contract basis for specific project tasks.


                                       8

<PAGE>



Item 2.  Description of Property.
Registrant  owns,  controls  and  participates  with others in mineral  property
interests and mineral property exploration and development programs in Colorado,
Idaho, Montana, Nevada, Utah, and Venezuela. The following property descriptions
contain deposit references according to the indicated  definitions,  although it
has not been proven that any of these deposits are commercially viable. In-house
studies  for  several  of the  undeveloped  properties  indicate  technical  and
economic feasibility,  although Registrant is not currently pursuing development
of any of its  exploration  properties  at this time.  The  following is summary
information regarding  Registrant's  principal properties.  For purposes of this
item,  Mineral Deposit or Mineralized  Material is a mineralized  body which has
been delineated by appropriately  spaced drilling and/or underground sampling to
support a sufficient tonnage and average grade of metal(s).  Such a deposit does
not qualify as a reserve, until a comprehensive evaluation based upon unit cost,
grade,  recoveries,  and other  material  factors  conclude  legal and  economic
feasibility.

Exploration Properties
(a)Vanadium/Phosphate Properties.
Registrant's  interests in the  properties  consist of fee  ownership,  State of
Idaho mineral  leases,  Federal  leases and lease  applications  and leases with
private  parties.  The properties are located near Paris and Bloomington , Idaho
and cover  approximately  3,000 acres.  To date,  drill  testing on the southern
portion  of the  deposit  show  tonnage  of  approximately  53  million  tons of
mineralized  material.  The  grade of the  upper  bed  material  of the block is
calculated  to be 25% P2O5 over a thickness of 9 feet and the grade of the lower
(main)  bed  material  is  calculated  to be 30% P2O5  over a 6 foot  thickness.

Metallurgical  test work on the  vanadium  bed has  resulted  in a patent  being
issued to Registrant regarding the extraction techniques which were developed as
a result of such work. Economic feasibility calculations show that production of
vanadium from the property is commercially feasible. Registrant is investigating
plans for  development  of the property,  however there can be no assurance that
marketing and financing arrangements can be obtained. This deposit may provide a
source for the purified  phosphoric acid production at the Calgary facility (See
Item 1(a) above).

(b)  Emigrant Property.
In 1987 Registrant  acquired fee ownership of two patented lode mining claims in
the Emigrant Peak area, Park County, Montana containing  approximately 38 acres.
Registrant  also owns two other patented  placer claims  containing 37 acres and
holds 13  unpatented  mining  claims in the same area.  This block of contiguous
mining  claims  contains  copper,  molybdenum,   gold,  silver,  lead  and  zinc
mineralization  which has not yet been fully delineated.  All necessary payments
were made to hold the unpatented claims in 1997.

(c)  Alunite Resources.
Alunite is a source of alumina (the raw material of aluminum), potassium sulfate
fertilizer,  sulfuric acid and sulfur.  Acquisition of Federal  alunite  mineral
rights is accomplished  through Federal Potassium Preference Right Leases issued
under Section 4 of the Leasing Act of February 7, 1927.

     (1) "LC" Alunite Property.
The property is located inn southwestern  Colorado,  about 7 miles south of Lake
City, Colorado and consists of approximately 1,667 acres. Results of exploration
work to date show a total of 61.1  million  tons of  mineralized  material.  The
grade of the  material is  calculated  to average  approximately  39.6%  alunite
(approximately 14.7% alumina).

In 1978,  Registrant  applied for a Preference  Right Lease for potassium on the
property (a "PRLA"),  in 1979  submitted the "initial  showing"  required in the
lease  application and in 1982 submitted the operating plan for an environmental
impact  assessment.  Approval of the project was recommended by a Bureau of Land
Management advisory panel. However, in 1985 a Congressional resolution suspended
all  Preference  Right Lease activity in Wilderness  Study Areas.  Until further
Congressional  action is taken,  progress on the project will be restricted.  In
1991, Registrant received notice from the Department of Interior that the Bureau
of Land Management  considers the PRLA as a valid existing right with respect to
any future  wilderness  designation.  Registrant  relinquished its 48 unpatented
mining claims covering the alunite property in 1993.


                                       9

<PAGE>



     (2)"NG" Property and Other Utah Alunite Interests.
The properties are located within the southern end of the Wah Wah Mountain range
in southwestern Utah, approximately 38 miles from Milford, Utah. Registrant owns
Federal  leases on 680 acres.  All required  lease  payments  were made in 1997.
Results of exploration and drilling  programs on the properties to date show 129
million tons of mineralized material with a grade calculated to be 37.9% alunite
(approximately   14.03%   alumina)  with  an  additional  287  million  tons  of
mineralized material with average grades calculated to range from 33.5% to 39.4%
alunite (approximately 12.4% to 14.6% alumina).

Other Properties
(d) San Luis Property.
Registrant  owns an 800 acre site near San Luis,  Colorado  on which gold mining
was conducted from 1991 through 1996 and from which Registrant  received royalty
income during that period. Mining and milling activities were completed in 1996.
The property was reclaimed in accordance  with the plan approved by the State of
Colorado  during  1997.  Registrant  is  evaluating  alternatives  for  sale  or
development of the real estate value of the property.

(e) Calgary Solvent Extraction Facility.
Registrant owns a hydrometallurgical  solvent extraction facility which was used
to extract uranium from  phosphoric acid from June 1983 through  September 1987,
when the adjacent  phosphoric  acid  fertilizer  plant supplying feed stock shut
down. (See Item 1(a) and 1(b) above). The facility occupies a 20,000 square foot
building and is located in southeast  Calgary,  Alberta on a 12 acre site leased
from the adjacent landowner.

Item 3.  Legal Proceedings.
Registrant knows of no reportable pending legal matters involving  Registrant or
its subsidiaries.

Item 4.  Submission of Matters to a Vote of Security Holders.
None.


                                    PART II

Item 5.  Market for Common Equity and Related Stockholder Matters.
(a)  Market Information.

Registrant's common stock trades on The NASDAQ Small-Cap Market under the symbol
ESCI.

                                 Price  Ranges (closing high and low bids)
                                       1997                      1996
1st Quarter                     $ 2.94   -  3 94           $ 1.63  -  2.56
2nd Quarter                       2.69   -  3.69             1.63  -  4.31
3rd Quarter                       2.06   -  3.13             1.50  -  3.75
4th Quarter                       1.06   -  2.19             1.75  -  3.88

The  price  ranges  shown  are based on NASDAQ  quotations  as  reported  by the
National  Association  of  Securities  Dealers,   Inc.  The  quotations  reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.

(b) Holders.
The number of record  holders of common stock,  one cent par value of Registrant
as of March 13, 1998 was  approximately  1,870,  which number  excludes  "street
name" holders.

(c) Dividends.
Registrant has not paid dividends since its inception and there are no plans for
paying  dividends  in the  foreseeable  future.  The  terms  of  the  $1,000,000
debenture  with  Tectonic  Construction  Co.  prohibit  the payment of dividends
without obtaining a written waiver.

(d) Recent Sales of Unregistered Securities.
See Items 1(a) and (b) above for a  description  of the  convertible  debentures
issued by Registrant in 1997 and in January and February of 1998. The debentures
were sold to a limited number of accredited  investors pursuant to the exemption
provided by section 4(2) of the  Securities  Act of 1933.  As of March 19, 1998,
$7,744,000  of such  debentures  issued in 1997 had been  converted to 7,100,144
shares of Common stock of  Registrant.  As of that date,  none of the debentures
issued in 1998 had been converted.  Placement fees totaling $630,000 in cash and
77,850 shares of stock were paid in connection with the convertible debentures.


                                       10

<PAGE>


In January  1997,  Registrant  sold 20,000  shares of its common  stock for cash
consideration  of  $41,720  to an  accredited  investor  in  reliance  upon  the
exemption provided by section 4(2) of the Securities Act of 1933.

Item 6. Management's  Discussion and Analysis of Financial Condition and Results
of Operations.  This Annual Report may contain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933.  Such  forward-looking
statements  may be found in this section and under the heading  "Description  of
Business." Actual events or results could differ materially from those discussed
in the forward-looking statements as a result of various factors including those
set forth below or under the heading "Description of Business."

                        Liquidity and Capital Resources
Management  believes that existing working capital and recent private placements
of  convertible  debentures  are  sufficient to the planned growth in operations
until  positive  cash flow is  achieved  in Calgary  and at ADA,  which are both
anticipated during 1998. The achievement of such positive cash flow is dependent
upon several  factors  including  continued  improvement  of product  quality in
Calgary,  success in marketing phosphate products and meeting competition in the
market  place,  the  failure  in any of  which  could  delay or  frustrate  such
achievement.  For ADA, the  achievement  of positive cash flow is dependent upon
the successful ongoing operation of the unit currently  operating at WPL and the
successful  startup and operation of the 2 units at MPC, delay or unsatisfactory
operations  at  any  of  which  could  delay  or  frustrate  such  achievement..
Additional  funds may be required to fund  expanded  exploration  activities  in
Venezuela (see Item 1(b) above). Private placements of common stock, convertible
debentures  and bank  borrowings  may be  evaluated  to fund such  requirements.
Registrant  received a net of $2.8  million  from the  issuance  of  convertible
debentures in the first quarter of 1998 (see Item 1(a) above).

Based on current estimates, the Calgary facility will require approximately CDN.
$500,000  (U.S.  $350,000) to finalize  modification  for the production of food
grade phosphoric acid.  Registrant  expects to finance those  requirements  from
existing working capital.

Registrant  is  funding  the  majority  of cash  costs  of the  Venezuelan  gold
exploration  activities.  Activities  planned  on CODSA 14,  the  existing  SAMI
contract and on those  concessions  expected to be acquired in the future can be
met  through  existing  working  capital.  Registrant  may raise the  additional
capital,  if and when  needed,  through  further  private  placements  of stock,
convertible debentures and/or joint venture arrangements, if appropriate.

Cash flow used in operations  totaled  $3,178,000  for 1997 versus  $893,000 for
1996.  Cash  flow  from  investing  activities  for 1997  included  funding  and
collections on notes receivable of $50,000,  capital  expenditures of $3,154,000
and the  purchase of  investment  in ADA of $417,000.  Cash flow from  financing
activities in 1997 consisted of payments on  restructuring  of extraction  plant
liability  of  $1,250,000,  payments  on notes  payable  and  long-term  debt of
$886,000,  proceeds  from the issuance of stock of $42,000 and proceeds from the
issuance of convertible  debentures  and notes payable of $8,586,000.  Cash flow
from  investing  activities for 1996 included  funding and  collections on notes
receivable  of $70,000  and capital  expenditures  of  $736,000.  Cash flow from
financing  activities  in 1996  consisted  of  payments  on  notes  payable  and
long-term debt of $9,000,  proceeds from the issuance of stock of $1,055,000 and
proceeds from the issuance of convertible debentures of $899,000.

                             Results of Operations
Revenues from sales totaled $1,468,000 in 1997 with $945,000 of that amount from
ADA and $538,000 from Calgary  phosphate  sales.  ADA's  revenues were less than
anticipated  due to  delays  in the  installation  of  units  at  Wisconsin  and
Mississippi. Sales of phosphate products were also less than targeted because of
the ADA delays and corrosion  experienced  in the Calgary  facility that delayed
the routine production of acceptable  technical grade product.  In 1991, royalty
income from the San Luis gold mine commenced.  Registrant recognized $692,000 in
revenue  from the  production  and sale of gold and silver from the  property in
1996.  Production from the mine ended in November 1996.  Rental income increased
slightly in 1997 due to increased charges to tenants.  Other income increased in
1997 due to an increase in interest  income  earned from  investment of funds on
hand and a legal settlement in the amount of $30,000.

Operating  expenses  increased  significantly  in 1997 as start up expenses were
incurred at activities related to both Calgary phosphate production  ($1,561,000
of the increase) and ADA ($700,000 of the increase).  Consolidated  research and
development   increased  to  $225,000  from   $109,000  in  1996.   General  and
administrative  expenses rose  significantly in 1997 as a result of adding staff
in Calgary for start-up activities ($342,000 of the increase),  consolidation of
ADA's start up  activities  ($699,000 of the  increase),  an increased  investor
relations  program  ($1,597,000  of the  increase)  and adoption of a sabbatical
leave policy during 1997 ($200,000 of the increase).


                                       11

<PAGE>


Registrant's interest expense totaled approximately $3,062,000 for 1997 and only
$82,000 for 1996.  Interest expense includes  approximately  $20,000 in 1997 and
$40,000 in 1996 from the  consolidation  of the Canadian  subsidiary's and ADA's
results.  Included in interest expense for 1997 is a $2,595,000  non-cash charge
representing the 25% discount from market related to the convertible  debentures
issued in 1997.  Registrant will be required to recognize $1,027,000 in interest
expense in the first quarter of 1998 as a result of the  convertible  debentures
issued in January and February 1998.

Extraordinary  gain from debt  restructuring  recognized in 1997  represents the
difference  between the  recorded  liabilities  at the time of  settlement  with
Yankee Companies of $9,382,000 and the settlement  payments totaling  $1,250,000
plus the  remaining  recorded  liability of  $4,850,000,  net of income taxes of
$985,000.  Extraordinary  gain  from  debt  extinquishment  recognized  in  1996
represents  the  difference  between  the  recorded  liabilities  at the time of
settlement with Alberta  Treasury of  approximately  $600,000 and the settlement
payment of $76,000, net of income taxes of $159,000.

                           Impact of Year 2000 Issue
The Year 2000 Issue is the result of computer  programs  being written using two
digits rather than four digits to define  years.  Any of  Registrant's  computer
programs  that have  date-sensitive  software may recognize a date using "00" as
the year 1900 rather than the year 2000.  This could result in a system  failure
or miscalculations  causing  disruptions of operations,  including,  among other
things, a temporary inability to process transactions,  send invoices, or engage
in similar normal business activities.

Based  on a  recent  assessment,  Registrant  determined  that  it  will  not be
necessary  to modify or replace any  significant  portions of its  equipment  or
software  so that its  computer  systems  will  properly  utilize  dates  beyond
December 31, 1999. The Year 2000 Issue is not expected to have a material impact
on the  operations  of  Registrant.  Registrant  does not  expect  to incur  any
material expenses or costs related to the Year 2000 Issue.

Based on a review of the nature and quantity of  transactions  with  significant
suppliers  and large  customers to determine  the extent to which  Registrant is
vulnerable  to those third  parties'  failure to  remediate  their own Year 2000
Issue,  Registrant  has  concluded  that it does  not  materially  rely on third
parties' systems for the continuance of its operations. However, there can be no
guarantee that a failure to convert by another company,  or a conversion that is
incompatible with Registrant's systems, would not have a material adverse effect
on  Registrant.   Registrant   has  determined   that  it  has  no  exposure  to
contingencies  related to the Year 2000 Issue for  products  or  services it has
sold.

                                       12

<PAGE>



                            New Accounting Standards
Statement of Financial Accounting  Standards 130 Reporting  Comprehensive Income
and Statement of Financial  Accounting  Standards 131 Disclosures About Segments
of an Enterprise and Related  Information  were recently  issued.  Statement 130
establishes  standards for reporting and display of  comprehensive  income,  its
components, and accumulated balances. Comprehensive income is defined to include
all changes in equity  except those  resulting  from  investments  by owners and
distributions to owners.  Among their  disclosures,  Statement 130 requires that
all components of comprehensive income shall be classified based on their nature
and shall be reported in the  financial  statements  in the period in which they
are recognized.  A total amount for  comprehensive  income shall be displayed in
the financial  statements where the components of other comprehensive income are
reported.  Statement 131 supersedes  Statement of Financial Accounting Standards
14 Financial  Reporting  for Segments of a Business  Enterprise.  Statement  131
establishes  standards  on the way that the public  companies  report  financial
information about operating segments in annual financial statements and requires
reporting of selected  information about operating segments in interim financial
statements issued to the public.  It also establishes  standards for disclosures
regarding  products  and  services,   geographic  areas,  and  major  customers.
Statement 131 defines operating  segments as components of a company about which
separate financial  information is available that is evaluated  regularly by the
chief  operating  decisionmaker  in deciding  how to allocate  resources  and in
assessing performance.

Statements  130 and 131 are  effective  for  financial  statements  for  periods
beginning  after  December  15, 1997 and  require  comparative  information  for
earlier years to be restated.  Statements 130 and 131 are not expected to have a
material impact on Registrant.

Item 7.  Financial Statements.
Index to Financial Statements
Independent Auditor's Report
Financial Statements:

  Earth Sciences, Inc. and Subsidiaries
     Consolidated Balance Sheet, December 31, 1997
     Consolidated  Statements of Operations,  For the Years Ended  December 31,
      1997 and 1996
     Consolidated Statement of Stockholders' Equity, For the Period from January
      1, 1996 to December 31, 1997
     Consolidated  Statements  of Cash Flows,  For the Years Ended  December 31,
      1997 and 1996
     Notes to Consolidated Financial Statements


                                       13




<PAGE>





                          INDEX TO FINANCIAL STATEMENTS




                                                                           PAGE
                                                                           ----

Independent Auditor's Report................................................F-2

Consolidated Balance Sheet - December 31, 1997..............................F-3

Consolidated Statements of Operations -
 For the Years Ended December 31, 1997 and 1996.............................F-4

Consolidated Statements of Changes in Stockholders' Equity -
 For the Years Ended December 31, 1997 and 1996.............................F-5

Consolidated Statements of Cash Flows -
 For the Years Ended December 31, 1997 and 1996.............................F-6

Notes to Consolidated Financial Statements..................................F-8




                                       F-1

<PAGE>






                          INDEPENDENT AUDITOR'S REPORT




To the Board of Directors and Stockholders
Earth Sciences, Inc. and Subsidiaries
Golden, Colorado



We have audited the accompanying  consolidated  balance sheet of Earth Sciences,
Inc. and  subsidiaries  as of December 31,  1997,  and the related  consolidated
statements of operations, changes in stockholders' equity and cash flows for the
years ended December 31, 1997 and 1996. These consolidated  financial statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an  opinion  on these  consolidated  financial  statements  based on our
audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit 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 consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of Earth Sciences, Inc.
and  subsidiaries  as of December 31, 1997, and the results of their  operations
and  their  cash  flows for the  years  ended  December  31,  1997 and 1996,  in
conformity with generally accepted accounting principles.




HEIN + ASSOCIATES LLP

Denver, Colorado
March 24, 1998


                                      F-2
<PAGE>



                      EARTH SCIENCES, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 1997



                                     ASSETS
                                     ------
CURRENT ASSETS:
    Cash and cash equivalents                                      $    332,000
    Trade receivables, with no allowance
     for doubtful accounts                                              826,000
    Costs in excess of billings on uncompleted contracts                338,000
    Inventories                                                         520,000
    Prepaid expenses and other                                          627,000
                                                                   ------------

             Total current assets                                     2,643,000


PROPERTY, PLANT AND EQUIPMENT, at cost                               20,458,000
    Less accumulated depreciation and amortization                   (5,250,000)
                                                                   ------------
             Net property, plant and equipment                       15,208,000
                                                                   ------------
EXCESS OF PURCHASE PRICE OVER FAIR VALUE OF NET ASSETS ACQUIRED       1,438,000
                                                                   ------------
TOTAL ASSETS
                                                                   $ 19,289,000
                                                                   ============
                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------

CURRENT LIABILITIES:
    Accounts payable                                               $    876,000
    Accrued expenses                                                    423,000
    Billings in excess of costs on uncompleted
     contracts                                                          200,000
    Note payables - related parties                                     527,000
    Other current liabilities                                           186,000
                                                                   ------------
             Total current liabilities                                2,212,000

LONG-TERM LIABILITIES:
    Extraction plant liability                                        4,850,000
    Convertible debentures:
         Related party                                                1,000,000
         Other                                                        5,752,000
    Other liabilities                                                   544,000
                                                                   ------------
                                                                     12,146,000

MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES                            3,000

COMMITMENTS (Notes 2, 3, and 11)

STOCKHOLDERS' EQUITY:
    Common stock, $.01 par value; 25,000,000
         shares authorized; 11,912,070 shares issued                    119,000
    Additional paid-in capital                                       12,261,000
    Accumulated deficit                                              (7,452,000)
                                                                   ------------
            Total stockholders' equity                                4,928,000
                                                                   ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                         $ 19,289,000
                                                                   ============


       See accompanying notes to these consolidated financial statements.

                                       F-3

<PAGE>



                      EARTH SCIENCES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS


                                                        FOR THE YEARS ENDED
                                                            DECEMBER 31,
                                                     --------------------------
                                                        1997           1996
                                                     -----------    -----------

NET REVENUES:
    Sales                                            $ 1,468,000    $      --

    Royalty income                                          --          692,000
    Other income                                         110,000        106,000
                                                     -----------    -----------
             Total revenues                            1,578,000        798,000

COST AND EXPENSES:
    Operating                                          2,565,000        505,000
    General and administrative                         3,557,000        380,000
    Research and development                             225,000        109,000
    Depletion, depreciation and amortization             341,000        260,000
                                                     -----------    -----------
             Total expenses                            6,688,000      1,254,000
                                                     -----------    -----------

OPERATING LOSS                                        (5,110,000)      (456,000)

OTHER INCOME (EXPENSE):
    Interest expense                                  (3,062,000)       (82,000)
    Minority interest in loss of subsidiary              297,000           --
    Other, net                                          (139,000)          --
                                                     -----------    -----------
                                                      (2,904,000)       (82,000)

LOSS BEFORE EXTRAORDINARY ITEMS AND TAXES             (8,014,000)      (538,000)

    Income tax benefit                                   985,000        159,000
                                                     -----------    -----------

LOSS BEFORE EXTRAORDINARY GAIN                        (7,029,000)      (379,000)
                                                     -----------    -----------

    Extraordinary gain from debt restructuring
         (net of income tax of
         $985,000 and $159,000)                        2,298,000        371,000
                                                     -----------    -----------

NET LOSS                                             $(4,731,000)   $    (8,000)
                                                     ===========    ===========

NET LOSS PER COMMON SHARE (Basic and Diluted):
    Before extraordinary item                        $      (.76)   $      (.05)
    Extraordinary Gain                                       .25            .05
                                                     -----------    -----------
             Net Loss Per Common Share               $      (.51)   $      --
                                                     ===========    ===========

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING             9,290,000      7,186,000
                                                     ===========    ===========



       See accompanying notes to these consolidated financial statements.

                                       F-4

<PAGE>
<TABLE>
<CAPTION>


                                           EARTH SCIENCES, INC. AND SUBSIDIARIES

                                    CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                      FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996


                                                                  COMMON STOCK           Additional                     Cumulative
                                                              --------------------        Paid-in       Accumulated     Translation
                                                              Shares        Amount        Capital         Deficit       Adjustments
                                                              ------        ------        -------         -------       -----------

<S>                                                         <C>         <C>            <C>             <C>             <C>
BALANCES, December 31, 1995                                 6,354,000   $     64,000   $  6,390,000    $ (2,713,000)   $ (1,795,000)

    Debt converted to common stock                            883,000          8,000        891,000            --              --
    Officer/director debt converted to common
           stock                                              210,000          2,000        111,000            --              --
    Stock issued for cash, net of related costs               899,000          9,000      1,046,000            --              --
    Stock and options issued for services                     100,000          1,000        199,000            --              --
    Stock issued to employees for bonuses                       3,000           --            8,000            --              --
    Net loss                                                     --             --             --            (8,000)           --
    Foreign currency translation adjustment                      --             --             --              --           (33,000)
                                                         ------------   ------------   ------------    ------------    ------------

BALANCES, December 31, 1996                                 8,449,000         84,000      8,645,000      (2,721,000)     (1,828,000)

    Debt converted to common stock                          2,620,000         26,000      3,900,000            --              --
    Officer/director debt converted to
           common stock                                       280,000          3,000        148,000            --              --
    Stock and options issued for services                     507,000          5,000      1,244,000            --              --
    Stock issued for cash                                      20,000           --           42,000            --              --
    Stock issued for partial interest
           in acquired subsidiary                              36,000          1,000        119,000            --              --
    Foreign currency translation adjustment                      --             --             --              --            (9,000)
    Transfer of foreign currency translation
           adjustment to additional paid-in capital              --             --       (1,837,000)           --         1,837,000
    Net loss                                                     --             --             --        (4,731,000)           --
                                                         ------------   ------------   ------------    ------------    ------------

BALANCES, December 31, 1997                                11,912,000   $    119,000   $ 12,261,000    $ (7,452,000)   $       --
                                                         ============   ============   ============    ============    ============


                               See accompanying notes to these consolidated financial statements.

                                                         F-5
</TABLE>

<PAGE>
<TABLE>
<CAPTION>



                                EARTH SCIENCES, INC. AND SUBSIDIARIES

                                CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                              FOR THE YEARS ENDED
                                                                                 DECEMBER 31,
                                                                       -------------------------------
                                                                           1997                1996
                                                                       -----------         -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                    <C>                 <C>
    Net loss                                                           $(4,731,000)        $    (8,000)
    Adjustments to reconcile net loss to net cash
         provided by (used  in) operating activities:
             Depletion, depreciation and amortization                      341,000             260,000
             Minority interest in loss                                    (297,000)               --
             Interest expense related to debt discount                   2,595,000                --
             Write-down of mineral properties                               87,000                --
             Gain on settlement of debt, net of income taxes            (2,298,000)           (371,000)
             Income tax benefit                                           (985,000)           (159,000)
             Expenses paid with stock and options                          427,000             208,000
             Changes in operating assets and liabilities:
                 (Increase) decrease in:
                      Receivables                                         (521,000)            116,000
                      Inventories                                         (519,000)               --
                      Other assets                                         318,000            (387,000)
                      Purchase of marketable securities                       --            (3,084,000)
                      Sale of marketable securities                      1,135,000           2,424,000
                 Increase (decrease) in:
                      Accounts payable                                     624,000             145,000
                      Accrued expenses                                     524,000                --
                      Other liabilities                                    122,000             (37,000)
                                                                       -----------         -----------
         Net cash provided by (used in) operating activities            (3,178,000)           (893,000)


CASH FLOWS FROM INVESTING ACTIVITIES:
    Collections on notes receivable                                         50,000              70,000
    Notes receivable funded                                                (50,000)            (70,000)
    Capital expenditures                                                (3,154,000)           (736,000)
    Purchase of investment in ADA                                         (417,000)               --
                                                                       -----------         -----------
         Net cash used in investing activities                          (3,571,000)           (736,000)







                 See accompanying notes to these consolidated financial statements.


                                                 F-6
</TABLE>

<PAGE>
<TABLE>
<CAPTION>


                               EARTH SCIENCES, INC. AND SUBSIDIARIES

                               CONSOLIDATED STATEMENTS OF CASH FLOWS
                                            (continued)

                                                                          FOR THE YEARS ENDED
                                                                              DECEMBER 31,
                                                                    ------------------------------
                                                                        1997               1996
                                                                    -----------        -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
<S>                                                                  <C>
    Payments on restructuring of extraction plant liability          (1,250,000)              --
    Payments on notes payable and long-term debt                       (886,000)            (9,000)
    Proceeds from convertible debentures and notes payable, net       8,586,000            899,000
    Proceeds from issuance of common stock                               42,000          1,055,000
                                                                    -----------        -----------
         Net cash provided by (used in) financing activities          6,492,000          1,945,000


EFFECT OF EXCHANGE RATE CHANGES ON CASH                                   3,000              8,000
                                                                    -----------        -----------

INCREASE (DECREASE) IN CASH                                            (254,000)           324,000

CASH AND CASH EQUIVALENTS, beginning of year                            586,000            262,000
                                                                    -----------        -----------

CASH AND CASH EQUIVALENTS, end of year                              $   332,000        $   586,000
                                                                    ===========        ===========

SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
    Cash payments for interest                                      $   223,000        $    40,000
                                                                    ===========        ===========

    Conversion of notes payable and debentures                      $ 4,440,000        $ 1,012,000
                                                                    ===========        ===========

    Stock and options issued for investor relations                 $   898,000        $   200,000
                                                                    ===========        ===========

    Purchase of property and equipment for debt                     $   178,000        $   125,000
                                                                    ===========        ===========

    Stock issued for payment of employee bonuses                    $      --          $     8,000
                                                                    ===========        ===========

    Stock issued for partial interest in acquired subsidiary        $   120,000        $      --
                                                                    ===========        ===========





                See accompanying notes to these consolidated financial statements.

                                               F-7
</TABLE>

<PAGE>


                      EARTH SCIENCES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1. SUMMARY OF NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
   -------------------------------------------------------------------

     Nature of Operations - The accompanying  consolidated  financial statements
     include the accounts of Earth  Sciences,  Inc.  (ESI) and its  wholly-owned
     subsidiaries,  ESI Chemicals, Inc. (ESIC), ESI Resources Limited (ESIR) and
     Recursos   Minerales   Venesi   C.A.   (Venesi)   and  its   majority-owned
     subsidiaries,  ADA Environment  Solutions LLC (ADA),  Minera Antabari C.A.,
     and Recurso Minerales  Esigeo,  C.A. ADA has been consolidated with ESI and
     its  subsidiaries  since its  acquisition,  effective May 1, 1997. ESIC has
     been a dormant  subsidiary since 1983.  ESIR's only asset is its investment
     in its wholly-owned  subsidiary,  Earth Sciences Extraction Company (ESEC).
     All   significant   intercompany   transactions   have   been   eliminated.
     Collectively, these entities are referred to as the Company.

     The Company is  principally  engaged in  production  of purified  phosphate
     products (PPA),  providing flue gas conditioning  technology (FGCT) for air
     pollution  abatement and natural resources  exploration.  The Company sells
     PPA and FGCT principally throughout the United States.

     Cash Equivalents - For purposes of the statement of cash flows, the Company
     considers all highly liquid debt  instruments  with original  maturities of
     three months or less to be cash  equivalents.  At December  31, 1997,  cash
     equivalents  consisted  of  money  market  instruments  in  the  amount  of
     $240,000, which are not FDIC insured.

     Inventories  -  Inventories  are  stated  at the  lower of cost or  market,
     determined by the first-in,  first-out  method and consist of the following
     at December 31, 1997:

                          Supplies           $176,000
                          Raw Material        100,000
                          Work-in-progress    134,000
                          Finished goods      110,000
                                             --------

                                             $520,000
                                             ========


     Percentage of Completion - ADA follows the percentage of completion  method
     of accounting for all significant  long-term  contracts.  The percentage of
     completion method of reporting income from contracts takes into account the
     cost and revenue to date on contracts not yet  completed.  The Company does
     not  believe  it will  incur any  losses on  contracts  in  progress  as of
     December  31,  1997.  However,  due  to  its  lack  of  operating  history,
     management  does  not  believe  it can  reliably  estimate  total  costs to
     complete contracts in progress and, therefore, has recognized revenues only
     to the  extent  of  costs  incurred.  Upon  completion  of  each  contract,
     earnings, if any, will be recognized.

     Revenue  Recognition - ESEC product sales are recognized  when products are
     shipped to customers.

     Property,  Plant and Equipment - Property, plant and equipment is stated at
     cost and  includes  a  solvent  extraction  facility.  Depreciation  on the
     facility and its  equipment,  while in  production,  is provided  using the
     units of production method based on estimated production over the estimated


                                       F-8

<PAGE>


                      EARTH SCIENCES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     life of the facility.  Depreciation  on other assets is provided  using the
     straight-line  method based on estimated  useful lives ranging from 3 to 30
     years.  Maintenance and repairs are charged to operations as incurred. When
     assets are  retired,  or otherwise  disposed of, the property  accounts are
     relieved of costs and  accumulated  depreciation  and any resulting gain or
     loss is credited or charged to income.

     Intangible  Assets - The excess of the  aggregate  purchase  price over the
     fair  value  of net  assets  of  businesses  acquired  is  included  in the
     accompanying  financial  statements as "Excess of purchase  price over fair
     value of net assets  acquired"  (Goodwill)  and is being  amortized  over a
     10-year  period  using  the  straight-line  method.  Goodwill  amounts  are
     reported net of accumulated amortization of $100,000 at December 31, 1997.

     Deferred  Exploration and Development Costs - Land and mineral  properties,
     including related deferred  exploration and development  costs, are carried
     at cost.

     The Company follows the policy of capitalizing all direct costs,  including
     labor,  related to the  exploration  and  development of properties held or
     controlled  by the Company,  which,  in the opinion of  management,  have a
     continuing value.

     Impairment of Long-Lived  Assets - In fiscal 1996, the Company  adopted FAS
     121  "Impairment  of Long-  Lived  Assets."  In the  event  that  facts and
     circumstances  indicate  that the cost of  assets  or other  assets  may be
     impaired,  an  evaluation  of  recoverability  would  be  performed.  If an
     evaluation  is  required,  the  estimated  future  undiscounted  cash flows
     associated with the asset would be compared to the asset's  carrying amount
     to determine if a write-down to market value or discounted  cash flow value
     is required. Adoption of FAS 121 had no effect on the financial statements.

     Income Taxes - The Company  accounts  for income taxes under the  liability
     method of SFAS No.  109,  whereby  current  and  deferred  tax  assets  and
     liabilities  are  determined  based on tax rates and laws enacted as of the
     balance sheet date.

     Foreign Currency  Translation - Through September 30, 1997, the accounts of
     ESEC were maintained in Canadian dollars, its functional  currency.  Assets
     and liabilities  were translated into U.S.  dollars at the current exchange
     rate, and earnings or losses were  translated at the average  exchange rate
     for the year; resulting translation adjustments were recorded as a separate
     component of stockholders' equity.

     During the last quarter of 1997, ESEC ended its  construction  and start-up
     phase of the Calgary plant and commenced  significant  production and sales
     activities of its primary  product.  The Company  purchases most of its raw
     materials  and sells most of its  products  from/to  U.S.  entities in U.S.
     dollars and as a result, ESEC changed its functional currency from Canadian
     dollars to U.S.  dollars  during 1997.  Accordingly,  effective  October 1,
     1997, current assets and liabilities denominated in Canadian are translated
     in U.S.  dollars at the current  exchange rate with any  resulting  gain or
     loss  recorded in the income  statement.  Property,  plant and equipment is
     recorded  at its  historical  costs  (U.S.  dollars) as of October 1, 1997,
     after taking into effect the foreign currency  translation  adjustment from
     Canadian dollars to U.S. dollars at that date. Translation adjustments that
     were shown as a separate component of stockholders' equity at September 30,
     1997 have been recorded as a reduction of additional paid-in capital.

                                       F-9

<PAGE>


                      EARTH SCIENCES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     Royalty  Income - Royalty  income  represented  the  Company's  3.5%  gross
     royalty in  production  from the San Luis gold mine for 1996.  The mine was
     leased to and operated by a third party. During the year ended December 31,
     1996, the Company had $638,000 in royalty income,  which represented 86% of
     the  Company's  revenues.  The ore  reserves  at San Luis  gold  mine  were
     depleted  in the fourth  quarter  of 1996 and,  therefore,  royalty  income
     ceased in 1996.

     Research and Development Costs - Research and development costs are charged
     to operations in the period incurred.

     Loss Per Share - The loss per common share is presented in accordance  with
     the  provisions of Statement of Financial  Accounting  Standards  No., 128,
     Earnings Per Share (FAS 128). FAS 128 replaced the  presentation of primary
     and fully diluted  earnings  (loss) per share (EPS) with a presentation  of
     basic EPS and diluted EPS.  Basic EPS is  calculated by dividing the income
     or loss available to common  shareholders by the weighted average number of
     common  shares  outstanding  for  the  period.  Diluted  EPS  reflects  the
     potential  dilution that could occur if  securities  or other  contracts to
     issue common  stock were  exercised or  converted  into common  stock.  All
     potential dilutive securities are antidilutive as a result of the Company's
     net loss for the years ended December 31, 1997 and 1996. Accordingly, basic
     and diluted earnings per share are the same for each year.

     Stock-Based  Compensation - In fiscal 1996, the Company  adopted  Financial
     Accounting  Standards Board "Accounting for Stock-Based  Compensation" (FAS
     123).  FAS 123  encourages,  but does not  require,  companies to recognize
     compensation  expense for grants of stock, stock options,  and other equity
     instruments to employees  based on fair value.  Companies that do not adopt
     the fair value  accounting  rules must  disclose the impact of adopting the
     new method in the notes to the financial statements. Transactions in equity
     instruments with  non-employees for goods or services must be accounted for
     on the fair value  method.  The  Company  has elected not to adopt the fair
     value accounting  prescribed by FAS 123 for employees,  and is subject only
     to the disclosure requirements prescribed by FAS 123.

     Use of Estimates - The preparation of the Company's  consolidated financial
     statements in conformity  with  generally  accepted  accounting  principles
     requires the Company's  management to make estimates and  assumptions  that
     affect the amounts reported in these financial  statements and accompanying
     notes. Actual results could differ from those estimates.  The Company makes
     significant  assumptions concerning the decommissioning cost of its solvent
     extraction facility,  the realizability of its investment in its extraction
     facility and land and mineral properties,  and the percentage of completion
     estimates  on  ADA  contracts.  Due to the  uncertainties  inherent  in the
     estimation  process and the  significance  of these  costs,  it is at least
     reasonably  possible that the Company's  estimates in connection with these
     items could be further materially revised within the next year.

     New  Pronouncements  - Statement  of  Financial  Accounting  Standards  130
     Reporting  Comprehensive  Income  and  Statement  of  Financial  Accounting
     Standards  131  Disclosures  About  Segments of an  Enterprise  and Related


                                      F-10

<PAGE>


                      EARTH SCIENCES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



     Information were recently issued.  Statement 130 establishes  standards for
     reporting  and  display  of  comprehensive   income,   its  components  and
     accumulated  balances.  Comprehensive  income is  defined  to  include  all
     changes in equity except those  resulting  from  investments  by owners and
     distributions to owners.  Among other  disclosures,  Statement 130 requires
     that all components of  comprehensive  income shall be classified  based on
     their  nature and shall be  reported  in the  financial  statements  in the
     period in which  they are  recognized.  A total  amount  for  comprehensive
     income shall be displayed in the financial  statements where the components
     of other  comprehensive  income  are  reported.  Statement  131  supersedes
     Statement of Financial  Accounting  Standards  14 Financial  Reporting  for
     Segments of a Business Enterprise.  Statement 131 establishes  standards on
     the way that public companies report financial  information about operating
     segments in annual financial  statements and requires reporting of selected
     information about operating segments in interim financial statements issued
     to the public.  It also  establishes  standards for  disclosures  regarding
     products and services, geographic areas, and major customers. Statement 131
     defines operating  segments as components of a company about which separate
     financial information is available that is evaluated regularly by the chief
     operating  decisionmaker  in  deciding  how to  allocate  resources  and in
     assessing performance.

     Statements  130 and 131 are effective for financial  statements for periods
     beginning after December 15, 1997 and require  comparative  information for
     earlier  years to be restated.  Statements  130 and 131 are not expected to
     have a material impact on the Company.


2. LIQUIDITY:
   ----------

     Management  believes  that  existing  working  capital  and recent  private
     placements of  convertible  debentures  are  sufficient to fund the planned
     growth in  operations  until  positive cash flow is achieved at ESEC and at
     ADA,  which are both  anticipated  in 1998.  For ESEC,  the  achievement of
     positive  cash flow is dependent  upon several  facts  including  continued
     improvement of product quality in Calgary,  success in marketing  phosphate
     products and meeting competition in the market place, the failure in any of
     which could delay such  achievement.  For ADA, the  achievement of positive
     cash flow is dependent upon the successful  ongoing  operation of the units
     currently  installed  at two power  plants and the  successful  startup and
     operation  of  an  additional  unit,  the  failure  in  or   unsatisfactory
     operations at any of which could delay such  achievement.  Additional funds
     may be required  to fund  expanded  exploration  activities  in  Venezuela.
     Additional private placements of common stock,  convertible  debentures and
     bank  borrowings  may  be  needed  to  fund   additional   working  capital
     requirements.  The Company  received  net proceeds of $2.8 million from the
     issuance of convertible debentures in the first quarter of 1998.

     Based on current estimates, final modifications to the Calgary facility for
     the  production  of food grade  phosphoric  acid will be  financed  through
     existing working capital.



                                      F-11

<PAGE>


                      EARTH SCIENCES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



3. ACQUISITION OF ADA:
   -------------------

     During  February  1997,  the  Company  acquired  a 5%  interest  in ADA for
     $400,000. Effective May 1, 1997, ESI acquired a majority equity position in
     ADA  through a  combination  of stock and cash and that was  accounted  for
     under the purchase method of accounting.  The Company paid $500,000 in cash
     and  $1,600,000 in notes for an additional  46% interest in ADA. As part of
     the acquisition agreement, the Company acquired an option for the remaining
     49% equity interests in ADA exercisable during the six months following May
     1, 1998 for issuance of 1,716,000 shares of stock. Although, at the current
     time,  ESI intends to exercise its option,  the  principals  of ADA have an
     option to require ESI to sell its 51% interest in ADA for the price paid by
     ESI plus  interest in the event ESI does not exercise  its option.  The net
     assets of ADA acquired in  acquisition  were  recorded at their  historical
     value,  which  approximated  their fair  value.  During  1997,  the Company
     recorded goodwill of $1,503,000 as a result of the acquisition of ADA.

     The  summarized  unaudited  pro forma  amounts  shown  below  reflect  this
     transaction as if it had occurred at January 1, 1996:

                                             For the Year Ended
                                                December 31,
                                         -------------------------
                                             1997           1996
                                         ------------    ---------

             Revenues                    $  1,818,000    $ 873,000
                                         ============    =========

             Net loss                    $ (4,871,000)   $(225,000)
                                         ============    =========

             Net loss per common share   $       (.52)   $    (.03)
                                         ============    =========


4. COSTS ON UNCOMPLETED CONTRACTS:
   -------------------------------

     The following  information is applicable to ADA's uncompleted  contracts at
     December 31, 1997:

              Costs incurred on uncompleted contracts   $ 801,000
              Less billings to date                      (663,000)
                                                        ---------

                                                        $ 138,000
                                                        =========

     The above  amounts are  included in the  accompanying  balance  sheet as of
     December 31, 1997 under the following captions:

              Costs in excess of billings on
                uncompleted contracts                   $ 338,000
              Billings in excess of costs on
                uncompleted contracts                    (200,000)
                                                        ---------

                                                        $ 138,000
                                                        =========


                                      F-12

<PAGE>


                      EARTH SCIENCES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




5. PROPERTY, PLANT AND EQUIPMENT:
   ------------------------------

Property, plant and equipment as of December 31, 1997 is summarized as follows:

                                                                      Estimated
                                                                    Useful Lives
                                                                    ------------

  Extraction facility                               $ 6,142,000          15
  Machinery and equipment                            11,511,000          10
  Furniture and fixtures                                146,000           5
  Leasehold improvements                                130,000           5
  Building                                              326,000          30
  Land and mineral properties, including deferred
    exploration and development costs (a)             2,203,000
                                                    -----------

                                                    $20,458,000
                                                    ===========
----------

     (a)  These land and mineral properties are not in production.  The recovery
          of the Company's  investment in these assets is dependent  upon future
          production  from  such  assets  or a sale of the  Company's  interests
          therein.


     The Company's  mineral  properties  include patented and unpatented  mining
     claims;  the latter  requiring  annual  rental fees to maintain  possessory
     titles.  Certain  bills have been  introduced  to in both  houses of United
     States  which could  adversely  effect the  potential  for  development  of
     existing  unpatented  mining claims and the economics of operating mines on
     Federal unpatented mining claims if enacted.  All of these bills are in the
     early stages of the  legislative  process and it is not possible to predict
     whether any change in the mining  laws will be enacted or if  enacted,  the
     form the changes may take. In addition,  the Company  leases or has options
     to lease various other claims.  Such leases are cancelable at the option of
     the Company.

     Depletion,  depreciation and amortization of property,  plant and equipment
     for the years ended  December 31, 1997 and 1996 was $241,000 and  $260,000,
     respectively.


6. EXTRACTION PLANT LIABILITY AND EXTRAORDINARY GAIN:
   --------------------------------------------------

     In January 1997,  ESI  finalized  agreements  with Yankee  Atomic  Electric
     Company  and  Vermont  Yankee  Nuclear  Power   Corporation   (the  "Yankee
     Companies")  and  acquired an option to  liquidate  the  liability to them,
     which at that time totaled $9,382,000. The liability arose from prepayments
     by the Yankee  Companies  for  uranium  during the period  that the Calgary
     plant  operated as a uranium  extraction  facility.  In October  1997,  ESI


                                      F-13

<PAGE>


                      EARTH SCIENCES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



     exercised  their  option by paying  the  Yankee  Companies  $1,250,000  and
     granting  them a 10-year net profits  royalty on  activities at the Calgary
     facility.  Future payments to the Yankee Companies under the royalty cannot
     exceed $4,850,000. However, ESI can currently purchase the royalty interest
     for  $3,000,000,  which  increases  $50,000  per  year,  but not to  exceed
     $3,250,000.  Under the terms of the agreement, the Company's future royalty
     payments will be 10% of net profits. The Company has recorded the liability
     at the  greater  amount,  until  such  time  as  when  or if,  the  Company
     repurchases the royalty or the  termination of the agreement.  During 1997,
     the  Company  recognized  a  extraordinary  gain  on  debt  restructure  of
     $2,298,000 as a result of this debt restructure.


7. LONG-TERM DEBT:
   ---------------
                                                                 December 31,
                                                                     1997
                                                                 ------------
     Related Parties:

     Note payable to a  stockholder/director  at the greater
     of prime  plus 2% or 10% (10% at  December  31,  1997),
     with quarterly payments of interest,  collateralized by
     ESEC's  assets.  The note was  repaid in full  February
     1998.                                                        $  500,000

     Note  payable  to  stockholder  at  9%.  Principal  and
     accrued   interest   payments   are  due  in  1998  and
     convertible to common stock at $.54 per share.                   27,000

     Notes  payable to  officers/directors  at 9%. The notes
     are collateralized by a mining property.  Principal and
     accrued interest were converted to common stock at $.54
     per share subsequent to December 31, 1997.                       37,000
                                                                  ----------
                                                                     564,000
       Less current portion                                         (527,000)
                                                                  ----------

     Long-term liability (classified with other liabilities)      $   37,000
                                                                  ==========


     Convertible Debentures:
     -----------------------

     Convertible   debenture,   related   party   -   to   a
     stockholder/director at the greater of prime plus 2% or
     10% (10% at December 31, 1997) with quarterly  payments
     of   interest   and   principal   due  in  March  2000,
     collateralized   by  the   assets   of  ESI  and  ESEC.      $1,000,000



                                      F-14

<PAGE>


                     EARTH SCIENCES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



                                                                 December 31,
                                                                     1997
                                                                 ------------
     Convertible  debenture,  other - at 4%  with  quarterly
     payments  of  interest  due from  August  1998 to March
     1999.  The  principal  balance  includes  a  $1,438,000
     premium as a result of the debentures being convertible
     to common stock at a 25% discount from market.                5,752,000
                                                                  ----------

                                                                  $6,752,000
                                                                  ==========


     During 1997, ESI issued convertible  debentures (the "Debentures") at their
     face value totaling  $8,785,000.  Of the total  Debentures,  $7,785,000 are
     convertible  at any time  following 45 days after the issuance date and are
     convertible  into shares of common stock based at a 25%  discount  from the
     market  price of the  common  stock at the time of  conversion,  but not in
     excess of $3.25 per share.  During 1997,  the Company  recorded  additional
     interest expense (premium)  totaling  $2,595,000 for the difference between
     the quoted price and the discounted price of the common stock that would be
     issued upon  conversion  of the  Debentures.  The  remaining  $1,000,000 in
     Debentures are convertible at the average rate of $3.12 per share.  ESI was
     required  to  register  the  shares  underlying  the  Debentures,  and  may
     repurchase  the  $7,785,000  in  Debentures  at a 25% premium under certain
     circumstances.

     The Debentures  totaling  $7,785,000 will  automatically  convert to common
     stock at a future date (up to two years) if not already converted or if the
     Company has not previously redeemed them. It is not the Company's intent to
     redeem any of the $3,216,000  Debentures  that mature during 1998. As such,
     these  Debentures have been classified as a long-term  liability since they
     will convert to common stock during 1998 and  therefore not require the use
     of current assets for their payment. As of December 31, 1997, $3,471,000 of
     the Debentures  had been converted to common stock.  Subsequent to December
     31, 1997, the Company issued an additional $3,081,000 of the 4% Debentures,
     which are  convertible  into shares of common stock based on a 25% discount
     from the market  price of the common stock at the time of  conversion,  but
     not in  excess  of $2.00  per  share.  Subsequent  to  December  31,  1997,
     $4,273,000  (face value) of the  Debentures  were  converted into 4,505,000
     shares of common stock.



                                      F-15

<PAGE>


                      EARTH SCIENCES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



8. INCOME TAXES:
   -------------

     Deferred  tax  assets  (liabilities)  are  comprised  of the  following  at
     December 31, 1997:

                                                 CANADIAN
                                                SUBSIDIARY         U.S.
                                                OPERATIONS     Operations
                                                -----------    -----------
     Deferred assets (liabilities):
          Net operating loss carryforward       $   441,000    $ 1,961,000
          Tax credit carryforwards                    2,000         13,000
          Depreciation differences                 (298,000)        14,000
          Mining properties basis differences          --         (356,000)
          Deferred revenue                        1,528,000           --
          Compensation related deferrals               --          169,000
          Other                                     136,000           --
                                                -----------    -----------
     Net deferred tax assets                      1,809,000      1,801,000
     Less valuation allowance                    (1,809,000)    (1,801,000)
                                                -----------    -----------

     Net deferred tax assets                    $      --      $      --
                                                ===========    ===========


     The  Company  has  remaining  U.S. a net  operating  loss  carryforward  at
     December  31, 1997 of  approximately  $5,285,000,  which if not utilized to
     reduce  taxable  income in future  periods,  will  expire in the years 1998
     through 2012. In addition,  the Company has $13,000 of alternative  minimum
     tax credit which is available to offset future U.S.  regular tax liability.
     The net operating loss carryforward  related to the Canadian subsidiary and
     operations  is  $980,000  (U.S.).   The  Canadian   investment  tax  credit
     carryforward for this subsidiary is $2,000 (U.S.).

                                      F-16

<PAGE>


                      EARTH SCIENCES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




     The  utilization  of these U.S. net  operating  loss  carryforwards  may be
     subject to  restrictions  because of the  ownership  changes of the Company
     that occurred as a result of issuances of the Company's  securities.  These
     restrictions  may  limit  the  amount  of  utilizable  net  operating  loss
     carryforwards per year.


9. STOCKHOLDERS' EQUITY:
   ---------------------

     Stock Bonus Plan - The Company has reserved 125,000 shares for awards under
     a stock bonus plan  established  in 1978.  As of December 31, 1997,  33,595
     shares remain available for award under the plan.

     Investor Relations - During 1997 and 1996, the Company engaged an entity to
     provide the Company  investor  relation  services over a five-year  period.
     During  1996,  in addition to certain  cash  payments,  the Company  issued
     options to the entity to purchase  300,000 shares of common stock at prices
     ranging from $2.00 to $4.00.  The options  expire at the rate of 60,000 per
     year over each of the  following  three  years with the  remaining  120,000
     expiring in 2001. During 1997, 60,000 options expired. Additionally, during
     1997,  in addition to certain cash  payments,  the Company  issued  320,000
     shares of common  stock to the entity.  The cash  payments  and the related
     cost  associated  with the stock grants are being  amortized over one year,
     the period the services are expected to be performed.

     Stock Options - The following is a table of options  issued during 1997 and
     1996:

                                                                      Weighted
                                                                       Average
                                             Employees  Non-employee  Exercise
                                              Options     Options       Price
                                              --------    --------    --------

   OPTIONS OUTSTANDING, December 31, 1995      150,000      10,000    $   1.29

           Options granted:
               Officers                        250,000        --      $   1.69
               Consultants                        --        29,000    $   1.69
               Investor relations                 --        60,000    $   2.00
               Investor relations                 --       120,000    $   2.60
               Investor relations                 --       120,000    $   3.60
                                              --------    --------    --------

   OPTIONS OUTSTANDING, December 31, 1996      400,000     339,000    $   2.09

           Options granted:
               Officers                        150,000        --      $   1.57
               Consultants                        --        50,000    $   2.50
           Debenture holder - related party       --        50,000    $   1.88
           Options expired                     (75,000)    (60,000)   $  (1.58)
                                              --------    --------    --------

   OPTIONS OUTSTANDING, December 31, 1997      475,000     379,000    $   2.19
                                              ========    ========    ========


                                      F-17

<PAGE>


                      EARTH SCIENCES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




     For all options  granted during 1997 and 1996, the weighted  average market
     price of the  Company's  common  stock on the grant date was  approximately
     equal  to  the  weighted  average  exercise  price.  The  weighted  average
     remaining  contractual  life for all  options as of  December  31, 1997 was
     approximately 2 years. At December 31, 1997, all options were  exercisable.
     If not previously exercised, options outstanding at December 31, 1997, will
     expire as follows:

                                                            Weighted
                                                            Average
                                           Number of        Exercise
           Year                             Shares           Price
           ----                             ------           -----

           1998                             210,000          $1.60
           1999                             339,000          $1.89
           2000                             185,000          $2.03
           2001                             120,000          $3.60
                                            -------

                                            854,000
                                            =======


     Pro Forma  Stock-Based  Compensation  Disclosures - The Company applies APB
     Opinion 25 and related  interpretations in accounting for its stock options
     and warrants which are granted to employees.  Accordingly,  no compensation
     cost has been  recognized  for grants of options and  warrants to employees
     since  the  exercise  prices  were  not less  than  the  fair  value of the
     Company's  common  stock on the grant  dates.  Had  compensation  cost been
     determined  based on an  estimate  of the fair  value  consistent  with the
     method of FAS 123 at the grant  dates for awards  under  those  plans,  the
     Company's  net income and earnings per share would have been reduced to the
     pro forma amounts indicated below.

                                                     Year Ended December 31,
                                                   --------------------------
                                                       1997           1996
                                                   -------------    ---------

        Net income (loss) applicable
         to common stockholders:
           As reported                             $  (4,731,000)   $  (8,000)
           Pro forma                               $  (4,803,000)   $(255,000)
        Net income (loss) per common share:
           As reported                             $        (.51)   $    --
           Pro forma                               $        (.52    $    (.04)





                                      F-18

<PAGE>


                      EARTH SCIENCES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



     The fair value of each employee option and warrant granted in 1997 and 1996
     was estimated on the date of grant using the  Black-Scholes  option-pricing
     model with the following weighted average assumptions:

                                           Year Ended December 31,
                                                1997  1996
                                                ----  ----

                     Expected volatility         72%   67%
                     Risk-free interest rate     5.7%  5.7%
                     Expected dividends          --    --
                     Expected terms (in years)    3     3



10. PROFIT SHARING RETIREMENT PLAN:
    -------------------------------

     Effective  January 1, 1988, the Company formed a defined  contribution  and
     401(k) plan to cover all eligible  employees.  The Company paid $71,000 and
     $30,000 as the contributions for 1997 and 1996,  respectively  based on 10%
     of the  eligible  employees'  annual  compensation.  In 1997 and 1996,  the
     Company  also  matched  401(K)  employee  contributions  up to 5% of  gross
     salary, totaling $40,000 and $15,000, respectively.


11. COMMITMENT:
    -----------

     Capital Lease  Obligations - The Company  leases  certain  equipment  under
     agreements classified as capital leases. Equipment under these leases has a
     cost of $178,000 and no accumulated  amortization  as of December 31, 1997.
     The following is a schedule of future  minimum lease payments under capital
     leases  at  December  31,  1997.  (The  capitalized   lease  obligation  is
     classified with other liabilities on the accompanying balance sheet.)

            Year                                            Amount
            ----                                            ------

            1998                                           $ 56,000
            1999                                             56,000
            2000                                             56,000
            2001                                             50,000
                                                           --------

            Total Future minimum lease payments             218,000
            Less amount representing interest               (40,000)
                                                          ---------

            Present value of net minimum lease payments     178,000

            Less current portion                            (56,000)
                                                          ---------

                                                          $ 122,000
                                                          =========


                                      F-19

<PAGE>


                      EARTH SCIENCES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




     Office  Lease  - The  Company  leases  office  space  and  equipment  under
     noncancellable  operating leases. Total rental expense was $10,000 and $-0-
     for the years ended  December  31, 1997 and 1996,  respectively.  The total
     minimum rental commitments at December 31, 1997 are as follows:

                Year

                1998                               $102,000
                1999                                102,000
                2000                                 96,000
                2001                                 85,000
                2002                                 86,000
                                                   --------

                                                   $471,000
                                                   ========


     ESEC's  production is being marketed  though one entity.  The agreement was
     executed  January 1, 1997 and renews  automatically  for 1-year terms.  The
     entity receives a commission from $2.00 to $5.00 per ton of product sold. A
     prepayment  of $100,000  was made in 1997,  consisting  of 50% cash and 50%
     stock.

     During 1997,  the Board of Directors  approved a one-year  paid  sabbatical
     leave for employees  who have been employed for 25 years or greater.  As of
     December 31, 1997, the Company has accrued $200,000 in connection with this
     policy.


12. RELATED PARTY:
    --------------

     During  1997 and  1996,  the  Company  made  loans  to an  officer/director
     totaling  $120,000  at an  interest  rate of 8%. Not more than  $70,000 was
     outstanding at any one time and these loans, and the related interest, were
     paid  back  to  the  Company   during   1997  and  1996.   The  loans  were
     collateralized by amounts owing to the officer/director from the Company.


13. FAIR VALUE OF FINANCIAL INSTRUMENTS (FAS 107):
    ----------------------------------------------

     The  estimated  fair  values  for  financial  instruments  under  FAS  107,
     Disclosures  about Fair value of Financial  Instruments,  are determined at
     discrete points in time based on relevant market information.

                                      F-20

<PAGE>


                      EARTH SCIENCES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



     These  estimates  involve  uncertainties  and  cannot  be  determined  with
     precision. The estimated fair values of the Company's financial instruments
     which differ from their recorded  values,  as measured on December 31, 1997
     are as follows:

                                              December 31, 1997
                                           -----------------------
                                            Carrying       Fair
                                             Amount        Value
                                           ---------    ----------

              Long-term debt               $   37,000   $   33,000
              Extraction plant liability    4,850,000    3,000,000


     The following  methods and assumptions were used to estimate the fair value
     of each class of financial instrument.

     Long-Term  Debt - The fair value is difficult to estimate as loans are from
     related  parties.  However,  fair value was  estimated  using an  effective
     borrowing rate of 15%.

     Extraction Plant Liability - The fair value is estimated based on the total
     payments  which  would  be  required  to  terminate  the  extraction  plant
     liability position as of December 31, 1997.


14.  CONCENTRATIONS  OF  CREDIT  RISK,  MAJOR  CUSTOMERS,  AND  OTHER  RISKS AND
     UNCERTAINTIES:
     ---------------------------------------------------------------------------

     Credit risk  represents the accounting loss that would be recognized at the
     reporting  date  if   counterparties   failed   completely  to  perform  as
     contracted. Concentrations of credit risk (whether on or off balance sheet)
     that arise from  financial  instruments  exist for groups of  customers  or
     counterparties when they have similar economic  characteristics  that would
     cause  their  ability  to  meet  contractual  obligations  to be  similarly
     effected by changes in economic or other  conditions  described  below.  In
     accordance  with FASB Statement No. 105,  Disclosure of  Information  about
     Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments
     with  Concentrations  of Credit Risk,  the credit risk amounts shown do not
     take  into  account  the value of any  collateral  or  security.  Financial
     instruments that subject the Company to credit risk consist  principally of
     money market instruments and receivables.


                                      F-21

<PAGE>


                      EARTH SCIENCES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



     Sales  to  unaffiliated  customers  which  represent  10%  or  more  of the
     Company's  sales for the year ended December 31, 1997 were as follows (as a
     percentage of sales):

          Customer                                    1997
          --------                                    ----

          ESEC
          ----
              A                                        32%
              B                                        18%
              C                                        15%

          ADA
          ---
              D                                        29%
              E                                        22%
              F                                        13%


     At December  31,  1997,  the Company had gross trade  receivables  totaling
     approximately $807,000 due from 21 customers.

     In 1997, ESEC purchased the majority of its superphosphoric acid (SPA) from
     three suppliers. SPA is the raw material processed into purified phosphoric
     acid.   There  is  no   assurance   that  the  Company   will  be  able  to
     maintain/extend  its contracts and supply  arrangement in the future and/or
     obtain sufficient  quantities of SPA at reasonable prices.  Other suppliers
     of SPA may not be readily available.


15. SUBSEQUENT EVENTS:
    ------------------

     During January 1998,  the Company signed a letter  agreement with an entity
     to acquire  exclusive  rights to explore and mine a diamond  concession  in
     Venezuela.  ESI is obligated  to make  payments of cash and stock valued at
     $50,000  during the 6 to 8-month  exploration  period,  after which it will
     have earned the exclusive  right to lease the  concession.  The lease terms
     call for royalties that range from 5% to 20% based on size and grade of the
     diamond mined.

     See Note 7 for issuance and conversion of convertible debentures.


16. BUSINESS SEGMENT INFORMATION:
    -----------------------------

     The Company  has  identified  its  principal  business  segments as natural
     resource  exploration,   production  of  purified  phosphate  products  and
     providing flue gas  conditioning  technology  for air pollution  abatement.
     These segments are shown in the  accompanying  table as ESI, ESIR, and ADA,
     respectively. ESIR is located in Canada.


                                      F-22

<PAGE>
<TABLE>
<CAPTION>



                                        EARTH SCIENCES, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                                           Depletion,
                                                   Operating                              Depreciation
                                   Net              Profit            Identifiable             and                Capital
                                Revenues           (Loss)(1)             Assets           Amortization         Expenditures
                              -----------         -----------          -----------        ------------         ------------
1997:

<S>                           <C>                 <C>                  <C>                 <C>                 <C>
       ESI                    $   120,000         $  (380,000)         $ 3,825,000         $   120,000         $    33,000
       ESIR                       513,000          (1,281,000)          13,846,000               9,000           2,679,000
       ADA                        945,000             108,000            1,618,000             212,000             620,000
                              -----------         -----------          -----------         -----------         -----------

       Total                  $ 1,578,000         $(1,553,000)         $19,289,000         $   341,000         $ 3,332,000
                              ===========         ===========          ===========         ===========         ===========

1996:

       ESI                    $   798,000         $    83,000          $ 4,207,000         $   122,000         $    89,000
       ESIR                          --              (159,000)          10,194,000             138,000             647,000
       ADA                           --                  --                   --                  --                  --
                              -----------         -----------          -----------         -----------         -----------

       Total                  $   798,000         $   (76,000)         $14,401,000         $   260,000         $   736,000
                              ===========         ===========          ===========         ===========         ===========

----------

(1)  Operating loss represents operating loss from the consolidated statement of operations less general and administrative
     expenses.


                                                      F-23
</TABLE>


<PAGE>
<TABLE>
<CAPTION>




Item  8.  Changes  In and  Disagreements  With  Accountants  on  Accounting  and
Financial Disclosure.
None.




                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.

                                Positions                         Term     First  Became
Name                   Age      and Offices                      Expires      Director
----------------------------------------------------------------------------------------

<S>                     <C>                                       <C>          <C>
Ramon E. Bisque         66      Chairman of the Board of          Annual        1963
                                Directors and Member of the       Meeting
                                Executive Committee                Date,        1998

Duane N. Bloom          64      Director, Secretary, Chairman        "          1963
                                of the Executive Committee

Michael D. Durham       47      Director, Member of the Audit        "          1997
                                Committee

Robert H. Lowdermilk    61      Director, Member of the Audit        "          1990
                                Committee

Mark H. McKinnies       46      Director, President, Treasurer,      "          1983

                                Member of the Executive Committee

Kristen R. Stevens      35      Director, Member of the Audit        "          1991
                                Committee

     The  appointment  of  Michael  D.  Durham  to the  Board  of  Directors  of
Registrant (the "Board") in 1997 was made pursuant to the ADA Purchase Agreement
whereby  Registrant agreed to make available one seat on the Board between April
30, 1997 and  November 1, 1998,  and so long  thereafter  as the  recipients  of
shares of Registrant in that transaction continue, in the aggregate,  to hold no
less than 1,000,000 shares.  Management  shareholders of Registrant entered into
voting  agreements,  agreeing  to vote  their  shares  of  stock in favor of the
designated individual. There are no other arrangements or understandings between
any directors or executive  officers and any other person or persons pursuant to
which they were selected as director or executive officer.
     Each of the  officers  named above serves from year to year at the pleasure
of the Board of Directors. Drs. Bisque and Bloom were first elected to the Board
of Directors of Earth Sciences,  Inc.`s  predecessor  company as of February 18,
1963. Drs. Bisque and Bloom were first elected to serve in their present offices
on March 22, 1974.  Mr.  McKinnies  was elected  Controller on January 25, 1980,
Secretary  on January 23, 1981 and as a Director  and  President on February 23,
1983.
     Dr. Bisque is Professor  Emeritus at the Colorado School of Mines,  Golden,
Colorado and was a co-founder of Earth  Sciences,  Inc. in 1963.  Dr. Bisque has
been Chairman of the Board of Directors, a member of the Executive Committee and
a full or part time employee of Registrant since 1974.
     Dr. Bloom was a co-founder of Earth  Sciences,  Inc. in 1963. Dr. Bloom has
been employed full time by Registrant since that time.
     Dr.  Durham  was a  co-founder  in  1982  of  ADA  Technologies,  Inc.,  an
Englewood,  Colorado  private company which contracts to the Federal  government
and others for development of emission technologies.  Dr. Durham is president of
ADA-Environmental  Solutions LLC, a majority-owned subsidiary of Registrant. Dr.
Durham was appointed to the Board on April 30, 1997.



                                       14
</TABLE>

<PAGE>
<TABLE>
<CAPTION>

     Mr.  Lowdermilk  has been  president of Tectonic  Construction  Company,  a
producer of washed aggregates and specialty sands since 1986. Mr. Lowdermilk has
a long history in construction and engineering projects.
     Mr. McKinnies is a CPA and worked for Peat, Marwick,  Mitchell & Co. before
commencing  employment at ESI in 1978.  Mr.  McKinnies was elected  President of
Registrant in February, 1983.
     Ms.  Stevens  has been an  attorney  since  her  graduation  from  Stanford
University in 1987 and specializes in real estate and other business matters.
     No relationship exists between any individuals named in this Item 9.

Section 16(a) Beneficial Ownership Reporting Compliance
     Section 16(a) of the Securities Exchange Act of 1934 requires  Registrant's
officers  and  directors,  and  persons  who own  more  than  ten  percent  of a
registered  class  of the  Company's  equity  securities,  to  file  reports  of
ownership  with the Securities and Exchange  Commission  (the "SEC").  Officers,
directors  and  greater  than  ten  percent  shareholders  are  required  by SEC
regulation  to furnish the Company  with copies of all Section  16(a) forms they
file.

     Based  solely on its review of the copies of such forms  received by it, or
written representations from certain reporting persons, Registrant believes that
during the  fiscal  year  ended  December  31,  1997,  all  filing  requirements
applicable  to its officers,  directors and greater than ten percent  beneficial
owners were  complied  with  except  that Dr.  Bisque was late filing his Form 5
reporting  two  gifts  of  stock,  Mr.  Lowdermilk  was late  filing  his Form 5
reporting one transaction and Mr. McKinnies was late filing his Form 5 reporting
two gifts of stock.  In  addition,  Dr.  Durham did not timely  file his Initial
Report on Form 3 and had one late filing  reporting one  transaction  on Form 4.

Item 10. Executive Compensation.

                                                  Summary Compensation Table

                                     Annual Compensation               Long Term Compensation
                                     -------------------               ----------------------
                                                                                Awards
Name of Individual and                                                          ------
Principal Position                   Year      Salary       Other(2)   Securities Underlying Options (#)
--------------------------------------------------------------------------------------------------------
<S>                                  <C>      <C>           <C>                   <C>
Ramon E. Bisque(1)                   1997     $85,175       $12,291               25,000
Chairman of the Board                1996     $81,288       $11,706               50,000
                                     1995     $74,765       $11,148               25,000

Duane N. Bloom(1)                    1997     $114,564      $16,388               25,000
Chairman of the Executive Committee  1996     $107,240      $15,607               50,000
Secretary and Director               1995     $101,931      $14,864               25,000

Mark H. McKinnies(1)                 1997     $116,618      $17,400               25,000
Director, President and Treasurer    1996     $101,568      $15,142              150,000
                                     1995     $ 96,763      $13,735               25,000

(1)Member of the Executive Committee of Registrant, which performs the duties of
the Chief Executive  Officer.
(2)Amounts  represent pension and matching 401(k)
payments  made to a qualified  plan by  Registrant  for the benefit of the named
individual.

                            Options/SAR Grants in Last Fiscal Year
                               Individual Grants
                Number of Securities    % of Total Options
                 Underlying Options    Granted to Employees   Exercise or Base   Expiration
Name                Granted (#)           in Fiscal Year        Price ($/Sh)        Date
-------------------------------------------------------------------------------------------
Ramon E. Bisque       25,000                  33%                  $1.88          10/30/00
                      25,000                                       $1.25          11/03/98*
Duane N. Bloom        25,000                  33%                  $1.88          10/30/00
                      25,000                                       $1.25          11/03/98*
Mark H. McKinnies     25,000                  33%                  $1.88          10/30/00
                      25,000                                       $1.25          11/03/98*

* Represents  options  granted in 1994 whose  expiration  date was extended from
11/03/97 to 11/03/98.

All options shown for each individual were exerciseable as of December 31, 1997.


                                       15

</TABLE>
<PAGE>
    Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values

                    Number of Securities Underlying       Value of Unexercised
Name                Unexercised Options at FY-End (#)      Options at FY-End
------------------------------------------------------------------------------
Ramon E. Bisque             125,000                             $    0
Duane N. Bloom              125,000                             $    0
Mark H. McKinnies           225,000                             $    0

All options shown for each individual were exerciseable as of December 31, 1997.

Compensation of Directors
Directors  who are not  also  executive  officers  of  Registrant  are  accruing
compensation  in the  amount of $500 per  quarter,  which  amount may be paid by
issuance of Registrant's  common stock, and are reimbursed for any out-of-pocket
expenses incurred in attendance at meetings. The number of shares of stock which
may be issued will be determined using the quarterly compensation amount and the
average  between the bid and asked price quoted  during the quarter.  A total of
25,252 shares of stock were issued in 1997 in payment of $38,500 of accrued fees
through year end 1996.

Item 11.  Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth the number of shares of the  Registrant's  common
stock owned beneficially as of March 6, 1998, by each person known by Registrant
to  have  owned  beneficially  more  than  five  percent  of  such  shares  then
outstanding,  by each  person  serving as a named  officer  and/or a director of
Registrant and by all of  Registrant's  officers and directors as a group.  With
the exception of Mr.  Lowdermilk , each of the individuals  named below has sole
voting and investment power for the respective shares.

                               Amount and Nature of
Name and Address               Beneficial Ownership             Percent of Class
--------------------------------------------------------------------------------
Ramon E. Bisque                     488,281 (1)                       2.98%
910 12th Street
Golden, CO

Duane N. Bloom                      690,622 (2)                       4.20%
910 12th Street
Golden, CO

Michael D. Durham                     29,706                        Less then 1%
8100 SouthPark Way, B-2
Littleton, CO

Robert H. Lowdermilk                841,889 (3)                       5.06%
910 12th Street
Golden, CO

Mark H. McKinnies                   287,055 (4)                       1.74%
910 12th Street
Golden, CO

Kristen R. Stevens                     200                          Less then 1%
910 12th Street
Golden, CO

Directors and Officers as a Group   2,337,753(5)                     13.61%
(6 individuals)

                                       16

<PAGE>



Notes to Item 11:
(1) Included in the amount shown are 146,640  shares to which Dr. Bisque has the
right to  acquire  beneficial  ownership  through  convertible  debt  and  stock
options.
(2) Included in the amount  shown are 164,370  shares to which Dr. Bloom has the
right to  acquire  beneficial  ownership  through  convertible  debt  and  stock
options.
(3) Included in the amount shown are 125,000  shares  registered  in the name of
Mr.  Lowdermilk's wife, Ann Gragg Lowdermilk.  Also included in the amount shown
are 370,115  shares to which Tectonic  Construction  Co.("TCC") has the right to
acquire  beneficial  ownership through  convertible debt and stock options.  Mr.
Lowdermilk is the president and majority shareholder of TCC.
(4) Included in the amount shown are 234,010  shares to which Mr.  McKinnies has
the right to acquire  beneficial  ownership  through  convertible debt and stock
options.
(5) The amount shown includes  915,135 shares to which  individuals in the group
have the right to acquire  beneficial  ownership  through  convertible  debt and
stock options.


Item 12.  Certain Relationships and Related Transactions.
(a) At  various  times  during  1997 and 1996,  Dr.  Bisque  borrowed a total of
$50,000 and $70,000,  respectively,  from  Registrant at an interest rate of 8%.
Not more than  $70,000 was  outstanding  at any one time in 1996 and these loans
were paid back to Registrant prior to each year end. All of the amounts borrowed
were  collateralized  by amounts owing to Dr. Bisque by Registrant and were made
available  from  funds  that  would  have   otherwise  only  earned   Registrant
approximately 5%.

In 1991,  the  Registrant  converted a total of  $366,000  of deferred  salaries
payable to Mssrs.  Bisque, Bloom and McKinnies to notes payable bearing interest
at 9%, payable on demand,  and granted them rights to convert such notes payable
to shares of common  stock at the then  current  market price of $.54 per share.
The notes are  collateralized  by a mining property.  From year to year,  Mssrs.
Bisque, Bloom and McKinnies have agreed not to demand payment during the current
year. As of December 31, 1997, $38,000 remained outstanding under the notes.

In 1997,  Registrant issued a convertible  debenture in the amount of $1,000,000
(the  "Debenture") to Tectonic  Construction  Co. ("TCC") and borrowed  $500,000
from TCC under a short-term  note (the "Note").  Mr.  Lowdermilk,  a director of
Registrant, is the president and majority shareholder of TCC. These amounts were
collateralized by a mining property, and buildings,  equipment,  receivables and
inventory in Calgary. The Debenture and the Note bear interest at the greater of
prime plus two points or 10% which interest is payable quarterly. The Debenture,
if not  converted,  is due March 31, 2000.  The Debenture is  convertible at any
time after  November 30, 1997 into shares of common stock at a weighted  average
rate of $3.20. The Note was repaid in full in February, 1998.

Item 13.  Exhibits and Reports on Form 8-K.

(a) Exhibits and Index of Exhibits (all exhibits  except as otherwise  noted are
incorporated  by  reference;  Exhibit  2.1 and 99.1 were  filed as  exhibits  to
Registrant's  April 30, 1997 Form 8K;  Exhibits  3.1, 4.3, and 10.5 through 10.9
were filed as exhibits to Registrant's  1996 Form 10KSB, all other such Exhibits
were filed as Exhibits to Registrant's 1993 Form 10KSB).

No.               Description
---               -----------
2.1         Stock Option and  Exchange  Agreement  and  exhibits  among Earth
              Sciences, Inc. and ADA-ES, Inc., ADA Environmental Solutions LLC,
              ADA Technologies, Inc., C. Jean Bustard, John F. Wurster, Kenneth
              E. Baldrey and Cameron E. Martin dated April 30, 1997.
2.2         Amended and Restated  Operating  Agreement  of ADA  Environmental
              Solutions LLC, a Colorado Limited  Liability  Company,  April 30,
              1997.
3.1         Articles of Incorporation, as amended and restated.
3.2         By-laws.
4.1         Agreement for Conversion Rights dated July 31, 1991.
4.2         Conversion Agreement dated June 23, 1993.
4.3         Form of Convertible Debenture due March 31, 1999.
4.4*        Form of Convertible Debenture due January 31, 1999.
4.5*        Form of Convertible Debenture due March 31, 2000.
10.1        Uranium   Extraction   Agreement   dated  May  14,  1976  between
              Registrant and Western Co-operative Fertilizers, Limited.


                                    17

<PAGE>



10.2        Lease  dated   April  3,  1978   between   Western   Co-operative
              Fertilizers, Limited and ESI Resources, Ltd.
10.3        Mining Lease dated October 1, 1987 between  Registrant and Battle
              Mountain Gold Company.
10.4        Letter of Intent - Gold Joint Venture in Venezuela dated December
              31, 1987 between Registrant and GEO C.A.
10.5        Cerro Gordo  Letter  Agreement  dated  September  1, 1996 between
              Registrant and Martin Trost Associates.
10.6        Option  Agreement  dated January 20, 1997 between  Registrant and
              Yankee Atomic  Electric  Company and Vermont Yankee Nuclear Power
              Corporation.
10.7        Letter of Intent among ADA  Environmental  Solutions LLC, ADA-ES,
              Inc. their respective members and shareholders and Registrant.
10.8        Securities Purchase Agreement dated March 21, 1997.
10.9        Registration Rights Agreement dated March 21, 1997.
10.10       Independent  Contractor  Agreement  dated January 1, 1997 between
              Registrant and Twin- Kem International, Inc.
10.11*      Subscription and Investment Agreement dated June 12, 1997 between
              Tectonic Construction Company and Registrant.
10.12*      Assignment of Net Profits  Interest  dated  November 1, 1997 from
              Registrant,  ESI Resource Limited,  and Earth Sciences Extraction
              Company to Yankee  Atomic  Electric  Company and  Vermont  Yankee
              Nuclear Power Corporation.
10.13*      Letter  Agreement  dated  January 9, 1998 between  CODSA 14 S.A.,
              Registrant and Recursos Minerales VENESI C.A.
21.1*       Subsidiaries of Registrant.
23.1*       Consent of Hein + Associates LLP
27*         Financial Data Schedule.
99.1        Financial Statements of ADA Environmental Solutions LLC, December
              31, 1996

(*) - filed herewith.

(b)  Reports on Form 8-K. None.


                                       18

<PAGE>


SIGNATURES
In accordance  with Section 13 or 15(d) of the Exchange Act, the  Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

Earth Sciences, Inc.
--------------------
(Registrant)

By /s/ Mark H. McKinnies                             /s/ Duane N. Bloom
  ----------------------                             ------------------
Mark H. McKinnies, President                         Duane N.  Bloom,  Member of
and Principal Financial Officer                      Executive Committee

Date   March 27, 1998                                March 27, 1998
       --------------                                --------------

In  accordance  with the Exchange  Act, this report has been signed below by the
following  persons on behalf of the  Registrant and in the capacities and on the
dates indicated.

/s/ Ramon E. Bisque                                  /s/ Robert H. Lowdermilk
-------------------                                  ------------------------
Ramon E.  Bisque                                     Robert H. Lowdermilk
Chairman of The Board of Directors                   Director

March 27, 1998                                       March 27, 1998
--------------                                       --------------
    Date                                                  Date


/s/Duane N. Bloom                                    /s/ Michael D. Durham
-----------------                                    ---------------------
Duane N.  Bloom, Director                            Michael D. Durham, Director

March 27, 1998                                       March 27, 1998
--------------                                       --------------
     Date                                                Date


/s/ Mark H. McKinnies
---------------------
Mark H. McKinnies, Director

March 27, 1998
--------------
     Date


                                       19