U. S. SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 _____________________________________________  FORM 10-QSB  (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2007  [    ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________ to ________  Commission File Number 0-12914 _________________________________________________  ENVIRONMENTAL ENERGY SERVICES, INC. (Exact name of small business issuer as specified in its charter)  Delaware
(State or other jurisdiction of incorporation or organization)43-1953030
(IRS Employer Identification No.)  3350 Americana Terrace, Suite 215, Boise, Idaho 83706 (Address of Principal Executive Offices)  (208) 287-4471 (Issuer's telephone number)  Not Applicable (Former name, former address and former fiscal year, if changed since last report)  Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes X,  No  __  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.  Yes ___,  No  X APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: as of September 10, 2007, the Registrant had outstanding 397,945,289 shares of its Common Stock, $0.001 par value. Transitional Small Business Disclosure Format (check one): Yes [__]; No [X]  {A0041158.DOC}  Environmental Energy Services, Inc. and Subsidiaries  FORM 10-QSB REPORT INDEX  Page No.PART I.  FINANCIAL INFORMATIONItem 1.  Financial Statements (Unaudited)Consolidated Balance Sheet as of June 30, 20073Consolidated Statements of Operations for the Three Months Ended June 30, 2007 and 20064Consolidated Statements of Operations for the Six Months Ended June 30, 2007 and 20065Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 20066Notes to Unaudited Consolidated Financial Statements for the Six Months Ended June 30, 20078Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operation21Item 3.   Controls and Procedures25PART II.  OTHER INFORMATION25Item 1.  Legal Proceedings25Item 2.  Changes in Securities25Item 3.  Defaults on Senior Securities26Item 4.  Submission of Matters to a Vote of Security Holders26Item 5.  Other Information26Item 6.  Exhibits and Reports on Form 8-K26Signatures27Exhibit Index28  {A0041158.DOC} 2   PART I.  FINANCIAL INFORMATION Item 1.  Financial Statements  Environmental Energy Services, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEET As of June 30, 2007 (Unaudited)  ASSETSCurrent Assets:Certificate of Deposit$            9,994Total current assets9,994Fixed Assets:Total Equipment (Net of Depreciation)14,871Other Assets:Investment in Wastech, Inc.211,968Deposit for drilling costs1,191,500Investment in gas and oil leases18,169,570Total other assets19,573,038Total assets$19,597,903LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Cash drawn in excess of available balance$         64,463Accounts payable, accrued interest, and other liabilities525,065Related party advance7,146,817Indemnification payable-related party15,504Total current liabilities7,751,849Long-term debt and deferred items0Total liabilities7,751,849Minority interest in consolidated subsidiary3,082,529Stockholders' equity:Series A Convertible Preferred Stock, 5,000,000 shares authorized; 121,000 shares issued and outstanding302,500Common stock, $0.001 par value; 500,000,000 shares authorized; 422,966,139 shares issued and outstanding422,966Additional paid-in capital93,801,035Accumulated Deficit(85,762,975)Total Stockholders' Equity8,763,525Total Liabilities and Stockholders' Equity$19,597,903   The accompanying notes are an integral part of these financial statements.  {A0041158.DOC} 3   Environmental Energy Services, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months Ended June 30, 2007 and 2006 (Unaudited)  Three Months ended June 3020072006Revenues$          58,107$          33,597ExpensesSelling, general and administrative524,026232,599Amortization and depreciation2,226784Total Expenses526,252233,383Income from operations(468,145)(199,786)Other income (expense)Interest income112118Interest expense(28,600)-Miscellaneous income6,638-Cumulative preferred dividends(8,433)-Loss on settlement(80,025)-Share of unconsolidated entity loss(24,752)-Total other income (expense)(135,060)118Net Income (Loss)(603,205)(199,668)Unrealized Gain (Loss)-1,196,262Comprehensive Income (loss)$       (603,205)$           996,594Earnings (loss) per share:Basic(0.00)0.00Diluted(0.00)0.00Weighted average number of common shares outstanding:Basic422,962,931400,247,451Diluted584,493,931455,078,451   The accompanying notes are an integral part of these financial statements.   {A0041158.DOC} 4   Environmental Energy Services, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS For the Six Months Ended June 30, 2007 and 2006 (Unaudited)  Six Months ended June 3020072006Revenues$         135,532$       230,054ExpensesSelling, general and administrative950,621394,677Amortization and depreciation2,22611,911Total Expenses952,847406,588Income from operations(817,315)(176,534)Other income (expense)Interest income1761,142Interest expense(28,600)-Gain on sale of oil and gas leases192,610-Miscellaneous income6,638-Cumulative preferred dividends(9,476)-Share of unconsolidated entity loss(39,744)-Loss on settlements  related party(80,025)-Total other income (expense)41,5791,142Net Income (Loss)(775,736)(175,392)Unrealized Gain (Loss)-1,071,817Comprehensive Income (loss)$     (775,736)$         896,425Earnings per share:Basic0.000.00Diluted0.000.00Weighted average number of common shares outstanding:Basic434,151,212400,983,711Diluted576,792,710456,254,989  The accompanying notes are an integral part of these financial statements.  {A0041158.DOC} 5   Environmental Energy Services, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 2007 and 2006 (Unaudited)  INCREASE (DECREASE) IN CASH20072006Cash Flow from Operating Activities:Net income (loss)$        (775,736)$             896,425Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:Depreciation and Amortization2,22611,911Unrealized (Gain) Loss on Marketable Securities-(1,071,817)Share of unconsolidated entity income (loss)39,744-Issuance of warrants for settlement4,275Issuance of warrants for services350,834--Changes in assets and liabilities:Accounts payable, Accrued Interest and Other Liabilities342,9731,013Cash drawn in excess of bank balance64,463-Accounts payable relating to drill rig-2,100,000Amount due for oil and gas leases-338,558Prepaid Accounts-(1,475)Deposit for drilling costs(1,191,500)-Settlement Payable-(75,000)Net Cash Provided by (Used in) Operating Activities(1,162,721)2,199,615Cash Flow from Investing ActivitiesInvestment in Wastech, Inc.(17,500)-Purchase (sale) of Oil & Gas Properties1,490,475(8,200,000)Purchased Oil & Gas Equipment-(2,100,000)Purchase Office Equipment-(7,749)Investment in Marketable Securities-(801,500)Net Cash Provided by (Used in) Investing Activities1,472,975(11,062,749)     The accompanying notes are an integral part of these financial statements.  {A0041158.DOC} 6    Environmental Energy Services, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 2007 and 2006 (Unaudited) (continued)  Cash Flows from Financing Activities:Borrowings  related parties(35,809)7,252,942Borrowings  unrelated parties21,10046,500Warrants issued in Duke settlement54,057Minority interest(53,309)Common stock issued for preferred dividends1,043-Preferred stock issuance, net of issuance costs299,500-Cumulative preferred stock dividends8,433-Repayments of borrowings  unrelated parties, net of new borrowings(400,000)1,600,000Shares issued by Blaze1,340,000Shares repurchased in Duke settlement(1,546,667)(102,434)Net Cash Provided by (Used in) Financing Activities:(311,652)8,750,508Net Increase (Decrease) in Cash(1,398)(112,626)Cash and Cash Equivalents at beginning of period11,392174,311Cash and Cash Equivalents at end of period9,99461,685Cash Paid for Interest00   The accompanying notes are an integral part of these financial statements.  {A0041158.DOC} 7   Environmental Energy Services, Inc. and Subsidiaries NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2007 (Unaudited)  1. Basis of Presentation The accompanying unaudited financial statements have been prepared by Environmental Energy Services, Inc. (the "Company") pursuant to the rules and regulations of the U. S. Securities and Exchange Commission. Certain information and disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these financial statements have been included. Such adjustments consist of normal recurring adjustments. This Form 10-QSB Report should be read in conjunction with the Form 10-KSB Report of Environmental Energy Services, Inc. for the fiscal year ended December 31, 2006, as filed with the U. S. Securities and Exchange Commission. The results of operations for the period ended June 30, 2007 are not indicative of the results that may be expected for the full year. 2. Summary of Significant Accounting Policies Nature of Operations.  The Company is an oil and gas exploration, development and production company.  During fiscal 2006, the Company acquired oil and gas leases in Arkansas, Louisiana, Oklahoma and Alaska.  Its largest property to date is a working interest in over 45,000 acres of leases in the Fayetteville Shale Field in Arkansas.  Its corporate strategy is to continue building value in the Company through the development and acquisition of gas and oil assets that exhibit consistent, predictable, and long-lived production. Its current focus is on working with the operator to develop our working interest in the Fayetteville Shale Field in Arkansas, and secondarily the exploration and development of our gas field in Louisiana. Consolidated Statements.  The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, EESV Drilling, LLC and Duke Oil & Gas Alaska, LLC, as well as its majority controlled subsidiaries, Appalachian Environmental Recovery, Inc., of which the Company owns 88.26%, and Blaze Energy Corp., of which the Company owned 76.83% at June 30, 2007.  All material inter-company transactions and balances have been eliminated in consolidation.  Investments in affiliated companies that are 50% or less owned, and where the Company exercises significant influence over operations, are accounted for using the equity method. Amortization and Depreciation.  Amortization and depreciation were calculated by the straight-line method based on the following useful lives: Royalty agreement6 yearsEquipment5  7 years  Amortization and depreciation expense for the six months ended June 30, 2007 and 2006 was $2,226 and $11,911, respectively. Use of Estimates.  The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.  {A0041158.DOC} 8   Liquidity.  The Companys consolidated balance sheet as of June 30, 2007 reflects cash and equivalents of $9,994, total current assets of $9,994 at historical cost, total current liabilities of $7,752,389, and an accumulated deficit of ($85,762,975).  Most of the Companys current liabilities represent advances made by related parties. During 2006, the Company purchased oil and gas lease rights in Arkansas, Louisiana, Oklahoma and Alaska.  The Company is obligated to expend a substantial amount of money to drill wells on the leased acreage, or the leases will terminate.  In most cases, the Company is obligated to pay delay rentals to keep the lease in force until it drills on the leased acreage. In the quarter ended June 30, 2007, the Company received requests for deposits for the first two wells to be drilled by the operator of its working interest in the Fayetteville Shale field.  To raise funds, the Company conveyed its working interest in the Fayetteville Shale field to Blaze Energy Corp., a publicly traded shell company controlled at the time by four directors of the Company, for 70 million shares of common stock in Blaze.  Prior to the transaction, Blaze had approximately 19,665,804 shares outstanding on a fully diluted basis, and thus the Company acquired ownership of 78% of Blaze as a result of the transaction.  Blaze raised $1,340,000 in the month of June 2007 in a private placement, which the Company used to meet its obligation for drilling costs.  On August 3, 2007, the Company sold 75% of its working interest in the Fayetteville Shale field for $15,177,679.  In addition, the Company received a refund of 75% of the unused drilling costs which it had previously deposited with the operator of the field.  The Company believes that the proceeds of the sale will not be sufficient to enable it to meet its obligation to pay drilling costs in the Fayetteville Shale field, and pay general and administrative expenses, and therefore the Company is actively exploring alternatives to raise capital. For the last several years, the Company has paid routine accounting, managerial, legal and basic general and administrative expenses from a quarterly royalty payment that are payable under a technology license pertaining to binding technology licensed to a production facility that qualifies for tax credits under Section 29 of the Internal Revenue Code.  In fiscal 2006, the Companys revenues from the royalty declined substantially, and were insufficient to pay all of the Companys general and administrative expenses.  The amount of the royalty is determined from the amount of tax credits generated by the facility, among other factors.  The amount of tax credits which are payable under the IRS program decline as the price of oil rises, and are eliminated if the price of oil rises above a certain level.  If the price of oil stays at current levels, it is likely that the amount of royalty payments will be far below historical amounts, and may actually be eliminated entirely. Earnings Per Share.  The Company has adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share," specifying the computation, presentation and disclosure requirements of earnings per share information.  Basic earnings per share has been calculated based upon the weighted average number of common shares outstanding.  Diluted net income per share is calculated based on the weighted average number of common shares and common stock equivalents outstanding during the year. Advertising.  The Company expenses advertising costs as incurred.  There was no advertising expense for the quarters ended June 30, 2007 and 2006. Marketable Securities.  Prior to 2006, the Company accounted for marketable securities in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities.  This statement requires securities, which are available for sale to be carried at fair value, with changes in fair value recognized as a separate component of stockholders equity.  As a result of trading restrictions and thin trading activity in shares of Wastech, Inc., the Company had classified the securities as long-term assets prior to the fiscal year 2006.  At and after December 31, 2006, the Companys investment in Wastech, Inc. was accounted for using the equity method of accounting.  (See Note 9).   Potential Environmental Liability.  The Companys oil and gas exploration and productive activities are  {A0041158.DOC} 9   subject to local, state and federal laws and regulations governing environmental quality and pollution control in the United States. The exploration, drilling and production from wells, natural gas facilities, including the operation and construction of pipelines, plants and other facilities for transporting, processing, treating or storing natural gas and other products, are subject to stringent environmental regulation by state and federal authorities, including the Environmental Protection Agency ("EPA"). In addition, former affiliates of the Company may have incurred liabilities for the deterioration of the environment as a result of its past future operations, and may incur environmental liabilities as a result of future operations. Significant fines and penalties may be imposed for the failure to comply with environmental laws and regulations. Some environmental laws provide for joint and several strict liability for remediation of releases of hazardous substances, rendering a person liable for environmental damage without regard to negligence or fault on the part of such person. In addition, the Company may be subject to claims alleging personal injury or property damage as a result of alleged exposure to hazardous substances, such as oil and gas related products.  Any substantial liability for environmental damage could materially adversely affect the operating results and financial condition of the Company.  Since the Company has no insurance coverage for environmental liabilities, if the Company were to incur liability for environmental damage, its business and financial condition could be materially adversely affected. Investment in unconsolidated entity.  The equity method of accounting is used for joint ventures and associated entities over which the Company has significant influence.  Generally this represents partnership equity or common stock ownership interests of at least 20% and not more than 50%.  Under the equity method of accounting, the investment is accounted for at cost and adjusted for the Companys pro rata share of the profits and losses of the entity. Comprehensive Income.  The Company has adopted Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income."  SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements.  The effect of SFAS 130 is reflected in these financial statements. Gas and Oil Properties.  The Company will follow the full cost method of accounting for the exploration, development, and acquisition of gas and oil reserves. Under this method, all such costs (productive and nonproductive) including salaries, benefits, and other internal costs directly attributable to these activities are capitalized and amortized on an aggregate basis over the estimated lives of the properties using the units-of-production method. The Company excludes all costs of unevaluated properties from immediate amortization. The Companys unamortized costs of natural gas and oil properties are limited to the sum of the future net revenues attributable to proved natural gas and oil reserves discounted at 10 percent plus the lower of cost or market value of any unproved properties. If the Companys unamortized costs in natural gas and oil properties exceed this ceiling amount, a provision for additional depreciation, depletion and amortization is required. At December 31, 2006, the Companys net book value of natural gas and oil properties did not exceed the ceiling amount. Decreases in market prices from December 31, 2006 levels, as well as changes in production rates, levels of reserves, and the evaluation of costs excluded from amortization, could result in future ceiling test impairments. The adoption of FAS 143, as well as the adoption of Staff Accounting Bulletin No. 106, did not have a material impact upon the Companys calculation of its ceiling test. Additionally, the impact of adoption of FAS 143 did not have a material effect on the Companys financial position or results of operations. The Companys adoption of Statement of Financial Accounting Standards No. 143 Accounting for Asset Retirement Obligations (FAS 143), may impact its accounting for gas and oil properties in future periods principally by (i) recognizing future asset retirement obligations as a cost of its oil and gas properties and (ii) subjecting to depreciation, depletion and amortization the recorded asset retirement costs as well as estimated future retirement costs associated with future development activities on proved properties, net of salvage value associated with the retirement of the properties.  {A0041158.DOC} 10   Asset Retirement Obligations. As discussed above, FAS 143, Accounting for Asset Retirement Obligations, was adopted by the Company. FAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made, and that the associated asset retirement costs be capitalized as part of the carrying amount of the long-lived asset. The Company owns natural gas and oil properties which require expenditures to plug and abandon the wells when reserves in the wells are depleted. These expenditures under FAS 143 are recorded in the period the liability is incurred (at the time the wells are drilled or acquired).  Since the Company had not drilled any wells on its leased acreage as of December 31, 2006, the Company has not recorded liability for associated retirement costs. Stock Based Compensation.  On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (SFAS 123(R)) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and warrants based on estimated fair values.  SFAS 123(R) supersedes the Companys previous accounting under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) for periods beginning in fiscal 2006.  In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB 107) relating to SFAS 123(R).  The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R). The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standards as of January 1, 2006, the first day of the Companys fiscal year 2006.  The Companys Consolidated Financial Statements as of and for the year ended December 31, 2006 reflect the impact of SFAS 123(R).  In accordance with the modified prospective transition method, the Companys Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R).  Stock-based compensation expense recognized under SFAS 123(R) for the six months ended June 30, 2007 was $134,313 with respect to options or warrants issued by the Company, and $219,521 with respect to warrants issued by Blaze. SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model.  The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Companys Consolidated Statement of Operations.  Prior to the adoption of SFAS 123(R), the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123).  Under the intrinsic value method, no stock-based compensation expense had been recognized in the Companys Consolidated Statement of Operations because the exercise price of the Companys stock options and warrants granted to employees and directors approximated or exceeded the fair market value of the underlying stock at the date of grant. Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period.  Stock-based compensation expense recognized in the Companys Consolidated Statement of Operations for the six months ended June 30, 2007 does not include compensation expense for share-based payment awards granted prior to, but not yet vested as of, December 31, 2005 as all prior awards were vested as of December 31, 2005. The fair value of compensation expense for the share-based payment awards granted subsequent to December 31, 2005 were estimated in accordance with the provisions of SFAS 123(R).  SFAS 123 (R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Upon adoption of SFAS 123(R), the Company is using the Black-Scholes option-pricing model as its method of valuation for share-based awards granted beginning in fiscal 2006.  The Companys determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Companys stock price as well as assumptions regarding a number of highly  {A0041158.DOC} 11   complex and subjective variables.  These variables include, but are not limited to the Companys expected stock price volatility over the term of the awards, and certain other market variables such as the risk free interest rate. The expected term of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior.  Stock price volatility is based on the historical volatility of the Companys stock for related periods.  Prior to the adoption of SFAS 123R, expected stock price volatility was estimated using only historical volatility.  The risk-free interest rate is based on the implied yield available on U.S. Treasury constant maturity securities with an equivalent remaining term.  The Company has not paid dividends in the past and does not plan to pay any dividends in the near future. The Black-Scholes option valuation model was developed for use in estimating the fair value of warrants, which have no vesting restrictions and are fully transferable.  In addition, option valuation models require the input of highly subjective assumptions, particularly for the expected term and expected stock price volatility.  The Companys employee stock options and warrants have characteristics significantly different from those of traded options or warrants, and changes in the subjective input assumptions can materially affect the fair value estimate.  Because Company stock options and warrants do not trade on a secondary exchange, employees do not derive a benefit from holding stock options or warrants unless there is an increase, above the grant price, in the market price of the Companys stock.  Such an increase in stock price would benefit all shareholders commensurately. 3. Accounts Payable, Accrued Interest and Other Liabilities Accounts payable, accrued interest and other liabilities at June 30, 2007, consist of the following: Accounts payable$      71,839Accrued expenses332,126Notes payable121,100$     525,065 4. Notes and Loans Payable As of June 30, 2007, the Company was indebted to A. Leon Blaser and his affiliates for $7,146,817.  The loans are unsecured, non-interest-bearing, demand loans.  The loan proceeds were used to fund the Company's obligations under its agreement to purchase additional shares of common stock in Wastech and working interests in the Fayetteville Shale field in Arkansas. 5. Notes and Loans Payable - Long-Term Liabilities As of June 30, 2007, the Company has no indebtedness classified as a long-term liability. 6. Acquisitions and Divestitures Settlement with J. Brad Duke On December 1, 2006, the Company, J. Brad Duke or designees (Duke), and A. Leon Blaser and various affiliates of Mr. Blaser entered into an agreement to restructure various business relationships among them.  In the agreement, the Company and Duke agreed to restructure a Lease Purchase Agreement dated September 14, 2006, under which the Company purchased the leases acquired under the Mineral Lease Investment Agreement for 26,666,667 shares of the Companys common stock and 2,000,000 warrants to purchase common stock.  Under the December 1, 2006 agreement, instead of issuing Duke 26,666,667 shares for the  {A0041158.DOC} 12   leases, the Company agreed to assign to Duke working interests in the Fayetteville Shale Field with a book value of $2,000,000 and issue 26,000,000 warrants to purchase shares of the Companys common stock at $0.175 per share.  The warrants expire on January 9, 2009.  In addition, Duke agreed to relinquish his 5% overriding royalty in the leases.  Closing under the agreement was subject to the satisfaction of title and environmental conditions relating to certain land that Mr. Blaser agreed to convey to Duke under the agreement.  The agreement closed on March 18, 2007.  In connection with the transaction, the Company and Duke executed a mutual release of any claim which each had against the other.  The Company recorded a gain of $192,610 from the transaction. The following table summarizes the calculation of gain from the settlement with Duke: Consideration to EESVCancellation of 26,666,667 shares$      1,546,667Termination of 5% ORR in leases200,000Release of 500,000 loan500,000Total2,246,667Consideration to DukeTransfer of 2,500 net acres in Fayetteville2,000,00026,000,000 warrants at 0.175 per share54,057Total2,054,057Net Gain$         192,610 The value of the shares of Company common stock that were cancelled in the transaction was determined from the market value of the common stock on the date of closing, which as $0.058 per share.  The fair value of stock warrants granted to Duke was determined using the Black-Scholes method using the following significant assumptions: Significant assumptions:Equity Price$0.058Risk-free interest rate at grant date4.93%Expected stock price volatility50%Expected dividend payout-Expected option life (in years)1.8333 The following table summarizes the working interests owned by the Company in the Fayetteville Shale Field before the transaction with Duke and the amount that was owned after the transaction closed: Prior to Assignment to DukeNet Acreage Assigned to DukeNet Acreage Retained by CompanyClinton AMI3,224 net mineral acres625 net mineral acres2,599 net mineral acresPearson AMI1,032 net mineral acres200 net mineral acres832 net mineral acresRemaining AMI8,653 net mineral acres1,675 net mineral acres6,978 net mineral acresTotal12,909 net mineral acres2,500 net mineral acres10,409 net mineral acres Transaction with Blaze Energy Corp.  {A0041158.DOC} 13   On August 3, 2007, the Company entered into a Securities Purchase Agreement with Blaze Energy Corp. (Blaze), under which the Company conveyed all of the outstanding shares of a wholly-owned subsidiary, EESV Fayetteville, Inc. (the Subsidiary), to Blaze in consideration for 70,000,000 shares of common stock of Blaze.  The Securities Purchase Agreement was made effective as of June 26, 2007, when the Company issued a press release announcing the transaction.  Blaze is a publicly traded corporation which, prior to the transaction, had no assets or operations, and minimal liabilities.  The common stock of Blaze trades on the Pink Sheets under the symbol BLZE.PK.  Immediately prior to the transaction, Blaze had outstanding 17,665,804 shares, and was obligated to issue approximately 2,100,000 more shares under a convertible debenture, and thus had outstanding approximately 19,765,804 on a fully diluted basis.  Accordingly, the Company acquired ownership of approximately 78% of Blaze on a fully diluted basis as a result of the transaction.  Simultaneously, the Company and Blaze entered into a Management Agreement, under which the Company agreed to provide management and overhead services to Blaze for one year in consideration for a monthly management fee of $100,000 per month.  The agreement has been valued at fair value in these financial statements.  The FASB defines fair value as the price at which an asset or liability could be exchanged in a current transaction between knowledgeable, unrelated, willing partes (FASB, 2004a).  The IASB defines fair value similarly.  Fair value can have multiple meanings and does not necessarily depend on the existence of active markets.  Moreover, even if market prices exist as they do in this transaction, the value to the entity need not equal its quoted market price.  The value of the investment in Blaze is based upon the sale price of a majority interest in the principal assets of Blaze to an unrelated third party on August 3, 2007.   SFAS No. 107 requires disclosure of fair estimates of all recognized assets and liabilities, and and is used in this instance. 7. Commitments and Contingencies In 1998, WasteMasters issued 63,000,000 shares of common stock and warrants to purchase 100,000,000 shares of common stock in settlement of WasteMasters liability under certain convertible debentures.  However, by an Order entered in March 14, 2000, a federal district court ruled that the shares and warrants were issued as a result of collusion and fraud between management of WasteMasters and the holders of the convertible debentures.  As a result, WasteMasters cancelled all shares and warrants issued pursuant to the Settlement Agreement, and such shares and warrants are not treated as outstanding on the Companys financial statements.  WasteMasters subsequently acquired all of the convertible debentures, and therefore the convertible debentures are not outstanding any longer.  However, prior to the courts ruling, certain of the shares had been transferred to persons who may qualify as holders in due course.  Under a holding company reorganization effected in 2001, the Company may be obligated to recognize the validity of any shares issued by WasteMasters to the extent they are held by a holder in due course.  WasteMasters surveyed the current registered holders of the shares, and believes that approximately 14 million shares may be held by potential holders in due course. The Company is obligated under a month to month lease for office space at $1,375 per month. The Company is obligated to pay Cox-Holsted & Associates, P.C. a management fee of $50,000 per quarter. 8. Issuance and Repurchase of Common Stock At June 30, 2007, the Company's authorized capital stock was 495,000,000 shares of Common Stock, par value $0.001 per share, and 5,000,000 shares of Preferred Stock, par value $0.001 per share.  On that date, the Company had outstanding 422,945,289 shares of Common Stock. During the six months ended June 30, 2007, the Company did not issue any shares of Common Stock, but it retired 26,666,667 shares of Common Stock in connection with the Duke Transaction (see Note 6).  {A0041158.DOC} 14   In January 2007, the Companys board of directors approved an amendment to its Certificate of Incorporation to modify the terms of its Series A Preferred Stock.  At the time, there were no shares of Series A Preferred Stock outstanding.  By the amendment, the Company authorized the issuance of 5,000,000 shares of Series A Convertible Preferred Stock with the following terms: · a liquidation preference of $2.50 per share; · mandatory dividends of $0.30 per year, payable quarterly; · the right of holders to convert any dividends that are in arrears into common stock at the current market price, subject to a minimum of $0.20 per share; · the right of the Company to redeem any shares of preferred stock at any time that the current market price of the Companys common stock is greater than $0.50 per share; · the right of holders to convert their shares of preferred stock into the following number of shares of common stock: the sum of (a) the number obtained by dividing the liquidation preference of the preferred shares by $0.20 per share, and (b) the number obtained by dividing the amount of accrued but unpaid dividends by the current market price of the common stock, subject to a minimum of $0.20 per share; · each share has one vote per share; · whenever dividends are in arrears for twelve calendar months or more, preferred stockholders have the right as a class to elect two (2) directors to the Companys board of directors. Shortly thereafter, the Company commenced a private offering of shares of up to $12,500,000 of Series A Convertible Preferred Stock at $2.50 per share.  During the quarter ended March 31, 2007, the Company sold 21,000 shares of Series A Preferred Stock for total gross proceeds of $52,500.  During the quarter ended June 30, 2007, the Company sold 60,000 shares of Series A Preferred Stock for total gross proceeds of $150,000.  During the quarter ended June 30, 2007, the Company also issued 40,000 shares of Series A Preferred Stock to a director in settlement of a disputed claim. 9. Equity Method Investment At June 30, 2007, the Company owned 33,622,211 shares of common stock in Wastech, Inc., which represents approximately 29.1% of the issued and outstanding shares of common stock of Wastech, Inc. The Company accounts for its investment in Wastech, Inc. using the equity method of accounting. Summarized financial information for Wastech Inc. as of June 30, 2007 and 2006, and for the six months ended June 30, 2007 and 2006, is as follows: 20072006UnauditedUnauditedTotal assets$1,621,682$5,908,948Total liabilities$1,025,480$4,727,267Net income($137,048)($168,400) 10. Warrants  {A0041158.DOC} 15   Environmental Energy Services, Inc. Transactions involving stock options or warrants issued to employees, consultants, officers and directors of the Company in fiscal 2007 are summarized as follows: Number of SharesWeighted Average Price Per ShareOutstanding at December 31, 200650,500,0000.14Granted (exercised)13,000,0000.38Cancelled/expired0-Outstanding as of June 30, 200763,500,0000.19  The weighted-average fair value of stock options or warrants granted to employees during the six months ended June 30, 2007, and the weighted-average significant assumptions used to determine those fair values, using a Black-Scholes option pricing model are as follows: Significant assumptions (weighted-average):Risk-free interest rate at grant date4.92%Expected stock price volatility50%Expected dividend payout-Expected option life (in years)5.0 Total stock-based compensation expense recognized in the consolidated statement of earnings for the six months ended June 30, 2007 was $134,313. Transactions involving the issuance of warrants other than for compensatory purposes in the six months ended June 30, 2007 are summarized as follows: Number of SharesWeighted Average Price Per ShareOutstanding as December 31, 200644,300,000$        0.21Granted26,000,0000.175Exercised--Cancelled or expired--Outstanding as June 30, 200770,300,000$        0.20  In the six months ended June 30, 2007, the Company issued 26,000,000 warrants in a settlement. The warrants have an exercise price of $0.175 per share, and expire on January 9, 2009.  The warrants issued in the settlement were valued at $54,057.  The estimated value of these warrant grants during the six months ended June 30, 2007 was determined using the Black-Scholes options pricing model and the following assumptions: Significant assumptions (weighted-average):Risk-free interest rate at grant date4.93%Expected stock price volatility50%Expected dividend payout-  {A0041158.DOC} 16    Expected option life (in years)1.8333 Blaze Energy Corp. Transactions involving stock options or warrants issued to employees, consultants, officers and directors of Blaze in fiscal 2007 are summarized as follows: Number of SharesWeighted Average Price Per ShareOutstanding at December 31, 2006--Granted (exercised)800,0001.00Cancelled/expired0-Outstanding as of June 30, 2007800,0001.00  The weighted-average fair value of stock options or warrants granted to employees of Blaze during the six months ended June 30, 2007, and the weighted-average significant assumptions used to determine those fair values, using a Black-Scholes option pricing model are as follows: Significant assumptions (weighted-average):Risk-free interest rate at grant date4.98%Expected stock price volatility50%Expected dividend payout-Expected option life (in years)3.0 Total stock-based compensation expense recognized by Blaze in the consolidated statement of earnings for the six months ended June 30, 2007 was $216,521. 11. Related Party Transactions The Company has engaged in certain transactions with related parties that are discussed in Item 12 of its Annual Report on Form 10-KSB for the year ended December 31, 2006, which is hereby incorporated by reference. Loans from A. Leon Blaser and Affiliates In the six months ended June 30, 2007, the Company repaid a $35,809 to A. Leon Blaser and his affiliates, net of funds advanced by Mr. Blaser and his affiliates during the period. The loans are non-interest, unsecured, demand loans.  The aggregate amount owed Mr. Blaser and his affiliates at June 30, 2007 was $7,146,817. Settlement with Julius W. Basham On May 8, 2007, the Companys board of directors approved a settlement of a claim by Julius W. Basham, II, a director of the Company since May 2006, for $200,000 of interest claimed by Mr. Basham on loans that Mr. Basham converted into common stock several years ago.  Under the settlement, Mr. Basham agreed to accept, in full settlement of his claim, 40,000 shares of the Companys Series A Convertible Preferred Stock, a 0.45% overriding royalty interest in the Companys interest in the Remaining AMI working interest in the Fayetteville Shale, and 400,000 warrants to purchase shares of Common Stock, of which 100,000 are  {A0041158.DOC} 17   exercisable at $0.05 per share, 100,000 are exercisable at $0.15 per share, 100,000 are exercisable at $0.25 per share, and 100,000 are exercisable at $0.50 per share.  The warrants expire five years after the date of grant. As announced in the Companys Form 10-KSB for 2006, A. Leon Blaser converted $4,400,000 of loans to the Company into an overriding royalty interest and warrants, and at the time directed that $100,000 of such amount be transferred to Mr. Basham as part of the settlement of Mr. Bashams claim.  As part of the approval of the settlement with Mr. Basham, the Companys board approved the issuance of 400,000 warrants and a 0.45% overriding royalty interest to Mr. Blaser to reimburse him for the overriding royalty and warrants that he had assigned to Mr. Basham in 2006. Employment Agreements with Officers. On May 8, 2007, effective as of January 1, 2007, the Company entered into employment agreements with A. Leon Blaser, chairman and chief executive officer, Greg Holsted, chief financial officer, and Michael Thompson, president.  The employment agreements provide as follows: · That Messrs. Blaser, Holsted and Thompson will receive annual salaries of $150,000, $200,000 and $200,000 per year, respectively; · That the annual salaries of Messrs. Blaser, Holsted and Thompson will increase to $175,000, $250,000 and $250,000, respectively, upon the Companys receipt of the first deliverable well production; · The officers employment is subject to standard provisions requiring that they maintain the confidentiality of  Company information, and prohibiting their competition with the Company or soliciting employees of the Company during and after the termination of their employment with the Company; · If the average stock price for any ten day period equals or exceeds $0.20 per share, then each officer will be paid a bonus equal to 1% of the Companys outstanding Common Stock, not to exceed 5,000,000 shares, not including any shares issued or issuable under identical provisions in the employment agreements of other officers of the Company.  The officer will be responsible for payment of employment taxes associated with the bonus. · In the event of a change of control of the Company, each officer shall receive a bonus equal to 1% of the Companys outstanding Common Stock, not including any shares issued or issuable under identical provisions in the employment agreements of other officers of the Company.  The officer will be responsible for payment of employment taxes associated with the bonus.  A change of control will occur if persons are elected by a vote of shareholders of the Company to fill a majority of the positions on the board of directors of the Company who were not nominated or approved by the existing board of directors prior to their election to the board. · Each officer will receive three weeks paid time off, insurance benefits and right to participant in 401(k) to the extent provided to other officers of the Company. · Each officer is not required to devote 100% of their time to Company affairs and is specifically allowed to continue other outside business or consulting obligations.  Mr. Blasers compensation is specifically set at a level that contemplates that he will devote approximately 50% of his time to Company affairs. Amendment to Management Agreement with GD Management Services, Inc.  {A0041158.DOC} 18   On May 8, 2007, effective as of January 1, 2007, the Company and GD Management Services, Inc. (GD) amended their Management and Operations Agreement dated January 1, 2003, as amended.  The amendment reduces the compensation paid by the Company thereunder from $100,000 per quarter to $50,000 per quarter, and reduces the amount payable as benefits from $2,500 per month to $1,250 per month.  The services to be provided by GD thereunder were amended to include only assistance in the administration of finances and advice and assistance on all matters within the historical knowledge of employees of GD pertaining to the Company.  GD simultaneously assigned the agreement to Cox Holsted & Associates, P.C. GD is owned in equal parts by A. Leon Blaser, the Companys chairman and chief executive officer, Greg Holsted, the Companys chief financial officer, and Douglas Holsted, who previously was an officer and director of the Company.  Cox Holsted & Associates, P.C. is controlled by Douglas Holsted.  As a result of the amendment and assignment, Mr. Blaser and Greg Holsted no longer have an interest in the management agreement.  Mr. Blaser and Greg Holsted simultaneously entered into employment agreements with the Company. Transactions with Blaze Energy Corp. In May 2007, the Company reached an oral agreement with the principal shareholders of Blaze Energy Corp. to use (Blaze) as a vehicle to raise capital to fund its share of drilling costs in the Fayetteville Shale field.  As part of that oral agreement, the sole board member of Blaze resigned and four persons who were officers and directors of the Company were appointed to the board of Blaze (A. Leon Blaser, Greg Holsted, Michael Thompson and Vaughn Featherstone).  Messrs. Blaser, Holsted, Thompson and Featherstone did not own any equity interests in Blaze at that time.  On June 1, 2007, the Company conveyed its working interest in the Fayetteville Shale field to a newly-formed subsidiary, EESV Fayetteville, Inc. (EESV Fayetteville).  EESV Fayetteville acquired the working interest subject to all existing royalties, and further agreed to pay the Company $1,125,000 upon the sale of part or all of the working interests.  Effective June 26, 2007, the Company conveyed EESV Fayetteville to Blaze in consideration for 70,000,000 shares of common stock of Blaze.  Immediately prior to the transaction, Blaze had outstanding 17,665,804 shares, and was obligated to issue approximately 2,100,000 more shares under a convertible debenture, and thus had outstanding approximately 19,765,804 on a fully diluted basis.  Accordingly, the Company acquired ownership of approximately 79.8% of Blaze as a result of the transaction (78% on a fully diluted basis). In the quarter ended June 30, 2007, Blaze sold 1,340,000 shares of common stock in a private offering at $1.00, and received gross proceeds of $1,340,000.  The proceeds were largely used to pay EESVs share of the costs associated with the initial wells being drilled in the Fayetteville Shale field.  As a result of the private offering, the Company owned 76.8% of Blaze as of June 30, 2007. The Company and Blaze entered into a management agreement, effective July 1, 2007, under which Blaze agreed to pay the Company a management fee of $100,000 per month.  In consideration for the management fee, the Company agreed to supply Blaze with the management time of A. Leon Blaser, Greg Holsted and Michael Thompson on a part-time basis, sufficient personnel to supervise and administer all finances of Blaze and all actual operations of Blaze, and office space in the Companys offices, as well as all services and costs incidental to such office space, such as utilities, phone, internet, fax capability, receptionist, file and document storage, and secretarial support. Employment Agreements with Blaze Officers On June 1, 2007, Blaze entered into employment agreements with A. Leon Blaser, as chief executive officer, Greg Holsted, as chief financial officer, and Michael Thompson, as president.  The employment agreements provide as follows:  {A0041158.DOC} 19   · That Messrs. Blaser, Holsted and Thompson will each receive annual salaries of $100,000 per year. · The officers employment is subject to standard provisions requiring that they maintain the confidentiality of  Company information, and prohibiting their competition with the Company or soliciting employees of the Company during and after the termination of their employment with the Company; · If the average stock price for any ten day period equals or exceeds $8.00 per share, then each officer will be paid a bonus equal to 1% of the Companys outstanding Common Stock, not to exceed 1,000,000 shares, not including any shares issued or issuable under identical provisions in the employment agreements of other officers of the Company.  The officer will be responsible for payment of employment taxes associated with the bonus. · In the event of a change of control of the Company, each officer shall receive a bonus equal to 1% of the Companys outstanding Common Stock, not including any shares issued or issuable under identical provisions in the employment agreements of other officers of the Company.  The officer will be responsible for payment of employment taxes associated with the bonus.  A change of control will occur if persons are elected by a vote of shareholders of the Company to fill a majority of the positions on the board of directors of the Company who were not nominated or approved by the existing board of directors prior to their election to the board. · Each officer will receive three weeks paid time off, insurance benefits and right to participant in 401(k) to the extent provided to other officers of the Company. · Each officer is not required to devote 100% of their time to Company affairs and is specifically allowed to continue other outside business or consulting obligations. · Each officers employment contract provides that the benefits thereunder are supplemental incentive or bonus compensation that is in addition to, and not lieu of, the officers right to compensation from the Company. 12. Other Material Events The Company owns a 14.22% undivided interest in a quarterly royalty payment that is payable under a technology license originally signed in 1998 by certain unrelated parties.  The technology license pertains to chemical binding technology licensed to a production facility that qualifies for tax credits under Section 29 of the Internal Revenue Code.  The amount of the royalty is determined from the amount of tax credits generated by the facility, among other factors.  In May 2007, the Company's share of the technology royalty was $33,596.76, which was far below the amount it historically received.  The decline in the amount of the royalty was due, in large part, to the fact that the amount of tax credits which are payable under the IRS program decline as the price of oil rises, and are eliminated if the price of oil rises above a certain level.  If the price of oil stays at current levels, it is likely that the amount of royalty payments will be far below historical amounts, and may actually be eliminated entirely. The Company investment in the technology license has been fully amortized. 13. Subsequent Events After June 30, 2007, Blaze issued 360,000 shares of common stock in a private offering at $1.00 per share, and received gross proceeds of $360,000.  {A0041158.DOC} 20   On August 3, 2007, EESV Fayetteville sold an undivided 75% of its working interest in the Fayetteville Shale field to a subsidiary of PetroHawk Energy Corporation (NYSE: HK).   EESV Fayetteville is a wholly-owned subsidiary of Blaze, of which the Company owned 76.8% at June 30, 2007.  The gross proceeds from the sale were $15,177,679.  In addition, EESV Fayetteville received a refund of 75% of unused drilling costs that had been placed on deposit to fund EESVs share of drilling costs for two wells being drilled in the Fayetteville Shale field and by a credit of $25,681.36 resulting from an acreage shortfall associated with certain acreage in the Fayetteville Shale field.  EESV Fayetteville used $1,125,000 of the proceeds to satisfy a note payable to the Company.  Blaze intends to use a portion of the remaining net proceeds to settle an overriding royalty interest that the Company granted in a portion of the Fayetteville Shale field in 2006, although the terms of the settlement have not be finally determined at this time. On August 3, 2007, the Company repurchased 25,000,000 shares of common stock held by One TEC, LLC for $0.01 per share. Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations. Disclosure Regarding Forward Looking Statements This Quarterly Report on Form 10-QSB includes forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (Forward Looking Statements). All statements other than statements of historical fact included in this report are Forward Looking Statements. In the normal course of its business, the Company, in an effort to help keep its shareholders and the public informed about the Companys operations, may from time-to-time issue certain statements, either in writing or orally, that contain or may contain Forward-Looking Statements. Although the Company believes that the expectations reflected in such Forward Looking Statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of such plans or strategies, past and possible future, of acquisitions and projected or anticipated benefits from acquisitions made by or to be made by the Company, or projections involving anticipated revenues, earnings, levels of capital expenditures or other aspects of operating results. All phases of the Company operations are subject to a number of uncertainties, risks and other influences, many of which are outside the control of the Company and any one of which, or a combination of which, could materially affect the results of the Companys proposed operations and whether Forward Looking Statements made by the Company ultimately prove to be accurate. Such important factors (Important Factors) and other factors could cause actual results to differ materially from the Companys expectations are disclosed in this report. All prior and subsequent written and oral Forward Looking Statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Important Factors described below that could cause actual results to differ materially from the Companys expectations as set forth in any Forward Looking Statement made by or on behalf of the Company. Overview The Company is an oil and gas exploration, development and production company.  During fiscal 2006, the Company acquired oil and gas leases in Arkansas, Louisiana, Oklahoma and Alaska.  Its largest property to date is a working interest in over 45,000 acres of leases in the Fayetteville Shale Field in Arkansas.  Its corporate strategy is to continue building value in the Company through the development and acquisition of gas and oil assets that exhibit consistent, predictable, and long-lived production. Its current focus is on developing our working interest in the Fayetteville Shale Field in Arkansas, and secondarily the exploration and development of our gas field in Louisiana.  {A0041158.DOC} 21   We intend to continue seeking acquisition opportunities which compliment our current focus. We intend to fund our development activity primarily through proceeds from various private placements sufficient enough to evaluate a greater portion of our mineral leases. Our revenue, profitability, and future growth rate depend substantially on factors beyond our control, such as economic, political, and regulatory developments and competition from other sources of energy. Oil and natural gas prices historically have been volatile and may fluctuate widely in the future. Sustained periods of low prices for oil or natural gas could materially and adversely affect our financial position, our results of operations, the quantities of oil and natural gas reserves that we can economically produce and our access to capital. Results of Operations Three Months Ended June 30, 2007 and 2006 The Company's revenues in the three months ended June 30, 2007 were $58,107, as compared to $33,597 in the three months ended June 30, 2006.  The Company's revenues result from payments received under a royalty agreement that expires in the first quarter of 2008.  As disclosed above, the royalty proceeds were lower than normal starting in 2006 as a result of an increase in the market price of oil, which has the affect of decreasing the tax credits upon which the royalty is based.  As long as the price of oil remains at historically high levels, the Company anticipates that the royalties it receives will be below historical norms or may be eliminated entirely. The Company reported a loss from operations during the three months ended June 30, 2007 of ($468,145), as compared to a loss from operations of ($199,786) during the three months ended June 30, 2006.  The decrease in income from operations was primarily attributable to decreased royalty revenue.  In addition, the Company has increased its general and administrative expenses as it prepares to enter gas operating and drilling operations, as general and administrative expenses increased to $524,026 in the three months ended June 30, 2007 as compared to $232,599 in the three months ended June 30, 2006, an increase of $291,427.  Significant factors in the increase in general and administrative expenses were: · Management compensation increased to $192,500 in the three months ended June 30, 2007, as compared to $36,000 in the three months ended June 30, 2006, as the result of the four officers drawing compensation in 2007 as compared to only one officer in 2006; · Management fee expense decreased from $107,500 in the three months ended June 30, 2006 to $53,750 in the three months ended June 30, 2007 as a result of the modification of a management services contract with GD Management Services, Inc. to reduce the management fees payable thereunder; · The Company recorded an expense of $219,521 for warrants issued to the directors of Blaze in the three months ended June 30, 2007. The Company reported net other expense of ($135,060) in the three months ended June 30, 2007, as compared to net other income of $118 in the three months ended June 30, 2006.  Net other expense increased substantially due to the following factors: · Interest expense of ($28,000) and a loss on settlement of ($80,025) resulting from the settlement of a disputed claim with a director;  {A0041158.DOC} 22   · Share of unconsolidated entity loss of ($24,752), representing the Companys share of the net loss incurred by Wastech, Inc. during the period. The Company reported a comprehensive loss of ($603,205) during the three months ended June 30, 2007, as compared to comprehensive income of $996,594 during the three months ended June 30, 2006. In the three months ended June 30, 2006, the Company recorded an unrealized gain of $1,196,262 from changes in the market value of its interest in Wastech common stock.  In 2007, the Company reported its interest in Wastech under the equity method, and therefore did not record gain or loss as a result of changes in the market value of its interest in Wastech. Six Months Ended June 30, 2007 and 2006 The Company's revenues in the six months ended June 30, 2007 were $135,532, as compared to $230,054 in the six months ended June 30, 2006.  The Company's revenues result from payments received under a royalty agreement that expires in the first quarter of 2008.  As disclosed above, the royalty proceeds were lower than normal starting in 2006 as a result of an increase in the market price of oil, which has the affect of decreasing the tax credits upon which the royalty is based.  As long as the price of oil remains at historically high levels, the Company anticipates that the royalties it receives will be below historical norms or may be eliminated entirely. The Company reported a loss from operations during the six months ended June 30, 2007 of ($817,315), as compared to a loss from operations of ($176,534) during the six months ended June 30, 2006.  The decrease in income from operations was primarily attributable to decreased royalty revenue. In addition, the Company has increased its general and administrative expenses as it prepares to enter gas operating and drilling operations, as general and administrative expenses increased to $950,621 in the six months ended June 30, 2007 as compared to $394,677 in the six months ended June 30, 2006, an increase of $555,944.  Significant factors in the increase in general and administrative expenses were: · Management compensation increased to $350,000 in the six months ended June 30, 2007, as compared to $46,000 in the six months ended June 30, 2006, as the result of the four officers drawing compensation in 2007 as compared to only one officer in 2006; · Management fee expense decreased from $215,000 in the six months ended June 30, 2006 to $107,500 in the six months ended June 30, 2007 as a result of the modification of a management services contract with GD Management Services, Inc. to reduce the management fees payable thereunder; · The Company recorded expenses of $134,313 for warrants issued to officers and directors of the Company, and $219,521 for warrants issued to the directors of Blaze in the six months ended June 30, 2007. The Company reported net other income of ($41,579 ) in the six months ended June 30, 2007, as compared to net other income of $1,142 in the six months ended June 30, 2006.  Net other income increased substantially due to the following factors: · Gain on sale of oil and gas leases resulting from a settlement with Duke in March 2007, in which the Company conveyed working interests in the Fayetteville Shale field with as historical cost of $2,000,000 and warrants valued at $54,057, in consideration for the cancellation of 26,666,667 shares, cancellation of a $500,000 loan to the Company, and the release of a 5% overriding royalty in certain oil and gas leases previously acquired from Duke.  {A0041158.DOC} 23   · Interest expense of ($28,000) and a loss on settlement of ($80,025) resulting from the settlement of a disputed claim with a director; · Share of unconsolidated entity loss of ($39,744), representing the Companys share of the net loss incurred by Wastech, Inc. during the period. The Company reported a comprehensive loss of ($775,736 ) during the six months ended June 30, 2007, as compared to comprehensive income of $996,594 during the three months ended June 30, 2006. In the three months ended June 30, 2006, the Company recorded an unrealized gain of $1,071,817 from changes in the market value of its interest in Wastech common stock.  In 2007, the Company reported its interest in Wastech under the equity method, and therefore did not record gain or loss as a result of changes in the market value of its interest in Wastech. Liquidity and Sources of Capital The Company's consolidated balance sheet as of June 30, 2007 reflects cash and current assets of $9,994 and a working capital deficit of ($7,741,855).  The Company's liabilities consist primarily of loans received from related parties. The Company believes that it has sufficient liquidity to satisfy its current liabilities as a result of the sale of a portion of its working interest the Fayetteville Shale field on August 3, 2007.  However, the Company believes it needs substantial additional capital to fund the development of the oil and gas fields that it has retained, and is actively exploring its options to raise capital.  There is no assurance that the Company will be able to raise the necessary capital, or that the terms under which it can raise capital will be favorable to existing shareholders. Going Concern The Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  As shown in the accompanying financial statements, the Company incurred a net operating loss in the six months ended June 30, 2007, and had significant unpaid accounts payable and liabilities. The Company has been dependent on the proceeds from a technology royalty to pay ongoing general and administrative costs, and there is substantial doubt as to the amount of royalty payments that the Company will receive in future periods.  In addition, the Company needs to raise substantial capital to meet its obligations to fund the drilling of oil and gas wells on acreage it has leased.  These factors create an uncertainty about the Company's ability to continue as a going concern.  The Company is currently trying to raise capital through a private offering of preferred stock.  The ability of the Company to continue as a going concern is dependent on the success of this plan.  The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Off-Balance Sheet Arrangements The Company does not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. Item 3.  Controls and Procedures. Our chief executive officer and chief financial officer are responsible for establishing and maintaining our disclosure controls and procedures.  Our chief executive officer and chief financial officer evaluated the  {A0041158.DOC} 24   effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of March 31, 2007. In designing and evaluating our disclosure controls and procedures, we recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our chief executive officer and chief financial officer concluded that as of June 30, 2007, our disclosure controls and procedures were (1) designed to ensure that material information relating to the company, including our consolidated subsidiaries, is made known to our chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms. This annual report does not include a report of our managements assessment regarding internal control over financial reporting or an attestation report of our registered public accounting firm due to a transition period established by the rules of the Securities and Exchange Commission. PART II.  OTHER INFORMATION. Item 1.  Legal Proceedings. The Company is a party to legal proceedings that are discussed in Item 3 of its Annual Report on Form 10-KSB for the year ended December 31, 2006, which is hereby incorporated by reference. Item 2.  Changes in Securities. In the three months ended June 30, 2007, the Company issued 60,000 shares of Series A Preferred Stock for gross proceeds of $150,000 to two investors. The proceeds were used for general working capital and to fund the Companys working interest owner contributions for development activity in the Fayetteville Shale Field.  The shares were issued pursuant to Rule 506 and the exemption from registration provided by Section 4(2) of the Securities Act of 1933. In the three months ended June 30, 2007, the Company issued 40,000 shares of Series A Preferred Stock and 400,000 warrants to purchase common stock to a director in settlement of a disputed claim. The shares were issued pursuant to Rule 506 and the exemption from registration provided by Section 4(2) of the Securities Act of 1933. In the three months ended June 30, 2007, the Company issued 20,850 shares of common stock to two individuals in satisfaction of accrued dividends on the Series A Preferred Stock in the first quarter of 2007. The shares were issued pursuant to Rule 506 and the exemption from registration provided by Section 4(2) of the Securities Act of 1933. In the three months ended June 30, 2007, Blaze issued 1,340,000 shares of its common stock for gross proceeds of $1,340,000 in a private placement. The shares were issued pursuant to Rule 506 and the exemption from registration provided by Section 4(2) of the Securities Act of 1933. Item 3.  Defaults upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders.  {A0041158.DOC} 25   None. Item 5.  Other Information. None. Item 6.  Exhibits and Reports on Form 8-K. Reference is made to the Index to Exhibits following the signature page to this report for a list of all exhibits filed as part of this report.  {A0041158.DOC} 26   SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ENVIRONMENTAL ENERGY SERVICES, INC.Date: October  4, 2007/s/ Greg HolstedBy: Greg Holsted, Principal Accounting Officer   {A0041158.DOC} 27    EXHIBIT INDEX  Exhibit NumberDescription and Incorporation by Reference2Agreement and Plan of Reorganization filed with the State of Delaware June 29, 2001 (incorporated by reference from the Form 8-K of the Company dated June 29, 2001)3.1Certificate of Incorporation of Environmental Energy Services, Inc., a Delaware corporation, filed June 29, 2001 (incorporated by reference from the Form 8-K of the Company dated June 29, 2001)3.2By-Laws of the Company (incorporated by reference from the Form 8-K of the Company dated June 29, 2001)3.3Amendment to Certificate of Incorporation dated January 25, 2007 (incorporated by reference to the Form 8-K of the Company dated January 25, 2007).10.1Form of Promissory Note (incorporated by reference to the Companys report on Form 8-K filed October 19, 2000)10.2Form of Amendment to Promissory Note (incorporated by reference to the Companys report on Form 8-K filed October 19, 2000)10.3Form of Second Amendment to Promissory Note (incorporated by reference to the Companys report on Form 8-K filed October 19, 2000)10.4Management and Operations Agreement between Environmental Energy Services, Inc. and GD Management Services, Inc., executed on March 14, 2003 and effective as of January 1, 2003 (incorporated by reference to the Companys report on Form 10-KSB for the year ended December 31, 2004)10.5Management and Operations Agreement between Environmental Energy Services, Inc. and GD Management Services, Inc., executed on November 20, 2003 and effective as of October 1, 2003 (incorporated by reference to the Companys report on Form 10-KSB for the year ended December 31, 2004)10.6Amendment to Management and Operations Agreement between Environmental Energy Services, Inc. and GD Management Services, Inc., executed on May 8, 2007 and effective as of January 1, 2007 (incorporated by reference to the Companys report on Form 10-QSB for the quarter ended March 31, 2007)10.7Form of Assignment of Overriding Royalty Interest (incorporated by reference to the Companys report on Form 10-QSB for the quarter ended September 30, 2006)10.8Employment Agreement between the Company and James J. Hines (incorporated by reference to the Companys report on Form 8-K dated March 9, 2007)  {A0041158.DOC} 28    10.9Employment Agreement between the Company and A. Leon Blaser, executed as of March 8, 2007, effective as of January 1, 2007 (incorporated by reference to the Companys report on Form 10-QSB for the quarter ended March 31, 2007)10.10Employment Agreement between the Company and Greg Holsted, executed as of March 8, 2007, effective as of January 1, 2007 (incorporated by reference to the Companys report on Form 10-QSB for the quarter ended March 31, 2007)10.11Employment Agreement between the Company and Michael Thompson, executed as of March 8, 2007, effective as of January 1, 2007 (incorporated by reference to the Companys report on Form 10-QSB for the quarter ended March 31, 2007)10.12*Employment Agreement between Blaze and Michael Thompson, effective as of June 1, 200710.13*Employment Agreement between Blaze and Leon Blaser, effective as of June 1, 200710.14*Employment Agreement between Blaze and Greg Holsted, effective as of June 1, 200710.15*Promissory Note of Blaze Energy Corp. payable to the Company10.16*Management Agreement between Blaze and the Company, effective as of June 26, 200711**Statement re: computation of earnings per share31.1*Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer31.2*Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer32.1*Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2*Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   *  Filed herewith.  ** Included within financial statements.   {A0041158.DOC} 29