UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549  Form 10-Q  (Mark One)  xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the quarterly period ended June 30, 2008  or  £   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)  DELAWARE43-1953030(State or other jurisdiction of incorporation or organization)(IRS Employer Identification No.)  3350 Americana Terrace, Suite 315, Boise, Idaho 83706 (Address of principal executive offices)  208-287-4471 (Issuers telephone number, including area code) _______________________________________________________ (Former name, former address and former fiscal year, if changed since last report)  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x  Yes  £  No  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  Large accelerated filer £ Accelerated filer £Non-accelerated filer £ Smaller reporting company x  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes £   No  x  State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:  406,121,024 shares of August 18, 2008.  1  Environmental Energy Services, Inc. and Subsidiaries  FORM 10-Q REPORT INDEX  PART I.  FINANCIAL INFORMATION 3 Item 1.  Financial Statements 3 Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.21 Item 3.  Quantitative and Qualitative Disclosures about Market Risk. 25 Item 4.  Controls and Procedures. 25 PART II.  OTHER INFORMATION. 26 Item 1.  Legal Proceedings. 26 Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds. 26 Item 3.  Defaults upon Senior Securities. 26 Item 4. Submission of Matters to a Vote of Security Holders. 26 Item 5.  Other Information. 26 Item 6.  Exhibits. 26 SIGNATURES 26 EXHIBIT INDEX 27   2  PART I.  FINANCIAL INFORMATION  ITEM 1.  FINANCIAL STATEMENTS  ENVIRONMENTAL ENERGY SERVICES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS  (unaudited)June 30,December 31,20082007ASSETSCURRENT ASSETS:Cash and equivalents$           37,437$        5,181,590Certificates of deposit1,749,5141,001,459Certificates of deposit pledged as collateral-240,000Accrued interest receivable-10,831Accrued production receivable265,344-Officer advances2,0002,000Notes receivable  auto loans, current portion6,33724,960Prepaid expenses-12,936Total current assets2,060,6326,473,776Fixed assets, net233,35530,543OIL AND GAS PROPERTIES:Evaluated, net of amortization1,104,290676,635Unevaluated7,515,0357,180,699Investment in incomplete wells1,156,124-Total oil and gas properties9,775,4497,857,064OTHER ASSETS:Investment in Wastech, Inc.676,149644,617Notes receivable  auto loans57,035203,473Total other assets733,184848,090TOTAL ASSETS$    12,802,620$      15,209,473             See the accompanying notes to the unaudited condensed consolidated financial statements.   3   ENVIRONMENTAL ENERGY SERVICES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (continued)  LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITYCURRENT LIABILITIES:Accounts payable and accrued expenses290,425127,724Related party advances6,058,0787,396,725Notes payable-241,118Preferred dividends payable50,35120,517Total current liabilities6,398,8547,786,084Minority interest in consolidated subsidiary2,294,3892,449,376DEFICIENCY IN STOCKHOLDERS' EQUITYSeries A Convertible Preferred Stock, 5,000,000 shares authorized, 221,000 and 121,000 shares issued and outstanding, respectively552,500302,500Common stock, par value $0.001 per share;  500,000,000 shares authorized, 406,121,024 and 405,121,024 shares  issued and outstanding, respectively406,121405,121Additional paid in capital95,728,02995,423,129Accumulated deficit(92,577,273)(91,156,737)Total stockholders' equity4,109,3774,974,013$        12,802,620$       15,209,473                    See the accompanying notes to the unaudited condensed consolidated financial statements.  4  ENVIRONMENTAL ENERGY SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)  Three months ended June 30,20082007REVENUES:Royalty income$              62,400$             58,107Oil and gas revenues341,501-Total revenues403,90158,107OPERATING EXPENSES:Selling and administrative1,157,994519,751Amortization and depreciation42,4231,026Total operating expenses1,200,417520,777LOSS FROM OPERATIONS(796,516)(462,670)OTHER INCOME (LOSS):Interest income38,350112Interest expense(1,345)(28,600)Miscellaneous income-6,638Loss on settlement-(88,574)Share of unconsolidated entity income (loss)(18,760)(23,380)Total other income (loss)18,245(113,804)Net Income (loss) before provision for income tax(778,271)(596,474)Provision for income tax--NET INCOME (LOSS) BEFORE MINORITY INTEREST AND PREFERRED DIVIDENDS$           (778,271)$         (596,474)Minority interest69,536-Preferred dividends(16,575)(8,433)INCOME (LOSS) APPLICABLE TO SHAREHOLDERS$          (725,310)$         (604,907)Net Loss per common share - basic$                         -$                         -Net Loss per common stock - fully dilutedNote 2Note 2Weighted average number of common shares outstanding-basic406,121,024422,962,931Weighted average number of common shares outstanding-fully dilutedNote 2Note 2    See the accompanying notes to the unaudited condensed consolidated financial statements.   5  ENVIRONMENTAL ENERGY SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)  Six months ended June 30,20082007REVENUES:Royalty income$              62,400$             135,532Oil and gas revenues429,906-Total revenues492,306135,532OPERATING EXPENSES:Selling and administrative1,890,608946,346Amortization and depreciation57,6792,226Total operating expenses1,948,287948,572LOSS FROM OPERATIONS(1,455,981)(813,040)OTHER INCOME (LOSS):Interest income67,134176Interest expense(5,371)(28,600)Gain on sale of oil and gas leases-192,610Settlement expense  unrelated party(125,503)-Settlement expense  related party-(88,574)Share of unconsolidated entity income (loss)(25,968)(54,102)Total other income (loss)(89,708)28,148Net Income (loss) before provision for income tax(1,545,689)(748,892)Provision for income tax--NET INCOME (LOSS) BEFORE MINORITY INTEREST AND PREFERRED DIVIDENDS$       (1,545,689)$         (748,892)Minority interest154,986-Preferred dividends(29,833)(9,476)INCOME (LOSS) APPLICABLE TO SHAREHOLDERS$       (1,420,536)$         (794,368)Net Loss per common share - basic$                        -$                       -Net Loss per common stock - fully dilutedNote 2Note 2Weighted average number of common shares outstanding-basic405,850,306434,151,212Weighted average number of common shares outstanding-fully dilutedNote 2Note 2    See the accompanying notes to the unaudited condensed consolidated financial statements.    6  ENVIRONMENTAL ENERGY SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)  Six months ended June 30,20082007CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss)$        (1,420,536)$         (794,368)Adjustments to reconcile net loss to net cash used in operating activities:Minority interest(154,987)(53,309)Adjustments for depreciation and amortization57,6802,226Stock and working interest issued in settlement125,503-Common stock issued for preferred dividends-1,043Issuance of warrants for services268,900350,834Issuance of warrants for settlement-8,549Share of unconsolidated entity loss25,96854,102(Increase) decrease in:Production receivable and accrued interest(241,577)-Cash drawn in excess of bank balance-64,463Preferred dividends payable29,8348,433Deposit for drilling costs-(1,191,500)Accounts payable and accrued expenses162,701342,973Related party repayments165,061-Net cash provided (used) in operating activities(981,453)(1,206,554)CASH FLOWS FROM INVESTING ACTIVITIES:Advances to/investments in Wastech, Inc.(57,500)(17,500)Investment in gas and oil leases(219,576)-Investment in drilling expenses(1,838,123)-Purchase of equipment(209,681)-Purchase and sale of gas and oil leases, net-1,490,475Net cash provided (used) by investing activities(2,324,880)1,472,975CASH FLOWS FROM FINANCING ACTIVITIES:Borrowings  unrelated parties-21,100Related party loan(1,338,647)(35,809)Investments in CDs(508,055)-Warrants issued in Duke settlement-54,057Repayment of notes payable(241,118)(400,000)Issuance of preferred stock250,000299,500Shares issued by Blaze-1,340,000Repurchase of shares in Duke settlement-(1,546,667)Net cash (used) by financing activities(1,837,820)(267,819)Net decrease in cash and cash equivalents(5,144,153)(1,398)Cash and cash equivalents at beginning of period$          5,181,590$             11,392Cash and cash equivalents at end of period$               37,437$               9,994   See the accompanying notes to the unaudited condensed consolidated financial statements.  7   ENVIRONMENTAL ENERGY SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (continued)  SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid during the period for interest$               5,371$                        -Cash paid during the period for taxes$                       -$                        -SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:Warrants issued for settlements$                       -$             62,606Warrants issued for services$             97,500$           134,313Warrants issued for services (Blaze)$           171,400$           216,521Common stock issued in settlement$             37,000$                       -                               See the accompanying notes to the unaudited condensed consolidated financial statements.  8


ENVIRONMENTAL ENERGY SERVICES, INC CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited)  Common SharesPreferred SharesCommon Stock, At ParPreferred StockAdditional Paid in CapitalAccumulated Deficit/OtherTotal Shareholder's EquityBalance at 12/31/07405,121,024121,000$     405,121$     302,500$ 95,423,129($ 91,156,737)$    4,974,013Sale of Preferred Shares-100,000-250,000--250,000Shares issued in settlement1,000,000-1,000-36,000-37,000Warrants to employees----97,500-97,500Warrants (Blaze)----171,400-171,400Net income-----(1,420,536)(1,420,536)Balance at 6/30/2008406,121,024221,000$406,121$    552,500$ 95,728,029($ 92,577,273)$    4,109,377                See the accompanying notes to the unaudited condensed consolidated financial statements.


9


Environmental Energy Services, Inc. and Subsidiaries NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2008 (Unaudited)  1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Accordingly, the results from operations for the six-month period ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ended December 31, 2008. The unaudited consolidated financial statements should be read in conjunction with the consolidated December 31, 2007 financial statements and footnotes thereto included in the Company's SEC Form 10-KSB. A summary of the significant accounting policies applied in the preparation of the accompanying financial statements follows. 2. Summary of Significant Accounting Policies The Company's significant accounting policies, which have been reviewed and approved by the audit committee of the Companys Board of Directors, are summarized in Note A of the Notes to Consolidated Financial Statements included in Item 8 of the Company's Annual Report on Form 10-KSB for the year ended December 31, 2007. Nature of Operations.  The Company is an oil and gas exploration, development and production company.  The Company has acquired oil and gas leases in Arkansas, Louisiana, Oklahoma and Alaska.  Its largest property to date is a working interest in over 50,000 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 interests 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 Blaze Energy Corp. (Blaze), of which the Company owned 76.9% as of June 30, 2008, EESV Fayetteville, Inc., a wholly owned subsidiary of Blaze Energy Corp., and Appalachian Environmental Recovery, Inc., of which the Company owned 88.26% as of June 30, 2008.  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.  No minority interest is reflected for Appalachian Environmental Recovery, Inc. because it had no assets, liabilities or operations during either 2008 or 2007. Revenue Recognition.  Revenues from the Companys interest in a technology licensing agreement are recognized when received.  The Company recognizes its share of oil and natural gas sales upon the operators delivery to the purchaser. Under the sales method, the Company and other joint owners may sell more or less than their entitled share of the natural gas volume  10  produced.  Should the Companys excess sales of natural gas exceed its share of estimated remaining recoverable reserves, a liability is recorded by the Company and revenue is deferred. Amortization and Depreciation.  Amortization and depreciation were calculated by the straight-line method based on the following useful lives: Equipment5  7 years Oil and gas producing property costs are amortized using a unit of production method. Amortization and depreciation expense for the six months ended June 30, 2008 and 2007 was $57,679 and $2,226, 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. Liquidity.  The Companys consolidated balance sheet as of June 30, 2008 reflects cash and equivalents of $37,437, total current assets of $2,060,632, total current liabilities of $6,398,503, and a working capital deficit of ($4,338,222).  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 the six months ended June 30, 2008, the Company received requests for deposits for 27 wells to be drilled by the operator of its working interest in the Fayetteville Shale field, for an aggregate cost of $1,079,605.  The Company projects that monthly revenues from wells in which the Company has invested will be sufficient, at current gas prices, to pay all of its general and administrative expenses when the wells come online and begin producing revenue in late 2008.  Until all of the wells begin producing revenue, the Company has effected partial deferral of salaries of its officers and certain employees. In addition, the Company is obligated to commence drilling a well in its Mirror Image Prospect by October 2008, or certain leases will expire.  The cost to drill and complete a well in the Mirror Image Prospect is about $13 million.  While the Company has received nonbinding commitments from third parties to purchase a 17% working interest in the Mirror Image Prospect, the Company still needs additional capital to drill the first well in the prospect.  The Company is trying to raise capital to drill the well by selling working interests in the well and is also negotiating an extension of the leases. At this time, the Company does not have the capital to fund all of its drilling obligations on the leased acreage, and pay general and administrative costs, and is trying to raise the capital.   Alternatives being considered by the Company are the sale of preferred shares of the company in a private placement, the sale of common stock of Blaze in a private placement, the sale of working interests in producing wells to investors, or a line of credit from a financial institution.  At this time, there is no assurance that the Company will be able to raise the capital it needs. 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.  For the three month periods ended June 30, 2008 and 2007, and the six month periods ended June 30, 2008 and 2007, common stock equivalents derived from shares issuable from the exercise of stock options and warrants are not considered in the  11  calculation of the weighted average number of shares outstanding because they would be anti-dilutive, thereby decreasing net loss per share. 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 June 30, 2008, the Companys net book value of natural gas and oil properties did not exceed the ceiling amount. Decreases in market prices from June 30, 2008 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. Set forth below is a summary of the carrying value of each of the Companys oil and gas assets at June 30, 2008: Lease Acq. And Delay RentalsIntegration CostsDrilling and Completion CostsTotalFayetteville Shale Field3,632,58834,7842,463,6786,131,050Mirror Image Prospect2,640,02975,003-2,715,032Morriltons Prospect686,790--686,790Independence Ridge50,000--50,000Maverick/Aegis192,578--192,5787,236,76975,0032,463,6789,775,450 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  12  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. 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). Reclassifications.  Certain amounts in the 2007 financial statements have been reclassified to conform to the 2008 presentation. 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, 2008 was $97,500 with respect to warrants issued by the Company, and $171,140 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, 2008 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  13  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 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. Recent Accounting Pronouncements.  In February 2006, the FASB issued Statement No. 155, Accounting for Certain Hybrid Financial Instruments (SFAS No. 155), which amends FASB Statements No. 133 and 140. SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument containing an embedded derivative that would otherwise require bifurcation, and broadens a Qualified Special Purpose Entitys permitted holdings to include passive derivative financial instruments that pertain to other derivative financial instruments.  SFAS No. 155 is effective for all financial instruments acquired, issued or subject to a remeasurement event occurring after the beginning of an entitys first fiscal year beginning after September 15, 2006.  SFAS No. 155 has no current applicability to the Companys financial statements.  Management adopted SFAS No. 155 on January 1, 2007 and the initial adoption of this statement did not have a material impact on the Companys financial position, results of operations, or cash flows. In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Asset. (SFAS No. 156).  This Statement amends SFAS No. 140 and addresses the recognition and measurement of separately recognized servicing assets and liabilities, such as those common with mortgage securitization activities, and provides an approach to simplify efforts to obtain hedge-like (offset) accounting by permitting a servicer that uses derivative financial instruments to offset risks on servicing to report both the derivative financial instrument and related servicing asset or liability by using a consistent measurement attribute  fair value. Management plans to adopt SFAS No. 156 on January 1, 2008 and it is anticipated that the initial adoption of this statement will not have a material impact on the Companys financial position, results of operations, or cash flows.  14  In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109 (FIN 48).  FIN 48 provides guidance for recognizing and measuring uncertain tax positions, as defined in SFAS 109, Accounting for Income Taxes.  FIN 48 prescribes a threshold condition that a tax position must meet for any of the benefit of the uncertain tax position to be recognized in the financial statements.  Guidance is also provided regarding de-recognition, classification and disclosure of these uncertain tax positions.  FIN 48 is effective for fiscal years beginning after December 15, 2006 and has no current applicability to the Companys financial statements.  Management adopted FIN 48 on January 1, 2007, and the initial adoption of FIN 48 did not have a material impact on the Companys financial position, results of operations, or cash flows. In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (SFAS No. 157).  SFAS No. 157 addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands the required disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, with earlier adoption permitted.  Management plans to adopt SFAS No. 157 on January 1, 2008, and it is anticipated that the initial adoption of this statement will not have a material impact on the Companys financial position, results of operations, or cash flows. On February 6, 2008, the FASB issued Financial Staff Position FAS 157-2, Effective Date of FASB Statement No. 157.  This Staff Position delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).  The delay is intended to allow the FASB and constituents additional time to consider the effect of various implementation issues that have arisen, or that may arise, from the application of SFAS No. 157.  The remainder of SFAS No. 157 was adopted by us effective for fiscal years beginning after November 15, 2007.  The adoption of SFAS No. 157 did not have an impact on the Companys financial position, results of operations, or cash flows. In September 2006, the FASB issued Statement No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS No. 158), an amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS No. 158 requires (a) recognition of the funded status (measured as the difference between the fair value of the plan assets and the benefit obligation) of a benefit plan as an asset or liability in the employers statement of financial position, (b) measurement of the funded status as of the employers fiscal year-end with limited exceptions, and (c) recognition of changes in the funded status in the year in which the changes occur through comprehensive income.  The requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective as of the end of the fiscal year ending after December 15, 2006.  The requirement to measure the plan assets and benefit obligations as of the date of the employers fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008.  SFAS No. 158 has no current applicability to the Companys financial statements.  Management adopted SFAS No. 158 on December 31, 2006 and the adoption of SFAS No. 158 did not have a material impact to the Companys financial position, results of operations, or cash flows. In September 2006, the Securities Exchange Commission issued Staff Accounting Bulletin No. 108 (SAB No. 108).  SAB No. 108 addresses how the effects of prior year uncorrected misstatements should be considered when quantifying misstatements in current year financial statements.  SAB No. 108 requires companies to quantify misstatements using a balance sheet and income statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors.  When the effect of initial adoption is material, companies will record the effect as a cumulative effect adjustment to  15  beginning of year retained earnings and disclose the nature and amount of each individual error being corrected in the cumulative adjustment.  SAB No. 108 became effective beginning January 1, 2007 and its adoption did not have a material impact on the Companys financial position, results of operations, or cash flows. In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159), an amendment of FASB Statement No. 115. SFAS No. 159 addresses how companies should measure many financial instruments and certain other items at fair value.  The objective is to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, with earlier adoption permitted.  SFAS No. 159 had been adopted and did not have a material impact on the Companys financial position, results of operations, or cash flows. In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements  an amendment of ARB No. 51 (SFAS No. 160): SFAS No. 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  This statement is effective for financial statements issued for fiscal years beginning on or after December 15, 2008.  The adoption of this statement will not have material impact on our financial statements. In December 2007, the FASB issued SFAS No. 141R (revised 2007), Business Combinations.  Although this statement amends and replaces SFAS No. 141, it retains the fundamental requirements in SFAS No. 141 that (i) the purchase method of accounting be used for all business combinations; and (ii) an acquirer be identified for each business combination.  SFAS No. 141R defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control.  This Statement applies to all transactions or other events in which an entity (the acquirer) obtains control of one or more businesses (the acquiree), including combinations achieved without the transfer of consideration; however, this Statement does not apply to a combination between entities or businesses under common control.  Significant provisions of SFAS No. 141R concern principles and requirements for how an acquirer (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 with early adoption not permitted.  Management is assessing the impact of the adoption of SFAS No. 141R. In March 2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities  an amendment of FASB Statement 133 (SFAS No. 161). SFAS No. 161 enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how: (a) an entity uses derivative instruments; (b) derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities; and (c) derivative instruments and related hedged items affect an entitys financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. Earlier application is encouraged. Because the Company does not have derivative instruments nor hedging activities, management does not expect adoption of this pronouncement to have any impact on its financial statements.  16  3. Accounts Payable, Accrued Interest and Other Liabilities Accounts payable, accrued interest and other liabilities at June 30, 2008 and December 31, 2007 consist of the following: June 30, 2008December 31, 2007Accounts payable281,941127,724Accrued expenses8,484-290,425127,724 4. Notes and Loans Payable As of June 30, 2008, the Company was indebted to A. Leon Blaser and his affiliates in the amount of $6,058,078. 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, 2008, the Company had no indebtedness classified as a long-term liability. 6. Commitments and Contingencies The Company has reported certain commitments and contingencies in the financial statements included in its Annual Report on Form 10-KSB for the year ended December 31, 2007, which is hereby incorporated by reference. On February 19, 2008, the Company settled a lawsuit brought against it in the name of Ironhorse Exploration, Inc. (Ironhorse) by a minority shareholder and officer of Ironhorse.  The lawsuit sought declaratory relief that Ironhorse owned certain oil and gas properties in the Companys name.  Under the settlement, the officer relinquished any claim or right to Ironhorse or any assets owned by the Company.   The Company granted the officer a 3.2436% working interest in the Mirror Image Prospect, and agreed to carry the officers costs to drill and complete the initial test well on the prospect.  Specifically, the Company is obligated to advance the officers proportionate costs to drill and complete the initial test well.  The Company is entitled to repayment of all costs from the first well proceeds payable to the officer, and the officer does not share in the revenues from the well until all costs paid on his behalf are paid from said revenues.  The officer is responsible for paying all costs associated with any wells after the initial test well.  The Company is also obligated, at its expense prior to completion of the initial test well, to assign the officer his proportionate share of any additional leases acquired within an area of mutual interest created by the settlement agreement, as well as any farmed-in acreage or swapped leasehold working interest rights prior to completion of the initial test well.  After completion of the initial test well, the officer has the right to participate in the additional of leased acreage with the area of mutual interest by paying his proportionate share of the lease cost. 7. Issuances and Repurchases of Common Stock At June 30, 2008, the Company's authorized capital stock was 500,000,000 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 406,121,024 shares of Common Stock, and 221,000 shares of Series A Convertible Preferred Stock.  17  During the six months ended June 30, 2008, the Company issued 1,000,000 shares of Common Stock to a third party in settlement of litigation.  The shares were valued at their market price on the date of execution of the settlement agreement, or $0.37 per share. 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. In December 2007, the Company commenced an offering of up to 4,750,000 shares of Series A Convertible Preferred Stock at $2.50 per share.  During the six months ended June 30, 2008, the Company issued 100,000 shares of Series A Convertible Preferred Stock for gross proceeds of $250,000. 8. Equity Method Investment At June 30, 2008, the Company owned 33,970,208 shares of common stock in Wastech, which represents approximately 29.43% of the issued and outstanding shares of common stock of Wastech. The Company accounts for its investment in Wastech using the equity method of accounting. Summarized financial information for Wastech as of June 30, 2008 and December 31, 2007, and as of the six months ended June 30, 2008 and 2007, is as follows: 20082007UnauditedUnauditedTotal assets$2,345,888$2,353,046Total liabilities$2,371,245$2,256,045Net income($89,855)($208,945)   18  9. Warrants Environmental Energy Services, Inc. Transactions involving stock options or warrants issued to employees, consultants, officers and directors of the Company in fiscal 2008 are summarized as follows: Number of SharesWeighted Average Price Per ShareOutstanding at December 31, 200771,500,0000.18Granted (exercised)21,000,0000.29Cancelled/expired--Outstanding as of June 30, 200892,500,0000.20  The weighted-average fair value of stock options or warrants granted to employees during the six months ended June 30, 2008, 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 date4.07%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, 2008 was $97,500. The Company did not issue any warrants other than for compensatory purposes in the six months ended June 30, 2008. 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, 2007800,0001.00Granted (exercised)200,0001.80Cancelled/expired--Outstanding as of June 30, 20081,000,0001.16  The weighted-average fair value of stock options or warrants granted to directors or employees of Blaze during the six months ended June 30, 2008, and the weighted-average significant assumptions used to determine those fair values, using a Black-Scholes option pricing model are as follows:  19   Significant assumptions (weighted-average):Risk-free interest rate at grant date3.57%Expected stock price volatility50%Expected dividend payout-Expected option life (in years)5.0 Total stock-based compensation expense recognized by Blaze in the consolidated statement of earnings for the six months ended June 30, 2008 was $171,140. 10. 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, 2007, which is hereby incorporated by reference. In January 2008, the Company loaned Wastech $57,500 to pay an outstanding audit bill. As of June 30, 2008, the Company was indebted to Blaze in the amount of $1,847,545.  Effective April 1, 2008, the Company and Blaze agreed that any loans from Blaze to the Company would bear interest at the prime rate listed in the Wall Street Journal.  The interest rate at the beginning of the quarter is used for the loan balance for the entire quarter.  For the quarter ended June 30, 2008, the Company accrued $25,966 in interest owed to Blaze.  This interest was eliminated during consolidation.  Prior to April 1, 2008, the loans from Blaze to the Company did not bear interest. On April 2, 2008, the Company and Ironhorse Exploration, Inc. entered into a participation agreement, under which the parties agreed that the Company owned a 10% participation interest in an oil and gas prospect located in Oklahoma known as Independence Ridge.  The Companys 10% participation interest is based upon the amount contributed by a J. Brad Duke to the total costs of acquiring the prospect.  Under the participation agreement, the Company is responsible for providing 10% of any additional costs necessary to develop the prospect, or will face a reduction of its 10% participation interest on a pro rata basis. The Company acquired Mr. Dukes interest in the field in 2006, along with his interest in fields in Arkansas, Louisiana and Alaska.  Ironhorse Exploration, Inc. is owned by A. Leon Blaser, Bruce Blaser, and Greg Holsted. On June 1, 2008, the Company entered into a lease of 2,314 square feet of space at 3350 Americana Terrace, Suite 200, Boise, Idaho 83706 from Americana Terrace, LLC.  The term of the lease is three years from June 1, 2008 to May 31, 2011.  The monthly lease payments are $3,471 per month, provided that the rent may increase each year, at the lessors discretion, by the Companys proportionate share of any increase in the lessors annual operating expenses over the lessors annual operating expenses in 2008.  Americana Terrace, LLC is majority owned and controlled by A. Leon Blaser and Bruce Blaser. On June 1, 2008, Blaze entered into a lease of 3,174 square feet of space at 3350 Americana Terrace, Suites 215 and 320, Boise, Idaho 83706 from Americana Terrace, LLC.  The term of the lease is three years from June 1, 2008 to May 31, 2011.  The monthly lease payments are $4,761 per month, provided that the rent may increase each year, at the lessors discretion, by Blazes proportionate share of any increase in the lessors annual operating expenses over the lessors annual operating expenses in 2008.  Americana Terrace, LLC is majority owned and controlled by A. Leon Blaser and Bruce Blaser. Effective June 30, 2008, the Company purchased two vehicles owed by Greg Holsted and Michael Thompson, and the leased the vehicles back to them.  The purchase price was the principal amount owed on loans obtained to purchase the vehicles.  The monthly lease payments were set at the  20  amount Messrs. Holsted and Thompson were previously paying in monthly payments on loans obtained to purchase the vehicles. 11. 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, 2008, and has significant unpaid accounts payable and liabilities. 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. 12. Subsequent Events None.  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-Q 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.  21  Overview We are an oil and gas exploration, development and production company.  Our corporate strategy is to continue building value through the development and acquisition of our existing gas and oil assets. However, we intend to continue seeking acquisition opportunities which exhibit consistent, predictable, and long-lived production. We intend to fund our development activity primarily through proceeds from internal cash flow from our wells in the Fayetteville Shale Field, from private placements of stock, and from the sale of working interests in undeveloped acreage. 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 Six Months Ended June 30, 2008 and 2007 We had revenues in the six months ended June 30, 2008 of $492,306, as compared to revenues of $135,532 in the six months ended June 30, 2007.  All of our revenues in 2007 and $62,400 of our revenues in 2008 were payments received under a royalty agreement that expired in the first quarter of 2008.  The royalty agreement expired on December 31, 2007, and we do not expect to receive any more revenues under the royalty agreement.  Our remaining revenues in 2008 were from gas produced from our wells in the Fayetteville Shale Field.  Our revenues in the first six months of 2008 are not reflective of our future revenues.  Since late 2007, we have invested in a substantial number of wells in the Fayetteville Shale Field, which started to come online in 2008.  We expect that our revenues will continue to trend upward throughout the remainder of 2008 as wells in which we have participated begin to produce gas.  The operator of our working interests in the Fayetteville Shale Field has proposed an aggressive drilling schedule to develop the field, and to the extent we elect to continue investing new wells, we expect the upward trend in our revenues to continue. We reported losses from operations during the six months ended June 30, 2008 and 2007 of ($1,455,981) and ($813,040), respectively.   The increase in our loss from operations in 2008 as compared to 2007 was primarily attributable to increased general and administrative expenses.  In particular, general and administrative expenses increased to $1,890,608 in the six months ended June 30, 2008 as compared to $946,346 in the six months ended June 30, 2007, an increase of $944,262.  Significant factors in the increase in general and administrative expenses were: · Management compensation increased to $585,833 in the six months ended June 30, 2008, as compared to $192,500 in the six months ended June 30, 2007, as the result of five officers drawing compensation in 2008 as compared to only four officers in 2007, and as a result of three officers drawing compensation at Blaze in 2008 as compared to none in 2007. · Payroll expenses associated with non-officer personnel increased to $189,676 in the six months ended June 30, 2008, from $12,380 in the six months ended June 30, 2007. · Legal expenses increased to $273,550 in the six months ended June 30, 2008, as compared to $216,044 in the six months ended June 30, 2007, as the result of costs associated with an SEC review of our past reports, legal expenses relating to certain  22  litigation that was settled in the six months ended June 30, 2008, and legal expenses associated with the drilling of our first well on our Mirror Image prospect. · Expenses associated with the issuance of warrants for compensatory purposes were $268,900 in the six months ended June 30, 2008, as compared to $350,834 in the six months ended June 30, 2007. We reported net other income (expense) of ($89,708) in the six months ended June 30, 2008, as compared to net other income (expense) of $28,148 in the six months ended June 30, 2007.  Significant factors in net other income (expense) in 2008 as compared to 2007 were: · In 2008, we recorded an unconsolidated entity loss of ($25,968), representing our share of the net loss incurred by Wastech, Inc. during the period, as compared to an unconsolidated entity loss of ($54,102) in 2007. · In 2007, we recorded a settlement gain of $192,610 resulting from restructuring a contract to acquire oil and gas leases, as compared to a settlement loss of ($125,503) in 2008 resulting from the settlement of certain litigation. · In 2008, we recorded interest income of $67,134, and interest expense of ($5,371), as compared to $176 of interest income in 2007 and ($28,600) of interest expense 2007.  Interest income increased substantially as a result of the investment of the proceeds of the sale of a portion of our working interests in the Fayetteville Shale Field in August 2007. In the six months ended June 30, 2008, we reported a net loss before minority interest and preferred dividends of ($1,545,689), and a net loss of ($1,420,536), as compared to a net loss before minority interest and preferred dividends of ($748,892) and a net loss of ($794,368) in the six months ended June 30, 2007.  In 2008, our net loss was affected by preferred dividends of $29,833 in 2008, as compared to preferred dividends of $9,476 in 2007.  In 2008, our net loss was reduced by a minority interest benefit of $154,986, representing the interest of the minority shareholders of Blaze, our majority controlled subsidiary, in the net loss generated by Blaze. Liquidity and Sources of Capital Our consolidated balance sheet as of June 30, 2008 reflects cash and cash equivalents of $37,437, current assets of $2,060,632, current liabilities of $6,398,854, and a working capital deficit of ($4,338,222).  However, our current liabilities consist primarily of loans received from related parties, and we have minimal indebtedness to unrelated parties. We project that monthly revenues from wells in the Fayetteville Shale Field in which we have participated will be sufficient, at current gas prices, to pay all of our general and administrative expenses when the wells come online and begin producing revenue in late 2008.  Until the wells begin producing revenue, the Company has implemented a partial deferral of salaries of its officers and certain employees, to a level with reduces our cash outlays for general and administrative expenses to no more than our current revenues from producing wells.  Even with the projected revenue from our wells, however, we have insufficient liquidity to satisfy our current general and administrative expenses and planned capital expenditures for the foreseeable future due to the substantial additional capital necessary to fund the development of our oil and gas fields.  In particular, our immediate capital needs are as follows:  23  Fayetteville Shale Field:  We project that our share of drilling and completion costs for wells drilled in the Fayetteville Shale Field for the remainder of 2008 will be approximately $2,000,000.  In the event we cannot raise the capital to fund our share of drilling costs, we will be forced to opt out of new wells proposed in the field.  In the event we elect not to participate in an exploratory well proposed by the operator of our working interests, we will forfeit our interest in the entire section.  In the event we elect not to participate in a development well proposed by the operator of our working interests, we will forfeit our interest in the entire section, except that we will not forfeit our interest in any well in which we have previously participated in the section.  If we have to forfeit part or all of our interest in a section because we cannot meet our share of drilling costs, we will have to write off our investment in the underlying leases at issue.  We are actively exploring options to raise capital to meet our drilling obligations, including the sale of preferred shares in a private offering, the sale of common shares of Blaze in a private offering, the sale of interests in producing wells, and obtaining a line of credit secured by our producing wells.   It is not possible at this time to quantify the amount of lease investment we will have to write off if we are unable to meet our drilling commitments on future wells. Mirror Image Prospect:  Our leases begin to expire in October 2008, unless we have commenced drilling operations in the Mirror Image Prospect by then.  We estimate that it will cost around $13,000,000 to drill and complete one well, which will be necessary to hold our leases in force. While we have received nonbinding commitments from third parties to purchase a 17% working interest in the Mirror Image Prospect, we still need additional capital to drill the first well in the prospect.   Leases covering 1,276 acres of land will expire between October 15, 2008 and January 15, 2009 in the event we are unable to commence drilling operations by then.  In that event, we would have to write off our investment in those leases, which would be about $960,000.  However, even if some leases expire prior to the commencement of drilling operations, we would still be able to drill the prospect, but our percentage working interest in the wells would be reduced by the amount of the lease acreage lost due to lease expirations. In the event we are unable to commence drilling operations by August 2009, leases covering an additional 32.5 acres of land will expire.  The remaining 719 acres of leases expire at various times between November 30, 2009 and January 31, 2010.  We are required to pay delay rentals of $181,690 in 2008 and $142,940 in 2009 to maintain leases expiring after 2008.  We are discussions with representatives of the lessors about extending the leases which are due to expire later this year. Our other prospects (Morriltons, Independence Ridge and Aegis/Maverick) are under leases which are not scheduled to expire any time soon, and therefore the focus of our capital raising and drilling activities are to meet our requirements in the Mirror Image Prospect and the Fayetteville Shale Field.  We are not required to pay delay rentals to maintain our Morriltons or Independence Ridge leases, while Aegis/Maverick requires delay rentals of only $17,152 in 2008. Our liquidity may also be impacted by the fact that most of our current indebtedness is in the form of demand loans from A. Leon Blaser and his brother.  As a demand loan, they have the right to obtain repayment of part or all of the loans at any time and for any reason or no reason at all.  To date, Mr. Blaser and his brother have only sought repayment of the loans as needed to fund obligations in their real estate business.  However, the residential real estate development business has experienced a slowdown nationwide, including in the Boise metro area, as a result of the current crisis in the mortgage markets.  The slowdown caused Mr. Blaser and his brother to obtain repayment of their loans in the last half of 2007 faster than they originally envisioned.  If Mr. Blaser and his brother continue to experience slowness in their real estate business, or if they suffer further adverse problems in their real estate business, we may be forced to repay our loans to Mr. Blaser and his brother, which would seriously jeopardize our ability to finance our drilling obligations on our oil and gas leases and pay our general administrative expenses, unless we are able to raise additional capital to offset the amounts we have repay Mr. Blaser and his brother.  24  There is no assurance that we will be able to raise the necessary capital, or that the terms under which we 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, 2008, and had significant unpaid accounts payable and liabilities.  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.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.  Because the Company is a smaller reporting company, it is not required to provide the information called for by this Item.  ITEM 4.  CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures Our chief executive officer and chief financial officer are responsible for establishing and maintaining our disclosure controls and procedures.  Disclosure controls and procedures means controls and other procedures that are designed to ensure that information we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and to ensure that information required to be disclosed by us in those reports is accumulated and communicated to the our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  Our chief executive officer and chief financial officer evaluated the 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 June 30, 2008.  Based on that evaluation, the Companys chief executive officer and chief financial officer have concluded that, as of the evaluation date, such controls and procedures were ineffective due to a lack of personnel allocated to the preparation of reports and the lack of clear direction to communicate all matters that may relate to the preparation of reports to the chief financial officer.  We have addressed the deficiencies by hiring additional personnel to assist in the preparation of reports and by instituting regular, weekly meetings to review matters that may need to be disclosed in reports, among other things.  25  Changes in internal controls The only changes in our internal controls over financial reporting that occurred during the quarter ended June 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting was to begin the process of hiring additional personnel to assist in the resolution of the deficiencies discussed in this Item 4.  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, 2007, which is hereby incorporated by reference.  ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. In the three months ended June 30, 2008, the Company issued 21,000,000 warrants to employees of the Company.  The warrants were issued pursuant to 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. None.  ITEM 5.  OTHER INFORMATION. None.  ITEM 6.  EXHIBITS. 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.  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: August 19, 2008/s/ Greg HolstedBy: Greg Holsted, Principal Accounting Officer    26     EXHIBIT INDEX Exhibit NumberDescription and Incorporation by Reference2Agreement and Plan of Reorganization filed with the State of Delaware September 29, 2001 (incorporated by reference from the Form 8-K of the Company dated September 29, 2001)3.1Certificate of Incorporation of Environmental Energy Services, Inc., a Delaware corporation, filed September 29, 2001 (incorporated by reference from the Form 8-K of the Company dated September 29, 2001)3.2By-Laws of the Company (incorporated by reference from the Form 8-K of the Company dated September 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 our report on Form 8-K filed October 19, 2000)10.2Form of Amendment to Promissory Note (incorporated by reference to our report on Form 8-K filed October 19, 2000)10.3Form of Second Amendment to Promissory Note (incorporated by reference to our 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 our 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 our 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 our report on Form 10-QSB for the quarter ended March 31, 2007)10.7Form of Assignment of Overriding Royalty Interest (incorporated by reference to our report on Form 10-QSB for the quarter ended September 30, 2006)10.8Employment Agreement between the Company and A. Leon Blaser, executed as of March 8, 2007, effective as of January 1, 2007 (incorporated by reference to our report on Form 10-QSB for the quarter ended March 31, 2007)  27   10.9Employment Agreement between the Company and Greg Holsted, executed as of March 8, 2007, effective as of January 1, 2007 (incorporated by reference to our report on Form 10-QSB for the quarter ended March 31, 2007)10.10Employment Agreement between the Company and Michael Thompson, executed as of March 8, 2007, effective as of January 1, 2007 (incorporated by reference to our report on Form 10-QSB for the quarter ended March 31, 2007)10.11Employment Agreement between Blaze and Michael Thompson, effective as of June 1, 2007 (incorporated by reference to our report on Form 10-QSB for the quarter ended September 30, 2007)10.12Employment Agreement between Blaze and Leon Blaser, effective as of June 1, 2007 (incorporated by reference to our report on Form 10-QSB for the quarter ended September 30, 2007)10.13Employment Agreement between Blaze and Greg Holsted, effective as of June 1, 2007 (incorporated by reference to our report on Form 10-QSB for the quarter ended September 30, 2007)10.14Management Agreement between Blaze and the Company, effective as of June 26, 2007  (incorporated by reference to our report on Form 10-QSB for the quarter ended September 30, 2007)10.15Participation Agreement between the Company and Ironhorse Exploration, Inc. (incorporated by reference to our report on Form 10-KSB for the year ended December 31, 2007)31.1*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.   28