U. S. SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 _____________________________________________  FORM 10-QSB/A  Amendment No. 1  (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2006  [    ] 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  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 July 21, 2008, the Registrant had outstanding 406,121,024  shares of its Common Stock, $0.001 par value. Transitional Small Business Disclosure Format (check one): Yes [__];  No [X]  Environmental Energy Services, Inc. and Subsidiaries  FORM 10-QSB/A REPORT INDEX  Page No.PART I.  FINANCIAL INFORMATIONItem 1.  Financial Statements (Unaudited)Consolidated Balance Sheet as of September 30, 20063Consolidated Statements of Operations for the Three Months Ended September 30, 2006 and 20054Consolidated Statements of Operations for the Nine Months Ended September 30, 2006 and 20055Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 20056Notes to Unaudited Consolidated Financial Statements as of September 30, 20068Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operation18Item 3.   Controls and Procedures21PART II.  OTHER INFORMATION22Item 1.  Legal Proceedings22Item 2.  Changes in Securities22Item 3.  Defaults on Senior Securities22Item 4.  Submission of Matters to a Vote of Security Holders23Item 5.  Other Information23Item 6.  Exhibits and Reports on Form 8-K23Signatures24   2  PART I.  FINANCIAL INFORMATION  Item 1.  Financial Statements  Environmental Energy Services, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEET As of September 30, 2006 (Unaudited)  ASSETSCurrent Assets:Cash$              22,120Total current assets22,120Fixed Assets:Equipment  net of depreciation18,746Other Assets:Marketable securities1,056,694Investment in private companies51,000Unproven gas and oil leases19,552,384Total other assets20,660,078Total assets$      20,700,944  LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses$             35,400Related party indemnification15,505Note payable500,000Related party advances7,039,500Total current liabilities7,590,405Stockholders' equity:Preferred stock, $0.001 par value; 5,000,000 shares authorized and outstanding-Common stock, $0.001 par value; 500,000,000 shares authorized; 451,911,747 shares issued and outstanding451,912Additional paid-in capital103,979,984Unrealized gain/loss on marketable securities(1,142,470)Accumulated deficit(90,178,887)Total stockholders' equity13,110,539Total liabilities and stockholders' equity$     20,700,944   The accompanying notes and accountant's report are an integral part of these statements  3  Environmental Energy Services, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months Ended September 30, 2006 and 2005 (Unaudited)  Three Months ended September 3020062005Revenues$              59,632$          219,330ExpensesSelling, general and administrative276,722193,261Depreciation and amortization78416,340Total expenses:277,506209,601Income (Loss) from operations(217,874)9,729Other income (expense)Interest income (expense)16390Loan Fee(150,000)-Litigation settlement-(150,000)Warrant expense(1,101,470)-Gain on sale of royalty interest975,705-Total other income (expense)(275,602)(149,910)Net income(493,476)$      (140,181)Unrealized gain (loss)(1,913,848)66,059Comprehensive income (loss)($     2,407,324)($        74,122)Earnings per share:Basic$              (0.01)$             (0.00)DilutedNote 2Note 2Weighted average number of common shares outstanding:Basic408,550,992384,083,631DilutedNote 2Note 2    The accompanying notes and accountant's report are an integral part of these financial statements.   4   Environmental Energy Services, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS For the Nine Months Ended September 30, 2006 and 2005 (Unaudited)  Nine Months ended September 3020062005Revenues$                289,686$             740,935ExpensesSelling, general and administrative671,399478,656Depreciation and amortization12,69549,020Total expenses:684,094527,676Gain (Loss) from operations(394,408)213,259Other income (expense)Interest income (expense)1,305341Loan fee(150,000)-Litigation settlements-(214,000)Warrant expense(1,101,470)-Gain on sale of royalty interest975,705-Total other income (expense)(274,460)(213,659)Net income (loss)(668,868)$                 (400)Unrealized gain (loss)(842,031)2,500Comprehensive income($        1,510,899)$                2,100Earnings per share:Basic$               (0.00)$                   0.00DilutedNote 2$                   0.00Weighted average number of common shares outstanding:Basic406,222,545384,083,631DilutedNote 2448,528,234   The accompanying notes and accountant's report are an integral part of these statements   5  Environmental Energy Services, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 2006 and 2005 (Unaudited)  20062005Cash flow from operating activities:Net income (loss)$             (1,510,899)$                     2,100Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:Depreciation and amortization12,69549,020Unrealized gain/loss842,031(2,500)Write off of investment50,000-Warrant expense1,101,470-Changes in assets and liabilities:Indemnification payable  related party-50,000Litigation settlement payable(75,000)112,500Accounts payable, accrued interest and other liabilities(24,600)(2,048)Net cash provided by (used in) operating activities395,697209,072Cash flow from investing activities:Purchase/sale of oil and gas properties, net(14,576,541)-Purchase equipment(7,749)(4,303)Investment in Wastech, Inc.(851,500)(180,000)Net cash provided by (used in) investing activities(15,435,790)(184,303)Cash flows from financing activities:Borrowings  unrelated parties500,000-Contribution to capital by affiliates7,450,836-Borrowings - related parties7,039,500(42,847)Repurchase of common shares(102,434)-Net cash provided by financing activities:14,887,902(42,847)Net increase (decrease) in cash$          (152,191)$        (18,078)Cash and cash equivalents at beginning of period$             174,311$           45,238Cash and cash equivalents at end of period$               22,120$           27,160      The accompanying notes and accountant's report are an integral part of these statements  6  Environmental Energy Services, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 2006 and 2005 (Unaudited) (continued)  SUPPLEMENTARY DISCLOSURE OF NONCASH TRANSACTIONS  20062005Shares issued for oil and gas assets4,650,000-Warrants issued for oil and gas assets47,162-   The accompanying notes and accountant's report are an integral part of these statements  7  Environmental Energy Services, Inc. and Subsidiaries NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2006 (Unaudited)  1. Basis of Presentation The accompanying unaudited financial statements have been prepared by Environmental Energy Services, Inc. (the "Company" or "Environmental Energy Services") 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, 2005, as filed with the U. S. Securities and Exchange Commission. The results of operations for the period ended September 30, 2006 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 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 developing our working interest in the Fayetteville Shale Field in Arkansas, and secondarily the exploration and development of our gas field in Louisiana. Depreciation and Amortization.  All assets acquired during the period were expensed at the time of acquisition.  Amortization and depreciation were calculated by the straight-line method using the following lives: Royalty agreement6 yearsEquipment5 years  Amortization and depreciation expenses for the nine months ended September 30, 2006 and 2005 were $12,695 and $49,020, respectively. Long Lived Assets.  In March 1995, Statement of Financial Accounting Standards SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of was issued.  SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. 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  8  financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Liquidity.  As of September 30, 2006, the Company's current liabilities exceeded its current assets by $7,568,285. The Company's assets exceed its liabilities by $13,110,539 at September 30, 2006.  However, current liabilities include $7,039,500 in related party advances, $15,504 due to the Companys chief executive officer for an indemnification payable and $500,000 due in note payable that was satisfied in a subsequent period.  The Company receives a quarterly royalty payment in an amount that it believes is sufficient to satisfy its routine accounting, managerial, legal and basic general and administrative expenses. 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.  The weighted average shares outstanding used in the basic net earnings per share computations for the three month and nine month periods ended September 30, 2006 and 2005 was as follows: Weighted average of common shares outstanding for the:September 30, 2006September 30, 2005Three months then ended408,550,992384,083,631Nine months then ended406,222,545384,083,631 For the three month periods ended September 30, 2006 and 2005, and the nine month period ended September 30, 2006, common stock equivalents derived from shares issuable from the exercise of stock options and warrants are not considered in the calculation of the weighted average number of shares outstanding because they would be anti-dilutive, thereby decreasing net loss per share. For the nine month period ending September 30, 2005, the dilutive weighted average number of shares outstanding was 448,528,234. Advertising.  The Company expenses advertising costs as incurred.  There was no advertising expense for the quarters ended September 30, 2006 and 2005. Influence of Government Regulation.  The Company's prior and potential operations are and would be subject to and substantially affected by extensive federal, state and local laws, regulations, orders and permits, which govern environmental protection, health and safety, zoning and other matters.  These regulations may impose restrictions on operations that could adversely affect the Company's results, such as limitations on the expansion of disposal facilities, limitations on or the banning of disposal of out-of-state waste or certain categories of waste or mandates regarding the disposal of solid waste.  Because of heightened public concern, companies in the waste management business may become subject to judicial and administrative proceedings involving federal, state or local agencies.  These governmental agencies may seek to impose fines or to revoke or deny renewal of operating permits or licenses for violations of environmental laws or regulations or to require remediation of environmental problems at sites or nearby properties, or resulting from transportation or predecessors' transportation and collection operations, all of which could have a material adverse effect on the Company.  Liability may also arise from actions brought by individuals or community groups in connection with the permitting or licensing of operations, any alleged violations of such permits and licenses or other matters.  The Forward Looking Statements  9  assume that there will be no materially negative impact on its operations due to governmental regulation. Potential Environmental Liability.  The Company may incur liabilities for the deterioration of the environment as a result of its past and potential future operations.  Any substantial liability for environmental damage could materially adversely affect the operating results and financial condition of the Company.  Due to the limited nature of insurance coverage of environmental liability, if the Company were to incur liability for environmental damage, its business and financial condition could be materially adversely affected. Marketable Securities.  The Company accounts 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 that 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 disputes surrounding the Company's investment in Startec, Inc., certain trading restrictions and thin trading activity, the Company has classified the securities as long-term assets.  As a result of trading restrictions on the Company's investment in Wastech, Inc., formerly known as Corporate Vision, Inc., and thin trading activity, the Company has classified the securities as long-term assets.  At September 30, 2006, marketable securities consist of the following investments: Wastech, Inc. (33,775,764 shares)$       990,181Startec, Inc. (645,125 shares)66,513  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. Reclassifications.  Certain reclassifications have been made in prior years financial statements to conform to classifications used in the current year. 3. Notes and Loans Payable As of September 30, 2006, the Company was indebted to A. Leon Blaser and his affiliates for $7,039,500.  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, Inc. and working interests in the Fayetteville Shale field in Arkansas. 4. Notes and Loans Payable - Long-Term Liabilities As of September 30, 2006, the Company has no indebtedness classified as a long-term liability. 5. Acquisition of Oil and Gas Leases Duke Investments On October 21, 2005, the Company entered into a Mineral Lease Investment Agreement with J. Brad Duke or designees (Duke) and Ironhorse Exploration, LLC ("Ironhorse").  Ironhorse is owned, in part, by Leon Blaser, Doug Holsted and Greg Holsted.  Under the Mineral Lease Investment Agreement, the Company and Ironhorse managed the acquisition, on behalf of Duke Investments, of certain oil and gas  10  leases using $1,500,000 set aside by Duke for that purpose.  The funds were used primarily to pay the lease acquisition costs, like lease payments, brokerage commissions and certain due diligence costs of the acquisition program.  Duke agreed that the Company or Ironhorse would have an exclusive right to drill on the leases for eighteen months.  In return, Duke received 1,000,000 shares of common stock of the Company, and would receive a 5% royalty interest in any producing wells drilled on the lease acreage.  In addition, Duke received a right of first refusal to invest in a private offering to raise funds to drill wells on the lease acreage.  The Company initially targeted three areas in Louisiana, Arkansas and Oklahoma which its geological and seismic experts found promising.  As a result, the Company managed the acquisition of leases covering 1,800 acres in Arkansas, 6,000 acres in Oklahoma and 1,570 acres in Louisiana. On May 17, 2006, the Mineral Lease Investment Agreement was amended to permit the Company to acquire leases in Alaska.  The Company submitted the winning bids on behalf of Duke for two sections of land in Alaska under an auction recently held by the State of Alaska.  The two sections cover approximately 11,400 acres in total.  The leases have a term of 5 years, with the right to renew the lease for an additional 5 year term.  The total amount invested in leases under the Mineral Lease Agreement is $2,000,000. On September 14, 2006, the Company entered into a Lease Purchase Agreement with Duke to acquire the leases acquired under the Mineral Lease Agreement.  Under the Lease Purchase Agreement, the Company acquired the leases for 26,666,667 shares of common stock and 2,000,000 warrants to purchase common stock.  Duke retained a five percent (5%) overriding royalty in the leases.  The Company and Duke subsequently amended the terms of this transaction to settle certain disputes between the Company and Duke.  (See Note 10 - Subsequent Events) Fayetteville Shale Field April 25, 2006 Participation Agreement.  On April 25, 2006, the Company entered into a Participation Agreement with One TEC, LLC ("One TEC"), under which the Company agreed to purchase working interests in oil and gas leases in Van Buren, Conway and Cleburne Counties in Arkansas which overlay the Fayetteville Shale Field.  The total purchase price for the working interests was $8,200,000, payable in four installments through June 7, 2006.  Under the Participation Agreement, the Company received a 10% working interest in the Clinton AMI, which covers approximately 25,000 acres; a 20% working interest in the Pearson AMI, which covers approximately 4,000 acres; and a 40-45% working interest in the Remaining AMI, which covers approximately 16,000 acres.  Material terms of the Participation Agreement include: · Typical base lease terms include a royalty of 18.75% to the lessor, a five year initial term, and a five year renewal term upon payment of additional rent to the lessor; · One TEC guaranteed a net revenue interest of the greater of 78.5% or the net revenue interest of the base mineral lease plus a 3% overriding royalty to One TEC; · The Company committed to participate in 20 exploratory or substitute exploratory wells on the leased acreage; · The Company agreed to carry a working interest of 15% for One TEC in the first 20 exploratory or substitute exploratory wells, plus the costs of pipeline taps for those wells;  11  · To the extent the Company elects not to participate in an exploratory well, it will forfeit its interest the drilling section, and to the extent it elects not to participate in a development well, it will forfeit its interest in the drilling unit; · The Company has the option of participating in additional acreage leased by One TEC in the area for reimbursement of One TEC's actual lease costs plus an administrative fee of 15%; · The Company is responsible for reimbursing One TEC for its actual seismic costs plus an administrative fee of 15%. The Company satisfied its commitment to purchase the working interests from One TEC under the Participation Agreement from loans obtained from third parties, most of which was provided by the Companys chairman and chief executive officer and his brother. August 25, 2006 Asset Purchase Agreement.  On September 6, 2006, the Company entered into an Asset Purchase Agreement (the "APA") dated August 25, 2006 with One TEC to increase its ownership interest in the Fayetteville Shale Field.  Previously, the Company had acquired working interests in three sections of leases in the Fayetteville Shale Field from One TEC pursuant to the Participation Agreement dated April 25, 2006.  Under the APA, the Company agreed to acquire the following working interests: · 35% working interest in the Clinton AMI (approximately 35,000 acres); · 30% working interest in the Pearson AMI (approximately 5,000 acres); and · 55% working interest in the Remaining AMI (approximately 20,000 acres). In addition, the Company acquired One TEC's interest under participation agreements under which it had previously sold working interests of 55% in the Clinton AMI and 50% in the Pearson AMI.   As a result, the Company owned a 45% working interest in the Clinton AMI, a 50% working interest in the Pearson AMI and 100% of the working interests in the Remaining AMI.  Finally, the Company also acquired all documents relating to the Fayetteville Shale Field, including any reports, studies, base mineral leases, geological surveys or reports, seismic reports, reserve estimates, drilling records, maps, projections or other documentation. The purchase price for the assets acquired under the APA was cash of $13,400,000 and 150,000,000 shares of the Company's common stock.  Of the cash payable under the APA, $2,500,000 was paid to One TEC prior to execution of the APA on July 21, 2006, $4,500,000 was paid upon execution of the APA, $2,400,000 was payable on September 15, 2006, $2,000,000 is payable on October 15, 2006, and the remaining $2,000,000 is payable on November 15, 2006. The APA provides that the shares of common stock issuable to One TEC under the APA would have a market value of at least $35,000,000 on July 1, 2007 (equivalent to $0.2333 per share), as determined by the average of the high and low price of the Company's common stock for the 10 trading days before July 1, 2007.  In the event the common stock does not have a market value of at least $35,000,000 on July 1, 2007, then One TEC has the right to be paid the difference in a) cash, b) additional shares of common stock, or c) any combination of cash and additional shares of common stock that the One TEC elects.  In the event One TEC elects to be paid any part of the difference between $35,000,000 and the market value of the common stock in cash, then the Company will be obligated to satisfy such amount by quarterly payments of principal and interest over two years commencing on October 1, 2007.  The interest rate will be LIBOR plus 2% per annum.  12  At the time the APA was executed, the Company did not have the ability to issue 150,000,000 shares of common stock to One TEC as required by the APA because the Company did not have sufficient authorized but unissued shares.  The APA provides that the shares of common stock issuable to One TEC must constitute at least 25% of the outstanding shares at the time the shares are actually issued to One TEC.  If the Company issued One TEC 150,000,000 shares of common stock when the APA was executed, One TEC would own 27.3% of the Companys outstanding shares and no additional shares would be issuable to One TEC pursuant to this provision in the APA. Other material terms of the transaction include: · One TEC bears responsibility for all liabilities relating to the Fayetteville Shale Field accruing before the date of the APA, and the Company is responsible for all liabilities relating to the Fayetteville Shale Field accruing after the date of the APA. · The Company agreed to take over responsibility for One TEC's Fort Worth, Texas office. The Fort Worth office will continue to handle the administration of certain oil and gas fields that One TEC has an interest in that were not acquired by the Company, and the Company will bill One TEC for its proportionate share of the costs of the office.  Initially, the parties agreed that One TEC will be responsible for 20% of the costs of the office, and the Company will be responsible for 80% of the costs of the office. · The Company agreed to sign one year employment agreements with Jackie Heide and Joe Svoboda, the two owners of One TEC, appointing them as officers of the Company.  Ms. Heide's position will be Vice President  Acquisitions and Divestitures.  Mr. Svoboda's position will be Vice President  Oil and Gas Operations.  The each will receive a salary of $150,000 per year, and will be allowed to spend some of their time on One TEC's other operations.  Both employment agreements have a term of one year.  Neither employment agreement has been signed at this time. · The Company agreed to appoint Ms. Heide and Mr. Svoboda to the board of directors of the Company. · The Company agreed that One TEC could retain its existing overriding royalty interest in the leases in the Clinton AMI, the Pearson AMI and the Remaining AMI, which generally equals the difference between 21.5% and the royalty reserved in the base mineral lease. The Company further agreed that One TEC will be entitled to an overriding royalty on additional leases acquired in the Fayetteville Shale Field equal to the greater of a) the difference between 21.5% and the royalty reserved in the base mineral lease, or b) 1.5%. The Company obtained the funds to make the initial payments under the APA from loans received from the Company's chairman and chief executive, or his affiliates.  The Company planned to obtain the funds to pay the balance of the purchase price from outside investors.  The Company was unable to obtain the funds to pay the balance of the purchase price under the APA.  Subsequent to September 30, 2006, the Company and One TEC reached a settlement of the Companys obligations under the APA. (See Note 10 - Subsequent Events)  Because the Company was in default under the APA at September 30, 2006, and subsequently settled its rights and liabilities by a partial conveyance of the assets that it acquired under the APA, the Company has reported the settlement with One TEC as if it had occurred on September 30, 2006.  The result of the APA and the subsequent settlement thereof was the acquisition of 2,900 net mineral acres in the Fayetteville Shale Field for (i) $7,000,000 paid One TEC under the APA, (ii)  13  $400,000 paid by the Company under the Rig Construction Contract with SRM International, Inc., and (iii) 25,000,000 shares valued at $0.09 per share, for a total purchase price of $9,650,000. Summary of Fayetteville Shale Field.  The Fayetteville Shale Field is an unconventional gas reservoir located on the Arkansas side of the Arkoma Basin, ranging in the area of the Companys leases in thickness from 150 to 300 feet and depth from 1,500 to 2,500 feet.  The shale is a Mississippian-age shale that is the geologic equivalent of the Barnett Shale found in Texas.  The Company believes this field represents one of the most promising unconventional gas finds in the United States.  According to the information available from wells already drilled in the Fayetteville Shale, the Company anticipates its initial production should exceed 2 MCFD per well with a reserve per well of 2  3 BCFG. The objective of the Company is to develop the leased acreage by drilling horizontal wells within the Fayetteville Shale zone.  According to Southwestern Energy Company, the leading producer in the Fayetteville Shale Field, its wells are experiencing an initial production of 1.7 MCFD testing for 30 days.  After the initial 30 day test they are producing at 1.6 MCFD.  Their slickwater or cross-linked gel fracture stimulation treatments are resulting in greater production and shallower initial decline rates, potentially raising initial reserve estimates.  The State of Arkansas requires that oil and gas wells be "integrated" into 640 acre sections.  The State of Arkansas allows nine (9) horizontal wells to be drilled per 640 acre section.  In general, production within a section is necessary to hold leased acreage within the section under the terms of the Company's leases. 6. Issuance of Common Stock and Warrants At September 30, 2006, 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 451,911,747 shares of Common Stock and no shares of Preferred Stock. On August 28, 2006, a majority of the Company's board of directors approved the appointment of Vaughn J. Featherstone to fill a vacant position on the board of directors.  The Companys existing policy is to grant directors 3,000,000 warrants to purchase common stock, of which 1,000,000 have an exercise price equal to the market price on the date of grant, 1,000,000 have an exercise price five (5) times the market price on the date of grant and 1,000,000 have an exercise price of ten (10) times the market price on the date of grant.  All of the warrants are exercisable five (5) years from the date of grant.  As a result, on August 28, 2006, Mr. Featherstone became entitled to 3,000,000 warrants, of which 1,000,000 are exercisable at $0.08 per share, 1,000,000 are exercisable at $0.40 per share, and 1,000,000 are exercisable at $0.80 per share. On September 6, 2006, the Company entered into the APA with One TEC, under which it agreed to issue 150,000,000 shares of common stock to One TEC.  (See Note 6 - Acquisition of Oil and Gas Leases)  The Company never issued the shares, and subsequent to September 30, 2006 entered into a settlement agreement with One TEC which, in part, reduced the number of shares issuable to One TEC, LLC to 25,000,000 shares. (See Note 10 - Subsequent Events) On September 14, 2006, the Company entered into a Lease Purchase Agreement under which it agreed to issue 26,666,667 shares of common stock to Duke, and 2,000,000 warrants to purchase shares of common stock.  The warrants may be exercised to purchase shares of common stock of the Company in the following amounts:  500,000 shares at $0.05 per share; 500,000 shares at $0.10 per share; 500,000 shares at $0.15 per share; and 500,000 shares at $0.20 per share.  The warrants expire on August 21, 2008.  (See Note 6 - Acquisition of Oil and Gas Leases)  The Company did not formally issue the shares,  14  and subsequent to September 30, 2006 entered into an agreement with Duke which, in part, will relieve the Company of the obligation to issue the shares if the agreement closes.  (See Note 10 - Subsequent Events) As of September 1, 2006, the Company issued 38,000,000 warrants as partial consideration for the conversion of $9,500,000 of loans to the Company into warrants and an overriding royalty interest in part of the Companys interest in the Fayetteville Shale Field.  The warrants expire on June 30, 2011.  9,500,000 warrants are exercisable at $0.05 per share, 9,500,000 warrants are exercisable at $0.15 per share, 9,500,000 warrants are exercisable at $0.25 per share, and 9,500,000 warrants are exercisable at $0.50 per share. 7. 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, 2005, which is hereby incorporated by reference. During the quarter ended September 30, 2006, the Company received loans from A. Leon Blaser and his affiliates.  The loans are unsecured demand loans which do not bear interest.  The loan proceeds were used to make payments to SRM under the Rig Construction Contract, $7,000,000 in payments to One TEC under the APA, and for working capital.  As described below, during the quarter ended September 30, 2006, $8,400,000 of loans from Mr. Blaser and his affiliates were converted into warrants and an overriding royalty interest in the Remaining AMI.  As of September 30, 2006, the amount due Mr. Blaser and his affiliates was $7,039,500.  During the quarter ended September 30, 2006, the Company paid $150,000 to a third party as a fee incurred by Mr. Blaser to borrow certain funds which he reloaned to the Company. The Company agreed to convert $9,500,000 of unsecured demand loans made to the Company into an aggregate 4.275% overriding royalty interest in the Company's working interest in the Remaining AMI section of the Fayetteville Shale Field.  Under the conversion, each lender received an overriding royalty of 0.045% in the Remaining AMI for each $100,000 of debt converted.  Each lender also received four (4) warrants for each dollar of debt converted.  The warrants are exercisable at any time until June 30, 2011, and carry exercise prices of $0.05 per share, $0.15 per share, $0.25 per share and $0.50 per share.   Of the loans converted into an overriding royalty interest, $8,400,000 were held by A. Leon Blaser and his brother, and $1,100,000 were held by unrelated parties. During the quarter ended September 30, 2006, Julius W. Basham, II forgave $27,000 in interest payable to him by the Company.  Mr. Blaser assigned to Mr. Basham a portion of the overriding royalty which he acquired in the Remaining AMI to compensate Mr. Basham for the foregiveness of the interest. 8. Restatement of Financial Statements The financial statements for the three and nine month periods ending September 30, 2006 have been restated to (a) reduce the amount of indebtedness which converted into a combination of royalty interests and warrants from $10,000,000 to $9,500,000, (b) reclassify the portion of the gain attributable to the conversion of loans by affiliates as a contribution to paid in capital, and (c) expense as a loan fee 38,000,000 warrants issued as partial consideration for the conversion of $9,500,000 of indebtedness.  The effect of the reclassifications had the following effect on the financial statements for the three and nine month periods ending September 30, 2006:  15   As Originally ReportedAs RestatedNet DifferenceUnproven oil and gas leases19,495,88619,552,38456,498Loan payable  unrelated party-500,000500,000Additional paid in capital96,587,120103,979,9847,392,864Accumulated deficit(82,342,521)(90,178,887)(7,836,366)Net income  three months7,342,890(493,476)(7,836,366)Net income  nine months7,167,498(668,868)(7,836,366) 9. Subsequent Events Settlement with Curt E. Arnspiger On November 8, 1999, the Company entered into an agreement with Curt E. Arnspiger to acquire 645,125 shares of common stock owned by Mr. Arnspiger in Startec, Inc.  The Company issued Mr. Arnspiger 1,290,250 shares in consideration for the Startec shares, but Mr. Arnspiger never delivered the Startec shares to the Company.  The Company filed a lawsuit against Mr. Arnspiger in Delaware County, Ohio to enforce the agreement.  On October 26, 2006, the parties entered into a settlement agreement, under which the Company dropped any claim to the shares of Startec, Inc. owned by Mr. Arnspiger, Mr. Arnspiger returned 1,290,250 shares of common stock in the Company which he received for the Startec, Inc. shares in 1999, and 1,009,541 additional shares of common stock that Mr. Arnspiger owned in the Company. Assignment of Rig Construction Contract On June 28, 2006, the Company entered into a Rig Construction Contract with SRM International, Inc. (SRM) to purchase a drill rig that was under construction. The total cost of the drill rig was $4,804,070.  Of the purchase price, One TEC had already made payments totaling $1,250,000 at the time the Company signed the agreement. The Rig Construction Contract provided that Company was obligated to pay the balance of the purchase price as follows:  $850,000 by June 30, 2008; $1,000,000 by August 1, 2006; $1,100,000 by September 1, 2006; and the balance of $604,070 upon delivery of the drill rig.  The Company made $400,000 of the payment due on June 30, 2008, but did not make the remainder of that payment or the other payments due on August 1, 2006 and September 1, 2006.  On August 23, 2006, SRM International, Inc. notified the Company that it was in default under the Rig Construction Contract.  On September 26, 2006, the Company and SRM agreed to a change order in which the existing defaults under the Rig Construction Contract were cured by a payment of $750,000 made by One TEC on the Companys behalf, and the Companys agreement to pay SRM $825,000 on October 10, 2006 and October 24, 2006. The Company was obligated to repay One TEC the sum of $750,000 that One TEC paid on the Companys behalf under the change order, but did not reach an agreement as to when or how such sum will be repaid.  The Company was not able to make the payment due on October 10, 2006 under the change order.  On October 25, 2006, the Company, SRM and One TEC agreed that the Rig Construction Contract would be assigned to One TEC, which assumed the Companys obligations thereunder. Settlement with One TEC On September 6, 2006, the Company entered into the APA with One TEC, which provided in part that the Company was obligated to pay One TEC $2,400,000, $2,000,000 and $2,000,000 on September 15, 2006,  16  October 15, 2006 and November 15, 2006, respectively.  The Company had previously paid the One TEC $7,000,000 under the APA.  The Company failed to make any of the payments, and as a result One TEC sent the Company a notice of default under the APA.  On December 5, 2006, the Company and One TEC entered into an agreement that settled and compromised their disputes under the APA.  Under the agreement, One TEC assigned the Company 2,900 net acres in the Fayetteville Shale Field, consisting of 724 net acres in the Clinton AMI, 232 net acres in the Pearson AMI, and 1944 net acres in the Remaining AMI.  In addition, the Company agreed to issue One TEC 25,000,000 shares of common stock.  In return, the Company relinquished any claim for repayment of $7,000,000 which it had paid under the APA and $400,000 which it had paid under the Rig Construction Contract with SRM, which had been assumed by One TEC on October 25, 2006.  All other terms and provisions of the APA were terminated, including any obligation of the Company to pay One TEC $6,400,000, to issue One TEC 150,000,000 shares of common stock, to enter into employment agreements with the principals of One TEC, or to assume responsibility for One TECs Fort Worth, Texas office.  The following table summarizes the working interests owned by the Company in the Fayetteville Shale Field before the settlement with One TEC and after the settlement: Prior to Settlement with One TECNet Acreage Acquired in SettlementNet Acreage After SettlementClinton AMI2,500 net mineral acres724 net mineral acres3,224 net mineral acresPearson AMI800 net mineral acres232 net mineral acres1,032 net mineral acresRemaining AMI6,709 net mineral acres1,944 net mineral acres8,653 net mineral acresTotal10,009 net mineral acres2,900 net mineral acres12,909 net mineral acres  Settlement with Duke On December 1, 2006, the Company, 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 the 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 leases, the Company agreed to assign to Duke working interests in the Fayetteville Shale Field with a book value of $2,000,000 and 26,000,000 warrants to purchase shares of the Companys common stock at $0.175 per share.  The warrants expire on January 5, 2009.  In addition, Duke agreed to relinquish his 5% overriding royalty in the leases.  Closing under the agreement is 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 Company expects the agreement to close in the first quarter of 2007.  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 will be owned after the transaction closes:  17   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  Amendment of Certificate of Incorporation to Modify Terms of Series A Preferred Stock   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.  18  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-KSB 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 We are an oil and gas exploration, development and production company.  During fiscal 2006, we acquired oil and gas leases in Arkansas, Louisiana, Oklahoma and Alaska.  Our largest property to date is a working interest in over 50,000 acres of leases in the Fayetteville Shale Field in Arkansas.  Our 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. Our 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. 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.  19  Results of Operations Three Months Ended September 30, 2006 and 2005 The Company's revenues in the three months ended September 30, 2006 were $59,632, as compared to $219,330 in the three months ended September 30, 2005.  The Company's revenues result from payments received under a royalty agreement that expires in the first quarter of 2008.  The Companys revenues declined substantially in 2006 as compared to 2005 as a result of a decline in the royalties 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.  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. The Company reported a loss from operations during the three months ended September 30, 2006 of ($217,874), as compared to income of $9,729 during the three months ended September 30, 2005.  The decrease in income from operations was primarily attributable to decreased royalty revenue and increased general and administrative expenses resulting from an increased level of operations resulting from the Companys purchase of a significant number of oil and gas leases in 2006. The Company reported comprehensive loss of ($2,407,324) during the three months ended September 30, 2006, as compared to a comprehensive loss of ($74,122) during the three months ended September 30, 2005.  During the three months ended September 30, 2006, the Company recorded an expense of $150,000 resulting from a loan fee that the Company paid on behalf of A. Leon Blaser for a loan that Mr. Blaser obtained to generate funds to loan to the Company.  In addition, in fiscal 2006, the Company realized a gain of $975,705 from the sale of a royalty interest in a portion of the Companys gas leases in the Fayetteville Shale Field.  The Company recorded an unrealized loss of ($1,913,848) in the three months ended September 30, 2006, as compared to an unrealized gain of $66,059 during the three months ended September 30, 2005.  The unrealized gain/loss in each period results from changes in the market value of the Company's investment in shares of Wastech, Inc.  The Company recorded $1,101,470 in warrant expense for warrants granted during the three months ended September 30, 2006.  In the three months ended September 30, 2005, the Company incurred an expense of ($150,000) resulting from the settlement of litigation. Nine Months Ended September 30, 2006 and 2005 The Company's revenues in the nine months ended September 30, 2006 were $289,686, as compared to $740,935 in the nine months ended September 30, 2005.  The Company's revenues result from payments received under a royalty agreement that expires in the first quarter of 2008.  The Companys revenues declined substantially in 2006 as compared to 2005 as a result of a decline in the royalties 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.  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. The Company reported a loss income from operations during the nine months ended September 30, 2006 of ($394,408), as compared to income from operations of $213,259 during the nine months ended September 30, 2005.  The decrease in income from operations was primarily attributable to decreased royalty revenue and increased general and administrative expenses resulting from an increased level of operations resulting from the Companys purchase of a significant number of oil and gas leases in 2006.  20  The Company reported comprehensive loss of ($1,510,899) during the nine months ended September 30, 2006, as compared to comprehensive income of $2,100 during the nine months ended September 30, 2005.  During the nine months ended September 30, 2006, the Company recorded an expense of $150,000 resulting from a loan fee that the Company paid on behalf of A. Leon Blaser for a loan that Mr. Blaser obtained to generate funds to loan to the Company.  In addition, in fiscal 2006, the Company realized a gain of $975,705 from the sale of a royalty interest in a portion of the Companys gas leases in the Fayetteville Shale Field.  The Company recorded an unrealized loss of ($842,031) in the nine months ended September 30, 2006, as compared to an unrealized gain of $2,500 during the three months ended September 30, 2005.  The unrealized gain/loss in each period results from changes in the market value of the Company's investment in shares of Wastech, Inc.  The Company recorded $1,101,470 in warrant expense for warrants granted during the three months ended September 30, 2006.  In the nine months ended September 30, 2005, the Company incurred an expense of ($214,000) resulting from the settlement of litigation. Liquidity and Sources of Capital The Company's consolidated balance sheet as of September 30, 2006 reflects cash and current assets of $22,120 and a working capital deficit of ($7,568,285).  The Company's current liabilities consist primarily of relate party advances and a note payable that was paid by a related party in a subsequent event.  All accounts payable and other current liabilities will be paid out of subsequent royalty payments. During fiscal 2006, the Company made significant investments in oil and gas leases.  Most of the funds used to make the investments came from loans from related parties.  A substantial portion of the loans were converted into warrants and a royalty interest in a portion of the leases.  However, as of September 30, 2006, the Company remains indebted to related parties in the amount of $7,039,500.  The Company needs to raise substantial capital in order to pay its share of drilling costs on the oil and gas leases.  The Company is currently offering shares of its Series A Convertible Preferred Stock in a private placement.  Based on the maximum number of shares of Series A Convertible Preferred Stock that the Company is authorized to issue, the maximum amount the Company may raise in the private placement is $12,500,000.  The Company is currently in discussions with investment bankers regarding sources of additional capital for capital expenditures. 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.  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 September 30, 2006.  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  21  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. This quarterly 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, 2005, which is hereby incorporated by reference. Item 2.  Changes in Securities and Use of Proceeds. On August 28, 2006, the Company issued Vaughn J. Featherstone 3,000,000 warrants to purchase common stock, of which 1,000,000 are exercisable at $0.08 per share, 1,000,000 are exercisable at $0.40 per share, and 1,000,000 are exercisable at $0.80 per share.   All of the warrants expire five years after the date of grant.  The warrants were issued to Mr. Featherstone upon his appointment as a director of the Company. On September 6, 2006, the Company agreed to issue One TEC, LLC 150,000,000 shares of common stock under an Asset Purchase Agreement, as partial consideration for the purchase of One TEC, LLCs interest in the Fayetteville Shale Field.  After September 30, 2006, the Company entered into a settlement agreement with One TEC, LLC under which the number of shares issuable to One TEC, LLC was reduced to 25,000,000 shares. On September 14, 2006, the Company entered into a Lease Purchase Agreement under which it agreed to issue 26,666,667 shares of common stock to Duke, and 2,000,000 warrants to purchase shares of common stock.  The warrants may be exercised to purchase shares of common stock of the Company in the following amounts:  500,000 shares at $0.05 per share; 500,000 shares at $0.10 per share; 500,000 shares at $0.15 per share; and 500,000 shares at $0.20 per share.  The warrants expire on August 21, 2008.   As of September 1, 2006, the Company issued 38,000,000 warrants as partial consideration for the conversion of $9,500,000 of loans to the Company into warrants and an overriding royalty interest in part of the Companys interest in the Fayetteville Shale Field.  The warrants expire on June 30, 2011.  9,500,000 warrants are exercisable at $0.05 per share, 9,500,000 warrants are exercisable at $0.15 per share, 9,500,000 warrants are exercisable at $0.25 per share, and 9,500,000 warrants are exercisable at $0.50 per share. All of the shares of common stock and warrants were issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933. Item 3.  Defaults upon Senior Securities. At September 30, 2006, the Company was in default under a Rig Construction Contract with SRM International, Inc. dated June 28, 2006 by virtue of the Companys failure to make monthly progress payments due on July 1, 2006, August 1, 2006 and September 1, 2006.  After September 30, 2006, the  22  Company settled the default by assigning the Rig Construction Contract to One TEC, LLC. At September 30, 2006, the Company was in default under an Asset Purchase Agreement with One TEC, LLC executed on September 6, 2006 by virtue of the Companys failure to make a payment of $2,400,000 that was due on September 15, 2006.  After September 30, 2006, the Company settled the default with One TEC, LLC. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5.  Other Information. None. Item 6.  Exhibits and Reports on Form 8-K. Furnish the exhibits required by Item 601 of Regulation S-B. Exhibit NumberDescription and Incorporation by Reference10Form of Assignment of Overriding Royalty Interest (incorporated by reference to the Form 10-QSB for the quarter ended September 30, 2006)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 Officer32.2*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. (b)     Reports on Form 8-K.   None.  23  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:  July 24, 2008/s/ Greg HolstedBy: Greg Holsted, Chief Financial Officer   24